Category: Firm Finances

Win-Win Alternative Billing Strategies – Part I

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

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 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 might 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 nationally, 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. 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. To get as efficient and effective as you can, then use this efficiency to 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 high chargeout rates that law firms have brought in over the last decade, and they now want retribution and rollbacks, or at the 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 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 can 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

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.