September 16, 2005
Protecting the Law Firm's Bottom Line
I just returned from TexLaw Management 2005 in Dallas where I hosted a discussion panel on the subject of Protecting the Bottom Line in a Complicated Marketplace. However, as I told the audience, an alternate title might be Can Both Law Firms and the Business Clients of Law Firms Get What They Want Out of Their Business Relationship?
The panel included yours truly as the moderator as well as:
- Marc Capelluto, Microsoft LCA (Legal Dept.) Procurement Manager: Marc’s current focus includes “Microsoft’s Project 50” and redesign of Microsoft’s Preferred Provider Program. Project 50 is a program to drive $50,000,000 to the bottom line by cutting expenses.
- David Hill Bradley, Partner with the prominent litigation firm Touchstone, Bernays, Johnston, Beall, Smith & Stollenwerck: As a legal service provider and partner, David is on the front line when it comes to this issue. His practice areas include transportation, business/commercial, premises, product liability and insurance.
- William C. (Bill) Cobb, WCCI, Inc. (Cobb Consulting): Bill is one of this country’s experts when it comes to pricing strategies for legal services. He invented the "value curve" which has played an important role in understanding and guiding the pricing of legal services for over a decade.
The hype today is that alternative fee arrangements are rapidly displacing the billable hour. In addition, the news is full of stories about activities to control legal cost. Consider the following examples:
- “It is only a matter of time before e-billing becomes the norm.” Corporate Legal Times, August 15, 2000
- Eight Big Corporations Form Group to Get Better Rates From Law Firms. National Law Journal, August 15, 2005
- GE just auctioned off purchase of legal services for seven practice areas to law firms who offered the "lowest rates." Corporate Legal Times, September issue
- General Counsels agreed that a major part of the solution is “getting tough with outside counsel." Corporate Legal Times, September, 2005
Yet the reality appears quite different based on data from multiple surveys.
- 90%+ of corporate 1000 firms haven’t moved to e-billing
- Law firms derived less than 10% of revenues from fixed fee arrangements
Among other related questions, the panel tried to answer the following:
- What is going on and what is the driving force behind all of the activity?
- What can law firms do to take advantage of existing conditions or at least protect their bottom line given the activity among corporate clients to control legal costs?
I believe the panel agreed with the following:
- Legal Departments are under pressure from CEOs and CFOs who have to make the numbers.
- General Counsels are struggling to achieve predictability, and that struggle manifests itself as an attack to reduce hours and rates.
One of the big questions of the day was the question “where are the alternative fee arrangements?" In spite of the hype, flat fee project arrangements and fixed fee portfolio services engagements are few and far between. I asked the panel, “Who is dragging their feet?” That is really an important question because only the flat fee and fee fixed arrangements address the underlying problem—the billable hour. On the law firm side, the billable hour method puts a lid on per-partner income and encourages inefficiency. On the corporate client side, the client has no idea what their cost will be. Flat and fixed fee arrangements would provide the solution:
- Law firms would be able to profit from their own technology & efficiency.
- Corporate clients would get want they want most—predictability.
Through give-and-take between the audience and the panelists, we may have arrived at an answer. We have a love/hate relationship with the billable hour. We may complain about it, but the truth is we have learned to live with it. Corporate clients are learning to manage it and that includes “preferred provider” programs to encourage or coerce law firms into doing right by it—“it” being the billable hour.
The fact is hourly billing is just an easy way to do business. We have gotten used to it. We know the dance steps:
- You bill;
- They adjust;
- We both complain.
I think Marc Capelluto from Microsoft said it best—“I don’t care what method you use to bill me, as long as what you bill is what we expected." In short, the message from the corporate world is "we have a budget and if you want to do business with us, both of us are going to live within that budget."
Corporate clients aren’t looking for the cheapest legal services. They want law firms to be more efficient. Off-the-street hourly rates are too high and can’t keep going up. Law firms can’t continue to improve their “productivity” just by increasing the hours worked on “my” business. The billable hour is fine, but it isn’t a license to increase law firm profits at the corporate client’s expense. Law firms are going to have to become more efficient. As we neared the end of the session, the message took a surprising turn. It came down to the following:
Law firms do not invest in adequate management talent. As the discussion ended, Marc, talking about law firm operations, asked me "where is scheduling software, where are budgets, where is voice-over IP, where is online conferencing and collaboration, etc? Why aren’t law firms implementing at least the basics when it comes to operational efficiency?"
We know the metrics that drive law firm profitability. To succeed, law firms have to manage leverage, utilization, effective rate, realization, etc.—but not at the expense of one particular case, matter or book of business.
Companies like Juris, Inc. offer powerful tools to track Key Performance Indicators and manage law firm talent. Juris, Inc.’s application, MyJuris®, provides managing and supervising attorneys with situational awareness that should allow them to make sure that their talent is fully utilized, but also that they are not over-lawyering individual matters or books of business. There are extraordinary tools available to law firms—but they are useless without sufficient dedicated management attention within the law firm. Twenty-five percent of a managing partner’s time just will not get the job done!
The billable hour isn’t going away. Even though alternate fee arrangements are good for both parties, with few exceptions, neither law firms nor corporate clients are pushing flat or fixed fee arrangements. The panel and audience appeared to agree that the billable hour will continue as the preferred billing method. But, corporate clients are going to push down both the number of hours they accept and the prices law firms can charge. Law firms are going to have to become more efficient to protect per-partner income. By doing so, they will provide the corporate client with a smaller target. Doing so will require more dedicated management at the law firm level.
Related posts
Filed under Alternative Billing, Law Firm Bus Model, Management by Tom Collins