5 Major Trends Impacting Canadian Law Firms Today

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Reblogged from Cameron's Profits for Partners Blog:

1) The Norton Rose Phenomenon One of today’s key trends affecting law firms of all sizes in Canada is the Norton Rose phenomenon. Norton Rose is a 2,900 lawyer global giant, organized as a Swiss Verein, which has just gobbled up Ogilvy Renault and Macleod Dixon in two quick bites. Within a matter of months, they have singlehandledly changed the face of the Canadian legal industry, creating the third largest legal firm in Canada and they’re just getting started. That’s pretty incredible, and scary for …

Win-Win Alternative Billing Strategies – Part III

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This is the third installment of a three part series based on my presentation on “Win-Win Alternative Billing Strategies” at the CBABC Sixth Annual Branch Conference in Las Vegas November 18-20, 2011.

What are the innovators doing?

The first innovator I’ll talk about is Patrick Lamb’s firm, Valorem Law Group based in Chicago.  Patrick was formerly with an Amlaw 100 firm, and decided to leave to start his own 9 lawyer litigation boutique to focus on fixed fee litigation services.  

Patrick has two main concepts he promotes in his billing approach.

First, he sets up fixed fee estimates for the various phases of a litigation file, in consultation with his client.  Then, at the end of each phase, the client is invited to add or subtract from the fixed fee for that phase, depending on perceived value provided.  And often the client is premiuming the fixed fee based on value perceived.  

Second, at the end of the file, when all the results are in, the client is invited to again adjust the final bill based on results and Patrick has the opportunity to gain a significant bonus based on results.

Only a handful of firms are doing fixed fee billing on litigation files, so Patrick is certainly at the leading edge here. 

Seyfarth Shaw is a 750 lawyer full service law firm with multiple offices in the US.  They’ve focused on “Lean” Six Sigma techniques in a big way.  Six Sigma is a technique that’s been used by many Fortune 500 companies to improve quality while reducing costs and getting more efficient.  “Lean” Six Sigma is a cut-down or leaner process than regular Six Sigma, which can be very resource and time hungry.  Seyfarth uses Lean Six Sigma techniques to significantly reduce the cost of producing legal work in conjunction with alternative billing and makes clients very happy in the process.

Orrick is a very large firm in the US which is offering portfolio billing, essentially a flat fee to provide all of a Fortune 500 company’s legal work on an annual basis.  Orrick signed such as deal a couple of years ago with a Fortune 500 company for a price totalling 20% less than what the client paid last year.  This will give Orrick tremendous incentive to get more efficient in the way it handles the file in order to maintain its profitability for this client’s work.  As a result of its experience with alternative billing, it is willing to take that chance, and it’s doing what it can to satisfy the client and their needs to reduce overall legal costs. Now that’s innovative.

The Economics of Alternative Billing

A 20 per cent discount with a 40% profit margin is equal to a 50 per cent cut in profit. That’s a big hit.  You’re going to have to really pedal hard to make up for that loss in profit when you get into alternative billing.

Leverage still works, and you should be optimizing where the work is done, making sure it’s done as efficiently as possible, at the lowest possible level, keeping in mind overall cost for the client is kept to a minimum. 

Realization is key to profitability, and you need to get more efficient.  The fact is that’s how many smart law firms track their profitability, it’s the realization on their time.  And that’s an opportunity cost that you have.

Some will say you don’t need your timesheets any more. I say, think twice about that, because you’ve got a lot of valuable information in your time and billing systems and you don’t want to lose that information by not recording time. 

Legal Project Management 

So that brings us to the latest “hot” thing in legal management.  Legal project management.  There are a few consultants out their touting this as the panacea to your alternative billing problem.  They talk about Six Sigma, LPM, getting more efficient while lowering costs and increasing quality, etc.

So, is LPM the solution?

As a first comment, lawyers are not good project managers, and have never had to be since they’ve been doing hourly billing for decades, which doesn’t reward efficiency.  It rewards more hours under most partner compensation systems.  So law firms have to do a total rethink of their partner compensation systems and criteria to operate effectively under alternative billing.

So how do we deal with this? 

I think there are some simple things that can be done to improve efficiency, without going whole hog into project management now.  Jim Hassett of LegalBizDev has some good advice, with just in time training of LPM, as an example. Look at where simple efficiencies can be gained, and experiment a bit.  

Law firms want to be seen as being proactive in reducing clients’ legal costs, so the smart firms are learning about project management now, and approaching their clients with the objective of getting more efficient if clients are receptive.

Legal project management can also be done whether you’re doing hourly or fixed billing, and similar benefits can result without as much risk for either side.

Legal project management is also being looked at as an alternative to alternative billing. Interest amongst law firms has gained rapidly over the last couple of years, as firms are rapidly trying to get themselves more efficient without clients forcing them to do AFA’s first.

Preparing for Alternative Billing

- Go slow at first, and experiment using pilot projects with understanding clients.  Don’t start with “A” clients, as they may get unrealistic expectations, and get upset when they aren’t offered alternative billing after all.  Start with B and C clients.

- Ask clients what they want

- Determine the value of your services to the client as we discussed earlier.

- Add value, as we discussed using 51 ways to add value, etc.

- Don’t throw away your timesheets, as they will be invaluable for tracking the profitability of your alternative billing files, and will also help you with costing and pricing future AFA’s. 

- You don’t have to be profitable on every AFA file.  This is a tough one for many partners to get their minds around.  With fixed fee billing, you will make some mistakes at first, so treat those as learning mistakes.  Just reduce the amount of risk at first by trying this out on smaller files until you get the hang of alternative billing.  The idea is that you will win some and lose some, but you are sharing risk with the client, and you will get better at it the more AFA’s you do.

- Improve your fee budgeting skills.  Lawyers aren’t good at budgeting, as they’ve never had to be under hourly billing.  You must do more work on this up front to optimize your profitability and produce a win-win result for your law firm and the client.

Call to Action

Prepare for alternative billing now.  It’s not going away anytime soon, so get educated on the topic and start looking at ways to implement alternative billing in your firm.

Look for ways to add value.  There’s many ways to add value for your clients, so start looking at this area now.  Clients are getting more demanding and want more value for their dollar, which they haven’t been getting in many cases under hourly billing.

Become more efficient.  You can do this in various ways, but start simple and work with your clients on ways to reduce wasted legal steps and get more efficient.  Learn more about Legal project management and how it can be applied in your firm.

Communicate with clients.  Find out whether they’re interested in alternative billing, and give them options.

Finally, partner with clients on alternative billing.  You can work together on this and hopefully create a win-win situation with a very satisfied client for a very long time.  That is the ultimate goal.

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The Small Firm Advantage

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Originally posted on Small Firm Innovation

Large law firms today are in a real bind.  Their large clients are looking for lower legal costs, but large firms have big overheads, lots of partners to feed, and little experience in providing alternative billing solutions.  They have increased their chargeout rates significantly in the last decade, and large clients are understandably upset.  The rise of the Association of Corporate Counsel (ACC) is an indicator of just how upset they are and their need for retribution.

Small firms, on the other hand, are sitting in the catbird seat.  They have what large clients want.  They have low overheads, their chargeout rates are significantly lower than large firms, and they have lots of experience with fixed fee billing for commodity work.  They’re also hungry to get their hands on large firms’ institutional client work.  Large clients are interested in what small firms have to offer, since large firms aren’t responding to their repeated requests for alternative billing.

The time is ripe for small firms to turn their better value offering to their advantage and steal good work away from large firms.  It’s there to be had, and large clients are looking for options.  Take the advantage now.  The economy is in tough shape, and the opportunity won’t get any better for small firms.

Put together an alternative billing strategy and lure away large firm partners looking for more flexibility and better work/life balance.  These partners can make more money in less time with a lean platform that’s already in place in a small firm. They can be the big fish in a small pond.  And many large firm partners are doing just that.  They’re jumping ship from large firms that have retirement policies that force them to retire in their prime practicing years.  Why not take your clients with you and create something new, that’s truly yours, and not be treated like an employee in a mega-firm where you have no say?

No oppressive rules, no national firm overheads, no one telling you what to do.  Be creative, experiment a little, and have fun.  What more can you ask for?  Use the technology you want without the constraints imposed by some large firm tech department.  Use LegalZoom technology, outsource to the best lawyers available, work virtually and create virtual teams of like-minded partners from other large firms who are ready for a change.  The legal industry is in turmoil, and that’s a real opportunity for small firms.

Develop a new strategic plan with a unique value proposition.  Offer value pricing and make clients very happy.  The Valorems of the world are already doing it, and have done all the groundwork for you.  Market yourself as the expert in your field on your terms, and no one else’s.  Use social media as you see fit, and take advantage of this very effective and inexpensive marketing technique that large firms just can’t seem to do as well as a small firm can.

Make your legal working life a lot easier and more fulfilling.  Work with like-minded people who want to create something new, something exciting, and something that can allow you to make twice as much money in half the time. Now that’s real work/life balance!

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Win-Win Alternative Billing Strategies – Part II

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This is the second installment of a three part series based on my presentation on “Win-Win Alternative Billing Strategies” at the CBABC Sixth Annual Branch Conference in Las Vegas November 18-20, 2011.

Value Pricing – Part II

In Ron Baker’s book “Implementing Value Pricing”, he puts forward an eight-step plan on how to price a job up front on a fixed fee basis.

The concept of value pricing that he talks about is different than the value billing concept that lawyers have talked about for years.  Lawyers usually work on an hourly basis, and then try to charge a premium at the end of the file based on the extra “value” as perceived by the lawyer.  So on a $30,000 file, if a significantly higher recovery is obtained than expected, the lawyer may try to charge a premium of $6,000, or 20%.  The client’s response might be, “Why are you charging me a premium at the end of the file. We had a contract for an hourly rate, right?”  Ah yes, the lawyer says, but in the fine print of the engagement letter there is a clause that allows the lawyer to charge a premium of whatever the lawyer wishes on top of the hourly rate based on the lawyer’s perception of value provided.   The client either says no, or thinks twice about using that lawyer the next time.

Instead, the value pricing system calculates the value up front, not at the end of the file as value billing does.  A very important distinction.

Another benefit of pricing for value up front is that it also allows you to obtain a larger retainer up front as well.  If you have scoped out the work properly and provided a fixed fee quote, with some measure of certainty for the client on the total amount of legal fees to come, they will be much more willing to give you a third or a half of the fixed fee up front.  If there is uncertainty as there is under hourly billing, the client is much more hesitant to pay a retainer, or will only provide a very small retainer up front.

So you need to negotiate the value and the price of the legal work in a conversation with the client up front.  Ask the client what he or she values. That value will determine what price you can charge for your legal services.

How is value determined? 

Does the client or the lawyer determine value?  The answer of course is the client.  Notwithstanding that the lawyer may have many years of experience in the practice area, every client has a different perception of the value that your firm provides.

Ron Baker says, “Price the customer, not the service.”  So each client needs a different value/price proposition.  What that means is that you may charge a different amount for the same service to different clients. However, keep in mind that each client wants service provided in a different way.  So each client has a different value “package” that it requires.  One client may want a service guarantee, one may want a fixed fee, and another may want the service provided tomorrow, not next week.  Each service feature carries a different price tag.  So it’s like a new car, which is provided with several different option packages, and each client gets to choose the options she wants.

The most important point here is that it’s all about choice.  The client wants choice.  They may decide to go with either a fixed fee or an hourly fee, or a hybrid fixed and hourly fee, but they want to have the choice to select from.  You need to provide them that choice.

4 Main Ways To Add Value For Clients

- Increase revenue – such as increasing the recovery for a plaintiff in a lawsuit

- Reduce the payment required as a defendant

- Reduce risk for client with a fixed fee

- Enhance reputation, such as using a blue chip law firm’s reputation to secure public financing that you may not have received otherwise.

Costing Out The Work

Once you’ve determined the price for your fixed fee service, you can then determine what it will cost to do the job.  You will need to to budget costs to arrive at the desired profit.  If you can’t make the cost work in order to get the desired profit margin, you simply decide right now not to take the job.  Why get involved in a loser if you know the answer up front?

Another key to Ron Baker’s pricing on purpose is that timesheets are actually done up front, instead of as the work is done.  By doing your timesheets ahead of time, you are able to determine what your costs are for pricing purposes to obtain the profit margin you require.

Do you still need to track time?

Yes! You still need to track time in order to understand what your costs are on each file and whether you were profitable.  This is one area where I disagree with Ron Baker, who says he wants to trash the timesheet.  Timesheets are still important for costing your files, and ensuring that you price your future jobs to optimize profitability.

Keep in mind that as you get into alternative billing and fixed fees, there’s always a danger that you will get involved in price wars.  Don’t.  This is a race to the bottom, as there’s always someone who will do the job cheaper than you.  Instead, do whatever you can to distinguish your legal services from the competition, and “uncommoditize” them. Any service can be “uncommoditized”.   If not, and it truly is just about price, get out of that business and replace it with something else where you can make money.

Another rule to consider is the 80/20 rule of profits.  Under this rule, you make 80% of your profits from just 20% of your clients.  Read Ron Baker’s “Implementing Value Pricing” and you’ll see the study backing up this guideline mentioned in one of the appendices.

So what that means is that you have to be ruthless in evaluating the profitability of your clients, and cut the bottom 20% on a regular basis and replace them with more profitable clients.  The first step is to determine profitability of each client, however. We’ll talk more about that in a future post.

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Win-Win Alternative Billing Strategies

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This is the first installment of a three part series based on my presentation on “Win-Win Alternative Billing Strategies” at the CBABC Sixth Annual Branch Conference in Las Vegas November 18-20, 2011.

Current Situation

Alternative billing has been done in conjunction with commodity work for decades in Canada.  Fixed fees are common for personal services commodity legal work such as residential conveyances, wills, etc.  However, alternative billing is not common for most business law and litigation work in Canada. Canadian law firms are not proactively offering alternative billing to their clients either.  And clients aren’t happy about that!

Alternative billing is growing rapidly in the US and Europe, however.  Large clients are pushing big firms to offer alternative billing and they’re getting price discounts of 20% +.  This is what’s coming to Canada soon as well.  So you need to get ready for how to deal with that.

The New York State Bar Association “Report of the Task Force on the Future of the Legal Profession”, published in April, 2011, has a set of recommendations on alternative billing, and it predicts that alternative billing will be the dominant form of billing in the future in the legal industry. Clients are pushing for it, and Bar associations are supportive.

The Association of Corporate Counsel (ACC) is going to be setting up shop in British Columbia and Alberta soon, so it’s coming very fast.

What Do Clients Want From Alternative Billing?

Clients want lawyers to provide more value for money.  Legal chargeout rates have risen dramatically in the last decade, and clients want a price rollback!

Clients also want more predictability in legal costs.  They want fixed fees.  They want to be able to budget their legal costs as close as possible in order to satisfy their CEO’s desire to reduce overall legal costs.

Clients want law firms to share the risk when working for them.  At the moment, clients have all the risks under hourly billing.  Clients want to pay for results, not hours spent. If results aren’t achieved as planned, law firms should be sharing the downside as well.

Many clients are looking for lower overall legal costs.  Legal costs are spiralling out of control, and clients are fed up.

What Do Law Firms Want From Alternative Billing?

Law firms want to maintain or enhance profitability when doing alternative billing.

Law firms want to manage risks, and may prefer not to take on all the risk, but are willing to share risks with the client.  But the risks are a spectrum, and there is a different price all the way along the risk spectrum.  The more risk, the higher the risk premium, just like a stock portfolio.  The higher the return, the higher the risk.  Clients are willing to pay a premium for less risk as well.

Law firms want to retain clients, so they need to offer alternative billing, as clients are looking for it now.  And you want to offer alternative billing before your competitors offer it and steal your clients away.

Law firms want to satisfy clients, and alternative billing offers ways to satisfy clients even more than you are now!

Value Pricing – Part I

So what’s your unique value proposition?  What do you offer that no one else offers for the same value as you do?  Many firms do not focus on this question, and it’s the most important question you need to answer, because it’s the first question a client will be thinking about.  Why should I use you instead of your competitors?

You will need a unique value proposition in order to succeed with alternative billing.  If you don’t, it’s just about price, and that’s a losing game in the end.  You have to distinguish yourself from your competition in order to price at a premium and achieve profitability with fixed fees.

Ron Baker is a CPA who has been talking about the concept of value pricing for over 30 years.  He is the real guru of alternative billing.

Ron presents the formula: Value = Customer Profit minus Price.  What this means is that Value equals the impact your legal work has on a client’s profit less the price of your legal service.   Everything you do for a client will have a positive or negative impact on a client’s bottom line.

Some of the value you provide will be in the form of a tangible benefit, eg. hard dollars recovered or saved, and some will be intangible benefits such as enhanced reputation eg. client gets public financing with the help of your law firm’s blue-chip reputation.

The document “51 Practical Ways To Add Value” on the ACC website is an excellent overview of how you can add value for clients.  It is from a large firm’s point of view, but many of the points are relevant for small firms as well.

For example, ask the client what their strategic plan is. Many clients are very impressed by firms that actually talk to them to find out what their company goals are.  From there you can find out what the client values, and organize your legal services and resources in a way that can truly benefit the client.  And when you start thinking about the client’s profits before your own profits, then you really add value.  If you can help the client become more profitable, your profits will flow naturally as a result.

5 Major Trends Impacting Canadian Law Firms Today

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1) The Norton Rose Phenomenon

One of today’s key trends affecting law firms of all sizes in Canada is the Norton Rose phenomenon. Norton Rose is a 2,900 lawyer global giant, organized as a Swiss Verein, which has just gobbled up Ogilvy Renault and Macleod Dixon in two quick bites. Within a matter of months, they have singlehandledly changed the face of the Canadian legal industry, creating the third largest legal firm in Canada and they’re just getting started. That’s pretty incredible, and scary for some at the same time. This is the new order in Canada’s legal industry.

This is also a defining moment for the legal industry in Canada, and will potentially drive more mergers and changes in national and regional firms as Norton Rose presses its influence. It could force Canadian national firms to get bigger or they’ll be swallowed up as well. Other global giants such as DLA Piper are waiting in the wings.  At 4,000 plus lawyers it’s the largest law firm in the world.  Discussions are happening amongst multiple potential Canadian merger partners, with other global firms no doubt interested in Canada’s lucrative resources legal work as well.

There are many similarities to what the large accounting firms such as KPMG and Deloitte went through in the ‘80s and ‘90s, as they used Swiss Verein structures to build their global presences as well.  The Swiss Verein structure provides limited liability, world-wide branding and consistent client service standards as some of its features.

Large Canadian law firms are being influenced by the large accounting firms in many ways. In the 90’s, large Canadian law firms went national to protect against the feared onslaught of accounting firms, which fizzled out when Enron happened, but the large national law firms remained. Now there is pressure  again being exerted from the outside, and large firms will have to restructure to fight against this new enemy.  Rumour has it that the large accounting firms are looking to get back into the legal industry again as well.

As an adjunct trend, the rise of the ABS regulations in the UK is putting an even more interesting spin on Norton Rose’s arrival in Canada. ABS allows public ownership of law firms, which is happening right now as UK firms are lining up to go public. If this trend catches on in the UK, even more resources will become available to UK-based firms like Norton Rose, and the US may have to consider the possibility of allowing public ownership for US firms to compete with publicly owned UK firms. This could lead to the ultimate showdown of publicly-owned global law firms, which may lead the legal industry to look something like the big 4 accounting firms when the dust settles, or…? Stay tuned on this one :) .

2) Move to Corporate Model

Another trend happening simultaneously is the move to more corporate models of firm governance amongst large Canadian firms. McCarthy’s moved to a board of directors and a full corporate business model a few years ago, and other large and regional Canadian firms are now going the same way. Practice groups are consolidating on a national basis, similar to what the large accounting firms have done for decades.

3) Alternative Billing

Fee pressures from clients are being experienced by firms of all sizes in Canada. It ranges from the small firms that do commodity work such as residential conveyances for less than what notaries charge in British Columbia, to large firms that are being pressed by large clients to offer alternative billing arrangements such as fixed fees to provide more certainty and less risky billing options.

Alternative billing is not as advanced amongst large firms in Canada as it is in the US and Europe, however, it is coming and firms need to prepare. It is being felt in the banking and intellectual property areas already, for example. It has been prevalent in commodity work in Canada for decades eg. personal services law, residential conveyancing, wills and estates, etc.

Project management is another trend that midsize and large firms are embracing, as a forerunner or as an adjunct to alternative billing. The idea is to get as efficient and effective as you can, then use this efficiency to go out and compete in the fixed fee arena, and hopefully maintain or enhance profitability.

The whole concept of value is being embraced by clients, who are looking at the very high chargeout rates that law firms have brought in over the last decade, and they now want retribution and rollbacks, or at the very least a stop to the increase in their legal budgets. The rise of the ACC Value Challenge is just one indicator of their resolve here.

If the economy worsens in a possible double-dip recession, clients will exert even more pressure on law firms. Firms must prepare for this change in the client’s mindset and must demonstrate more value to satisfy clients.

There is also a movement to reduce the recovery of soft costs such as photocopies and fax charges, which irritates some clients, and law firms are pulling back on this somewhat.

4) National Firms Cleaning House

National firms are cleaning house and cutting partners with practices below minimum $ practice size and clients that don’t meet minimum $ billings levels. This is a great opportunity for small and regional firms, who are picking up these senior national partners who have been pushed out or who have left national firms for better work/life balance.

This can be a great boon for the smaller firm, as they acquire new talent and institutional clients, who will remain with the smaller firm after the partner finally retires. Many national partners have established long relationships with their clients, and are able to transition their clients to their new smaller firms and make them profitable with the lower overheads of a small firm.

5) The Rise of Innovative New Legal Business Models

The rise of innovative new business models such as Delegatus, Clearspire, Axiom, Cognition, etc. The concepts of outsourced in-house counsel, no partners, franchised firms and virtual firms are threats to national and regional firms and an opportunity for small firms.

“Non-law firm” legal service providers such as Thomson Reuters are also looking at getting into the business of providing legal services through their outsourcing arm Pangea3. The ABS regulations offer the potential of “Tesco law”, which opens up possibilities for many more non-legal entities to provide legal services as well. These are threats to traditional law firms of all sizes.

Presented at the Seventh Annual CBA Law Firm Leadership Conference held October 24-25, 2011 in Vancouver, BC

Planning for Success – Key Issues & Goals

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Originally posted on Small Firm Innovation

In the first planning installment, we talked about creating a vision and core values statement. The next step is to identify the firm goals and key issues facing the firm.

One suggestion for getting buy-in from the partners is to have them write down the top 3 goals for their practice and for the firm, as well as the things that are stopping them from achieving their personal and firm goals (the key issues).  Submit these for compilation and discussion at a planning retreat.  This will also start the process of aligning personal and firm goals.

At the planning retreat, list all the goals and issues on flipchart paper and post them for all partners to review as the day proceeds.  Then start discussing the issues one by one until you have exhausted all issues.

I’ve found the process is usually more successful if you start by discussing the issues first and the goals after.  Lawyers are naturally focused on what’s wrong with the firm rather than the positives, so I find this approach simplifies and speeds up the discussion considerably as a result.

Once all of the issues have been discussed, then you can start prioritizing the issues.  Aim to have the top 5 issues decided on by the day’s end.  This part of the process can proceed quite quickly if you’ve already had a thorough discussion of the issues beforehand.

Once you have a prioritized list of the top 5 issues facing the firm, you can now start to turn those issues into quantifiable goals.  For example, if one of the issues is “lack of profitability”, then the goal can be converted to “increase profits by x% over x years”.  This is a quantifiable goal with a deadline, which is essential for follow-through and measuring the success of the firm plan later on.

Review the list of goals submitted prior to the retreat, and add or modify to this list based on the discussion of the key issues.  Decide on the top 5 goals as a group.

Once you have decided on the top 5 goals, then you need to determine if completing these goals will be enough to achieve your vision.  If not, you will have to repeat the process until you come up with an adequate set of goals which will achieve your firm vision.

In the first installment we talked about determining where you’re at today and your vision of where you want to be in 5 years.  The difference between these two points is known as the “planning gap.”  The strategic plan will include all of the steps required to get you from where you’re at today to achieving your vision.  The strategic plan will normally cover a 3 to 5 year time frame.

This completes the goal-setting phase.  Now we can start thinking about the strategies and action plans needed to complete the firm plan.  We’ll discuss this phase in the next planning installment.