New Group to Address Client Value - Pricing, Project Management, Process Improvement

Those of us who have spent years in the trenches helping law departments obtain more value from outside counsel, and helping law firms better profit while delivering more value to their clients, have long lamented the lack of an organized effort to share best practices with others facing the same challenges, particularly with regard to best practices in pricing, project management and process improvement.  Our wait is over:  the international Legal Marketing Association (LMA) announced the formation of a new "Client Value" Special Interest Group (SIG) with a charter to network, educate and share best practices among law firm, law department and service provider professionals who focus on pricing, project management and process improvement.  The SIG is one of several offered by LMA; the others focus on Competitive Intelligence, Small Firm/Solo Marketing, Service Providers, Social Media and Chief Marketing Officers. I've faced these issues from all angles -- in my role leading business development for a global law firm, I was constantly faced with drafting RFPs that were client-focused and priced to win while also maintaining law firm profitability; as a CEO and senior corporate executive, I was regularly battling the in-house legal department for more transparency on budgets and risk management, and hiring outside counsel who took a "you need us more than we need you" approach to client interaction; as an executive with several service providers, I've brought to market products and services designed to help law departments and law firms forge stronger and more collaborative relationships; as a management consultant, writer and frequent keynote speaker, I am constantly addressing audiences of in-house lawyers or private practice lawyers struggling with adapting to the enormous changes taking place in the legal profession.  One thread has been constant in every one of these interactions:  no one can do it alone!  It's critical for clients and providers to get and stay on the same page to ensure that both parties enjoy a mutual and financially lucrative relationship.

This issue of mutual advantage, in my opinion, has been lacking from many of the existing perspectives:  whether it's the standard client panel filled with self-important General Counsel providing endless anecdotes of law firm foibles, while simultaneously ignoring the fact that the their own internal corporate clients are just as unhappy with the law department; or the various caucuses of in-house counsel defining the new normal as "law firms made enough money, now it's our turn" as if their collaboration was somehow an ever-shifting zero-sum game; or law firm leaders who refuse to acknowledge the very real impact of economic forces on their practice; or my fellow consultants who have great depth of expertise to advise either law firms or law departments, but not both -- because they've never worked with "the other side" except in an adversarial capacity.  This era is ending.

My expectation is that the new SIG will is represent all stakeholders - lawyers from law firms and law departments, of course, but also business professionals managing corporate budgets, e.g., procurement; pricing experts retained by law firms to better link price, cost and value; vendors building tools to analyze and manage complex matters; business development and marketing professionals who are increasingly asked to differentiate law firms on factors such as budget predictability, use of alternative fees and project management rather than just size and practice mix.  What these professionals can do together is establish an ongoing dialog, define and improve industry metrics, better define for vendors what to build and why, and provide a roadmap and best practices for those who have been heretofore reluctant to join the fray.  Just as other industries have settled on standard technology formats, a common vocabulary, licensing protocols and educational tracks for newcomers, the legal marketplace can greatly benefit from such interaction.  (And for the occasional detractor who assumes any interaction between buyers and sellers or among competitors inevitably leads to collusion or anti-trust concerns, I say "You are more than welcome to remain on the sidelines and keep out of our way!"

So join me in congratulating the Legal Marketing Association for proactively embracing one of the critical four P's of Marketing (product, place, promotion, price) and launching the new SIG.  And join me in thanking the many busy professionals who have, informally and formally, collectively and individually, led these efforts prior to the formation of the SIG, most notably Toby Brown, Director of Pricing & Strategic Analysis at Akin Gump, who will head the new SIG.  Also, thanks to Aleisha Gravit, President of LMA, and Betsi Roach, Executive Director of LMA, for making this happen.  I look forward to a new chapter in the growing book about the business of law.

Full Disclosure: I am a member of the Board of Directors of the Legal Marketing Association and contributed to the effort to form the new SIG.

 

 

Timothy B. Corcoran delivers keynote presentations and conducts workshops to help lawyers, in-house counsel and legal service providers profit in a time of great change.  To inquire about his services, click here or contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.

Better Rainmaking Through Relationships and Data

I was recently interviewed by Bloomberg Law for its Behind the Headlines series.  In the interview (click here to view), host Lee Pacchia and I discuss the evolution of rainmaking -- otherwise known as business development or sales -- in law firms.  In the heady days of yesteryear, rainmaking involved networking, establishing and nurturing relationships, ensuring that when clients and prospective clients encountered a legal issue, the rainmaker was top of mind and received a call.  Of course it's slightly more complex than that, as good rainmakers will say that you also have to be credible and competent in your field.  Others will say that working the cocktail circuit isn't enough, particularly with sophisticated buyers, so coming to the table with industry knowledge and solutions in mind is important.  All of this is true.  It's also true that, for the most part, successful rainmakers are a relatively small segment of the Biglaw population.  Most successful partners have had some success in bringing in work, and while many can cover their own compensation and overhead, quite a few don't generate enough business to make a dent in the typical large firm's overhead.  A disproportionately high percentage of revenues are concentrated in a relatively small number of business generators.  And these rainmakers know it, hence the heavy courting of laterals with portable books of business. The essence of the interview is describing how rainmaking has become more challenging in the tougher economy.  Clients are severing long-standing relationships to seek lower-cost providers.  Others are putting immense price pressure on traditionally premium practices.  Still others are demanding budgets and certainty and project management expertise in order to minimize surprise and manage change.  The stereotypical gregarious rainmaker with a winning smile and a firm handshake who can work a room like nobody's business is giving some ground to a more sophisticated, data-driven approach.  This is good news, because as rainmaking evolves more partners have a greater chance to succeed.  Here are five additional thoughts to the points I made in the interview:

Don't chase every dollar.  Revenue is not the same as profit.  In the traditional law firm financial model, the way to generate profit is to bill hours.  The more hours billed, the more profits generated.  This works... to a point.  Most firms track their top clients by revenue.  This is a nice starting point but as a data point to guide future business decisions it's incomplete. Without understanding the corresponding profit for the matters, we might be celebrating dollars that are dilutive rather than additive to the firm's PPP.  So many firms have some version of the top rainmaker handsomely rewarded for bringing in a $5 million client... that costs the firm $5.5 million to service.  When we look at lifetime value of a client, which incorporates repeat business, cost to acquire new engagements, depth of practices engaged by the client, and more, we find that some business is not worth pursuing. It's critical to analyze which work is profitable, which clients are profitable, and devote greater resources to winning and keeping work that is lucrative.

Relationships always matter. But not all relationships are equal.  When I work with practice groups to understand what process they have in place to identify and pursue new business opportunities, the first discovery is that few have any process whatsoever.  However, those firms that reward, and fund, business development activities (not results) will generate an exhaustive list of client lunches, event sponsorships, association dues and game tickets.  By putting in place a simple opportunity pipeline populated with a few key data points, it becomes much easier to distinguish between the lunch with Mary, the chief legal officer of a Fortune 100 company on the outskirts of town, whose company has entrenched legal providers handling most of her premium work, and very rarely encounters "bet the company" issues, and who has dined on the firm's dime 23 times in the last five years without sending a single piece of business, and lunch with Ted, the deputy GC of a small subsidiary of a mid-size manufacturer of aircraft components, who has hired the firm 4 times in the last 3 years for increasingly complex matters and whose company has been named a co-defendant in a high-profile products liability case filed after an airplane crash in Singapore... which just so happens to be where we've recently opened an office.  We may also discover that game tickets have generated, or at least been a factor in, $125,000 in new business in the last year, but our monthly breakfast briefings that cost, in total, $23,000 to produce have generated $432,000 in new engagements, 50% of which are with new clients.

Relationships can't overcome bad economics.  Every partner reading these words has had a longtime client sever ties in recent years.  These are golf partners, law school pals, people we've joined on vacations, even people whose kids' weddings we've attended.  And yet, when push comes to shove and their CFO is breathing down their neck, they change law firms in order to maintain their budget and keep their jobs.  Wouldn't it be helpful to know which clients are changing outside counsel more frequently now than they have in the past?  Wouldn't it be helpful to know if the economics of certain  industries are creating budgetary pressure on legal budgets across all competitors in the space, giving us time to prepare for the tough call?  Wouldn't it be helpful to know which practices, or even which tasks within given practices, our clients feel are declining in value and for which they will refuse to pay premium rates in the future?  This information is out there for anyone looking for it.

Don't confuse strategic pricing with suicide pricing.  It's important to understand the recent remarks made by my friend and colleague, Bruce MacEwen, who is one of the brightest minds I know.  In an earlier Bloomberg Law interview he described the suicide pricing taking place as firms offer substantial discounts to win business.  This is absolutely happening, and in time these firms will become known because they simply can't sustain their infrastructure for very long with non-profitable revenue streams.  But I am also aware of some savvy practice group chairs in other firms who are offering favorable pricing that, to an casual observer, looks like suicide pricing but in fact may be strategic pricing.  Simply put, if I can lower my cost of legal service delivery by eliminating wasteful steps through process improvement, then I can maintain profitability even at a lower price point.  Every firm has wasteful steps, as defined by the client, and this is reflected in the firm's realization rates.  Whether through undisciplined write-downs that partners take before invoicing, or negotiated write-downs after invoicing, the firm's realization rates reflect the difference between price and value from the client's perspective. And here's a scary thought - as more clients embrace billing analysis and benchmarking, it's going to get even tougher.  We're still at the nascent stages of downward price pressure in this market.

Stop smirking, mid-size law firms. You're next.  I have a number of mid-size law firm clients and they are experiencing, in general and in aggregate, one of the busiest stretches ever. As one partner said to me, "Recession? What recession? I've never been busier and I'm getting very little pushback on rates."  True.  One thing the recession proved is that there are fantastic lawyers in mid-size firms whose expertise rivals that of Biglaw. And because these mid-size firms in mid-size cities offer mid-size rates, clients are calling.  The trouble is, if there is no differential value offered by these mid-size firms other than slightly lower rates -- no project management, no alternative fees, no predictable budgets -- then the clients will eventually press forward with fee arbitrage and select firms in the next lower tranche, offering similar quality at slightly lower rates.  And the mid-size firm partners, particularly those who staffed up quickly to meet rising demand, will be left with high overhead and rapidly declining revenues.  Rinse and repeat.  And when the bigger firms start embracing process improvement to lower their cost of delivery and can thrive at lower rates, then the pressure on the mid-size firms will come from above and below.

If you aren't having these discussions in your board rooms and practice group retreats, then you had better get started.  Despite what you may have heard or assumed from the prognosticators of doom, the crisis facing the modern law firm is eminently solvable and law firms can and will thrive.  The question is, will you be on board the bus or under it?

Timothy B. Corcoran delivers keynote presentations and conducts workshops to help lawyers, in-house counsel and legal service providers profit in a time of great change.  To inquire about his services, click here or contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.

The Role of Procurement in the Selection of Outside Counsel

My friend Dr. Silvia Hodges recently asked me to contribute to a book she was compiling and editing, Buying Legal: Procurement Insights and Practice, published by the Ark Group in association with Managing Partner.  The book is a collection of articles from 32 leading authorities discussing the increasing partnership between the corporate legal department and the corporate procurement function to select and manage legal expenses, including outside counsel.  The book is divided into two parts, Section A is designed to benefit outside counsel and Section B is for in-house counsel and procurement professionals.  However, I recommend that anyone involved in the buying or selling of legal services would do well to read the entire book. The involvement of procurement in the purchasing of legal services is swiftly becoming the ‘new normal.’ And not just for sourcing low-end, routine or commoditized legal services – but increasingly for higher-stakes legal work too! This critical new report will equip law firms and in-house legal and procurement teams with the necessary tools to make these new relationships successful.

It’s packed with original research, case studies, opinion pieces, practical approaches, and checklists that address the key challenges and opportunities that buying and selling legal services creates – from relationship building and management, to financial and strategic decision-making. Industry leaders, Riverview Law, Wragge & Co LLP, PwC, Dechert LLP, Kennedys Law LLP, Corporate Executive Board, Institute for Supply Management, Akin Gump Strauss Hauer & Feld LLP, Validatum, Vantage Partners LLC, Trusted Advisor Associates and many more provide insightful case studies and advice on key topics, including:

• Benchmarking the procurement of legal services
• Pricing and negotiation strategies
• Bulk buying of legal services
• Understanding the requirements of the procurement department
• Successful complex tendering
• Current trends in the procurement of international legal services
• Procurement departments’ sourcing strategies
• Building relationships with the CPO
• The role of procurement in purchasing legal services
• The positive and negative effects of discounts
• Top tips for successfully procuring legal services
• Trusted tactics to get the most from spending on outside services
• Demonstrating law department value through analytics
• Using technology to source legal services; and much more

The chapter I submitted is titled "Why CEOs Love Procurement" and discusses how corporations continually seek a competitive cost advantage.  This is particularly critical in challenging economies or markets when revenues are flat or declining.  A modern CEO doesn't just look at growing revenue or decreasing overhead, but looks to lower the cost of goods sold and service delivery.  For law firm leaders faced with declining demand, increasing price pressure and competition from above and below, it's critical to understand the role of procurement in managing a corporation's expenses.  Lawyers who believe procurement is a euphemism for "selecting the lowest cost provider" are misguided.  Differentiation on factors other than price are critical, yet most lawyers and most law firms market in ways that are indistinguishable from the competition.  As I wrote a few years ago when I first tackled the role of procurement:  "A law firm that can demonstrate its prowess in managing to a budget through effective project management, that keeps the client fully informed of any changes to expectations, that staffs appropriately and doesn’t 'overwork' matters or expect clients to subsidize young associate training, is in a better position to present clear, quantifiable evidence of its higher rates."

For a brief excerpt, visit here.  To purchase the book online, visit here or here.

Timothy B. Corcoran delivers keynote presentations and conducts workshops to help lawyers, in-house counsel and legal service providers profit in a time of great change.  To inquire about his services, click here or contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.

Embracing the New Normal - The College of Law Practice Management's Futures Conference

Calling all lawyers, law firm managers, consultants and vendors! The College of Law Practice Management and Georgetown Law invite you to the 2012 Futures Conference, October 26-27, at the Georgetown Law Center, Washington, DC. Where better to examine leading-edge law practice management issues than to tap our Fellows and guests who are making the future happen now? We’ll discuss:

• The New Model of Law Firms
• “Value” From the Eyes of Different Beholders
• Managing Partners of the Future
• The Myriad Challenges of Diversity
• The Consumer Law Revolution (and What It Means for Biglaw)
• 2012 InnovAction Awards Presentation (hosted by yours truly, the awards chair)
• New Normal from the GC Perspective
• Also, for first time, the Legal Academy Practice Research Report —where academics cast a cold eye on your most vexing issues.

The roster of speakers and presenters is unprecedented and includes Jim Sandman, Susan Hackett, Eric Margolin, Amar Sarwal, John Michalik, Thomas Grella, Fredrick Lautz, Charles Vigil, Ward Bower, Aric Press, Toby Brown, Mark Chandler, Tanina Rostain, Stephanie Kimbro, Michael Mills, Marc Lauritsen, Mitt Regan, Juliet Aiken, Heather Bock, Lisa Rohrer, Verna Myers, Ron Friedmann, Mark Cohen, Ben Lieber, Andy Daws, Patrick Lamb and Steve Nelson.  For more details on each speaker, visit the conference website.  If you don't know most, or even many, of these speakers, then you can't possibly be serious about adapting to the new normal.

Learn more about the sessions from conference co-chair, Ron Friedmann, here.

Download the complete Futures Conference brochure here.

Expect a lively and engaging event. Panel presentations with active audience input will combine with breakout sessions to help you understand the forces jolting the legal market today.

Registration is Open 

Register online here for the Futures Conference. Be sure to watch the Futures Conference 2012 meetings page for more information on the program schedule, speakers and special events.

Special thanks to event sponsors (Platinum) Greenfield Belser, Attorney at Work and Practical Law Company, (Gold) American Bar Association's Law Practice Management section, the Canadian Bar Association, International Legal Technology Association, Ricoh Legal and Thomson Reuters and (Silver) Alexander Open Systems, Altman Weil, Inc., Association of Legal Administrators and the Legal Marketing Association.

The Butterfly Effect of Delays and Overbilling

In a recent Legal Project Management workshop that I conducted, several law firm partners and I were discussing the importance to clients of predictability in their legal budgets.  Most agreed that if a couple dozen outside law firms submitted invoices that were delayed and over budget by even a modest amount, the aggregate impact would be troubling to the client.  However, few agreed that on an individual basis, any one invoice could cause much harm.  I explained that something as simple as a $15,000 surprise on a legal invoice on a $100,000 matter could have far-reaching impacts.  Those familiar with chaos theory recognize the butterfly effect as the potentially large impact of seemingly innocuous small actions, popularly characterized as the flapping of a butterfly's wings leading some weeks later to a hurricane in another corner of the globe. There was also a popular film of the same name demonstrating this concept.  The partners found it helpful for me to illustrate mathematically how this concept plays out in a corporation. I won't go into great detail into corporate budgeting here, but let's stipulate that businesspeople spend a lot of time building budgets for every function, for both the cost and revenue sides of the ledger.  And then they hold periodic "re-forecast" reviews to address the inevitable changes that take place, such as revenue for Product A coming in under budget, revenue for Product B trending well above budget, personnel costs below plan, supply chain costs above plan, and so on.  Imagine it's late November and Big Co. has just concluded its final re-forecast session of the year and all changes have been noted and locked in.

Smith & Jones LLP, is one of Big Co.'s trusted law firms, and has been handling a thorny litigation matter for the better part of a year.  The firm sends Big Co. an invoice for $55,000, which is $15,000 more than the relationship partner estimated at the last budget review meeting in September.  There has been no update since.  The invoice reflects billable hours conducted in September and October, and because of the usual delays in collecting daily time entries and the arduous pre-bill review process, the invoice isn't sent to the client until late November.  The General Counsel is aghast and reacts pretty strongly, even though the invoice reflects reasonable fees for legal work that was essential to achieving a favorable outcome in the litigation, though admittedly this includes some work that the firm did not anticipate back in September.  The billing partner is baffled by the GC's reaction, because the firm achieved the outcome that Big Co. wanted.  Let's examine the chain of events this delayed over-billing triggers.

First, the GC's compensation includes a meaningful portion based on the ability to remain within budget.  Had the GC been aware of the potential over-billing even a few weeks earlier, she could have worked with the Chief Financial Officer to shift priorities and funds to address the need.  Now, sadly, the GC is likely to lose some personal compensation because the surprise occurred so late in the fiscal year... there goes the shore house rental next summer!  Secondly, the GC has to visit the CFO with hat in hand and sheepishly admit that she didn't really have a handle on the legal budget that was reviewed in exhaustive detail mere weeks before.  By contrast, her colleagues managing Big Co.'s supply chain were able to reasonably estimate the immensely variable costs of shipping, manufacturing and labor, and her colleagues managing Sales were able to forecast revenue in a very competitive marketplace within a small margin of error.

What options does the CFO have at his disposal to deal with the overage?  Most good CFOs employ clever hedging strategies that can produce emergency funds in a pinch.  But so late in the fiscal year, there aren't a lot of options.  He can consider a layoff, but to net $15,000 in payroll savings in the coming month, after severance costs, would require a fairly sizable layoff of junior employees, or showing the door to a highly compensated individual or two.  But Big Co. doesn't relish the optics of conducting a layoff in the middle of the holiday season, so that option is off the table.  The CFO then looks at other expenditures to see what can be eliminated, but his insistence that every function phase the budgets precisely means that no functional budget has any excess unspent funds at this late date.  So we have to look at generating new revenue to cover the shortfall.

Let's imagine Big Co. operates with a gross margin of 10%.  This means that to cover a $15,000 expense overage, it must generate $150,000 in gross revenue. If Product A has a unit price of $10,000, Sales must move 15 new units in the next four weeks. Of course we can't forget the 5% commission associated with the sale of each new unit, so we need to bring in another $7,500 in revenue, for a total of 16 units, to cover this cost.  As it turns out, the sales cycle for Product A is typically 3 months, and the Sales team has by this point in the year picked all the low hanging fruit.  To move new units in the compressed time frame of one month requires an additional 5% commission incentive and a 10% price break.  Now we need to sell 18 units to cover the legal invoice over-billing.  But let's not forget that revenue for Product A can't be recognized all at once.  This product has a revenue recognition schedule of 50% at sales closing and 50% at final delivery, which is typically 6 months later.  Since only half the revenue can be immediately recognized, now we must sell nearly 40 units or almost $350,000 in the next four weeks.  Imagine the delight of the Vice President of Sales when the CFO calls to demand 40 additional sales of Product A with less than a month left in the fiscal year, a period which includes a fair amount of down time due to the holidays.

The CFO is not pleased with the GC's performance; the Sales VP is extraordinarily displeased with the GC -- the department that already slows down every sale by requiring grueling contract reviews; the GC's family is unhappy because the summer break will now consist of a staycation; and the GC is unlikely to retain Smith & Jones LLP again because of this transgression.  Yet the the billing partner remains blissfully unaware, because in his mind the firm achieved the desired outcome through good lawyering, which is what should matter most to the client.  Had the partner alerted the GC in September, or even October, that some additional wrinkles in the litigation would incur some additional hours, then this overage could have been addressed in the re-forecast exercise.  Had the firm employed some process improvement techniques to reduce the delays between posting time and invoicing, the GC would have had an early warning.  Had the firm relied on a budget and legal project management tools, the deviation from the expected course would have been obvious to all immediately, not months later.

When I walked through this anecdote with the partners at my workshop, I relied on several pages of a flip chart, lots of barely legible scribbling and some off-the cuff calculations.  We had some fun doing the math and acting out the reactions of the various parties.  But make no mistake, this is a deadly serious issue.  As a Chief Legal Officer reported in a client interview I conducted for a law firm client some months ago when we discussed billing policies, "The first time a law firm makes the mistake of over-billing without notice, I'll scold them and give them another shot.  If they do it again, I'll write down the invoice and simply refuse to pay it.  If they do it a third time, I will not use the firm again and I make it a point to tell my colleagues in other companies of my experience."  I asked the CLO if he tells firms when they're fired under these circumstances.  "Never," he declared.  "They probably assume they're still on the short list but that I just don't have any relevant matters.  Or maybe they assume some competitor has undercut them on price.  Rarely do they even call to find out why I haven't hired them lately.  And those that do call, I don't have the time to explain how their delays and over-budget fees complicate my life. Instead I just tell them their rates are no longer competitive."

Law firm leaders, as you look at your own operations, it's important to know the consequences of your firm's actions.  Like the butterfly flapping its wings and causing a tsunami a world away, do your actions -- or inactions -- create devastation that you never see or hear?

Timothy B. Corcoran delivers keynote presentations and conducts workshops to help lawyers, in-house counsel and legal service providers profit in a time of great change.  To inquire about his services, contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.