Increasing Profits Through Strategic Practice Management Improvements

Practice management can be a strategy for increasing profits per partner, reducing risk or otherwise improving the firm, such as by making clients happier, winning new work or recruiting and retaining high quality lawyers.

This paper describes the profit improvements a hypothetical law firm can realize using four examples of practice management projects that focus on knowledge strategy. Improvements in profits per equity partner range from 3% to 11%. This paper also describes practice changes that can reduce risk or otherwise improve the firm.

Knowledge Strategy Is Broadly Defined

We use Knowledge Strategy in a broad sense, extending well into what is commonly considered practice management. As we use the term, it encompasses lawyer behavior and workflow procedures by which the firm's lawyers increase their personal and collective knowledge in order to improve performance and reduce risk. For example, knowledge strategy includes:

  • Quality lawyer training, feedback and mentoring that not only imparts relevant senior lawyer experience to more junior lawyers, but also shares lawyer expertise among colleagues.
  • Effective practice group meetings that discuss current issues, promote group communication and include training.
  • Good precedents and model forms.
  • Effective search system for written advice (both memos and e-mail) and documents.
  • Repository of firm experience on each matter that includes commentary and billing information.
  • Easily accessible knowledge about client needs, current firm work for the client and competitors for the client's work.
  • Lists of internal subject matter experts.
  • A culture of sharing information.

Knowledge Is a Strategy

Knowledge strategy is a practice management strategy for increasing profits per partner, reducing risk or otherwise improving the firm. How? Four examples of using knowledge strategy to improve profits (discussed in more detail below) are:

  • Make partner non-billable time more efficient. For example, improve the efficiency of pitch preparation through a matters and experience database.
  • Enable junior lawyers to take on more senior work, thereby increasing leverage. Methods include training, model documents, matter how-to manuals and an improved feedback system.
  • Improve lawyer efficiency to replace soft write-downs and hard write-offs with new work. Methods include training, model documents, better firm-wide document searching and enterprise search.
  • Improve the efficiency of fixed-fee matters. Methods include training, model documents, dedicated lawyer team and greater use of paralegals.

As may be apparent from the above discussion, we believe knowledge strategy

  • is not technology.
    • Software can be an effective aid, once know-how sharing strategies are decided.
    • Technology comes second.
    • Spending must be kept in line with expected benefits.
  • is not a luxury only the largest firms can afford.
    • All firms have goals that knowledge strategy can support.
    • Changing internal procedures, at no cost, could be a knowledge strategy project if it produced strategic benefits. One example would be instituting more rigorous practice group meeting procedures with mandatory attendance, a formal agenda, current developments discussion, a training component and circulated minutes.

Four Examples of How Knowledge Strategy Can Improve Profits

We have assembled four numerical examples to illustrate the effect successful knowledge strategy projects can have on profits per equity partner. These are intended to show how relatively small improvements in lawyer efficiency in the right places can have an unexpectedly powerful effect on profits.

Of course, the key will be to select knowledge strategy projects that can produce these efficiencies. The purpose of the economic model is to help maintain focus on where those efficiencies need to occur.

The model assumes a firm size of 350 lawyers. The results are not particularly sensitive to firm size. Rather, they depend mostly on partner-associate leverage, billing rates, average hours billed and margin. The full economic model can be reviewed by following the link at the bottom of this page ("About the Law Firm Economic Model").

Example # 1 - Matters & Experience Database Reduces Partner Non-Billable Time

The firm establishes a series of manual procedures and software aids to create a more efficient system for preparing pitches for new work.

  • A database is established covering all matters. It includes:
    • Vetted descriptions of the matter, both shorter for external display and longer for internal use. The description includes special legal issues and other important aspects of the matter.
    • Categorization of the matter type based on a firm taxonomy (subject matter index).
    • Industry data for the client (automatically included from a third party database).
    • Financial data from the billing system about lawyer time, fees and profitability (automatically included).
    • Names of the principal partners and associates working on the matter (automatically included).
  • Lawyer biographies are kept updated and coordinated across HR, the external web site and the marketing department.
  • New internal procedures, such as after-matter review meetings among the lawyer team and periodic biography updates, are established to gather the needed information for the above database and biographies. The after-matter review meetings throw off additional benefits of associate training and lessons learned.
  • New software permits a user-friendly front-end for the matters and experience database.
    • Lawyer subject matter expertise included in the internal versions of biographies is enhanced by automatically listing the matter types the lawyer has most often worked on.
    • Coordinating the lawyer biographies is accomplished with existing technology resources.

As a result of these changes:

  • Pitch preparation time for partners is reduced because
    • comparable firm experience is more quickly identified. There are fewer broad e-mails, less phoning around and less time redrafting/reviewing matter descriptions and seeking updated biographies.
    • comparable matters for fee estimates are more readily identified.
  • If partners save 1 hour/week of non-billable time on pitches and fill it with billable work, profits per equity partner improve by 3%.
  • As a bonus, staffing new matters becomes more efficient because lawyers with relevant experience are more easily identified.

Example #2 - Associates Take On More Senior Work

Through better training, model forms and mentoring, associates take on more senior work, with no reduction in quality. In other words, associates move up the work "food chain".

  • Half the partners shift 1 hour/week of billable time to training, forms and extra mentoring. This calculates to 1.7% of total partners' billable time being shifted to non-billable activities.
  • The associates shift 1 hour every other week of billable time to attending training. this calculates to 1.3% of total associates' billable time being shifted to non-billable activities.
  • As a result, associates take on 10% of partner billable time. This is an arbitrary assumption, but it seems reasonable. The associates, however, are not as efficient as the partners in doing this work. We assume it takes 1.5 associate hours to accomplish what used to be 1 hour of partner billable work. The firm hires additional associates to provide the extra required hours.
  • The partners use their extra billable time (in other words, the former partner time that's now been taken on by associates) to take on new billable work. The firm hires additional associates to support the partners with this new work.
  • The increase in total number of new associates for both the old partner work and the new partner work calculates to 16%.

As a result of these changes, the model shows that profits per equity partner improve by 4.6%. Clients for the old work actually see a 2.2% decline in fees.

Example #3 - Reduce Soft and Hard Write-Offs Through Efficiency Gains

Assume that 5% of partner hours and 10% of associate hours are written off before or after the bill is sent, due to inefficiency or client fee sensitivities.

Through practice management and knowledge strategy improvements, lawyers are able to complete matters in fewer hours. These improvements could include better training and an improved feedback system, model documents, a taxonomy-aided firm-wide document search system and enterprise search. (A taxonomy is a subject matter index.)

If the new efforts cause written-off hours to be cut in half, with those saved hours being billed and collected on other new work, profits per equity partner will improve by 11%.

Example #4 - Improve Efficiency of Fixed Fee Work

Assume that fixed fee arrangements cover 10% of the firm's billable fees. For simplicity, we also assume the profitability of that work is the same as the firm's hourly work.

Through practice management and knowledge strategy improvements, such as those described above in Example #3, lawyer time to complete fixed fee work is reduced. Lawyers fill their new time with additional fixed fee work. To focus this example on fixed fee work, we assume there is no change in efficiency of hourly work. (If there were, we'd be combining Examples #3 and #4.)

If lawyer time to complete fixed fee work is reduced by 10%, the model shows that profits per equity partner for that fixed fee work improve 28%. Profits per equity partner improve 3% firm-wide.

How Knowledge Strategy Can Reduce Risk

Law firms, like all businesses, manage risk as well as profit.  For a law firm, the risks most relevant to knowledge strategy efforts are quality and consistency. Quality risk encompasses giving incorrect advice or making mistakes in preparing documents. Consistency risk encompasses giving different clients - or even the same client - different advice on the same question. Reducing these risks cannot readily be put into a financial model, as increasing profits can. Nevertheless, techniques for addressing these risks warrant consideration.

Quality risks can be addressed through knowledge strategy efforts such as:

  • Improved training, including accountability for lawyers learning the content being taught.
  • Model forms and/or good example documents. These can also improve efficiency, which aids in profit improvement if focused as described in Examples #2-4 of the previous section.
  • Effective practice group meetings, including a formal agenda, mandatory attendance (for partners, too), a current issues discussion, a training component and minutes that are circulated and/or posted on the intranet.
  • An open door practice that promotes communication among lawyers, including encouraging associates to reach out to partners.

Consistency can be improved through:

  • A discussion of current issues at regular practice group meetings. Meeting minutes discussing those issues should be included in an electronic advice retrieval system (discussed next). If the practice area is sufficiently dynamic, the firm could consider a special current issues database.
  • Effective access to prior advice, including:
    • An automated document search system,
    • Subject matter coding (taxonomy) of documents to improve search precision (relevance of retrieved documents),
    • Capturing e-mail advice, and
    • Accurate document type coding to improve search recall (extent of retrieving all relevant documents).
  • Model forms and/or good example documents.
  • Improving group communications for asking and answering questions.
    • Consider designating a coordinating partner to answer or find answers.
    • Encourage a culture of consultation. Consider whether the partner compensation model is an obstacle to sharing information and aiding colleagues.
    • Consider an electronic discussion system for lawyers to ask and answer questions on a group basis. It would operate similarly to an e-mail listserv or a wiki. Replies would be available for viewing by all in the practice group. Constructing a separate system keeps the discussion out of the e-mail system and aids in capturing results for future reference. The complete conversation could be included in the firm's searchable advice database.

Addressing a third risk - the risk of conflicts - is also a form of knowledge strategy. A software-aided conflicts-checking system is essential for a large firm. It should also tie to an external database to identify client company relationships, such as parent and subsidiary. The efficacy of the system should be periodically reassessed as the firm's practice and client base evolve and the firm expands.

How Knowledge Strategy Can Improve the Firm

Knowledge strategy can be used to achieve strategic goals other than increasing profit and reducing risk. Examples of other improvements in the firm are:

Happier Clients

Many of the initiatives discussed previously that improve profitability or reduce risk also make clients happy. They can lead to higher quality work, faster turnaround and possibly lower fees.

Calling clients after each matter, or at least periodically, to ask how the firm is doing can provide invaluable information and head off potential problems. If the client is not calling to complain about something, it should not be assumed all is well. By the time the level of client concern rises to making a call, the problem has grown bigger and the fix, if possible, will almost surely be more difficult. Some clients may also simply seek to avoid conflict and a difficult conversation, quietly directing more work elsewhere.

New Business

New business efforts can be aided by knowledge strategy initiatives such as the following:

  • Improve marshaling of prior experience and lawyer expertise for pitches through a matters and experience database, as described earlier in Example #1.
  • Centralize knowledge about all work the firm is doing for a client, to aid cross-selling.
  • Link individual partner Outlook contacts to a central customer relationship management system. With such a system, any partner can tap another partner's contacts at a prospective client. The system should also be linked to the firm's alumni database.
  • Improve knowledge about current clients and prospects through news feeds directed to lawyers working for that client.
  • Improve intelligence about other law firms competing for the client's business. If the client relationship is good, this information could be sought during the periodic "how are we doing" calls discussed above under "Happier Clients." Those calls are also an opportunity to learn about the client's needs for additional legal services.
  • Experiment with alternative fee arrangements. While this subject goes well beyond know-how sharing and practice management, the matters and experience database described in Example #1 above can aid in identifying similar matters for fee benchmarking.

High Quality Lawyers

Most of the initiatives that support quality work product also generally improve lawyer quality. Effective knowledge strategy tools also result in happier lawyers, which may have its own positive effect on quality - and recruiting. Knowledge strategy techniques that may make lawyers happier are:

  • An intranet designed as a portal, customizable to show each lawyer's current documents, e-mails, client news, etc. The most commonly used programs, such as e-mail, document management and the firm-wide advice/document retrieval system, would appear as min-windows (web-parts) within the portal window.
  • Enhanced advice/document search that permits filtering on subject matter categories based on a firm (or practice group) taxonomy (subject matter index) and includes OCR scans of closing documents and other major documents for a matter that may not have been generated on the firm's systems.
  • Enterprise search of other firm knowledge collections, such as e-mail, billing information, records department files and billing information (for partners).
  • Automation-assisted e-mail filing.

Write A Knowledge Strategy Plan

The firm should develop a written knowledge strategy. The document should describe the goals of knowledge management - improve profits, avoid risk, etc. It should, of course, tie to the firm's overall strategy.

The knowledge strategy document should also set forth the extent of the firm's financial commitment, which can be modest. Some projects will pay for themselves, although measuring results in financial terms can be challenging. Other projects may involve difficult process re-engineering but no significant financial outlays. The firm will need to decide how to categorize a project as knowledge-related. Once a project has been successfully implemented, at some point it moves from the knowledge strategy budget to the firm's general operational budget.

The knowledge strategy document should also

  • include a time horizon - measured in years, not months,
  • describe how success will be measured for projects,
  • outline who will lead the efforts, with partner involvement being essential, and
  • recognize that cultural change will likely be required (with partners seen leading the change).

The know-how strategy should be revisited annually.

Knowledge Strategy Project Implementation Suggestions

When implementing knowledge strategy projects, the firm should communicate what is expected of the various constituencies, such as that partners will need to devote more time to training and mentoring, or that all lawyers will need to participate in after-matter review meetings to discuss lessons learned and collect information about the matter for retrieval in preparing future pitches or researching issues that have arisen.

Start with pilot projects where possible. For example, select a practice group with the best success chance or that has expressed the greatest interest.

Gain intelligence about what peer firms are doing. This information is useful for idea generation. Each project must still be evaluated based on the firm's own needs, however. For example, a broad enterprise search system may be too expensive for the expected benefits in light of the firm's current know-how sharing evolution.

Read the accompanying White Paper on this web site regarding "Principles of a Successful Knowledge Strategy Project".

Conclusion

Knowledge strategy should be a high-level effort, led by firm management and supporting specific firm objectives, such as profit improvement or risk reduction. It should not be technology-driven.

About the Law Firm Economic Model

The examples in this paper were based on a simplified law firm economic model. The assumptions and details of the model's base case and the four examples discussed in this paper can be reviewed by clicking here.

About Us

City_20_20footer

KM/JD Consulting LLC renders impartial practice management advice to law firms on improving efficiency, increasing profits and reducing risk, emphasizing knowledge strategy.

Jack Bostelman, President

Handshake_20footer

Before founding KM/JD Consulting LLC, Jack practiced law in New York for 30 years as a partner of pre-eminent AmLaw 20 firm Sullivan & Cromwell.

Visit My Blog - Connecting the Dots

Footer_20blog_20cropped_204_20shutterstock_152157374

How a practice management technique called knowledge strategy can help law firm leaders achieve strategic goals – ideas from a former AmLaw 20 senior partner.