Category: Profitability

red and white dart on darts board

Is this the “tipping point” for use of Lean Six Sigma in law firms?

Clifford Chance, a ‘Magic Circle’ firm in the UK, has decided to train all of its lawyers in ‘Continuous Improvement’ techniques. CI is a subset of Lean Six Sigma or Lean, a process improvement technique used by Fortune 500 companies for years, but has had minimal penetration in the legal industry to date. Seyfarth Shaw, a large US law firm, has been an innovator in Lean techniques for several years, but few other firms have committed to Lean in the way Clifford Chance is now doing.

Lean is a method used for increasing efficiency of processes, as explained in this article on legal process mapping. Seyfarth Shaw, one of the firms mentioned in the article, has used process mapping with its clients with good results.  They have reduced ‘waste’ in legal processes, which can range from 30% to 80% of the total work required.  It is surprising there is so much waste in how legal work is done.  Perhaps not that surprising; however, as hourly billing arrangements encourage wasteful working habits. You get paid more money the more hours you work on a file under hourly billing arrangements, so the temptation to over-work a file is there.

Hourly billing encourages inefficiency, while fixed fee billing encourages efficiency.  As law firms become more efficient in the way they work on files, they must switch to fixed fee billing to maintain or increase file profitability. If you don’t change your billing method, you will find your profits shrinking away as you get more efficient under hourly billing.

Many firms resist fixed fee billing since they aren’t willing to change the way they do the work. Why change when making good money under hourly billing arrangements? What will likely force the change is that the move to Lean techniques by firms like Clifford Chance will accelerate the move to fixed fee billing arrangements. As this happens, other magic circle firms and large US firms will be forced to change to compete for clients hungry for this more efficient way of working and the lower overall legal costs that result. Eventually the rest of the legal industry will follow suit.

Partner compensation systems will also need to change to reward partners for increasing efficiency instead of billing more hours. This will be a very difficult change for most firms, however, and there will be casualties along the way as partners battle to maintain their position on the compensation grid. So law firms need to prepare for these changes now, before it’s too late.

man in black suit working

The Accountants are Back!

Recent developments indicate that accounting firms such as KPMG are looking at getting back into the legal industry after an absence of over ten years. See articles here and here. Accounting firms had to get out of the legal services business back when the Sorbanes-Oxley Act came into effect in 2002 due to conflicts with their management consulting, audit and legal services businesses.

With the ABS regulatory changes now well underway in the UK, accounting firms are looking closely at the legal industry again.  Accounting firms are well ahead of law firms on the business management and marketing fronts, and will be formidable opponents to law firms if they commit their resources to a full-scale re-entry to the legal industry.  And that’s what they appear to be preparing for in the UK. I fully expect the global accounting giants to make a big push into the legal industry in the near future, and smart law firms will team up with the accountants to provide global business advisory services unmatched in the world today. Some global accounting firms will move back into the legal sector again in a big way by merging with mid-tier and large law firms in ABS structures to gain legal market share quickly.

I also see many opportunities for small and midsize law firms to team up with accountants to provide trusted business advisory services not being offered today.

Client-Facing KPIs

Originally published in Law Practice Magazine

Many law firms use Key Performance Indicators (KPIs) to maximize their profitability, but have little knowledge o­­­­­f what their clients’ KPIs are. This is because law-firm partners commonly hold the view that the lawyer has lots of experience with this type of client or work, and believes he or she knows what the client wants already.  However, the only way to really know what clients want is to ask them. When you ask clients what’s important to them, these five client-facing KPIs usually stand out.

Deliver on Time 

Most clients have a good idea of the turnaround time they require from the law firm. But you need to ask them what that timeline is in order to find out exactly what they’re looking for here. Then you need to measure your success in achieving this objective on an ongoing basis, because the client certainly will be.

Meet Budget 

The client expects an estimate or budget for the legal costs up front, and will judge you on how close you come to the original estimate and how frequently you meet budget. The client will also expect you to be as efficient as possible.

Be Effective 

Did you achieve the outcome the client was looking for within the client’s cost parameters? First you need to ask the client up front what outcome he or she views as success. You then need to measure your progress toward achieving this outcome on a regular basis throughout the file.

Add Value 

Ron Baker, a well-known value-pricing consultant, created this formula for determining value. I have modified it slightly for this article.

Value = Increase in client profits minus the cost of your legal services.  The client’s perception of value is determined by its view of how much “profit” you added to its bottom line during your engagement. The client assesses the value that your firm added on both a quantitative and qualitative basis.

Value can be added in four main quantitative ways:

1) Help the client increase revenues—e.g., refer work to client, obtain large recovery on plaintiff file, etc.

2) Limit costs, e.g. reduce payout on an insurance matter

3) Reduce risks, e.g. prevent potential for future payouts

4) Use your firm’s reputation to help the client obtain financing

In addition, the client will qualitatively assess your firm’s “value add” based on criteria such as your creativity, what you added to its knowledge systems, your win/loss ratio, and whether you work compatibly with its people and its culture.

Satisfy the Client 

The client is constantly evaluating you on all of the above factors in assessing its satisfaction with your service.  Amazingly, recent studies show that the average law firm asks only five of its 20 top clients whether they are satisfied with the firm’s service. Law firms need to be more proactive about asking clients if they’re satisfied, and make changes as required to meet the clients’ satisfaction.  You can track client satisfaction on a continuous basis using interviews, survey questionnaires, and so on. Keep regular track of your client-satisfaction scores, and focus on increasing satisfaction. Reward partners for achieving high client-satisfaction scores.

The Challenge 

Hourly billing systems are still the norm for law firms and encourage law-firm partners to maximize billable hours and production, not to be timely and cost-effective on client files. The challenge for most firms is how to motivate partners to achieve both firm profitability and client KPIs. Law-firm partner-compensation systems must be modified to reward partners for being on time and cost-effective in order to make this happen.  Whether you bill on an hourly or fixed-fee basis, however, you still need to maximize value for your clients. That’s how you can establish a long-term strategic partnership with your clients, which will provide a steady and growing stream of profits for years to come.

Are you ready for client-facing KPIs? Put your clients’ success first, and use this goal to motivate all lawyers and staff in your firm. The rest should follow naturally.