Lawyers: Ask for the Order!

Mike O’Horo of RainmakerVT posted a great article, “Lead-generation is not the same as business-generation”.  See here. The article notes how the whole process of marketing as most law firms do it is essentially worthless if you “don’t ask for the order” and make the sale.  Most lawyers have great difficulty with this step, and miss out on a lot of very profitable business.

In most law firms, the number of real rainmakers is less than 10-20% of the total # of partners.  Yet all equity partners are expected to bring in business of a minimum $ amount to support the growth and profitability of the firm.  Rainmakers must be compensated to a level that keeps them happy, as they are a rarity in the practice of law.  You must motivate and retain these rainmaker partners with appropriate compensation packages to ensure the future success and profitability of the firm.  The rest of the partners must be satisfied with earning less if they can’t or won’t bring in the business.

You must reward your rainmakers with bonuses or higher units of compensation to keep them motivated and bringing in new business. You’re not just rewarding partners for hours billed, you’re rewarding partners for originating work, which needs to carry a bigger weighting at compensation time.  This is where many small and midsize law firms’ compensation systems fall short in my experience.  This is rewarding lawyers for increasing sales, and really no differs from paying bonuses to the best-performing car salesperson on the lot. The sooner law firms get this, the better off they’ll be.  Since all partners will share in an increasing pie, individual partners can’t be worried a rainmaker is making more than them, when everyone benefits from what a rainmaker does.

Law firms must operate in a business-like fashion.  For decades, law firms have operated with a partnership business model protected from the ravages of competition that other professions and businesses have had to endure.  Changes must now be made quickly to become more business-like in your operations and reward partners for “asking for the order” before your competitors beat you to it and steal your rainmakers away from you.

Win-Win Alternative Billing Strategies – Part III

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.

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.