On the advice of a consultant, Keith has been pushing for more proactive practice group management: asking each group to establish a strategy and external identity, specific revenue and realization rate goals (with profitability goals to be imposed in a couple years) and plans for client relationship management, business development, talent management (for partners and associates) and internal practice efficiency improvement. The primary burden falls on the practice group chairs. While many have shown good management skills in moving their plans forward, others have made little or no progress. Generally this latter group are in their positions because of their superior lawyering and new business skills, not their management skills. Replacing them as chairs is not an option, however. Keith decides to apply the personality strategies to the chair of an important practice group.

Recognizing that without more lawyer input the administrative staff cannot gather accurate and complete profile data about concluded matters, Keith has started a lawyer-driven project to collect this information. This experience data will be used to assist lawyers in identifying comparable matters for purposes of finding precedents, preparing pitch materials, staffing matters with lawyers who have relevant experience and identifying internal experts on a particular type of matter. The data can also be used for more complete league table reporting. The project envisions associates submitting the required data at the end of each matter, using an on-line form. Keith had asked a partner in the firm's capital markets group to head this project, but progress has been limited. The partner has been diligent in pursing the initiative, but has been getting limited traction with her fellow partners and the associates in the practice group. The main challenge has been getting the many involved lawyers to attend meetings and follow up on their individual commitments.

“How can I get my partners to follow through on their commitments?” muses Keith Mayfield, Chairman of an AmLaw 100 firm. His current concerns are several internal practice improvement projects that need to be headed by partners but are floundering because the partners spend all their time on client work and none on the projects. These include: a legal project management initiative, a pilot program to collect better data about matters to facilitate finding similar matters for precedents, pitch materials and internal expertise, an effort to revitalize management of an important practice group that has been essentially unmanaged, and a project to revamp internal continuing legal education for senior associates and partners. Keith has never believed as strongly as he does now in the accuracy of the maxim “Managing lawyers is like herding cats.”

A recent American Lawyer article described a study* showing that AmLaw 200 firms saw significant fee increases from major clients in 2012 and 2011 over the prior year. Yet the AmLaw 200 financial surveys by the same publication show profits increased only modestly in 2011 (2012 not yet being available). How can this be? The study also showed hours were flat year-to-year, but that doesn't explain why the profit trend didn't follow fees.

This Part 3 describes cautions to be considered in taking action based on profitability data and sharing this sensitive data more widely within the firm. Because actual cash collections lag, often by a significant amount of time, the performance of the work and incurrence of related expenses, using actual collections as a basis for profitability calculations may be disadvantageous when the calculations are being used to aid management decisions. The profitability information would be significantly delayed in relation to when the work was performed, correspondingly delaying any action management may choose to take. One way to address this delay involves using forecasted collections (revenues) based on hours worked on a matter. Under this method, the theoretical collectible amount at standard rates would be reduced by historical rates of discounts, write-offs and write-downs. Expenses would be calculated the same way as for the cash collections method of calculating profitability previously discussed. Using forecasted revenues, though, aggregate annual profitability for all matters will not precisely equal the firm's actual profitability for the year, which could be confusing to some.

This Part 2 discusses allocating general expenses to matters and issues arising in calculating profitability by other sub-units, such as by client, practice area, office and lawyer. General expenses, also known as indirect expenses or overhead, will be allocated to matters, offices and lawyers on a more arbitrary basis. Examples of general expenses include book and electronic library subscriptions, technology infrastructure costs, compensation and benefits for most administrative staff and occupancy costs for administrative staff. One allocation method for these general expenses is to allocate them to a matter in proportion to the share of firm revenues of the matter. A somewhat more accurate method would be to allocate general expenses to a matter in proportion to the matter's share of direct margin. Direct margin is revenues minus the specifically allocated expenses discussed in the previous section, such as timekeeper compensation and occupancy expense.

This Part 1 discusses why it may be a good idea to consider profitability at a more granular level than the firm as a whole, such as by client, matter, practice area or even partner. It also discusses how to allocate some types of expenses at the matter level. Keith Mayfield, Chairman of an AmLaw 100 law firm, is spending another Sunday morning looking at his firm's recent financial reports. He wishes he had more granularity. Today he's focusing on profitability. Keith's colleagues seem enamored these days with looking at overall realization rates, which are the amounts actually collected as a percentage of what was worked at standard billing rates. Keith understands that realization rates are important, but believes profitability is the purest measure of financial success. Because it takes into account rates, leverage, margin and utilization, Keith believes profitability should be the starting point. High realization rates on work with low profitability aren't such a great thing. Low realization rates on high-profit work, such as work that utilizes lots of associate leverage, may be an area for improvement but worth the effort to fix. Realization rate is but one of those four key variables that mathematically combine to equal profits, as discussed in an earlier post, “The Economics of Practice Management,” Parts 1 and 2. “Wouldn't it be great,” thought Keith, “if I could see profitability by client, by practice area, by office and by type of work? Wouldn't it be even greater if I could see it by matter, by type of fee arrangement and even by lawyer and partner?”

AmLaw 20 firm Cleary Gottlieb invested $2.5 million to send 116 first-year associates to a “mini-MBA” training program for two weeks last month, according to a recent press report.* The firm plans to send additional new associates through the program as they arrive later this year. The goal, as reported, is to advance the new lawyers' understanding of the business and financial concepts inherent in work for the firm's clients. Aside from favorable press coverage, what is the internal calculus that would lead a firm to make such a significant investment?

Keith's consultant starts by emphasizing that before starting work on a particular project, the firm should create a written plan for the project that contains these basic elements: scope of the project, budget, people resources required, groups within the firm who are interested in the outcome, timeline and success metrics. These will be discussed below. Each project should have its own plan. Creating a written project plan, and the elements of the plan, are basic parts of project management, but frequently overlooked in law firm projects with lawyers.

Keith realizes that a list of efficiency improvements gathered from lawyer suggestions, even from only a few practice groups, would likely be rather long. He asks his consultant how to prioritize the list. The consultant advises Keith to start by asking the lawyers themselves to rank the requests they believe will bring them the most value. This is best done at the same meeting where the suggestions are gathered. First, draw up all the suggestions into one large list. Then go through each one, asking for votes from all who believe a particular suggestion is in the top three in terms of value. The three suggestions with the most votes are the ones the group believes to be most valuable.

“How can I get my lawyers to practice more efficiently?” muses Keith Mayfield, Chairman of an AmLaw 100 firm. Keith realizes that greater efficiency would not reduce revenues, even with the billable hour model that his firm has still largely been able to maintain. Doing the same work for a lower fee will make the firm more competitive, attracting more work. As discussed in my previous post (The Economics of Practice Management, Pt. 2), revenues will likely increase, as will profits per equity partner – if the firm can be more efficient. Having decided that most of his lawyers aren't ready for a full dose of legal project management, Keith is thinking of other ways his firm can do the work in less time, hopefully surpassing client expectations.

“We live on planet Earth!” declared the 4-year-old, boasting to my son about his new knowledge of the solar system. The boys were waiting with their class as the parents signed them out of preschool for the day. “No! We live at home!” my son responded righteously. He was a year younger and not yet burdened with planetary learning. “No! We live on planet Earth!” the other boy insisted more loudly. “No, no! We live at home!” my son shouted. This escalated until my wife and the other boy's mother had to break up the shouting match. Lawyers and technology professionals can find themselves in the same situation as those two boys. When the two groups sit down to design and build the technology piece of a know-how sharing project, a funny thing happens. Both sides appear to speak English, yet they couldn't be further apart in the way to approach the problem than if they spoke different languages and came from alien cultures.

If Keith could look ahead two years, this is what he'd see as he reflects on his efforts to upgrade the commercial real estate group's practice. Overall, he is extremely satisfied. The acceptance of new lateral partners has been excellent and the effort to obtain more premium work has been a resounding success. The group's reputation among commercial real estate clients has correspondingly improved. The uptraining of existing partners allowed the group to take on premium work brought in by the new lateral partners and other successful business-getters at a much faster rate than if the work were handled by only the laterals and a few star partners.

Having addressed partner buy-in, Larry turns his attention to gaining associate support. The most important aspects of the associate training are attendance and assimilation of the material. The mid-level and senior associates are the main audience, yet they are subject to the greatest pressures to put client work first. Accountability for training attendance and participation, and support from the partners, are the key ways to address attendance. Larry's key steps are ...

Keith had previously convinced Jeff, the head of the commercial real estate practice group, that Jeff was not the right person to run the initiative. The other candidates are Larry, the senior partner and mentor in the commercial real estate group, and Bob, the rising star partner expected by many to succeed Jeff some day as head of the group. Keith has decided that Larry is the right person to lead the effort. Larry won't feel threatened by the arrival of new lateral partners, as the younger Bob might. Larry is also naturally more of an organizer and teacher, making him a better match for the required tasks.

This is a four-part post. In this Part 1, we will see how Keith gets the right people to run the profitability initiatives. In Part 2, we will see how the leaders of the initiatives get the rest of the practice group to play ball. In Part 3, we will see how a collaboration between the practice group and the IT Dept. can work. In Part 4, we will look back after two years to see what worked and what didn't. We will also summarize some of the principles that lead to success. Having decided to move forward with his plans to capture premium work and to move associates more quickly up the work food chain, Keith Mayfield, chairman of an AmLaw 100 firm, considers how to make these plans happen. Moving associates up the work food chain will affect the entire firm. Capturing premium work is intended only for some practice groups.

The question left at the end of Part 1 was whether the investments of partner time in training and of associate time in attending training would offset the benefit of increased associate leverage. Applying the basic law firm economic model to the general training example is instructive. Let's assume: A quarter of the firm's partners shift 2 hours/week of billable time to training, forms, mentoring and tools-building. All the firm's associates shift 1 hour every other week of billable time to attending training. As a result of this partner effort, associates take on 10% of partner billable time, but require 50% more time to accomplish what a partner could have done. New billable work is available and the partners use their extra time (that is, the time freed up by the associates' taking on some partner work) to take on new work. The firm hires additional associates to satisfy the need for associates to take on 10% of partner work and to handle the additional work taken on by partners with their 10% available time. Using the model, these changes result in profits per equity partner improving by 4.6%. Clients also see a 2.2% decline in fees. This kind of improvement obviously does not happen overnight. Most likely a few practice groups will initiate the effort. Others will follow in response to the proper direction and incentives from management and inspiration from the successful groups.

It is Spring 2012 and preliminary 2011 financial results for more than half the AmLaw 100 have been published. Keith Mayfield, chairman of the AmLaw 100 firm introduced in my first post, somberly reviews these results in his office one evening when the phones have finally quieted. While revenues and profits per partner are up at many firms, they are down at many others. Keith wonders how many of those increases in profits per partner were engineered through gimmickry, such as de-equitizing partners. More significantly, at the firms he considers peers, the numbers show a disquieting trend: Revenues are up slightly, but expenses are up more. Profits per equity partner, the litmus test for partner morale, are down several percentage points. Unfortunately, these averages accurately presage his firm's results, which haven't yet been published. Keith concludes that external forces, mainly client fee pressures amidst increased competition, are responsible for these trends. He wonders what his firm can do to turn this profit squeeze around before the situation becomes precarious. He is well aware that even a solvent firm can collapse quickly if its partners lose confidence in the firm's future and its leadership.

Knowledge strategy is an old subject, but underdeveloped at most firms, even at those with Knowledge Departments and Chief Knowledge Officers. Knowledge is what lawyers know about their past work, what they know about their clients, what they know about their business and what they know about the competition. The challenge is how to capture and share this knowledge. Examples of ways to share knowledge are listed later in this post. The key to sharing knowledge is to understand the special personality traits of lawyers, and to establish an approach that addresses, or even embraces, those traits. As you know from leading your firm, lawyers are: skeptical, autonomous, averse to change, focused – to the exclusion of all else – on getting the client work done, yet very interested in learning new things. Psychological studies have confirmed that lawyers do, in fact, differ in these ways from the general business population. As in the case of any significant law firm initiative, know-how sharing requires an approach that takes these personality traits into account and, ideally, harnesses them in support of the new initiative.

Keith Mayfield, the chairman of an AmLaw 100 firm, is doing some long-range planning one Sunday morning in his home office. It's the only time he can really think. As he considers various strategies to maintain profitability – and even improve it – in the face of increasing competition and client fee pressures, he realizes how alone he is. As a lateral partner who's been at the firm over 20 years, he is close, both professionally and personally, to many of his partners. Some are members of his management committee. Yet often he feels he's the only person who thinks about the firm as a business; the only one who thinks about all the external forces affecting the firm. He can see so clearly the changes the firm needs to make; why can't the others? To be sure, some of his partners do look at what's going on outside the firm. But they generally focus only on new business issues, such as what a competing firm is doing to win one of their valued clients; how to win a new client from another firm; or a new practice area to enter. Many of his partners are truly brilliant. All are hard-working. Yet they are focused – almost to the exclusion of all else – on getting the client work done. After that, they may think about getting new work. They don't think about business models, organizational issues, the trend towards commoditization of legal work, client perceptions of value and other basic management concepts.