November 25, 2008

The Corporate Management Structure: Viable in the Legal industry?

12:34 pm

In a former career I consulted within the corporate world. There, the majority of companies used a management approach where levels of managers would have direct reports that would scale upwards to higher levels- essentially a vertical corporate structure. Although there has been a shift within many organizations to a “matrix” or “flat” horizontal platform, the structure of boss and direct report still exists at the core. Since I have been consulting for the legal industry I have seen similarities to the corporate structure, but there are some fundamental differences, and it has always struck me that there could be a better organizational structure within the legal industry that would provide the desirable attributes of accountability and developmental planning.

Almost every firm has department chairs or practice group leaders who are responsible for the management of that portion of the firm. In addition, the mentoring of associates is a big priority for most firms. But is it truly a boss/employee relationship?  Do law firms have “management teams.”? 

The idea of management teams within the legal industry is not a new idea, but it is one that has been tough to implement. In an ideal setting you would have one partner managing several associates, with responsibility for their utilization, development, and discipline. This way when an associate is underperforming there would be one partner to talk with, who should know all the ins and outs of what is taking place. That is not what we are seeing today. Generally you have an associate working on a multitude of partners’ matters. This creates various issues, among them multiple levels of discounting by responsible attorney, personality differences, and having to request additional work from multiple attorneys to meet billable hour targets. The last of these is the most troubling.

The Redwood Think Tank did a study that indicated that those associates who eventually make partner start out making or surpassing their billable hours target and continues with this trend until they are promoted. Conversely those associates that end up leaving the firm or managed out within the first 5 years start and continue not making their billable hours goal from the beginning. 

 

These facts are pretty powerful in addressing associate development, even after the first year. I am not sold that those associates who underperform are not getting the work solely because of a lack of effort or poor performance.  Perhaps it is because they were not placed in the proper environment, and perhaps having the right mentor could be the key to success. A mentor might not only provide the needed billable hours to meet goals, but also the legal and organizational knowledge to propel an associate down the partner track. The opposite is true for those associates who don’t have a sufficient mentor. Are firms losing qualified associates simply because of a substandard organizational structure?
 
A potentially better structure would be to have one partner feeding work and being responsible for the development of a specific group of associates. This structure might not work with many law firms, as originations and responsible hours vary by group/partner, but it does not mean that you cannot have a boss/direct report relationship. A system that allows the associate to request more work from the mentor, and the mentor using that request to go to other partners for more work if he/she does not have it available could create a more cohesive and development-friendly atmosphere.
 
Having a structure like this provides the ability to analyze data by mentoring partner to identify development gaps and fill them when needed. I am not suggesting that underperformance is always due to a lack of mentoring, I am simply suggesting having accountability by associate and partner so there are two points of contact.
 
The question remains how to make this feasible and cause a shift to the suggested structure. The first suggestion is robust time-keeping software that can break out and measure the performance of mentoring time as well as other non-billable activities.  The second, and more important suggestion, is that the performance of those associates whom a Partner is mentoring should be included within the partner compensation process. For most firms the focus for partner compensation continues to be billable hour generation and collections. The idea of assigning a portion of compensation has been quite subjective. If management teams are in place, and you truly measure the success of those teams, you end up assigning a number that can be benchmarked against other teams. Placing a quantitative value on mentoring and addressing it within partner compensation would be give this process the best chance to affect real change.
 
–Russ Haskin
 
Russ Haskin is Director of Consulting for Redwood Analytics/Lexis Nexis.
 

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November 30, 2008

Kurt Beasley @ 11:00 am

Hello - What a great source. Thank you for providing this resource. Question - it is time for my firm to bring on an additional attorney. I do not have a plan, partership etc., for earning equity and revenue sharing. do you have a sample that i could look at? Need a method of sharing income generated through my office.

Thanks again.

Kurt

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November 18, 2008

Alternatives to the Billable Hour

1:30 pm

For years, there has been much talk, and decidedly less action, on “alternatives to the billable hour.” GC’s say they want this, and firms say they are willing to provide these options, but neither side tends to “walk the walk” in a way that matches up with their stated intentions. We think there are a couple of key reasons for this:

1.       On the GC side, as much as companies are interested in reducing costs, there is little creativity or interest in crafting “win-win situations.” There is clarity in the billable hour, and with that model, less concern that firms will be leaving money on the table that ends up in law firms’ pockets.
 
2.       On the law firm side, firms quite simply have trouble managing to a fixed price or blended rate. It takes people skilled at active management and estimation, which only comes with experience. Firms often always lose money the first few times they try these types of arrangements, making them “gun shy” about doing it again.
 
The result of the above two issues is that the billable hour continues to dominate, despite its’ being a disincentive to efficiency on the firm side, and an inexact way of predicting legal expenses for clients.
 
In these less-than-robust economic times, both sides should take a harder look at the pricing models that exist currently for legal services. The most obvious issue, implicit in both of the above-stated problems, is one of trust, which is borne out of relationships and experience. As we all know, trust is a key component in the long-term success of any client/law firm engagement, and especially on one using a pricing model other than the billable hour.
 
On the law firm side, the more firms can accurately understand the value to the client they are providing for various types of work, the better they can accurately assess the appropriate work effort and the price the company is willing to pay. Over time, the combination of these 2 things can be used to accurately price the work profitably, based on staffing needs and their associated cost.
 
On the client side, the client has to understand that the law firm is a business too, and requires a margin on its work for it to desire to continue the long-term relationship. The greater the clarity into what the client bottom line is— whether total cost, expense predictability, outcome, or some combination—the better the firm can be at pricing the work in question.
 
There are many tools available to law firms (such as Redwood Analytics’ Matter Planning Tool) to help firms price out blended or hourly rates, with multiple scenarios and sensitivities. These are a key piece, from the firm side, of understanding how leverage and pricing affect profitability. However, it is the back-and-forth between the client and firm that ultimately has the biggest impact on alternative pricing arrangements. Firms must understand and respect clients’ priorities and their relative importance regarding legal services, and clients need visibility into firms’ bottom line as well.   This give-and-take, and both sides’ commitment to long term success of the relationship, will be what make alternative arrangements succeed. Given rate pressures, clients’ general dissatisfaction with legal services, and a more challenging economic environment, firms would do well to begin to engage their clients in these conversations, if they haven’t already done so.
 
–Bo Yancey
 
Bo Yancey is Director of Professional Services for Redwood Analytics/Lexis Nexis.

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November 11, 2008

Client Stages - A new way of looking at a client’s life cycle

3:59 pm

Inventory aging buckets are boring. Useful, yes, but still boring. Looking at how unbilled or uncollected hours have been spread over 30 day increments reminds me of learning to count by 2’s. There IS a business need for dissecting Inventory into manageable buckets, but that is for another post. Even before hours start to age, it is important to understand if we are growing the number of hours being worked. It’s simple. Look at this year, look at last year, do the math – better/worse. Right? 

At a basic level, yes. However, what if you take the concept of creating Inventory buckets and apply it to the growth in production over time? You would either create another collection of buckets (5%, 10%, etc.) OR you would have an entirely new perspective on the development of your client base.
 
At Redwood Analytics, we call this Client Stages.   These Stages allow us to analyze the client base in ways beyond a simple ranking of hours or growth rates. The basis for the Stages is the growth of the hours worked over the last 12 months (Rolling 12) compared to the 12 months prior (Prior Rolling 12). By using the last 24 months, independent of calendar years, we capture the growth from 2 full business cycles rather than a partial perspective such as year-to –date. Once the growths rates are calculated, the clients are categorized into the following lifecycle stages:
 
ACTIVE Work within the last 12 months
New & Renewed Work within the last 12 months, no work in previous 12 months
Thriving 100% growth in work vs. prior rolling 12 months
Growing

Between 20% and 100% growth in work over prior 12 months

Stable

 Between -20% and 20% growth in work from prior 12 months
Declining Between -50% and -20% growth
At Risk More than 50% decline
 
 
INACTIVE No work in the last 12 months
Dormant             No work in the last 12 months, but work in previous 12
Lost No work in last 24 months
 
Having the client population dissected into these stages allows for much broader analytic review. Now rather than looking at the clients as a total pool, we can analyze them based on their lifecycle stage. Identifying clients who are declining or at risk of going dormant becomes easier and provides you with meaningful, decision-making information very quickly. If you are trying to determine where to spend client development dollars, focusing on strategic clients in some of the underperforming stages is a good place to start. 
 
The more that you can look at your client base from different angles, the more that opportunities will reveal themselves to you. Client stages are just the beginning of a forward looking view at your firm’s health—which in large part is based on its clients. Take some time and consider the value that could be gained from examining clients based on how long they’ve been with the firm; their ranking based on the revenue potential they bring to the table; or perhaps a rating system based on key metrics like realization, production, and cash cycle. Inventory aging buckets are useful from a billing & collections standpoint, but don’t limit yourself to one perspective of your firm’s lifeblood.  
 
–Jonathan Huyard
Jonathan Huyard is a senior consultant with Business of Law Services team for Redwood Analytics/LexisNexis.

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November 4, 2008

Heller in the Cellar

4:38 pm

I read this article on the downfall of Heller Ehrman with great interest. What this doesn’t say is that Heller was a firm who last year had profits per partner in excess of $1,000,000, and in 2004 was ranked 2nd on the American Lawyer’s A List.  The key takeaways are that weak leadership, and the resulting lack of direction and ability to make key decisions, doomed the firm.   The dissolution of the firm was brought to bear by lenders who called in loans when the firm’s partnership numbers dwindled below what was allowed in financial covenants.  In essence, a “bank run” ensued with partners leaving, which caused the banks to act.  (The current financial crisis likely did not help).

There are other firms who are similarly exposed, and while law firms generally don’t have a lot in the way of “retained earnings,” it does not mean that their financial health should not be scrutinized.  Fixed costs, equity partner contributions, and debt financing are all things that can bring about the end of a firm in challenging times if managed inappropriately.  As a managing partner at the conference I attended last week said, “lawyers often vote with their feet.”  That’s what happened here.  In my view, this shows the delicate balance firms must face in building consensus while still being able to make tough decisions.  Increasing profits year over year certainly helps. 

- Bo Yancey

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October 30, 2008

Law Firm Talent Management Doesn't Stop with Recruiting

2:57 pm

Without question, gaining an understanding of the characteristics of successful lawyers within individual firms can help firms to make wiser recruiting investments.  The “Moneyball” project worked on by Kerma Partners and Lexis Nexis’ Redwood Think Tank focused on the characteristics of lawyers before they entered the law firm studied.  Valuable information for the firm to have?  Certainly, if thoughtfully incorporated into a recruiting strategy.

However, recruiting the best candidates for success within a firm’s culture is only part of the story.  What’s the strategy to develop these associates after they are hired?   The most qualified new lawyer can be mismanaged (or unmanaged), whittling away at the likelihood of success.  The good news is that regardless of the candidate’s development before being hired, his/her development is largely within the control of the firm.
 
While the recent spotlight on analytics around recruiting efforts is very positive momentum, a firm really should not focus on a recruiting strategy without building a complementary development strategy.  Over the past year, the Think Tank has been studying what differentiates successful lawyers once they begin their careers.   In the handful of firms we’ve looked at, we have seen a (varying) correlation to success for attributes such as the type of exposure an associate receives, the clients they work with, and the volume of work they perform.   Look for an article summarizing these results in the near future.  As with the Moneyball conclusions, it will be important for firm managers to view information about the success of their own lawyers in the context of their own firm’s culture. 
 
I welcome feedback and ideas for attributes to test as we continue to apply real analytics to the issues surrounding talent management in law firms.
 

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