After (more than) numerous times of trashing on task codes in pricing presentations, a few people prodded me into doing something about it. In those presentations on pricing, the topic of task codes would always come up. I suggested that maybe task codes aren’t the place to start when focusing on pricing, budgeting, etc. Instead we would start by setting standards for the type of work being performed. In other words, you should understand what type of matter is involved before you worry about task or other segments of work under that level.
[Ed. Note: Today’s post comes from guest blogger, Steve Nelson from The McCormick Group. Steve suggest the next generation of COOs will need different skills and perspectives to be successful. He is right. – TB]
A recent article in Bloomberg Big Law Business detailed the increasing sophistication of Chief Operating Officers at law firms, pointing out that many of the new COOs have managed corporate organizations, other major professional services firms, and large government agencies.
But the article misses an important factor in what law firm leaders need in today’s environment. Much has been written lately about the challenges that the AmLaw law firms are facing because of the increased scrutiny by clients and their own “chief operating officers”, as evidenced by the growth of the Corporate Legal Operations Consortium (CLOC). What has changed, particularly since the recession, has been a complete reevaluation of the “law firm engagement”. Clients have taken a much more comprehensive view of their outside counsel retention, not just in terms of billing rates and alternative fees, but in the way that their work is handled. This ranges from billing practices, composition of teams, and the reporting of even minor “event changes” that impacts the engagement as a whole.
One of my old jokes I used to use arose out of lawyer questions about “AFAs.” Lawyers would ask, How can you tell if an AFA will be successful? My answer: I have caller ID. The point being that success came with lawyers willing to focus on the numbers. And I already knew who those lawyers were.
This answer has changed over time. Now-a-days the answer is: When the client’s legal operations people are involved. When a law firm pricing person can engage directly with a client-side “pricing person” the resulting pricing deal (f.k.a. AFA) will be win-win and we get there a lot faster.
I recently published an article on the topic of Legal Operations, but it’s too long to be a blog post (hint hint Casey) so I am just posting a link to it here. It explores how the legal operations roles are growing in number and becoming more aligned with the emerging law firm roles around pricing, legal project management and the like.
This development has an excellent chance of driving practical change (finally) in the legal industry.
|Photo by Danielle MacInnes|
Of late, Casey has been posting some excellent material on the high BS factor of law firm marketing. This plus an event I participated in on Friday in NY spurred me on to write a post. However, don’t expect this post to be anywhere near as long as Casey’s. That man is the Dostoevsky of blog post writing.
Years ago I got into the legal speaking circuit after presenting on the future of the legal profession to a group of bar leaders. I called the presentation “Staying Relevant.” I credit this moment with pushing me into the spotlight of change in the legal profession since it lead to a slew of speaking invites and for me becoming known for driving change in the legal market.
The billable hour has been trashed repeatedly over how it motivates bad behavior in law firms. The reasoning goes that rewarding hours billed motivates lawyers (associates and partners) to spend more time on tasks than necessary, resulting in inefficiencies. My personal opinion is that rewarding hard work is not the problem, but instead poor management over the efforts of workers is the real problem.
For now, I will leave that argument aside and turn attention towards clients. It’s easy to toss stones at the glass house across the street, but clients should be taking a hard look at their own financial motivations first.
At a conference this fall, I posed a question on how clients reward their internal lawyers. The group involved included both clients and law firms. The question was: What financial motivations do in-house lawyers have for reducing the cost of legal services? I figured it was a fair question, since that is the primary complaint about law firm compensation systems.
Part of the motivation for the question came from a conversation with a colleague who moved from a firm to a client over a year ago. They noted that in-house lawyers are not threatened by the emerging roles in legal departments focused on cost savings. The reason they are not concerned is that the new roles pose no threat to their own careers. In-house lawyers advanced by – being good lawyers and not by being cost focused.
After I posed my question to the group there was a long, silent pause. It appeared no one had ever asked this type of question, so people had to think about it. But even then, the response was just shrugs. Finally one person from the client-side noted that lawyers who regularly force write offs were noticed positively in some fashion.
1 – People in glass houses shouldn’t through stones. If misaligned comp systems are a problem, you might want to start with updating your own before you trash others’.
2 – After giving it some thought, the one comment made about financial motivation is actually counter-productive. If in-house lawyers show value by securing regular write offs, they are being rewarded for engaging with law firms who are habitually inefficient, or worse, padding their bills.
I have run into #2 a number of times. My best guess is that in-house lawyers feel write offs are truly driving value since management can view it as measurable cost savings. At a prior firm I had one partner suggest we preemptively write down 2% of the time on every bill to save the client the time since that was what they did. I asked if the work was being done poorly necessitating a 2% hit. He said no. So I said no – since the client would still write the time off 2% to show value to their boss.
The challenge of aligning comp with client cost goals is therefore one faced by both firms and clients. And it is one more argument for why clients and firms should work collaboratively on addressing the needs for more cost savings and efficiencies.
Otherwise, expect to the hear the sounds of more glass shattering.
Of all the adaptations law firms need to make to be successful, the biggest challenge going forward will be making changes to their partner compensation systems. Ben Weinberger of Prosperoware tackles the subject head-on in today’s guest post.
The earliest known written legal code, Ur-Nammu’s Code, has been attributed to have originated in 2050 B.C., though its authorship is still up for grabs (some attributing that to his son, Shugli). Shortly after that, law firms were formed on a partner-based business model whereupon compensation was based largely upon hours originated and hours worked on behalf of the firm.
And so it went for a while. This compensation model brought with it an obvious behavior incentive for lawyers or partners to bill as many hours as possible. As the market slowly shifted, so did the clients’ sentiments regarding this particular form of incentivizing.
In remediation, firms first recognized that they had to look more carefully at billable hours and compensate their timekeepers on realization rather than billable rates. This first foray into restructuring the compensation model ensured, at the least, the firm was actually compensated prior to the lawyer or partner. As firms grew in size and complexity and management structures became more complex, however, compensation models evolved to incorporate numerous other metrics that brought with it a combination of some science–and some art. Still, partners responsible for bringing in large books of business were always compensated for that volume, just as partners who brought in billable hours were compensated for billable hours.
The clients’ sentiments, however, have not been satisfied.
The shift in market–as driven by those shifts in sentiments–is accelerating. In fact, a legal talent/future business strategies report just released by Deloitte boldly forecasts a radical tipping point for the legal industry by 2020, a short four years–or less than one five year strategy plan–from now, stating:
“The transformation of the profession is likely to be profound…Indeed, by around 2020, we expect a tipping point for individual firms which will impact the competitive landscape [and the role of talent in law firms]. Businesses must prepare effectively now so they are not left behind by the end of the decade.”
Smart firms have started recognizing and evolving the way they do business to accommodate this change in market condition. Specifically, they are starting to compute profitability of matters, using business intelligence, and empowering their professionals to understand cost of production and more modern performance metrics such as actual margin on matters. The firms are providing their professionals with the appropriate tools to enable them to select appropriate resources and more accurately budget matters to ensure sustainable profitability for the firm.
Unfortunately, one issue remains at many firms that hinders their ability to modernize their business: legacy compensation models. In the firms which are getting ahead of the game and trying to evolve their culture to a more profit oriented focus, without also adjusting their compensation model, they’re battling themselves as they retain inefficient incentive structures to drive the right behavior.
If specific billable hour targets are still tied to partners’ compensation, they have less incentive to distribute billable work to the most cost-effective resource.
When I was at a firm a few years ago, the finance director and I went through an exercise to compute the relative profitability of each grade of our lawyers in the firm–newly qualified associates, senior associates, junior partners, etc.–all the way through to the senior partner level. By correctly assessing a number of criteria that evaluated the true cost structure, we were able to calculate the cost of each billable hour per each different grade of lawyer. Once identified, we shared the results with our firm partners: and as it so happened, our most profitable hours were being worked by our senior associates. In various ensuing discussions I’ve had with colleagues and peers at other firms, it would seem that this result is a fairly standard occurrence.
As part of the exercise, we computed and readily shared with the firm’s partners during a retreat the true profitability metrics for each hour worked by our equity and senior equity partners. For senior equity, this equated to approximately negative USD $130/hour. This was not an easy statistic to share with the senior partners (it’s tricky to tell your collective ‘bosses’ that, to borrow a phrase from one of my favorite films, Mr. Mom, “you’re doing it wrong”); however, we took the exercise further and explained that their time was, in fact, best spent managing clients (client care), focusing on business development, and ensuring that work was appropriately distributed across the firm. Recast across these work functions, they more readily accepted and comprehended the validity of the financial results we were sharing.
The next logical step was for our firm to take a much closer look and carefully evaluate its compensation formula for partners. We took a more holistic view of what types of behaviors we were seeking to drive and what we wanted to incentivize partners to do, and what clients wanted to incentivize partners to do—these three things are not mutually exclusive and, in fact, should be aligned.
In recognizing that the firm was in a competitive market and that a significant source of its revenue was being generated through alternative fees and fixed fee work, there was very quick recognition and acceptance of the need to ensure that work was being completed in the most efficient and economically viable manner. We found that by providing our lawyers greater insight into firm resourcing, costs, and historical budgeting, and that by enabling our lawyers to see in real time how their engagements were progressing, they were better able to ensure that work was being completed efficiently, effectively, and appropriately.
To do so is at the core of a firm’s future success, according to Deloitte:
“Firms will want to continue to demonstrate that they can offer clients the best products, price and service. We believe that the most successful law firms will be those that are agile enough to flex resources in order to meet client needs at an efficient price.”
Firms today that are looking at ensuring sustainable business models need to look not only at how they are allocating work and pricing that work, but they also have to consider how they are incentivizing their professionals to complete that work. If their compensation models have not evolved in such a manner as to help encourage the most appropriate distribution of work, they are going to find it far more difficult to implement real positive change in both the behaviors and the long term profitability—ie longevity–of the firm. 2020 is less than four years away.
Where will your firm be then?
Ben Weinberger is the Vice President of Solutions for Prosperoware. Ben is an industry thought leader and a licensed attorney with more than 20 years of experience in the strategic development, transformation, and direction of operations and technology in a variety of public and private organizations. He can be reached at firstname.lastname@example.org.
|Image [cc] evan p. cordes|
One of the biggest question marks in the legal industry is around driving change in law firms. We all know change is needed, but it tends to come very slowly for law firms [insert shocked exclamation here, soaked in sarcasm]. There are a number of classic law firm change methods in use, but none tend to increase the rate of change at a level consistent with change in the real world. I suggest fear as a strong motivator and fear around money as the penultimate motivator.
And this is where profitability comes in.
We’ve covered the subject of profitability in the past about what it is, but here I want to suggest it as a tool for change. More specifically, law firms should create cultures of profitability in order to drive change.
The Profit Methodology
The first step in creating a profit culture is deciding on a profit methodology. This first step can be the one that brings the entire effort to a grinding halt. Partners can easily see that any profit method will eventually impact them, so they spend hours arguing about what it should or shouldn’t be, trying to tilt the model in their favor. This is of course understandable. However, given the proclivity for and skill in arguing lawyers possess, having all of them engage on this at once is what usually kills the plan. In actuality, a given model favoring one partner over another is so minuscule, the arguments are not worth making. But remember our guiding light about fear over money, and you will understand this behavior. So the solution is helping partners understand the low value of arguing and that the real goal is having a method that is not focused on an unachievable, absolute profitability, but instead on one that is instructive for how partners can improve profit.
I won’t go into detail here, but there are three basic profit methodologies a firm can utilize:
- Contribution Margin,
- Gross Margin, and
- Net Margin.
Each model treats partner compensation in a different way, either treating all as:
- a Labor Cost,
- All as Profit, or
- has some method for segmenting a portion as cost, leaving the rest designated as profit.
Which ones firm picks is not as important as just picking one.
Once a firm moves past adopting a methodology, they move on to step two.
In this step it needs to be somebodies job to go around the firm presenting and talking with partners about the profit methodology. Relatively simple presentations showing how the model works for various types of work should be given. And then given again and again and again.
An ideal person for this is a pricing director, since they are in a primary role on this subject and over time will be the person who puts this all into action. Absent that, someone with a finance role will work, provided they present well to partners.
Step two is never done, since partners need to hear this message a few times for it to sink in. And firms are always adding new partners to the roster.
Once we have some reasonable level of understanding, then a deeper education effort should be made. This puts the model into action with partners’ own financial information. This can be done with pricing requests or even better, with existing, ongoing matters. As we all know, clients are keen on cutting spend, so many matters have budgets or caps or some other fee deal that require partners to stay on top of fees. This is a great opportunity for them to see profit in action.
Throughout all three steps in this process, firm leadership should be supporting and sharing the message in firm-wide situations and in practice group meetings. In the third step, education can be done in individual partner evaluation situations too.
The Compensation Caution
When a firm pursues this path, they should be prepared for the compensation questions. Once partners figure this all out and understand that the way they price and manage their work drives profit, they will want to know how and if this all will impact their comp. Most firms at this point in time do not factor profitability in to individual comp. Even under this circumstance, it’s relatively easy to talk about how a rising tides raises all boats. And that story is going to be a good one to tell throughout this entire journey. The real goal of a culture of profit is not beating up people with marginal numbers. Instead the real goal is driving the whole range up.
Lawyers tend to see things in black-and-white, so they may see any numbers below an average or benchmark as failing. Throughout this culture change effort, you would do well to use the message that the goal is to increase profit across the board. You will have matters with high profit that can be made more profitable with minimal effort. Just because one is above average does not mean one has reached their potential. Of course you will find some work with “negative” profit. Be prepared for that. Firms chose to have a range of practices for many reasons beyond the profit of specific work.
As firms go down this road, it will raise new debates and discussions within the partnership. Firms will face new questions and may not have immediate answers. This is part of the value of creating a culture of profit. These are discussions you need to be having, but have been avoiding. The results will be a financially healthier firm. But a firm will need to be prepared and willing to openly discussing the new issues that come up.
Hit the Road
You may be thinking this road to profit sounds a bit bumpy, and you would be right. However, here’s the deal: You have to go down this road. Firms that avoid or delay this quest will be significantly handicapped in this changed, competitive legal market. Long-term, they will likely go under or at a minimum, be marginalized as lower profit firms.
Change is as Change Does
The real power of the profit culture comes in to play in driving change. People love to talk about all of the change that is needed in the legal industry. It’s been a while since I heard anyone say AFAs were a passing fad or that clients are going to pull back from discount requests. But even with the need for change being common knowledge, change is coming too slowly.
With a profit culture in place a firm creates a sense of urgency around change. Partners now have a clear reason to adopt change. It will no longer be a theoretical good idea, it will become an obvious, pressing need. Partners will now know what drives better margins and what they need to do to attain them. More importantly, they will know that everyone else also knows this and what their grade is within the partnership. And we know how type-A lawyers are. Having low profit numbers is like getting a C- in a law school class. No lawyer wants that grade, especially when your peers will see it.
So – putting this all together, creating a culture of profit is necessary for law firms that want to thrive or even survive. It will be critical to their ongoing financial success and it will drive the change they desperately need to stay competitive in the market. As an added benefit, it will drive cost savings for clients.
So why aren’t all firms doing this?
|Image [cc] Xtreme Xhibits|
Whenever I try to explain to my friends and family what my job is as a pricing guy, they usually give me a blank stare. My kids have even comment they think I might actually work for the CIA since I can’t seem to explain it well. The reason is is that pricing jobs are unique in the legal profession and seem to change on a daily basis.
Thankfully Lisa Gianakos has come to the rescue, writing an article in the just-released edition of Practice Innovations. She interviews three pricing professionals (Matt Laws, Kristina Lambright and Bart Gabler) and gives a nice look into what those of us in these roles do on a day-to-day basis.
So if you have ever wondered what we do. Or if you are one of us and struggle explaining it to your friends, you can now send them here.
Thanks to Lisa and Practice Innovations.
Oh yeah, there are a number of other excellent articles in the issue as well. I suggest you take a look.
|Image [cc] slworking2|
Recently I participated on a panel on the future of the profession for the National Conference of Bar Presidents and walked away thoroughly convinced the profession is doomed.
For those of you unfamiliar with how bar associations make decisions, I offer the following story:
If someone asked for permission to go to the bathroom, a bar would form a task force (or commission) to fully examine whether going to the bathroom was a good idea and to highlight all of the pitfalls around bathrooms. After 18 months they would issue a report stating that going to the bathroom is generally a good thing and should be promoted to those who need to go, but only if all of the potential negative impacts have been understood, limited and communicated to those considering bathroom breaks. The report would not actually authorize the request to use the bathroom. It would be left to the Bar Board to actually enact a rule permitting said activity. The Board rarely follows up as they are busy forming the next task force and would not want to take any heat for authorizing such a dramatic change.
In the meantime, the guy who made the original request either went, or died.
The presentation panel actually offered a real-life example, that broke this mold – at least in some fashion. The panel participant from Washington, discussed how they are implementing Limited Licensure Legal Technicians (LLLT). That effort began in 2001, culminating in the first licensees coming online this Spring. But in this circumstance, the Supreme Court actually pushed this through, against the wishes of the bar. The result was one small change to the market that took 14 years to implement.
And here is where things got ugly – the audience focused in on the details of the LLLT program, trying to poke holes in it. This audience was made up of Bar Presidents and Executive Directors. These people are well positioned to drive change across the profession. But instead of talking about how they could adopt similar changes in an accelerated fashion, they were looking for ways to kill it.
I sat there as long as I could listening to this. Finally I could take it no longer and interjected. I “suggested” that a failure to drive disruptions would lead to others moving in and taking over the legal market. With some internal fortitude, I was able to avoid using swear words.
After the presentation a number of attendees from state bars sat down to chat with me about all of this. A universal theme was that whatever they might do to disrupt the market and drive innovation will be met with strong resistance by the bar membership. As I see it, bar associations have little to gain by pushing on this issue, even though they have a lot to lose by doing nothing. Their members will not abide any efforts short of turning the clock back. I gave numerous suggestions for how a bar might drive change to the group. All were met with exacerbation and a recognition that any efforts will be met with broad and strong resistance.
For a long time I have held out hope that the legal profession would step up and address the needs of the market: for both lawyers and clients. After this experience, I have come to the hard conclusion: That is not going to happen. As smart as lawyers are, their training and experience have made them a reactive and dogmatic group. In their minds, the way they have been doing it is the only way to keep doing it. Anything else is a threat to the profession and their practice specifically.
This all saddens me. Lawyers hold a sacred duty to the rule of law. Their inability to act means the rule of law will be handed off to someone else – someone without that obligation. As a society we will all be worse off.
If the medical profession is any indicator, we should fully expect insurance companies and or perhaps banks to become our future legal service providers.
Welcome to the future.