By Richard Alonso
August 16, 2011
“Many firms have collections of great lawyers. The time may be coming when clients will expect them to go beyond this and become effective organizations.” So predicted management guru David Maister five years ago in an article in The American Lawyer, “Are Law Firms Manageable?" Since then, the "Great Recession” may have hastened this era in which outside counsel now find themselves — when clients want greater value (not just alternative billing), when clients seek value that can only be delivered by effectively organized businesses. How will today and tomorrow's successful law firms be able to satisfy this demand?
At a recent seminar on “Understanding How Operations Affect a Firm's Ability to Build Value,” the Philadelphia chapter of the Legal Marketing Association (LMA) explored the link between a law firm's business decisions and its ability to deliver client value. The program was given by two seasoned law-firm administrators drawing on decades of experience at several Am Law 100 firms: a marketing director with an MBA in international business, and a business and finance director with an MBA in entrepreneurial ventures.
The stumbling blocks for “collections of great lawyers” to organize effectively and increase client value stem largely from attorneys' training and practice, according to Maister. These include problems with trust, teamwork and ceding power to leadership; suspicions of overarching principles (witnessed by agreement on a firm's theoretical values, but unwillingness to enforce them); and professional detachment.
In firms large or small, the attorneys along with the marketing, finance/operations, technology and HR professionals could increase the bottom line if they better understood how they could work together to increase client value.
A typical law firm may have these financial and operational realities:
- Revenue is driven by time, with all focus on billable hours.
- The firm is actually a loosely linked group of attorney entrepreneurs who may not like being managed or managing others.
- The partners or shareholders are paid based on business generation and collections, and expenses are paid right away, resulting in powerful focus on the current fiscal year.
- Shared risks and expenses, as well as large, semi-flexible profit margins (between 19 and 63 percent in the Am Law 100), can result in complacency about the business of the firm.
- Tiered compensation systems mean that some partner projects are not prioritized.
- An overall focus on short-term financial performance results in too little time spent developing associates and staff, and over-reliance on growing by lateral hires.
- In some firms, management is composed of partners nearer to retirement who may not have a long-term, vested financial interest in the firm.
Short-term financial incentives might lead a firm's strategic initiatives — which could be externally focused on increasing value to clients — to internally focus on goals such as profits and plugging gaps in service areas. In addition, attorneys' training to contest ideas and theories can lead to resistance to new initiatives for a firm. Having many owners with differing priorities can result in ambiguous firm proposals without actionable specifics. Furthermore, perfectionism and risk-avoidance, while virtues in the practice of law, can become vices in decision-making for a successful and competitive organization.
After reviewing these operational factors that can inhibit a firm's ability to deliver value, the LMA presenters discussed three specific examples of areas with potential for increased client value: (1) complying with billing guidelines; (2) proposing and delivering alternative fee arrangements; and (3) growing capabilities through lateral hires.
Complying with Billing Guidelines
Neglecting to read a client's billing guidelines — which specify what will and will not be paid as well as the required format and timeliness for bills — can be a big drain on a firm's bottom line. Noncompliance can mean write-offs, losing a percentage of revenue, spending partners' time correcting bills and, most dangerously, angering the client.
The LMA presenters pointed out that marketers could help on the front lines of RFP responses. Some lawyers may say, “We will comply with whatever the guidelines are, as long as we get the business,” but it is necessary to know whether the firm can comply and at what cost. Marketers who work on RFPs should read the billing guidelines and additionally make sure lawyers and the finance or operations department reads them.
Billing guidelines can also be a wealth of competitive intelligence on what really matters to a client. For instance, if they say the client will not pay for more than two lawyers in a deposition, then it may be wise to focus the RFP response on efficiency. At the RFP response level, there is potential for attorneys to negotiate: to affirm they can comply with the guidelines, but to suggest other billing methods that have worked well for other clients.
Alternative Fee Arrangements
Clients value alternative fee arrangements (AFAs) for various reasons, including their predictable costs and to participate in an industry trend. The LMA presenters posited that law firms could also realize benefits from AFAs, including predictable revenue, higher margins and effective sharing of risk — if they do them right. Successful AFAs encompass project scope; data mining to estimate costs; staffing; competitive intelligence; efficiency and project management; and ongoing monitoring of cost, scope and schedule. If a firm is not proficient at this, it risks running over budget and writing off many charges.
An audience member at the LMA seminar — a client relations director — agreed with the LMA presenters' point for the need for project management and monitoring, adding that clients hate surprises and want to know in advance when they are approaching cost thresholds. However, most firms need to make significant structural changes to manage matters within the context of an AFA. Optimally, a firm must align compensation to an AFA's pricing scheme, rather than use the traditional financial incentives that align with billable hours. For example, to successfully offer a volume discount, the compensation formula should consider efficiency metrics. Otherwise, a lawyer may think, “I'd rather get low realization than lower my billable hours.”
The LMA presenters suggested marketers ask these questions about AFAs:
- Can we pitch a fee arrangement that benefits both client and firm?
- Are there other ways we can add value to the fee proposal? (e.g., client wanted discount; we could instead offer to visit the client and write up a matter assessment for free rather than charging 15 hours.)
- Is there a better arrangement that will satisfy the client's underlying needs? (Is inside counsel's underlying need for lowest prices or to excel before their boards?)
- Is the scope clear or is the client just looking to leverage price negotiations with its current counsel?
- What else do we need to negotiate? (Now is the time.)
- How does the strength of our relationship factor into the risk sharing?
Growing through Laterals
The typical focus on short-term performance can lead a typical law firm to grow its capabilities through lateral acquisitions of attorneys and practice groups. While lateral growth may be easier than organic growth, is it cost-effective?
In most cases, a firm's motive is not about adding value to existing clients, but a hunt for new clients. Lateral candidates and their books of business are closely scrutinized, especially today. The process can be thick with layers of due diligence. However, a firm usually does not know the real reason lateral candidates are moving or how well they work with others. Sometimes they add value to the firm and its clients, and sometimes not.
Why do laterals sometimes fail and move on? The LMA presenters pointed to a number of reasons. Among them, if a lateral's book of business is big and self-sustaining, he or she may tend to silo the practice rather than integrate with the rest of the firm. Law firms need strategies to introduce laterals to other partners and their clients, and achieve deep integration. They could mandate that laterals spend one day per month in each office or a firm could assign a six-month mentor. These strategies, though, are successful only if the compensation system supports the behavior.
The LMA presenters made the point that when a firm adds a new practice, it is similar to a business adding a new product line. Such a business would do everything possible to develop and integrate the new line. At most law firms, this is not a high priority, and the results are self-evident. On the other side of the table, equity-level laterals are buying into a business. Part of their due diligence should be asking to meet with the firm's senior administrators to discover the firm's capabilities to deliver value to clients.
What can marketers do to reduce the time before a lateral starts adding value to the firm? The LMA presenters recommended getting in early on the discussion (besides writing the press release); understanding the internal challenges; communicating capabilities; building relationships; and prioritizing efforts to externally market, support and truly integrate the lateral into the firm.
As David Maister conceded, “Law firms are different” than other professions and businesses. Nonetheless, the market for legal services is changing. Firms that pay attention to organizing effectively and increasing client value will tap into a powerful differentiator for clients and for lasting success.
The LMA presenters posed the question to legal marketers: What can you do to increase your firms' operational effectiveness? The answer begins with making recommendations in an operational context, considering the financial implications beyond marketing. Marketers can act as business advisers of uniquely run businesses: bridging the gaps between the operational side, the attorney side and the client side of a law firm.
Richard Alonso serves on the board of the Legal Marketing Association's Metropolitan Philadelphia Chapter. He can be reached at richard@AlonsoMarketing.com.
Reprinted with permission from the August 16, 2011, issue of the Legal Intelligencer. © 2011 by Incisive Media US Properties, LLC. Further duplication without permission is prohibited. All rights reserved.