The following is a summary of remarks I made to the Clearwater (FL) Bar Association Solo & Small Firm Section on Tuesday, April 10, 2012 at the Greek Town Restaurant in Clearwater.
My wife’s friend, Christina, is enrolled in the
Executive MBA Program at University of Tampa.
A few weeks ago, on a Saturday, Christina called to see whether I would
mind reviewing her accounting homework.
We spent a couple hours going over the problems. A few days later, she called again to schedule
time the following Saturday and asked whether five classmates could tag along. This began my adjunct-adjunct teaching career
– think “off-off Broadway.”
A Business Case Study
After our most recent study session, I posed a
hypothetical business case to my MBA group:
·
Imagine a business with leaders who have minimal,
if any, formal business training. Further
assume these leaders act in a leadership capacity only part-time; most of the
time they are indistinguishable from any other employee of the business.
·
Every employee operates with a high degree of
autonomy and wears many, many hats – acting as his/her own marketing manager,
sales director, scheduler, production department, quality control inspector,
credit manager, billing department, and collection agent.
·
The business delivers lots of different products;
each product tailored to the customer’s unique needs. Product quality depends largely on each customer’s
special circumstances and the employee’s production skills.
·
Pricing, too, is tailored to each customer’s
situation.
·
Fortunately, demand has remained brisk for a number
of years; more than enough to absorb new competitors entering the marketplace.
·
Then things begin to change!
o First, prohibitions on advertising are relaxed and, to keep pace with
direct competitors, a big, new expense item is introduced to the budget.
o Second, the economy hits bottom and suddenly demand for these products
drops; there is an industry-wide slump and competition changes from friendly to
intense.
How, I challenged these future MBAs, should the leaders of this business respond to ensure survival?
MBA Recommendations
By now, you have figured out I was describing the
legal industry and the challenges we’ve undergone in recent years. The MBAs had yet to be exposed to service
organizations, but that didn’t constrain them from making recommendations fast
and furious. Their advice: the business
needs to move quickly, guided by detailed financial analysis to:
1. Assess their cash flow
requirements to see how much time and what financial resources
they have to weather the situation;
2. Examine financial strengths and
weaknesses of various product lines to figure out which
are profitable and which to discontinue; and
3. Reduce their operating costs while at the same time increasing
efficiency and productivity.
I thought the MBA students were spot on in
assessing the situation and how to react.
How Most Law Firms Actually Reacted
Apparently most law firms didn’t get this type advice. Instead, most of them did the following:
1. The boldly cut back on perks, like free soda, in an effort to maintain
gross margins.
2. When that proved insufficient, back office staff was reduced and later
underproductive lawyers were jettisoned.
3. Finally, they attempted a Hail Mary pass – turning to business
development consultants in hopes that given enough training everybody might miraculously
become a rainmaker.
Most law firms reacted with short-term responses to what is clearly a long-term challenge. When the US economy comes back, we won’t be able to simply hit a reset button and return to business as usual circa 2007. Gone forever are the days when firms can deal with financial challenges simply by raising hourly rates with impunity.
The Innovative Few
However, there are a few, an innovative few, big law
firms deviating from the pack. These
firms are channeling my MBA students by doubling down on two back office
activities – finance and technology.
In years past, big law firms exiled their finance
and technology teams to lower floors or separate buildings, rarely permitting
them to interact with the lawyers, keeping them unseen and unheard except in
reply to a specific question or complaint.
These innovative firms no longer view finance and technology simply as
cost centers. Their finance and IT
resources are moving front to drive increased efficiency and productivity.
This new innovative efficiency and productivity
focus can be capsulized into three broad categories:
1. Outsourcing – to reduce costs and boost back off productivity;
2. Practice Management – to increase lawyer productivity; and
3. Financial Analysis – to improve profitability of lawyers, clients and matters.
The law firms are motivated by a concern that if
they aren’t among the first to become more efficient and productive and someone
else beats them to it, that other firm will end up eating their lunch. It is a simple Darwinian matter of adapting
and evolving to stay atop the economic food chain.
Outsourcing
There is a business in Fargo, North Dakota which has
become one of the city’s largest employers.
It’s not a high-tech venture; in fact, it performs among the lowest tech
services you might imagine. They do typing.
This company performs overflow typing services for
more than 30 of the AmLaw 100 law firms.
Whenever a long document is heavily edited, the marked-up version is transmitted
to Fargo and one of the 400+ typists employed there performs the typing changes. This work used to be performed by in-house
personnel staffed for peak deadline demand and woefully underproductive most of
the time. In contrast, the Fargo company
has higher demand and is able to manage flexible work hours to meet the
ebb-and-flow of its many customers. Not
insignificantly, the labor costs in Fargo are significantly lower than any
place where these AmLaw 100 firms have offices.
Another outsourcing example involves London-based
CMS Cameron McKenna. Last year, this
1,100-lawyer firm outsourced its entire “middle office” employees to a company
who is now responsible for all mid and lower-level accounting, IT, library,
office facilities and photocopy personnel and resources. The contract between the law firm and
outsourcer is reportedly worth $856 million over 10 years.
Another example of outsourcing is from personal
experience. At Jenner & Block, I
inherited a dysfunctional IT operation; the “gang that didn’t compute.” The newly recruited IT director and I quickly
concluded she could focus all of her energies executing a new technology
delivery strategy to support the lawyers or become a full-time recruiter to
obtain the support staff needed to accomplish the former; she couldn’t do
both. We decided to outsource the staff
to an independent IT company who hired our people, replaced those whose skills
didn’t match the job and provided new career path opportunities for those who
remained. The independent company became
responsible for all daily IT work routines.
If three help desk techs called in sick the same day, it was their responsibility
to staff the call desk; and when we needed a Cisco networking black belt to
resolve a one-time in-a-million problem, they had resources in their bullpen to
fix our crisis. Outsourcing this
function was one of the best decisions of my career because it freed-up my time
to focus on other, more pressing issues.
Business consultants advise leaders to identify and
off-load non-core tasks which can be performed by as well-or-better, for the same
cost-or-less by someone else. This
liberates managers to give their full attention to things that really matter –
those activities impacting customer service and revenue generation. This is the business case for outsourcing the
law office back office.
The three outsourcing examples cited have the
following things in common. The law
firms received:
1.
Better service from the outsourcer, able to incorporate industry
“best practices;”;
2.
Lower operating costs, because the
outsourcer is in the business of providing these services using a non-law
firm business model; and
3.
More time to focus on other, more important things directly
impacting the firms’ revenue-generating activities.
Practice Management
I trace the history of efficiency and productivity
in the legal industry to an event in 1993.
Prior to that date, law firms
cared only about the billable hour with time reducing—productivity enhancements
viewed as a threat to partner income. Productivity to help meet deadlines was good;
anything likely to reduce billable hours was bad.Then in 1993 a Chicago lawyer named Fred Bartlit made a remarkable announcement. A senior equity partner at Kirkland & Ellis, Bartlit announced he was leaving that venerable firm to establish a new kind of law firm – a firm who would charge clients for the “value” of work performed, not by the hour. Bartlit’s press release was the first formal shot-across-the-bow attacking the billable hour.
Bartlit’s new law firm did not cause the demise of
the billable hour, but it got corporate clients thinking about their economic
relationship with outside counsel. Nearly
20 years later, the billable hour is still alive, albeit weakened. Today, most corporate legal work is still
performed on a billable hour basis, but the economic slump has tilted the power
base in the corporate client-law firm relationship in favor of the client. “Value billing,” “alternative fee
arrangement,” “fixed fee with success bonus” are now all the rage.
At 4L Law Firm Services we are working with a firm
who last year decided to expand their nascent family law practice by
advertising uncontested divorces on a fixed fee basis. Almost immediately, the number of family law
cases increased. However, despite the
uptick in new cases, the partners’ net income was no greater than it was a year
earlier. They turned to us to help them
figure out what went wrong.
Examining their books we quickly noted the firm hired
an additional paralegal to help with the additional case volume, staff overtime
increased significantly, recorded billable hours declined since timekeeping on
the fixed fee matters was deemed unnecessary, and the volume of commercial and
employment litigation had declined from prior years’ levels.
We convinced the firm to experiment with
timekeeping over a 2-month period. Every
timekeeper was asked to account for a minimum of 7.5 hours a day – client time
and non-client time activities. From
this data we concluded the law firm:
1.
was earning less than half the amount they would
have billed on the fixed fee matters if hourly rates had applied; and
2.
was spending practically no time involved in the
community, doing the types of relationship-building marketing that formerly
produced the lucrative commercial and employment defense work that used to be
their practice staple.
It was a classic tale. The fixed fee uncontested divorce work
crowded out the high value commercial and employment litigation. Everyone was working harder for less money.
Since this analysis, timekeeping has now become
mandatory at the firm – a minimum of 7.5 hours per day – regardless of the fee
arrangement on any matter and including their non-client time activities. Non-client time has been rechristened “investment
time.” We set up a series of pseudo investment time clients
with names like chamber of commerce, bar association, community bank, and XYZ
auto dealership. The partners give one
another investment time assignments, treating those assignments with the same urgency
and deadlines as client work. Their goal
is to make sure sufficient time is devoted to non-client activities likely to
generate more profitable work and thereby reduce the volume of lesser
remunerative matters.
With respect to the billable assignments and
“shadow billable value” on the fixed fee matters, we are helping the firm
identify opportunities to become more efficient. Increased efficiency and productivity is what
Practice Management is all about. [One
large AmLaw 100 law firm is going so far as to hire non-lawyer managers with
black belt status in Six Sigma management techniques to flow chart every aspect
of client-lawyer relationship and how every litigation and transactional
assignment is performed. This firm hopes
not only to become the most efficient large law firm; they also want corporate
America to know they have adopted a corporate approach to how legal services
are performed.]
4L Law Firm Services is working with the law firm
to fully embrace Practice Management.
Among the things we are doing with them:
1.
Establishing a database template for each area of
law – e.g., family law; commercial litigation; auto accident cases; employment
litigation. We are using the firm’s
client intake interview form as the starting point to organize the facts of each
case.
2.
Designing procedures to scan every piece of
incoming mail so that case-specific communications can be linked to the case
database.
3.
Using document management software to link every
document generated within the firm, every email sent or received, pertinent
PDFs and court filings, case research and eventually voicemail messages to the
case database.
4.
Linking relevant contact information from the
firm’s main contact list to the specific case database where it can be enhanced
to reflect each party’s role.
5.
Enabling calendar/docket appointments to be linked
to the case database.
6.
Providing the ability to generate electronic
task/to-do lists to the case database.
7.
Delivering a document assembly interface so first
drafts of documents can be selected from a forms library and linked to the
specific case where the case caption and case-specific names and facts can be
automatically inserted into the form, even adjusting pronounces to he, she or
it and his, her or its. Cutting and
pasting is inherently inefficient as compared to document assembly
applications.
The whole purpose of Practice Management is to make
lawyers and staff more efficient and productive by organizing everything
relevant to a specific case in a single, logically organized digital location,
so lawyers can spend more time lawyering and less time searching for and grinding
out paper.
Budgeting/Cash Flow Management
There’s a Boston comedian named Steven Wright who
asserts, “Everyplace is within walking distance if you have enough time.” Unfortunately, in business, as in life, there
seldom is enough time and it is helpful to have a roadmap to periodically gauge
your progress and consider alternatives.
In business this roadmap is a budget and regular financial projections
and cash flow estimates serve to provide the periodic progress checks.
4L Law Firm Services is working with another law
firm who had a fantastic 2011. The
number of lawyers increased by nearly 40%; they moved into larger, more
luxurious space; they took on two significant contingency cases which continue
to look like real winners and billable hours were up significantly year-to-year. In hindsight, it is fair to say the firm did
not make a single bad decision in 2011 – except they neglected to budget. Without a budget, firm leadership was unable
to measure the cumulative impact of their management decisions.
At year-end, the firm’s leaders were surprised upon
learning the bonus pool was lower than the preceding year. More importantly, this information came to
light too late to properly manage the other partners’ bonus expectations. We currently are helping this firm to put
together its first ever budget even though today’s date is April 10th. It’s never too late to budget or make cash
flow projections.
Conclusion
Over the past half hour, we discussed the crazy
business model which subsumes the practice of law. We also touched on outsourcing, improving
efficiency via practice management tools, and the importance of budgeting and
cash flow management. The point is this:
ongoing economic pressures are forcing law firms – big and small – to change
our business model. No one believes
we’ll ever go back to practicing law the way it was before 2008.
The largest law firms are spending more than $39,000
per lawyer each-and-every year on improving their financial back office to
manage their law firms better and to upgrade their technology resources by
which lawyers organize and execute their daily work. The comparable spending on financial and
technology resources at smaller law firms – those ranging in size from solo
practitioners to 20-some lawyers – averages less than $11,500 per lawyer per
year. Large law firms are outspending
you by more than 3-to-1 in the race to achieve greater efficiency and
productivity and outpace the competition for the best clients and best talent.
Notwithstanding the 3-to-1 spending disadvantage,
there is good news to report. Small and
midsize firms no longer require large firm budgets to access large law firm financial
and technology resources. For one thing,
smaller firms can make quicker decisions – there are fewer egos involved to
weigh in on decisions big and small.
Secondly, both outsourcing and advances in private cloud computing
options can provide large law firm resources at a sliver of the cost of
bringing those resources into your office on a full-time basis.
Large firms are focusing on efficiency and
productivity because they see no other option but to do so. Small and midsize firms are no less immune
from the same pressures.
