Partner rates increased an average of 3.5% each year during the 3 years ended June 30, 2014, according to a report recently issued by Lexis-Nexis CounselLink, an e-billing service used by corporate law departments. The report focuses on rates, not total cost of matters. A law firm that undertakes serious improvements in matter matter management may be able to change the dialogue with clients from rates to value. To overcome client skepticism, the firm will likely need to be transparent with clients about the specific improvements it has made.

The Citibank/Hildebrandt report paints a picture of recovery for large law firms. It also reinforces the point made in the recent American Lawyer report covered in my prior blog that the improving averages mask an increasing disparity in performance among large firms, with a few doing extremely well, many doing somewhat well and many doing badly. The performance differences cannot be explained simply, but the trend suggests there is a formula for success that firms must discover and apply. Citibank/Hildebrandt make their suggestions. I urge that investing in practice group re-engineering be included in the formula as well.

In the past 10 years, the market for business legal services shrank by 25% in real terms, but the AmLaw 200 firms hung on by increasing their share of that market, by raising rates and by increasing leverage. The top 10% of those firms pulled away from the pack and have thrived. These conclusions come from a recent special report by the American Lawyer based on its extensive database and U.S. Census economic data. The report urges firms to survey their clients and develop an action plan - essentially to prepare and execute a strategic plan. The remainder of this post describes the steps to formulate a strategic plan and the importance and difficulty in actually executing the plan.

Keith Mayfield, chairman of an AmLaw 200 firm, is reflecting on a presentation that advocated: (1) paying practice group leaders primarily based on the performance of of their group, (2) requiring them to devote a majority of their time to non-billable management of the group, and (3) empowering them to influence compensation of the partners in their group.

Here are six strategies for improving collaboration and efficiency within a firm: (1) introducing profitability of matters rather than realization rate as the financial metric for evaluating partners, (2) apply methods to overcome lawyer resistance to organizing work product for more efficient re-use, (3) institute checklists to guide practitioners, (4) create a search system that adds subject matter and other filters to full-text search to bring the efficiency of on-line shopping sites to law firm work product retrieval, (5) institute a system to identify on a timely basis when a matter has been completed in order to trigger information collection for marketing and fee benchmarking, enable league table submissions, schedule after-action reviews and improve lawyer utilization, and (6) begin conducting after-action reviews.

Kendra Masters, head of the Capital Markets practice at an AmLaw 100 firm, has tried for many years to improve the way her lawyers collaborate, yet her efforts have not succeeded. Kendra sees how her lawyers can be more efficient, and produce a higher quality and more consistent work product, if they took the time to create some tools. For example: checklists, a repository of precedents, a system for sharing current developments news, an enhanced training program, a robust Group intranet and a complete deal list. Kendra has tried to do some of this work all by herself. These were all good ideas, but she has little to show for her efforts. A consultant explains to Kendra why, due to lawyer personalities, her efforts have not worked. He outlines a different approach that he says has worked many times, which employs tactics designed to overcome lawyers' natural resistance.

Keith Wetmore, former chairman of Morrison & Foerster, raised a very fair point after reading my prior blog post: Is matter profitability smoke and mirrors? (June 30, 2014). He correctly pointed out that tying partner compensation to matter profitability, as opposed to using profitability purely as a diagnostic tool, was a major and unexplained leap on my part. Assuming a firm is using matter profitability as an analytical tool to drive decisions about what matters to pursue or take on, today's post explores the further question of tying partner compensation to profitability.

Keith Mayfield, chairman of an AmLaw 100 firm, is worrying about expense allocation issues as he prepares to introduce profitability of matters as a new metric to his partners. Keith views hooking partner compensation to matter profitability as essential to steering partner behavior in the right direction. At the same time, he regards the subject as fraught with peril. He is deliberately proceeding at a slow pace, to improve the chances that his partners will embrace this new approach. Getting them to understand and accept the judgments inherent in matter profitability calculations is an important step towards success of the initiative.

Keith Mayfield, chairman of an AmLaw 100 firm, reads the recently published Altman Weil annual survey of law firms in transition. More than half the firms with over 250 lawyers believe they have too many non-equity partners. Yet only 2.2% of surveyed firms have an up-or-out policy for this partner category. “Law firms need to manage the non-equity tier with much more attention and discipline, including standards for entry and exit,” advises Altman Weil.

This post discusses a key point in Altman Weil's 2014 annual survey of law firms in transition, which was released last week, and its implications for law firms. An addendum to the post also summarizes other highlights of the survey. The law firms that are successful in improving efficiency will have the advantage. The hard part isn't deciding what to do; it's getting it done. Start with a pilot group and keep up the pressure. This is a long-term investment that will take time and effort at the outset but can bring great benefits over time.

"[2013] ... was a year in which a handful of the richest firms got much richer, the far-flung vereins got much bigger, and almost everyone else struggled just to keep up with inflation," reported the American Lawyer earlier today. The performance gap between firms appears to be increasing. Strategy and execution may be part of the reason. Improving collaboration and efficiency in its practice groups will be a necessary element in most cases.

“We like to say our work is so high-end that every deal is unique, but only 20% of what I do on a given deal is original,” admits a thought leader in the mergers & acquisitions group of an AmLaw 100 firm. She's speaking to Keith Mayfield, chairman of her firm. Keith is interviewing some of his colleagues for ideas about how to make their practices more efficient. In experienced-based practices, such as M&A and commercial litigation, nothing is cookie-cutter, but the majority of the work involves rearranging pieces of work done before, sometimes in a complicated way but not in a truly original way. By taking a pragmatic approach to enhancing efficiency and collaboration within the practice group that embraces piecemeal improvements, substantial progress can be made at a fraction of the effort required to overhaul the whole practice. Also, a culture of continued improvement can be cultivated for the long-term.

This post describes seven ways that a law firm can efficiently assimilate new learning among its lawyers. The main goal is to improve the quality and consistency of service to clients. This makes clients happy and reduces risk to the firm. A further benefit is that junior (and lower-cost) lawyers can more quickly get up the learning curve, which reduces the cost to the client. These lower costs generally lead to reduced write-downs and write-offs, which improves realization rate and profitability.

Jeff is the head of the Banking and Finance Group at an AmLaw 200 firm. It's the start of the year and he's filling out his partner objectives form. Although practice group leaders are typically not financially rewarded for effective group leadership, many pursue their roles seriously for other reasons, such as loyalty to the firm, ambitions to advance within the firm management structure or a sense of personal satisfaction. Even though practice group leaders have little to no direct authority over the partners in their group, there is much they can accomplish through coordination, demonstrating initiative and applying good organizational skills, as long as they maintain the respect of their colleagues. These activities include coordinating and providing leadership in the group's efforts to get new business, assisting with knowledge-sharing efforts and introducing process improvements.

“It's been a year and $100,000. Now you're telling me we have to start over?” exclaims Keith Mayfield, chairman of an AmLaw 100 firm, to the director of the firm's IT Department and the head of the firm's Corporate Division, which is by far its largest lawyer group. Keith is referring to a high-profile system being built to automate the semi-annual process of Corporate Division partners providing performance reviews of associates. During a painful postmortem, the following facts come to light: business requirements kept changing, the IT Dept. just went along, partners were not committed and the system imposed a big culture change on partners.

Several law firm leaders are sharing ideas over drinks after a leaders' roundtable. They're discussing the final session, which covered value-adding information a firm can gather at the end of a matter, such as experience data and after-matter reviews. A lively discussion then ensues about how hard it is to accomplish the seemingly trivial task of learning on a timely basis when a matter has been completed.

Over drinks at the annual partner retreat of an AmLaw 100 firm, several partners in the healthcare group are talking shop. They’re based in different offices and are still getting to know each other, even though they work in the same practice group. Jeff, a partner based in Dallas, describes a difficult question he recently fielded for client Metro Insurance under the Affordable Care Act. “I was dealing with that same question for County Healthcare System last week!” exclaims Mary, a partner based in New York. “I’m actually working through that issue right now,” interjects Carlos from the San Diego office. “What did you guys tell your clients?”

Keith Mayfield, chairman of an AmLaw 100 firm, is reading the recent press report on the survey by Wells Fargo’s private bank of law firm results for the first nine months of 2013: Gross revenue increased 2.5%, Expenses also increased 2.5%, Total hours billed declined 0.75% and hours per lawyer declined 1.1%, and Effective rates increased 3.6%. Keith reads a press report about the Citibank survey for the same period, which is in line with the Wells report, though showing that revenue gains outpaced expenses by 0.4%. Citibank concludes with, "[T]he underlying challenges facing the legal industry remain: tepid demand and excess capacity." “That’s about where we are,” Keith thinks to himself. “Our expense increases have cancelled out our revenue gains from rate increases, client demand is soft and we have too many partners.”

“You didn't check the by-laws!” exclaims Andy in exasperation to a junior associate at an AmLaw 100 firm. Andy, a capital markets partner, has just been pulled out of a meeting on a new deal to fix a corporate authority problem on another deal that is supposed to close tomorrow. The problem, which was missed by Andy's team, has been belatedly raised by underwriters' counsel at the pre-closing for a $200 million SEC-registered bond issue by Andy's corporate client. The company's by-laws contain an unusual provision, inserted years ago by its recently retired founder, requiring a super-majority board vote for any borrowing exceeding $20 million. The company had not borrowed in many years. As it turns out, the telephonic meeting to authorize the bond issue was attended by only a bare majority of the board.

“Top 10 Knowledge Strategies for Larger Law Firms,” a 57-page white paper for law firm leaders, is now available from the Knowledge Strategy Interest Group, which I chair, in the Law Practice Division of the American Bar Association. Knowledge strategy focuses on improving efficiency and quality at the practice group level through better collaboration and sharing of what lawyers know about client work, about clients, about markets for their services, and about their firms as businesses. Knowledge strategy also emphasizes involvement by the firm's senior-most leaders, which is the main driver of change in law firms.

“How can I change the culture here?” ponders Keith Mayfield, chairman of an AmLaw 100 firm. “I want this firm to be more open to new ideas about how we work, especially changes that can make us more efficient,” he thinks to himself. Keith has just finished reading an intriguing article that explains why some innovations take a long time to take hold, and ways to speed that up. For example, two dramatic medical innovations in the mid-19th century illustrate contrasting acceptance periods. Surgical anesthesia caught on immediately. Within six months it was being used in most regions of the world. In contrast, only a few years later the discovery of the life-saving benefits of antiseptic liquids and procedures in surgery had virtually no impact. Despite the fact that infection killed as many as half the patients who underwent major operations, it took almost 50 years for antiseptic methods to become an accepted part of surgical practice.

The private banks of both Citibank and Wells Fargo recently reported the results of their first half 2013 law firm surveys, which portrayed similar pictures: Flat-profits Very modest revenue growth (0.5% and 1.5%, respectively) over the prior year period. Higher growth in expenses (up 2.4% and 3.5%) than revenues, resulting in declining margins. Growth in billing rates of 3.7% and 3.5%, part of which may be due to staffing more senior lawyers on matters and part due to hourly rate increases. The much lower revenue growth implies that much of these rate increases did not “stick” (in other words, that the rate increases were significantly offset by lower realization rates). Lower lawyer productivity (also known as utilization; in other words, average hours billed per lawyer) than the prior-year period (down 2.4% according to Wells Fargo).

Keith Mayfield, Chairman of an AmLaw 100 firm, is shaking his head as he enters his office. He has just returned from the monthly meeting of the Commercial Finance Group in his firm. This was Keith's practice area before becoming chairman. For the umpteenth time the status update of the Group's standard forms was “no progress”. The assigned partners have been too busy with client work to review the associates' drafts. It's been three years since the effort began. Several of the associates who drafted the forms have left the firm. The forms project has been restaffed at the partner level several times because of the problem of delayed review. One meeting of the assigned partners to address big-picture comments resulted in an unresolved disagreement about how to address several provisions. Clearly there's something wrong with the process, not the individuals. Later that day Keith happens upon The Checklist Manifesto[*] as he's looking for airplane reading at the airport newsstand. He's read it already and moves on, but it gets him thinking.

Keith Mayfield, chairman of an AmLaw 100 firm, is debating with his management committee the pros and cons of introducing to his firm's partners the metric of profitability of a matter rather than realization rate, the metric currently used. Keith believes using realization rate gives only part of the picture and doesn't permit comparisons across practice groups. A high realization rate on a low-leverage tax advisory matter could produce lower profitability than a medium realization rate on a high-leverage routine bank-loan matter. In other words, realization rate measures only the revenue side, whereas profitability also takes into account expenses attributable to the matter, driven principally by the lawyer resources used.

There are gaps between what law firm leaders acknowledge they should be doing and what they are actually doing, according to Altman Weil's annual “Law Firms in Transition” survey, released last week. For example, while 96% of respondents believe more price competition and a focus on improved practice efficiency are permanent changes in the law firm environment, only 55% of firms with 250 or more lawyers have significantly changed their strategic approach to efficiency in delivery of legal services. This post comments on improving efficiency in delivery of legal services, then presents a summary of the full survey, which also covers other topics.