10 major trends impacting Canadian law firms in 2015

Global firms such as Norton Rose and Dentons have moved into Canada and more are on the way. They have swallowed up mid-tier law firms such as Macleod Dixon, Fraser Milner and Ogilvy Renault. Heenan Blaikie is another casualty of the competition being created by these global giants as corporate and securities deals now have more major players vying for fewer deals. These global mergers also create breakoffs of groups of partners who don’t want to be part of a worldwide firm run from New York, London or Brussels. This creates opportunities for small and midsize firms to absorb these disaffected partners, with their institutional clients, which are greatly desired by small firms, and can be run profitably from a smaller, more efficient platform.

Since the financial crisis of 2008, clients are demanding fee discounts of 10% to 50%. They are under pressure from their CEO’s to cut their legal costs and discounts are the easiest way to accomplish that.

Clients are also pushing for alternative billing as they want fixed fees and some certainty on their legal costs and as a result firms must focus on becoming more efficient.

There’s also a rise of innovative NewLaw business model firms providing legal services with much lower overheads, up to 50% lower than large firms and they are stealing work away from large firms because their charge-out rates and fixed fees are also up to half as much as large firms. This puts a lot of strain on maintaining realization rates and profitability in an increasingly competitive legal market environment.

Legal services are increasingly being commoditized in line with the competition created by more players in the legal market, and more lawyers are being pumped out of law schools that aren’t needed to meet the demand. Clients realize that often lawyers aren’t needed to do many simpler legal tasks, and they’re pushing for work to be outsourced to other cheaper jurisdictions or countries, or pushed down to paralegals, contract lawyers or outsourced general counsel to be done more cost-effectively. The mystique of law firms being the only ones who can do legal work is fast fading. There are many other non-law firm competitors in the legal industry now.

Realization rates are dropping. In the Georgetown Law 2014 Report on the State of Legal Market the average overall realization rate in 2014 was 83.5%, which was down 8% from the 92 percent rate reported in 2007, so that’s a big drop in realization over the past seven years. Clients are rebelling against law firms’ steady increase in their charge-out rates over the past decade, and they’re fed up and just will not take it anymore. Large firms have increased their charge-out rates much more than small and midsize firms, so that’s another opportunity for small and midsize firms to steal clients away from large firms.

Technology focus – LegalZoom and other automated legal service providers are quickly picking up market share and commoditizing most routine legal forms and documents. Law firms are automating more of their predecents and routine legal documents to increase their efficiency for fixed fee quoted commodity work.

Client focus is a term you’re hearing more and more, as clients demand that law firms think about client needs and profitability, not just their own. Clients want law firms to focus on their KPIs and their strategic goals.

Finally, mid-tier law firms are under continuing cost pressures as global firms are pushing hard from the top and NewLaw firms are nipping them from underneath. Mid-tier firms such as Heenan Blaikie, Macleod Dixon and Ogilvy Renault didn’t have the sophisticated management structure or the resources needed to compete with the global firms, and the NewLaw firms have cut their overheads in half. So mid-tier firms are increasingly in a Catch-22 situation, with nowhere to run. They will either be swallowed up or blown up, unless they change their business models.  Again, here’s another opportunity for small firms and midsize firms under 50 lawyers to steal clients away from their larger counterparts and hold the NewLaw firms at bay by reducing their overheads and updating their business models.

 

The Small Firm Advantage

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!

Win-Win Alternative Billing Strategies – Part II

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.