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The recent Ark-group KM conference left me with a new thought on why law firms have rewarded hours to the exclusion of so many other worthwhile metrics. This new thought is a new dimension on the challenge. The old arguments stand, however, taken from another angle:

Partners think like workers, not owners.

This new thought came when someone raised the point that associates are not motivated to complete work within a defined amount of time.  Say what? This is akin to a factory worker taking more time than allocated for a task and being rewarded for that. The factory worker doesn’t get to chose. They are a worker. They perform the tasks they are assigned under the constraints they are given. Another person, a.k.a. Management, represents the owners’ interest in extracting profit. They define the tasks and constraints in such a way to drive profits. Workers are motivated to work hard and receive compensation for working hard. However, they perform their work within the well-defined constraints.

Law firms should expect associates to work hard. But management should be defining the tasks and constraints such that profit is maximized. Why isn’t this happening?

Partners think like workers, not owners.

The business model is built on that mindset. Compensation for owners actually rewards worker behavior. We know this reward system drives billable hour behavior, which reflects a worker view. The current partner mindset is: I will be paid more if I work (bill) harder.

Logically, an owner wants to be paid more too. But their rewards typically come from doing more with less. They may be hard workers in terms of the hours they put in, but they are not the ones making the widgets. They work hard on driving growth and profit. They are not rewarded for hours but instead on the performance of this business. So the problem stems from the fact that although partnerships are rewarded on the performance of the business, individual partners are not.

Previously I have noted the owner/worker challenge when defining profit for law firms. This owner/worker factor is also obviously creating a problem for driving profitable behaviors. We can’t expect partners to behave like owners when they are treated like workers.

As firms hopefully, finally tackle the compensation challenge, they will want to drive a shift in the mindset so that law firm owners start thinking like owners. Law firms – if you want to prosper, start rewarding owner behavior among your partners instead of worker behavior. Otherwise:

Partners will continue to think like workers, not owners.

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Without exception, whenever I have seen a General Counsel (GC) asked about law firm email newsletters, I have witnessed the exact same response: Immediate Anger. I witnessed this recently at the COLPM Futures Conference. When the email newsletter subject came up with a panel of GCs, the angry responses ran the gamut of:

  • Delete, delete, delete.
  • These are on subjects I don’t care about.
  • I receive a flood of them whenever my company gets sued. Nice try.
  • The subject lines are meaningless to me. Why would I open these?

So these newsletters are not worthless. Calling them worthless would be too kind. Instead they are relationship poison. So why do firms send them?

In defense of legal marketers, I believe this is not their doing. Having been in that role in the past, I know that partners insist on the current approach. To highlight the frustration – partners insist on subject lines that violate every reasonable marketing standard. Subject lines are 50% of the reason someone opens an email. They need to be short, relevant and attention-getting. A lengthy and technically accurate sentence in a subject line is therefore plainly a bad idea. But partners insist on this approach because they think clients will be impressed with their legal acumen and command of the English language.

The message is clear from clients: Stop sending these. Yes, they would find short, targeted (as in sent to the right type of client and lawyer), actionable, valuable legal updates from their firms to be useful. However, the current crop of quasi-law review emails they get have negative value.

Lawyers: You hired marketing professionals – let them do their jobs. Your clients will obviously appreciate it.

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I was very happy to see that my RSS feed picked up an new post from Dr. Bonnie Cheuk this week. After nearly a year off from her blog, she came back with a very interesting perspective of “What is the future of information professionals?” where she opens up with some very open ended questions:

  • What do information professionals do?
  • What do others think we do?
  • What should we be doing now?
  • What is our future?
  • How should we define it?
Nothing like coming back with a bang!
Dr. Cheuk challenges the notion that technology is solely behind the major shifts in how the information profession has changed in the past 15 years. 

Personally, I think the major shift is not about technology, it is how we redefine information from “static, objective” information that we can manage as objects to “communicative” information whereby information is a “process of becoming” (the process to inform, to understand, to share common struggles, to look for facts, to look for multiple perspectives etc).

The “static” information is now turned into a “communicative” process where even the author of the information can be influenced by the user of the information. This type of fluidity of how information moves back and forth is something that information professionals need to understand in order to position themselves and “create value for your companies or stakeholders.”

She goes on to discuss how the changes shouldn’t be viewed from our own perspectives, but rather from the perspectives of those who engage with the information we provide. She suggests a number of ideas gathered from the problems that business executives, middle management, knowledge workers, entrepreneurs  educators and parents face.

Dr. Cheuk lists a number of opportunities that Information Professionals have in being strategic partners, providing practical solutions, being a trusted adviser, advocating for change, and preparing others for the future. Along side the opportunities also come the challenges of acquiring the right skills and demonstrating exactly how we are up to the challenge of influencing change. She believes that the Information Professional has a role to play… if we are willing to accept the challenge.

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An article on a recent PWC survey of UK law firms caught my eye. So I dug into it. The title “Top 10 UK Firms Use Int’l Growth To Grab Huge Revenue Slice” gave me the impression these firms were doing well by growing in international markets. So the questions for me were: Where? and How? I really wanted to learn from these successful firms’ experience.

At first blush, a rosy picture appeared.

The top 10 firms, which receive about 44 percent of the total legal revenues among the top 100 firms, are reinforcing their dominance with better results across all financial metrics, according to PwC’s 21st Annual Law Firms’ Survey for 2012.

Wow. Things must be going well. They are grabbing a big piece of the market (44%) and the financial results are up in every way.  But wait a tick.

Despite the revenue increases reported by 82 percent of the firms that participated in the survey — much of it through mergers and lateral hires — profits per equity partner in the top 10 firms fell 24 percent when compared to 2008 and adjusted for inflation, according to the survey.

So apparently “better results” includes a significant drop in profits. And ‘growth’ is growth in number of laterals. But it could have been worse for the Top 10.

The top 10 firms have managed to keep a stable headcount, but those firms ranked just below the top 10 saw “significant average reductions both in equity partners and in overall fee earner numbers,” the survey said.

Although there was some good news on the cost savings front.

Though more than half of the firms surveyed completed cost reduction programs in the previous two years, most reported savings of just 5 percent and none reported more than 10 percent in savings, according to the report.

 OK – so not really good news. What was the point of this article?

[Editors Note: As I was going through some of the details for my InfoNgen post from a couple weeks ago, InfoNgen’s Director of Sales, Jim Hanlon, pointed me to an online resource for setting up a mutually agreeable time to meet, in this case a phone call, called timetrade. I found it to be a very good resource, and being the “editor” that I am, I quickly conned… er, convinced, Jim to do a review of the product and post it here on 3 Geeks. -GL]
I recently started using a new online appointment setting software called timetrade.  As a salesperson myself, whenever someone calls me and can concisely explain who they are,  what they do,  why it is valuable and doesn’t sound like they are calling from the moon, I am willing to listen.  Upon taking a look at their site I realized that I actually had a problem that they might be able to solve. This is generally what I look for in a potential customer when I am on the vendor side of the table so I decided to give them a shot and do their 1 month free trial. Their offering is basically an online appointment setting tool that integrates with outlook, iCal, Google, etc. and solves the problem of having to go back and forth via email several times or more in order to find a mutually agreeable time for a phone call, meeting, online demo, lunchtime flashmob,  etc.  I think that they focus on selling to sales organizations, but I think any business person who doesn’t have a personal secretary (must be nice) will benefit from this product.

It works like this. As a user, you have a web portal where you can manage your preferences, which includes what activities you want to be able to set up- for me it is generally either a phone call or an online demo.

Although I can produce these links from the site, they have an outlook plug-in (as well as google and ical) which let me click an icon in outlook and insert the link directly into an email on the fly. The outlook plug-in actively syncs with my calendar, so that when someone opens the link they will only be able to schedule a time that I am actually available as long as my calendar is up to date.  Remembering to block travel days and such has probably been my biggest challenge with making this completely seamless.

Once the person has selected a time that works for them and scheduled it, we both get an email confirming it, and it will automatically show up in my outlook calendar. If it is a phone call, I don’t need to take any further action until the time of the call, and if it is something like a webex demo, I simply update the meeting with the webex details any time prior to the date.  One limitation is that if I sent this out to multiple people for the same meeting, I would probably get back multiple requests so it works better when you are coordinating with one person.

I was a bit skeptical on how much value this would add to my workflow, but it has definitely saved me a ton of time, and also increased the volume of things on my calendar due to higher response rates when I request a meeting from a new prospect.  There isn’t a ton of customer support, but in general I haven’t needed any, and at $49/year for a subscription it is a no-brainer.

Leading up to this final installment in our series – we have defined profitability for firms, described the four profit drivers and looked at how the market is pushing on all of this. In this post we take on how Legal KM can re-focus its efforts to help firms respond to all of this pressure.

The Hill Looks Steep

Significant challenges present significant opportunities. Yes – law firms are facing intense market pressures. No – law firms have not yet truly faced the challenge.

This presents a tremendous opportunity for Legal KM (LKM). Perhaps the biggest challenge here is the lack of understanding by law firm partners and leaders as to the underlying issues. Shockingly (or not), most partners have little understanding of what makes legal work profitable. They hold fast to the old model that hours and realization lead to more income for them. Although in some practices and markets a variation of this reality still holds true, for the most part it does not. Clients increasingly are holding the line on rates driving down realization. And clients are no longer willing to pay for however many hours a law firm bills on a task or matter.

Opportunity #1

Historically LKM has had minimal participation on the financial side of law firms. Many times client and matter billings are presented with portals or on dashboards, however these are usually relatively simple metrics. These tools do not typically show profitability or help partners appreciate the impact of our four drivers on their wallets. Firms will struggle greatly with change if they do not even know where to start. It is the old and familiar tale of “follow the money.”

Capturing, understanding and delivering this financial knowledge will have high value for firms. Better and easier to understand profit metrics will lead to improved decision making by firm leadership. These same metrics will also be used by the frontline lawyers enabling better resource management decisions.

Currently many law firm financial departments are being pushed to the limits just trying to stay up on traditional reporting requests, as more firm partners are demanding timely financial information. Run – don’t walk, to your financial department and offer to help them find some breathing room.

Opportunity #2

Another opportunity presented by this situation is what might be called “re-engineering the practice.” Without going into a lot of detail, it is obvious that firms will need to change the ways in which they deliver their services to drive profitability. The profit driver Leverage can be a powerful tool. But pushing work down only works when a firm has the right systems in place to support that shift. Legal Project Management (LPM) a current hot topic cannot function without supportive LKM systems in place. This does not mean LKM should necessarily try to co-opt LPM, but instead find ways to drive the success of LPM efforts. If a firm does not have any process improvement or LPM, then LKM can help initiate those efforts. If LPM is being utilized, LKM can supplement and enhance those efforts. Firms need this help. LKM is just the type of resource to step-up and make it happen.

Other Opportunities

Hopefully these two opportunities help illuminate the path forward for LKM. Find the pain in your firm and address it. Focus on the greatest level of pain. One might argue that “search” is a pain for law firms, and they would be right. But this type of pain is not touching the decision makers of law firms in meaningful ways. Instead, what most firms are concerned about right now is flat revenue, rising costs and the possibility of reductions in partner incomes. LKM will do well if it focuses on addressing those pain points.

I had the honor and pleasure of sitting between Mary Abraham and John Gillies at the ARK KM Conference in New York City over the last two days.  Mary and John are two of the most prolific and talented live tweeters on the planet. They attend conferences and tweet nearly every word coming from the speaker micro-seconds after they have been spoken.  In the last few years, I have gotten an education in KM through twitter by following the tweets of Mary and John and countless others.  I have been able to attend many conferences across the planet that I could never have afforded to attend in person, by simply following the Twitter hashtag associated with the conference.  It was a real treat to see Mary and John in action.  Although, having participated remotely so often, I discovered I have developed a kind of Twitter myopia. I sat in the room and listened to some really terrific presentations, but I didn’t believe a word they said until I read it in a tweet.

On the first day of the conference, I was seated at a table with Mary on my left, John on my right, and David Hobbie (a prolific tweeter in his own right) on the other side of John.  I tweeted the following and David and Mary responded.


Let this be a lesson to lazy kids everywhere:  If you’re going to mooch off the hard work of others, never ever brag about it!

A few notes about this Tweet Stream:

I have edited the stream quite a bit.  I flipped it, it is now in chronological order from top to bottom. I removed a lot of redundancies.  I removed all straight retweets that added nothing to the original or simply said “Agreed” or “Interesting”. Where I kept a retweet, I removed the original quoted text and indented the retweet beneath the tweet it was referring to.  I removed the conference hashtag, except where it was used in reference to the conference itself, or if the hashtag was being commented upon.  I kept the back and forth peripheral conversations only when, in my opinion, it added something to the content being presented.  Needless to say, I cut a lot and I was probably inconsistent throughout, so don’t hold me to anything I just said.  I think what remains is a pretty good set of notes from a terrific group of note takers and some really wonderful presentations. 

I have copied the Title, Description, and Presenters from the Agenda and entered them into the Tweet Stream in the appropriate places.

Our own Toby Brown gave the Keynote on Wednesday, but this stream picks up after his keynote with the first Client Panel.  Toby’s ongoing series of blog posts “The Economics of Law and the Future of Legal KM” is a distillation of the Keynote he gave on day one. 

 The conference began with a mutiny of sorts.  After Toby’s keynote the official hashtag of the conference was announced as #ARKKM2012.  We pick up our stream, already in progress…

UPDATE: David reminds me in the comments that he and Mary were live blogging summaries of many of the ARK KM presentations on their respective blogs:   

Having defined profitability and categorized the four drivers of profit for firms, in Part 4, we now turn to the market’s impact. 

Why Does This All Matter?

Over the past five to ten years, there has been a significant shift in the economics of the legal market. Previously law firms were able to raise rates to increase profit, typically 8-10 percent each year, with costs growing at only 4-5%. These rate increases resulted in increased profit. About 10 years ago, things began to change. The market finally became saturated with a sufficient number of lawyers (a.k.a. supply) so economic forces took over and started to impact prices. At first, firms felt this in realization. Clients began asking for discounts. However, at the same time, firms continued their price increases, so profits were only marginally impacted.

Two other forces came to bear in the market. The first was technology. Accelerated changes in technology enabled new competitors and encroachers. However, this change has been on a slow burn. The other force was The Recession, beginning in 2008. This forced in-house counsel to increase rate pressure on firms. Leadership in client companies no longer accepted “I can’t” as an answer from the General Counsel (GC) when asked to lower legal costs. Previously the GCs would say they couldn’t predict litigation or deals and therefore could not control costs. The CEOs finally said “enough.” The amount of legal work was not the question. The cost of it was. So clients really turned up the pressure on firms on price, to the point of demanding rate freezes. The days of significant rate increases and high realization were over.

Firm were pushed from a “cost-plus” business model, where profit was built in to the price (hourly rates) to a profit margin model. Now the game is managing costs of delivery such that a reasonable margin is made.

If you consider the four drivers of profit, the first three are clearly under intense pressure from market forces. Rate increases for firms have dropped from 8-10% per year to about 3-4%. Realization has also been dropping, currently at about 86% of standard rates. Finally with over-capacity in the lawyer ranks at most firms, productivity is dropping as well, driving up cost rates. This leaves firms with leverage as the only real alternative for counter-acting the other market forces. You might think this would give a clear direction for firms to respond to market pressures.

However, in this new economic world we have a significant challenge: Firms have not recognized the change. The vast majority of partners and firm leaders still focus on hours billed and realization to maintain profitability. Most firms did implement efforts to try to control costs. However, these controls were not focused on lowering the cost of delivery, but instead were just administrative overhead cost reductions. These overhead reductions have helped stem the tide, and allowed holding ground on profits. This approach will not sustain as no business can cut its way to growth. Instead, investment in new methods and technologies is needed if firms expect to grow their markets and enhance their profitability.

In Part 2 of this series we explored the impact of Rates and Realization on law firm profits. In Part 3 we look at the other two drivers: Productivity and Leverage.

The Profit Drivers:

Productivity (a.k.a. Utilization)

Productivity is the number of billed hours per timekeeper  Most firms will have a benchmark productivity of 1800 or 1900 billable hours per year, driving an expectation of a certain baseline level of productivity. For profitability, this comes into play on cost rates.

Each time keeper has a cost per year. There are two components: Compensation and Overhead. These are commonly referred to as Direct (compensation) and Indirect (overhead) costs. The indirect costs are usually a hot-button issue for firms as everyone wants to argue about where various administrative costs should be applied. Side-stepping that issue, firms decide on reasonable numbers based on the level of the time keepers. Partners, for instance, may have higher overhead costs allocations as they use more resources within a firm. Once a firm agrees on these costs, then you divide the overall cost number by the benchmark number of hours to get a cost rate per hour.

The punch line on productivity: When productivity goes down, cost rates go up. If you have a lawyer who costs $500,000 per year working 1900 hours, her cost is $263 per hour. If her productivity drops to 1700 hours, her cost rates increases to $294 per hour.

The impact of cost rate changes on profit is typically half that of realization. Of course that depends on the differential between the cost rate and the realized rate. The closer they are, the bigger the impact and it becomes just like the point-of-no-return seen in realization.

Caveat: Lawyers tend to manage profit by focusing on costs. This is the least effective way to enhance profitability. Most costs are relatively fixed on an annual basis. Salaries, rent, insurance, technology and the like are consistent costs year-to-year. Firms wanting to enhance profitability should focus their energies on the revenue side of the equation.

Tangent: We’ll take a small detour here to differentiate between profitability on the client and matter level versus profitability on the practice group or firm level. For example, when looking at the profitability of a matter, productivity should be neutralized. If a firm has under-utilized lawyers, it should not count that factor when evaluating the profits for a matter or a client. Under-utilization or low productivity could be used to show increased cost rates on the client level. The real problem with low productivity though is not in how a specific matter is being staffed, but instead is a firm management problem. Under-utilized lawyers are a symptom of over-capacity (i.e. a firm has more lawyers than work). At the client and matter level, the issue is using the proper level of staffing. If you factor in higher cost rates for underutilized lawyers, you are motivating partners to use busy associates instead of those with capacity. This is not a behavior you want to encourage.

Leverage – The Great Equalizer

The last driver of profit is leverage. This is the amount of non-partner work versus partner work performed. Or from another angle, the percentage of partner time worked per matter or per client.

We took that tangent for an important reason. Leverage is the highest impact profit driver. And firms looking to enhance their profitability will want to encourage the best use of leverage and not let low productivity encourage counter-productive behavior.

The basic economic concept of leverage is that the more workers work, the more owners (partners) benefit. Workers generate the profits that pay partners. Therefore, the more work is push downed to them, the better leverage you have and the more profit is generated.

Of course caveats apply. Partner level work should be done by a partner. The mantra here is: push work down to its lowest cost, appropriate labor source. This sounds obvious and reasonable; however, until recently, firms have profited from pushing work up to the highest rate source, which was a great idea when competition was low.

Further, and taken to a logical extreme, you could make the argument that partners should do no work to maximize profits. Technically you would be correct. If partners spent all of their time getting business in the door and workers provided all the effort, you would maximize profit. However, as mentioned above, partners are also workers. Clients expect the high-expertise of partners on their work and in fact make many purchasing decisions with this in mind.

Another point to consider, partner work also generates revenue. In a situation where 25% of the work is performed by partners, about a third of the revenue comes from their time. The bottom-line is that work should be allocated to the right resources. Firms should make every effort to move the work down and ensure the timekeepers involved are constantly improving their skills so they can continually take on higher levels of work.

And a final important point on leverage: When it improves, the fee to clients goes down. As work is pushed to lower cost resources, the overall fee for a given piece of work should go down. I say “should” since this is dependent on the work being performed at competent lawyer levels. If work is pushed down to timekeepers who take too much time to complete the tasks, the reasonable leverage line has been crossed. Staying on the right side of that line essentially means higher profits for firms and lower fees for clients. Truly the win-win result the market is begging for.

In Part 4 we tie the four drivers into a single picture and talk about the effect of market forces on the group of drivers.

In Part 1 of this series, we introduced the concept of tying Legal KM (LKM) closer to a law firm’s bottom line  We also introduced the concept of law firm profitability  In Part 2 we explore the first 2 (of 4) profit drivers for firms: Rates and Realization

The Profit Drivers:

Rates

Although obvious, the point needs to be made. Billing Rates are the core pricing structure used in the industry and the level of a firm’s rates are key in determining its level of profitability. As a rule-of-thumb, a 1 point increase in rates leads to 2 points increase in profit. The reverse applies as well. In my experience, there might be a range of 1% to 3% increase in profit for each point of rate change. The range exists since it depends on the specific time keepers involved and the relationship between the billing rates and the time keepers’ cost rates (more on that later).

Realization

Realization is the percentage of money collected versus the standard rate. Once you have a standard rate there are three basic ‘events’ that drive down the actual dollars collected against that rate.

#1) Discounts

Discounts are the market (via specific clients) telling a firm their prices are too high for a piece of work. One might think firms should lower their prices in response to his information, however, that could be a mistake. Sometimes clients shop price by the level of discounts. They are not concerned with the actual price but instead focused on the amount of discount they are extracting. Whether this is rational behavior in an economic sense is not relevant. Firms need to adjust their pricing and pricing strategies in response to the market, but need to do so in smart ways.

#2) Write-Downs

These are reductions from a bill before it goes to the client. This reduction signals the firm / partner deciding certain effort had no value. This becomes important as firms look for ways to lower the cost of delivery of a service. By identifying recurring types of write-downs and eliminating the effort before it is done, a firm will lower the costs of the service.

#3) Write-offs

These are reductions requested by the client after they have seen the bill. This client signal says they did not see value in some effort. This may occur because a firm did not communicate the value of the effort properly or it may just be that work should not have been done. It should be noted that in some cases, write-offs are just good ole fashion flakey clients who don’t pay their bills. For this discussion, we will treat that as a cost of doing business.

Adding these three elements, gives you total realization. The final number is important, but the three components are instructive as to what is driving a level of realization.

The impact of realization is much the same as that of rates. A 1% drop in realization will, on average, result in a 2% drop in profitability. Well, at least it does when you are relatively close to 100% realization. As that realization number drops, the impact magnifies. As you approach 60-70% realization, it becomes infinite. This is the case since you are approaching the cost rate levels of most time keepers. This means you are reaching the point where your margin goes to zero and when you pass that point it goes to negative. At a general level, this point-of-no-return is about 67% percent. However, it can vary based on the mix of timekeepers involved in a given piece of work. Some time keepers cost rates can be 50% of billing rates, whereas others may be closer to 80%.


 In Part 3, we will take on the other two profit drivers: Productivity (a.k.a. utilization) and Leverage.