The latest post from Jim Hassett’s blog Legal Business Development.
This two part post previews results from my book Client Value and Law Firm Profitability, which will be published this summer. All quotes are from managing partners, chairs, and other senior decision makers at AmLaw 200 firms. Each participated in 30-minute in-depth interviews and spoke freely based on the understanding that they could review their quotes before publication, but they would not be quoted by name.
One tactic that many law firms are experimenting with to lower cost is simply to pay less to get the work done. This can be accomplished by directly hiring lower-cost contract attorneys or by outsourcing this function to a growing number of legal process outsourcing firms such as Axiom, Pangea3, and Novus Law.
There is considerable evidence that this trend is growing. In their 2014 Client Advisory, Hildebrandt Consulting and Citi Private Bank reported that in the 10 years from 2002 to 2012, the percentage of “temporary/other” lawyers in large firms grew from 2.4% to 6.1% (p. 7). The report also noted that “In the Law Firm Leaders Survey, 82% of respondents answered that they are using temporary or contract lawyers. Additionally, 70% responded that they are using permanent, lower cost, non-partner track lawyers” (p. 6)
In our sample, 97% of the firms who discussed this issue had used contract attorneys who were paid as little as $30 per hour, and 59% had experimented with outsourcing, which can be even cheaper. About one-third of the firms are planning to increase the work done this way (31% for contract attorneys and 36% for outsourcing).
These experiments have taken a variety of forms, some more successful than others. Here are a few of the examples mentioned by our participants:
Next week, in Part 2 of this post, we will quote some senior managers who have been less enthusiastic about this approach.
Start by asking top clients how often they would like to review the status of their matters, and whether they prefer email reports, phone calls or in person meetings. If practical, offer the matter reviews for free and repeatedly emphasize that you are doing this to assure client satisfaction at your own expense.
The first Wednesday of every month is devoted to a short and simple tip to help lawyers increase efficiency, provide greater value to their clients and/or develop new business. For more ideas to increase satisfaction, see my books the Legal Business Development Quick Reference Guide and the Legal Project Management Quick Reference Guide.
In the current competitive environment, many law firms are struggling with three key questions:
Based on the data we are currently analyzing in our study of Client Value and Law Firm Profitability, most firms are making a lot more progress on the first two questions than on the third.
The new book Law Firm Pricing: Strategies, Roles, and Responsibilities provides a guide to this progress. It was written by two of the leading pioneers in this new field – Toby Brown of Akin Gump and Vincent Cordo of Reed Smith – and provides an excellent overview of the current state of this rapidly evolving area. (Full disclosure: Vince has been a LegalBizDev client for the last few years.)
This book should be required reading not just for pricing directors and their staffs but also for managing partners, executive committee members, and pretty much anyone who wants to understand how large law firms are changing the way they price both hourly and AFA work.
In 2012, we wrote an article for Bloomberg Law Reports entitled “The Rise of the Pricing Director.” At that time, despite extensive networking we were able to find only a handful of people who held the title of pricing director in a law firm, or performed that function. Law firms generally move a little more slowly than glaciers, but the growth in pricing directors in the two years since has been meteoric. There is now even a blog site that tracks the names of senior managers at large firms with the word “pricing” in their title. The total stands over 70 as this is written, and may be higher by the time you read this.
With 20/20 hindsight, it is easy to see the reason for the rapid growth of the “pricing director” title and function. The well-documented changes in the legal profession over the last few years have placed intense pressure on profits. It is therefore not surprising that a new host of high-level executives has emerged to help law firms set their prices in a way that will help them to maintain and grow profitability.
This book is quite well written, with a notable absence of legal and business jargon. Brown and Cordo discuss, clearly and thoughtfully, the responsibilities of the pricing director; the director’s multiple roles, both internal and client-facing; the crucial importance of pricing strategy to long-term profitability; the need for data-based solutions in all contexts; and the frequent resistance of law firm partners to many of these developments.
The authors are especially incisive in their analysis of the behavioral incentives and factors that affect law firms, which are after all made up of human beings:
They are also extremely thoughtful about the role of technology in today’s law firm and about its limitations:
This wouldn’t be much of a review if we didn’t find something to criticize, and there are a number of places where we wished the discussion went deeper. For example, Chapter 3 – Pricing and Profitability – begins with a two page introduction to how profits are defined differently by different firms, a topic that we think requires far more detail, including the implications of different definitions of realization (which many lawyers confuse with profit) versus cost accounting and other models. Lawyers will never agree on how to become more profitable if they don’t first agree what the word means.
Another problem can be seen in the book’s discussion of “four drivers of profitability”: rates, realization, productivity and leverage. Leverage is defined “as the percentage of partner time worked per matter or per client” (p. 18). The authors go on to argue that: “The basic economic concept of leverage is that the more workers work, the more owners (partners) benefit. Workers generate the profits that pay partners. Therefore, the more work is pushed down to them, the better leverage you have and the more profit is generated (p. 19).”
That is certainly how firms thought about profit under the “old normal” pyramid model, but the world has changed. For example, in a fixed price environment, efficiency is king, and leverage can lead to higher costs and more unbilled time. Suppose a $1,000 per hour senior partner can solve a problem in one hour, but a $300 per hour associate will require ten hours to come to the same answer. If the firm is paid the same fee regardless of who does the work, it is obvious that solving the problem at the unleveraged partner “cost” of $1,000 is more profitable than at the leveraged associate cost of $3,000. (Of course, billable rates are really not a cost, but let’s keep it simple.)
In a post I wrote in 2009 entitled the “Law Firm of the Future,” I quoted Fred Bartlit, founder of Bartlit & Beck, as noting that to maximize leverage “some big firms traditionally hire over 100 new associates per year, and that most leave within a few years. This means a significant portion of the firm’s workforce is inexperienced. ‘Who cares? Their inefficiency is billable,’ he said. ‘In the future, the ideal firm will be underleveraged with about 50 partners and three associates in training.’” Thus, in Bartlit’s view of the future, leverage is not a driver of profit, it is a driver of loss.
But enough quibbling. Discussions like this can get very complicated very fast, and it may be years before law firms reach a consensus. So this criticism of the profitability chapter says more about the state of the art of pricing than it does about the book. I am hoping that in a few years Toby and Vince will write a second edition with the expanded explanations we are waiting for.
In the meantime, the practical experience of these two industry leaders places them in the forefront of critical changes in the legal industry, and they have written an extraordinarily valuable book.
As they summed it up: “From the authors’ experiences, the pricing director role has been very challenging, but quite rewarding. It exists at the vanguard of change for an industry in desperate need of it. . . . The last word on legal pricing is that it is a roller coaster ride and nobody is sure yet exactly how it will end.” (p. 2)
The most successful business development program we’ve seen: The case of Adams and Reese (Part 4 of 4)
To fully understand the success of the Adams and Reese coaching program, there is one more factor that cannot be ignored: the firm’s ability to deliver the kinds of legal services that clients are looking for these days.
An extremely important ingredient in sales success is having a product that people want to buy. You’ve probably heard the cliché that a great sales person could “sell ice to Eskimos.” But when the Gallup Organization reviewed 40 years of research on sales (in the book Discover Your Sales Strengths), they found evidence that “a good salesperson can sell anything” is a myth. No matter how talented the sales person may be, or how well they are coached, they will not get rich selling Betamax recorders or 3.5-inch computer disks.
These days, what most legal clients want to buy is value, They want the same high quality legal services they have been getting for years, but they also now expect firms to be creative, transparent, efficient, and cost-effective. As a regional firm with more than 300 lawyers but significantly lower overhead than name brand firms based in cities like New York, Chicago, and Los Angeles, Adams and Reese is in a very good position to offer the kind of value that many clients are looking for.
A few months ago, the Wall Street Journal blog posted an article with the headline “Smaller Law Firms Grab Big Slice of Corporate Legal Work… Midsize Firms Nearly Double Share of Big-Ticket Litigation.”
The data behind the headline is described in a Harvard Business Review HBR Blog Network post which was co-authored by Firoz Dattu, the founder of AdvanceLaw, “an organization helping its general counsel clients identify top lawyers at firms vetted for quality, innovation, efficiency, and client service.”
AdvanceLaw clients include companies like Google, Deutsche Bank, NIKE, Nestle, Starwood Hotels, 3M, Mastercard, eBay and McDonald’s, all of whom are looking to lower costs and increase efficiency.
At this time, only 10 law firms in the United States have been vetted to belong to this value providing network. Adams and Reese is at the top of the list on the AdvanceLaw web page. (All right, it’s in alphabetical order, but still…)
So you could say that another reason for the success of this particular coaching program was that as a growing regional firm, Adams and Reese was well positioned to provide the high value services that clients are demanding these days. (Not all firms are so lucky, which is one reason legal project management has become so popular as a way to increase efficiency.)
At the end of the day, developing new business ultimately comes down to understanding what clients want, and giving them just a little more. Derek Anchondo, an Adams and Reese special counsel who does transactional work for oil and gas clients in the Houston office, agreed. As a former in-house counsel himself, he often sees things from the client perspective. Business development coaching helped him sharpen this perspective and frame it in a way that gained the trust of prospective clients.
“When you go into a client meeting, you need to be totally prepared to hear the client’s point of view,” Anchondo said. “Just listen. Don’t go in with a forceful sales pitch right away, just let them talk. You can learn so much by listening.”
Anchondo learned that sales progress is possible only after learning the prospective client’s needs. Then – and only then – can he decide which members of his firm might best meet those needs
“We wanted to build work from one particular client, and we realized that our challenge stemmed from their existing relationship with a different law firm,” Anchondo said. “My coach and I brainstormed ideas. We had four or five meetings, and I familiarized them with our fees and services available in the Houston office. Now they are thinking of expanding their work with us to include tax and OSHA work. It took that many meetings to swing the pendulum, but the approach worked.”
No matter how you do it, business development simply takes time. Many law firms have strategic plans that call for growth, but Adams and Reese is one of the few we have seen that is investing the time and money needed to achieve their goal. The investment has already paid for itself and is continuing to produce ever higher returns.
Adams and Reese plans to continue business development coaching with appropriate lawyers in the firm.
Amazon is now selling a new Kindle version of my Legal Business Development Quick Reference Guide. This book lies at the heart of the highly successful Adams and Reese program I’ve described in the last few posts, and is used in all of our business development coaching and training programs. See our web page for sample chapters, reviews, and ordering information for the printed book, including volume discounts up to 50% on orders of multiple copies.