Blaqwell is a pre-eminent consultancy that advises top law firms on high-level issues, such as strategy, mergers & acquisitions, compensation systems, performance measurement and lateral hiring strategies.
KM/JD Consulting advises leaders of Am Law 200 firms how to improve practice group productivity and achieve real follow-through from lawyers on internal initiatives.
This is a 3-part post. Part 1 below describes what we mean by productivity in the law firm context, why improving productivity is essential for most firms' survival and the importance of metrics for productivity improvements. Parts 2 and 3 will provide many examples of different types of productivity improvements that a law firm may consider in the areas of revenue/profit management, service delivery changes, people management, knowledge management, process management, and technology solutions.
The Management Committee struggles to understand productivity
Keith Mayfield, the chairman of an Am Law 100 firm with 600 lawyers and over a dozen offices across the United States, has convened the Management Committee to discuss whether the firm should be doing more to improve productivity.
Large firms keep growing their profits
“We're being left in the dust by firms that are growing their profits per equity partner,” complains Samantha, the chair of the firm's Corporate Department. “Firms like Latham and Kirkland are proving you can have 2,000 lawyers, earn over $3 million in profits per equity partner and still grow revenues and profits more than 8% a year.” A few other Committee members nod in support.
“I beg to differ,” replies Jerry, the chair of the Litigation Department. “We've grown profits per equity partner at a 6% annual rate for years. We must be doing something right. I'm fine if we're not growing quite as fast as some.” Other members indicate their agreement with Jerry.
“To achieve our profitability improvements we've mostly been early-retiring and de-equitizing our less productive partners, and actually getting smaller,” responds Keith, the chairman of the firm. “We're pretty much at the end of the gains we can make with that.”
“I'm perfectly happy with my income, even if it doesn't grow,” retorts the Litigation chair stubbornly.
Large firms are competing for our talent and clients
Keith continues, “A third of Am Law 100 firms have grown profits per equity partner 10% or more each year in recent years, without cutting equity partners.
“I still don't see why we can't be happy with our current results,” argues the Litigation chair in an effort to hide that he really doesn't know what to do.
“The larger firms are able to pay more for the few super-star partners who can really make a practice succeed,” explained Keith. “Those firms can spread that cost over a larger base, and are tempting away our best talent. They also have more pricing flexibility because they've figured out how to deliver their services at a lower cost than ours. They're taking our business. As we sit still, they get stronger. Doing nothing is not an option.”
“I won't go along with being taken over by one of those behemoths, if that's what you're getting at,” declares the Litigation chair. “For once I agree with you,” adds the Corporate chair. There is general agreement within the Committee.
“That's not my point,” Keith replies calmly. “Being taken over is exactly what I'm trying to prevent.”
Other firms are leaving us behind
“What I'm saying is that if other firms can do the same work for less cost, there must be ways for us to do that as well. We're being forced to match their prices anyway. We should try to make money despite lower prices, just as they are,” concludes Keith.
“I thought having a strategy to be distinctive means we aren't competing on price,” observes Samantha, the Corporate chair.
“You're overstating the point, Sam,” replies Keith. “Being distinctive means we aren't competing solely on price, but we're still bound by the constraints of what our clients consider to be the value of our services. That means we're still under pressure to match the productivity gains of other firms, most of which also have strategies. Also, I'm not sure we're really succeeding in implementing our strategy, but that's a discussion for another day.”
“So how do we improve productivity?” asks the Litigation chair, who voices the puzzled looks on most of the other Committee members.
“I'm glad you asked,” replies Keith, as he opens the conference room door for a consultant, who enters and begins an explanation on this topic as he hands out a presentation package.
What we mean by “productivity”
The consultant begins with an explanation of productivity in the context of improving law firm results, because the term is used in many ways.
For economists, productivity is the value of output per unit of production. In the law firm context the value of output for a matter is what the client considers fair value for the services delivered. Hopefully this equals at least the firm's cost of delivery of the service on the matter plus its target margin, but often it does not, leading to client dissatisfaction, write-downs and write-offs.
The way law firms have been traditionally structured, a proxy for productivity is the profit earned by one partner and the timekeepers he or she supervises on the matter. Profitability can be improved either by increasing the price paid for the service or by lowering the cost of delivery. For years, law firms have focused on the former by merely raising hourly rates. That tactic is increasingly resisted by clients. There are many other ways, though, to improve productivity.
Increasing overall net income through improved productivity increases profits per equity partner. Higher PPEP aids in retaining and attracting talent in the face of growth by competing firms. It also means a larger total income base and therefore greater flexibility to pay exceptional talent.
Many types of productivity improvements also allow the firm to reduce fees to clients to make the firm more competitive, while maintaining profits.
Productivity improvement vs. strategy
“That's a nice theoretical explanation,” interrupts the Litigation chair, “but we have a different strategy here. We're emphasizing six practice areas and focusing on three industries.”
The consultant resumes with a clarification.
Productivity improvement is not a strategy. Instead, productivity improvement is an operational element to compete more effectively. Winning firms are making substantial gains in productivity – winning more business, underpricing at the margin, and showing value systematically to clients. As in other industries, law firms are constantly working to improve productivity, emulating each other because productivity advances are readily copied. Firms that do not meet this competitive standard of productivity fall behind because they must reduce prices to match competitors without having taken corresponding steps to reduce costs.
Strategy aims to differentiate, typically to avoid competing solely on price, though it may be a valid strategy to be the least expensive in selected services. For most firms, strategy without productivity improvements will not succeed in the long-term. Very few firms can differentiate themselves so strongly that they succeed despite lack of productivity gains. Effective differentiation does allow a firm to charge more, because clients perceive greater value in the differentiated service. Yet because of continuous productivity improvements by competing firms, the value clients perceive for even differentiated services is generally declining. Most firms feel the pressure to reduce prices over time (or produce more value for the same price) and to make productivity improvements in order to maintain profitability.
“I get that even with our strategy we need to keep improving our productivity,” responds Samantha, the Corporate chair. “But I'm confused about something else. In the past we've been urged by our executive director to work more hours as a way of improving productivity. You seem to be saying that productivity means doing the work in less time. Since we still mostly bill by the hour, how does that help us make more money?”
The fallacy of inefficiency under the billable hour model
The consultant explains that it is no longer the case that firms can charge what they want, if that were ever true. Although price competition has always existed, it started to become far more intense during the slowdown in demand during and following the 2008 recession. In addition, clients have become far more sophisticated about pricing and value as a result of access to huge amounts of data collected through e-billing systems. As a result, law firms, which have not historically focused on measuring and improving productivity, now lag clients in knowing the cost of comparable services offered by competing firms.
For matters that have discounts and write-offs, doing the same work at a lower cost of hours will free that time to be used in new fee-paying work. Even on matters without discounts or write-offs, applying the freed-up hours to new fee-paying work will allow the firm to hold its own on overall revenues and profitability, while enabling it to charge lower per-matter prices to clients.
In fact, many lawyers mistake increasing utilization – the number of billable hours recorded by the same timekeepers – for improving productivity. This is not true. Productivity means working fewer, not more, hours to produce the same result in a matter. More precisely, it means working a lower total cost of hours to produce the same results. For example, pushing work down to lower cost lawyers, even if they require somewhat more time, may reduce the overall cost of producing the work. In contrast, increasing the cost of hours on a particular matter, such as through the same lawyers spending more time or senior lawyers hoarding work, while delivering the same value reduces productivity, making the matter relatively more expensive to the client than competitors' offerings. This results in discounts and write-offs.
To illustrate, the consultant offers some examples of productivity improvements that are financially advantageous to the firm.
Perform the same work in less time. One way to boost productivity is to become more efficient by performing the same work using a lower total cost of hours. As previously noted, the firm makes more money by re-deploying the saved hours on new work.
For the same reasons, efficiency improvements increase profits on matters with fixed fees, which are becoming more prevalent. A firm that can effectively manage its resources to consistently profit on fixed fee arrangements can choose how much, if any of its productivity benefits to share with the client through reduced fixed fees.
Push work down. Finding ways for junior lawyers to perform some of the work of senior lawyers, who can then take on new work, improves associate-partner leverage, increases profits and reduces per-matter fees to clients. Pushing down work in this fashion can be accomplished through additional training and mentoring, and knowledge tools such as extensive checklists and playbooks.
Increase the value (and fees) of the work. By targeting more high-value work in certain practice areas as part of a strategy to differentiate itself, a firm can justify higher fees per timekeeper. To accomplish this kind of initiative a practice group may decide to bring in new talent with special expertise and undertake a program of special training and mentoring to spread that expertise among other partners.
“Won't all these shortcuts to improve productivity hurt the quality of our work?” asks Jerry, the Litigation chair.
The consultant responds that high hours don't necessarily mean high quality. In fact, many of the tools and training techniques that allow lawyers to perform the same work in less time, or more junior lawyers to perform more senior work, also improve quality and consistency of their work product. Conversely, sometimes having a more senior person perform the work is more efficient and produces higher quality results.
The excess capacity problem
“You keep mentioning ‘new fee-paying work',” observes Jerry. “Everyone knows work is harder to come by these days. Isn't that a bigger problem than productivity?” he asks.
Acknowledging that the point is important, the consultant explains that capacity and productivity are related. One of the biggest practical problems is how to put excess capacity to work, including capacity freed up due to efficiency gains. Some firms have become quite sophisticated at understanding clients' value perceptions and meeting them through marginal pricing. Basically, these firms are selling services at whatever discount is needed to make the sale, but only at that time for that matter. They are not undermining other fee arrangements.
The airlines have become very sophisticated at this marginal cost pricing. Unsold lawyer time is like airline seats. The cost is fully borne by the firm whether or not it is bringing in revenue. Charging even $1 for unsold time improves profitability.
Managing deployment and pricing of lawyers to address short-term excess capacity, long-term full-price demand, matching expertise across the firm with matters and lawyer career development requires the firm to develop a sophisticated system. Keeping all lawyers fully occupied on fee-paying work, even with selective deep discounts, can be a powerful way to improve productivity.
Perennial excess capacity in certain practice areas should cause the firm to consider how those practice areas relate to its strategy. If they are part of the firm's strategy, re-examination of the strategy may be in order. If they are not a focus of the strategy, the firm should consider whether to restructure them with different talent or a different industry focus, or whether to de-emphasize them.
Establishing productivity metrics allows the firm to manage its efforts to improve its productivity initiatives and incentivize its lawyers to be more productive. Effective management includes knowing whether the firm's productivity initiatives are successful, and determining which initiatives are the most effective.
Existing metrics are not granular enough. Some generally accepted metrics exist that are useful for measuring productivity improvements at the firm level. One common metric is profits per equity partner. A metric that reflects supervision efforts of both equity and non-equity partners, though, is compensation of all partners divided by number of lawyers (CAP per lawyer). This metric is analogous to revenues per lawyer but also takes into account costs.
These generally accepted metrics, however, are not sufficiently granular to allow comparisons across practice groups, industry groups, groups of matters, client service teams or a single unit of production (such as an equity partner). Traditional measures such as utilization, revenue per lawyer and hourly rates also do not capture productivity. Even realization and leverage are not productivity measures, although they may measure components of productivity. The absence of standard granular metrics perhaps reflects the fact that law firms have not traditionally measured productivity, as noted above.
Developing productivity metrics. A firm will, therefore, need to develop its own metrics to measure productivity at these more granular levels. The relevant metrics will vary across each firm based on its own situation, such as its typical staffing composition for matters, the types of productivity initiatives being measured and the financial and other data it already collects. In many cases a firm will be able to construct metrics from its existing data, but in some cases will need to start collecting new types of data.
Firms may have greater success by focusing reporting and incentives on a small number of metrics that correlate with strategic goals and circulating reports with those metrics broadly to partners and other supervisory lawyers. Reports that cover a multitude of metrics may be ignored, or relied on for the wrong metrics. Reports with limited circulation fail to influence the many supervisors and decision-makers whose cooperation is needed to achieve the goals behind the metrics.
The Management Committee reconvenes
“Well, now I understand the difference between strategy and productivity,” declares Samantha, the Corporate Department chair, after conclusion of the presentation. “But I'm still not sure exactly what we should be doing to improve our productivity.”
“Yeah, I get that we're behind but how can we turn this around?” asks Jerry, the Litigation chair, who is now somewhat worried.
“Then you'll be happy to hear that at our next meeting our consultant will give us a long list of concrete actions we can consider,” replies Keith, who is pleased that resistance has changed to interest among the Committee members.
Continuous productivity improvement is necessary for most firms, even if they are pursuing a differentiation strategy. Because of the ease of emulating others' improvements, the competitive standard of productivity is continually improving. Eliminating unproductive equity partners, while a good hygiene measure that improves profits per equity partner, is not a sustainable way to improve productivity. It also leaves the firm smaller and more vulnerable to larger firms.
At the firm level, CAP per lawyer is a useful proxy measure for productivity for many firms. Before a firm can effectively improve productivity, though, it needs to be able to measure productivity at the practice group and other granular levels. In the absence of standardized measures, firms must develop their own productivity metrics.
Future posts in this series, will provide many examples of different types of productivity improvements that a law firm may consider in the areas of revenue/profit management, service delivery changes, people management, knowledge management, process management, and technology solutions.
[Photo credits: © Can Stock Photo Inc. / Bialasiewicz, alphaspirit & edharcanstock]