Increasing law firm profitability – what’s working and what’s not?

Cameron's Profits for Partners Blog

Originally published in Canadian Lawyer

Leverage

One of the fastest and easiest ways to increase profitability is to increase leverage by moving work down to the most efficient staffing level.  I’ve noticed some firms are adding non-equity partners to increase leverage and profitability, and this is a trend that continues to build. Clients are pushing hard on rates and don’t want to pay to train associates.  Non-equity partners, by contrast, hit the ground running and don’t incur training and supervision costs. Firms don’t break even on associates until three to five years of call on average, while non-equity partners are profitable right away.

Other ways to use leverage:

– Large national firms are pushing out underperforming partners with practices that don’t meet their minimum size standards, as they continue to lever themselves for maximum profitability.

– Personal-injury firms are outsourcing legal work to India to reduce costs.  This is quite…

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Increasing law firm profitability – what’s working and what’s not?

Originally published in Canadian Lawyer

Leverage

One of the fastest and easiest ways to increase profitability is to increase leverage by moving work down to the most efficient staffing level.  I’ve noticed some firms are adding non-equity partners to increase leverage and profitability, and this is a trend that continues to build. Clients are pushing hard on rates and don’t want to pay to train associates.  Non-equity partners, by contrast, hit the ground running and don’t incur training and supervision costs. Firms don’t break even on associates until three to five years of call on average, while non-equity partners are profitable right away.

Other ways to use leverage:

– Large national firms are pushing out underperforming partners with practices that don’t meet their minimum size standards, as they continue to lever themselves for maximum profitability.

– Personal-injury firms are outsourcing legal work to India to reduce costs.  This is quite a step forward in Canada, where until recently our privacy laws have made law firms hesitate to make this move.  If the outsourcing company’s servers are based in Canada and the work is being checked by Canadian lawyers, then this option can work well.

– Large national firms have outsourced administrative tasks such as word processing and billing to reduce costs.  Many firms are also outsourcing entire facilities-management, technology and marketing departments to local outside vendors such as Ricoh and Pitney Bowes Inc.

Cost Containment

“New business-model firms” such as Delegatus services juridiques inc. in Montreal and Cognition in Toronto are effectively acting as outsourced general counsel for large clients.  They operate on a virtual basis to contain premises costs and have also stripped down the management infrastructure required to run their operations. Their lawyers spend most of their time at clients’ offices, using clients’ support staff on files, which helps keep overhead costs down to as much as 50 percent of the average large firm.

Some firms are getting into project management in a big way, and find that clients are very happy to work with them to reduce their overall legal costs by getting more effective and efficient in how their legal matters are handled. This is a significant trend, and one that some law firms are using as a warm-up to alternative billing.

Centralized Management

Firms of all sizes are centralizing their governance systems to increase their efficiency and profitability. By giving managing partners the power to affect partner compensation, these firms allow the managing partners to motivate partners to do non-billable tasks that help to achieve strategic objectives.

Setting up file-approval systems under the control of a managing partner can lead to significant gains in profitability. In my experience, top-down, centralized management is the most efficient and effective way to manage.

Selecting the right clients is also crucial to becoming more profitable. Successful firms evaluate clients for their profitability, their ability to pay, and their fit with the firm’s strategic goals.

Utilization

Some firms are using “full-day” time accounting where lawyers track all non-billable time in addition to billable time. The idea is to get lawyers to account for all of their available time at the office, e.g. eight or 10 hours a day.  By having lawyers and staff account for all of their time, firms are capturing 10 to 20 percent more billable time and adding significantly to profitability as a result.

Firms should also attend to this non-billable information to ensure that their lawyers are not just focusing on the short term and their own billable hours. As management guru David Maister would say, how you spend your non-billable time is where your real profit is in the long term—for instance, your business-development efforts.  Tracking lawyers’ non-billable time can also reveal whether project-management techniques are working effectively and efficiently.

Another recent innovation is smartphone time-capture technology that allows lawyers to log their time while they work it, rather than afterwards, when their memory is hazy. This is the key to maximizing time-capture percentage.

Strategic Planning

Firms that proactively carry out strategic planning are more profitable than firms that don’t. Today’s highly competitive legal market demands that firms maintain a continuous planning mindset if they want to succeed. In the successful firm, the managing partner takes charge of executing the strategic plan and focuses on getting partners to follow through on their assigned tasks in order to achieve the goals of that plan.  The most profitable firms reward partners who complete non-billable tasks and penalize those who don’t.

The firms that do the best in today’s market are the ones with a tight vision.  They keep their team closely focused on the firm’s strategic goals, as opposed to taking a silo approach in which everyone operates independently. The days are past when a law firm could make easy money while letting every partner do whatever he or she wanted.

Partner Compensation

Your firm will make better profits if it rewards partners for the value they provide to clients rather than if it rewards them only for hours billed. Partners also need to be rewarded for profitable practices, in addition to sheer volume of billings. Those who expend extra effort in the firm’s best interests should be rewarded the most, and those who lever work down to others and unselfishly lead their practice groups should get special rewards.

Generally speaking, firms with subjective compensation systems are more profitable than formula-based firms. This is because the formulas usually drive partners to focus on personal production, instead of helping grow the whole firm.  An “eat what you kill” approach can stunt the growth and profitability of a firm.

People

Firms with strongly defined core values for their people do better than firms without them. In order to succeed, a firm needs a strong culture, where everyone buys in. This helps it achieve its goals faster, and makes its staff work harder and feel more fulfilled.

As the push to acquire the best talent continues, small firms are capitalizing on opportunities to hire senior partners who are close to retirement and are being pushed out of large firms.  Some are leaving early, taking their clients with them, to join small firms and enjoy better work-life balance. This can be a great win-win for both the senior partner and the small firm, as these partners can bring big-firm institutional clients that are coveted by small firms and can significantly increase their profitability.

Win-Win Alternative Billing Strategies

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.