This is a live blog post from the College of Law Practice Management (COLPM) annual Futures Conference (agenda). This session is Exploring the Nuances of Value.
[Posted at end of session; please forgive typos and failures to capture every detail accurately.]
Moderator: Aric Press, American Lawyer Media
Panelists: Toby Brown, Akin Gump; Mark Chandler, Cisco Systems.
Background: Started in KM, mentioned alternative fee arrangements, then a day later, was talking to a GC about AFA.
How pricing and AFA works:
1. Partner calls seeks help with AFA
2. Asks what partner thinks number should be and factors that might cost the price up or or down.
3. Toby then models how to staff the matter, presents alternatives to partner; they agree on one.
4. Toby then monitors progress on the matter, sending regular reports to partner, checking with partner on staffing. “Here’s where you are, here’s where you said you would be, here is where you are going off track”. Learn from other industries to raise red flag when projects go out of scope or when team exceeds budget. This ultimately requires process re-engineering.
The real value Toby adds is in probing with partner abut the relationship with client and how much of the value / price / cost conversation has already taken place with client. “Value comes out of the conversation with client”. If partner has not had sufficient conversations, Toby talks to clients about pain points and what they want. Example: client initially asked for fixed fee for a very large, ongoing matter. Toby explained that because of risk, that number would have to be high. Client’s real requirement turned out to be predictable quarterly spend, which is quite different. So questions designed to draw out what’s really important to client. In another instance, one client just did not want first year associates on a matter. Yet another example: client needs to be able to demonstrate to an auditor that they are paying “market” for certain legal work.
Mark has not heard the type of analytic framework Toby put forward a decade ago. Legal market has been slow to adopt the changes technology has wrought in other service markets. For Cisco, certainty is a keep goal. Cisco management notices of legal goes $1M over its quarterly $50M budget.
Value is subjective. Mark cites macroeconomic concept of consumer surplus, where many consumers benefit from a market price that below what they would be willing to pay. This stands for the proposition that each consumer has a different definition of value. Mark is trying to align law firm thinking with law department needs. Hours are in internal accounting mechanism; they are fine for firms to measure their factor inputs but its not necessarily related to value.
For Cisco, value depends on type of work. Value means one thing for patents (of which Cisco has about 750 applications per year). Cisco gives buckets of patents to each firm so that each firm can take risk per patent but do OK on portfolio. For corporate secretarial work, Cisco outsources all work to Orrick, which hires counsel around the world as needed. Each year, price must come down 5%.
Bottom line: measure value by the case. Value does not mean shifting all the risk; it means aligning interest. Most aggressive bids tend to come from firms that do most work with Cisco. Trust relationship is core to achieving relationship
Mark talks about some law firm ads and taglines. One firm says “Everything Matters”. His view is that’s great - if you bill by the hour. Not great from his view because for Cisco, not everything matters as much.
Question & Answer
To Toby: do you use firm data to analyze past costs or performance. Toby: no longer will do this. Finds that partners will say look at these 5 similar matters and then finds the total fees range from $300k to $1.5M - so how similar can they be. Firms don’t capture data the right way but tools are no emerging, for example, Sky Analytics, to capture data the right way.
Some firms, e.g., Kirkland & Ellis, track their own litigation costs. Is this a growing trend? Toby: yes, more and more firms are using task codes to track and understand time. But even better is to understand the cost of delivering service and finding ways to reduce the cost.
If we track hours, if we analyze historic hours, shouldn’t we be concerned that we are simply quantifying bad ways of working? How do we be sure we can be more efficient? Toby: I can’t get better, faster, cheaper until I have more data about my cost of production. Effort does matter but it is not the only driver of value.
This is a live blog post from the College of Law Practice Management (COLPM) annual Futures Conference (agenda). This session is Presentation of the 2012 InnovAction Awards.
[Posted at end of session; please forgive typos and failures to capture every detail accurately.]
Tim Corcoran is moderating. Scott Rechtschaffen of Littler and Lisa Damon of Seyfarth are on stage to receive InnovAction awards.
Tim provides background on the InnovAction Awards: worldwide search for innovation in the legal market. Tim talks about lawyers’ ‘race to 2nd place’ and how these awards are meant to encourage the first movers. The ten entries this year come from around the world.
LITTLER CASESMART ®
Selected for Littler CaseSmart. Background:
- Littler subject to pricing pressure for decades
- Matra: “Let’s break Something”
- History of experimenting with alternative delviery methods
- Little CaseSmart ("LCS") is a firm within a firm
The problem / challenge: client asked firms to reduce spend by 20%. Partner in charge said, ‘we’re only doing 20% of their work but what if we got all of their work and re-engineered work to reduce cost”
LCS is a re-designed legal process and includes a proprietary technology platform. Re-engineering included assessing who did what work and pushing work to the least cost competent worker. Greatest value in LCS is information for clients, both at macro and micro view. It creates actionable intelligence, for example, identifying where claims occur so client can take action address root causes of the legal problems. Knowledge management, wikis, blogs support the work.
Dedicated flex-time staff attorneys do the work, supervised by shareholders and other full-time lawyers. The fomer are onshore, Littler employers. Though they are virtual workers, firm includes them in meetings and firm activity. They have average 11 years experience and strong EEO backgrounds. One is even ex-shareholder who wants more flexibility.
Client was concerned that Little was not making enough. Client want stability / longevity. 3400+ charges processed through LCS in 2 years. 80% of charges defended v. settled. 1.7% cause findings, well below national average. BI from system has changed employment practices.
Motto has been: Have a big vision, start small, then scale quickly.
Seyfarth and Littler compete vigorously but have united to try to disrupt the traditional market.
Seyfarth is an AmLaw 100, full-service, international law firm. 800 lawyers. The usual mix of partners, some very resistant to change.
- Legal industry took a wrong turn (law firms became about themselves; compensation tied to closely to minutes; we became vendors not business partners)
- Belief that listening closely to client, firm could really solve client problems; those solutions would delight client and they would reward firm with deep business relationships.
Lisa remembers skepticism of many partners that lowering client bills would be good for firm. But she turned out to be right.
Why Lean Six Sigma? Lean is a journey, not an endpoint. Always need to improve. Firm need a process and an approach to deliver service better. Firm stopped, looked at how it worked, re-designed how it worked, then went to market. The firm put all leaders through Lean training. Seyfarth started big - all leaders went through 4-month Lean Six Sigma Greenbelt training. Ultimately, lawyers hung in because they saw that Lean is more than a process or a tool - it’s a way to think. The firm kep Lean thining and discipline but shed some math and jargon.
Projects span all offices and practices. Not all partners have bought in but the number grows regularly. Lean applies equally to one-off bet-the-company cases and to commodity work.
Quick case study: routine litigation portfolio. Not huge stakes but a lot of cases and fees. Analyzed costs, which depended on task coded billing. Initially, firm had to go back to improve accuracy of task codes. Now, lawyers are better at task coding their time. Look for where costs spikes are in matters and focus process improvement on what causes the spikes. Firm now has 180 process maps.
Continuous Improvement: culture of root cause and ‘why’; lessons learned [after action reviews]; lean discipline and process mapping (including with clients); wonder of metrics (used widely and with clients); tools and technology to support client; understanding what we do well and where we need help; loving disruptive thinking.
- Embrace disaggregation, including working closely with competing law firms
- Continuous work on developing knowledge resources and tech for client service
- Loving e-billing and working with clients on metrics
- Work with clients, firm, law schools to reshape law school education
What is the sound of outstanding law firm client service?
That’s a rhetorical question inspired by a Wall Street Journal article today, The Search for Sweet Sounds That Sell, which holds hidden lessons for law firms.
It describes how makers of consumer product goods invest heavily to engineer the sounds products make when opened or during use. “Subtle auditory cues can make a big difference to shoppers choosing from several brands, companies say.” Clinique tested “40 prototypes of inner parts of the mascara” so that it would make the right sound when twisted shut. Frito-lay had to pull environmentally friendly packaging of SunChips off the market because consumers did not like the noise it made when opening. A Sharpie has to make exactly the right sound. The list goes on.
The relevance to law firms? Most consumer goods are mature products. Makers invest in both product formulation and package design. Sound, smell, and package design matter - a lot.
I have bad news for law firms: you increasingly look like the makers of consumer goods. You operate a mature business in a slow-growing market where providers compete furiously for
consumers clients. Too many lawyers think that product formulation quality legal advice is the only that counts.
Smart lawyers and firms understand that clients also care about packaging and delivery. Client service may not have a sounds but it does have many service delivery attributes. These include responsiveness, transparency, attitude, pricing, and company / industry knowledge.
Investments in pricing, legal project management, technology, knowledge management, and alternative resourcing mean as much if not more to improving service delivery and client experience than they do to legal work. How long before law firms invest in labs to test out different approaches to service delivery?
I feel like I am waiting for the other shoe to drop in the BigLaw market.
Consider the following items over the last 10 days that discuss the woes of large law firms:
- Law Firms Wring Out Back-Office Costs in the Wall Street Journal on law firms opening low cost service centers and outsourcing (front page, Market Place, 8 Oct 2012).
- To Survive, Firms Will Have to Get Serious About Costs, Get Off the Lockstep Treadmill by Patrick Lamb of Valorem Law in the ABA New Normal series, who writes about ‘right staffing’ (9 Oct 2012).
- Law firm partnership: the Grand Delusion by Stephen Mayson, on the fundamental problems of law firm partnerships (9 Oct 2012)
- Suicide Pricing, a Bloomberg Law interview with Bruce McEwen (aka Adam Smith, Esq.), who suggests Biglaw over capacity is driving unsustainable downward price pressure (12 Oct 2012). He has also written a recent multi-part blog post, Growth is Dead.
- BigLaw must reduce cost, not just tinker with pricing by John Wallbillich (aka The WiredGC), on how real competition drives down prices and that alternative fees alone do not reduce costs. (16 Oct 2012).
- And the walls came down by Jordan Furlong, who offers an excellent overview of legal market challenges / solutions (17 Oct 2012).
- Inexorable laws of supply and demand are biting #BigLaw by George Beaton, a very astute legal market observer and consultant in Australia, who cites the Mayson and McEwen blog posts, adding his own take, including that corporate law has become a permanent buyers’ market. (19 Oct 2012)
If the commentators are right, what happens? We see some signs of change and law firm response, for example, reduced hiring of new lawyers, stealth lay-offs, alternative fee arrangements, legal project management, and lower cost staffing. These changes feel enormous to law firms yet I could argue these are simply “minor adjustments", an inadequate response to new market forces.
One commentator offers a dire prediction: the ABA Journal headline, reporting on a Bloomberg Law interview with consultant Kent Zimmerman of the Zeughauser Group, says it all: Law Firm Consultant Predicts ‘Absolutely’ More Layoffs and as Many as Five BigLaw Dissolutions . Without taking a position on that view, I note that law firms are not like airlines. When airlines reduce capacity, they park airplanes in the Arizona desert or sell them in distant markets. That capacity goes away, which reduces supply, which lets airlines raise prices. When law firms dissolve, many lawyers move to other firms. Capacity does not just disappear.
So that’s why I wait for the other shoe to drop. Maybe we get lucky and somehow muddle through. But maybe BigLaw is in worse trouble than firms currently understand. That’s why I have shifted my focus to service delivery improvement. Law firms that figure out how to provide outstanding service to their top clients have a better chance of prospering.
In my recent post, BigLaw Growth is Dead - Lower Cost Support Tipping Point?, I wrote about Bingham opening a support center in Lexington, KY and asked whether other large firms would take steps to reduce overhead. Conversations I had 10 days at the Ark Law Firm Pricing and Profitability Conference ago reinforced the importance of this question.
BigLaw pricing experts explained how they factor overhead into their profitability analysis: most allocate it to fee earners on a sliding scale, more to partners than other lawyers and more to lawyers than to staff. They also confirmed that the average overhead per lawyer ranges between $200k and $300k per year.
In competitive markets, players wring costs out of operations. Post the economic crash, large firm face growing competition. That means more alternative fee arrangements (AFA) and more profitability analysis. And that in turn educates partners on the real cost of the fee earners. Will partners have a collective “a-ha” moment when they realize the impact of the enormous overhead? Perhaps that realization is a big factor in the growing number of boutique and “new model” law firms that compete both for high-stakes and every-day corporate legal work.
With such high overhead - it exceeds the comp cost of junior lawyers - BigLaw keeps open a “price umbrella.” That is, it creates the opportunity for competitors to gain share by selling equivalent or near-equivalent service at a lower price point. Price umbrellas tend to close absent a monopoly position, highly differentiated offerings, or supply-demand imbalances. Large firms have none of these to prop open the umbrella. Other commentators have noted that alternative to law firms are growing but BigLaw is not. And while data are sparse, I suspect boutiques and new model firms are also gaining share.
If this analysis is correct, then the question is whether the umbrella closes with a crash or slowly and gracefully. Either way, it seems likely we will see more cuts in law firm overhead.
Update (moments later). Minutes after posting this I came across the WSJ article, Law Firms Wring Costs From Back-Office Tasks, posted late Sunday. A meme at work?