Marg Bruineman included my comments in her excellent article, “Keep your eye on the prize”, published in Canadian Lawyer I magazine. The article discusses cash flow issues facing Canadian law firms today. My comments focus on suggestions for increasing cash flow using various bad debts prevention controls, including retainers, credit checks and credit limit systems.
Here is my latest white paper written for Clio on “Alternative Billing Structures in Law Firms”. In the paper I discuss how to determine the “hard value” that your law firm will provide during the course of the engagement. This will help determine the price you can negotiate up front before the engagement proceeds. If you can master value-pricing and this “hard value” determination process, you will unleash one of the major boosts for optimizing long-term profitability for your law firm.
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.