“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.
How a practice management technique called knowledge strategy can help law firm leaders achieve strategic goals – ideas from a former AmLaw 20 senior partner.
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, closes the book he's just finished on the long flight back from visiting several of his firm's offices. The book, published in April 2013, is one of the latest prognostications about the possible end of Biglaw. It's called The Lawyer Bubble, by Steven Harper, who is a retired partner of Kirkland & Ellis. As Keith gazes out the window, he thinks about the book's message: Biglaw doesn't have a sustainable business model in today's world. That conclusion doesn't sit well with Keith. Not because he doesn't like it, but because he thinks the book dramatizes and over-simplifies the problems faced by large law firms. In Keith's view, the book is a long read with a short message. It contains extensive discussions of statistics that are intended to support the author's arguments but too often come across as not directly relevant to the points being made or as jumping-off points for unsupported inferences.
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.
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.”
The after-action review meeting also presents a unique opportunity to collect other valuable information that otherwise may be unavailable. These include: capturing key substantive issues addressed, recording the main factors affecting the fee, and verifying matter parameters and description. After-action review meetings also serve a training and morale-building purpose for associates. This meeting may be the only time during the matter where some associates get a sense of the scope of the entire matter and how the part on which they worked contributed to the whole. Also, merely participating in an after-action review meeting and being treated as an equal team member will contribute to more positive morale among associates.
“Why are people talking about after-action reviews?” wonders Keith Mayfield, chairman of an AmLaw 100 firm. The topic has been coming from many directions recently. One of his lateral partners has just left his office after suggesting the firm begin after-action reviews for all matters, as they did at the partner's previous firm. Last week Keith lunched with the general counsel of a prospective litigation client, who asked whether the firm regularly conducts after-action reviews. Last month Keith attended a managing partner leadership meeting, where he now remembers the subject came up briefly during a breakout session. Keith's now curious to learn more. Keith calls the consultant who ran the breakout session, who has law firm experience, to ask why after-action reviews are being talked about.
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.
Having compiled a list of the commercial real estate group's existing internal and external resources, Tony, the group's chair, gets input from partners and associates at the group's next monthly meeting as to which of those existing resources are most important. He also asks what new resources the group's lawyers would like. Two or three ideas become projects to add in a future phase of the intranet, such as a database of internal firm experts on various subjects. Based on the practice group meeting, Tony develops a good idea of the three most important internal resources that will drive users to the site. He makes a note that Carlos, the associate tasked with supporting the group's intranet, should make it a priority to keep these current.
Keith Mayfield, Chairman of an AmLaw 100 firm, is dismayed. He has just finished a meeting with his chief operating partner, who raised a problem with the functioning of the firm's practice groups. A review of how the groups operate revealed that associates feel lost within most groups: They are unsure where to find practice resources, unaware of current developments, inattentive to training opportunities and lacking a feeling of community. Even many partners feel this way, especially laterals. Delving deeper, the review revealed that the practice group intranet sites were by-and-large not being used, readily confirmed by a review of usage statistics kept by the IT Dept. The main reason, discovered through associate interviews, turned out to be that the content was stale. There were generally no lawyers charged with maintaining the sites. Names were assigned, but the responsibility was not taken seriously because practice group leadership did not press the importance of the sites or hold the content maintainers accountable. Associates also complained that the sites, which had been established a decade ago, were difficult to navigate and not invitingly designed when compared to current web sites.
Keith Mayfield, the chairman of an AmLaw 100 firm, has just returned to his office from an internal planning meeting with the chairs of the firm's key practice groups. The chair of the intellectual property group expressed frustration that his group had a rich store of resource materials, but had trouble making them available to the group's lawyers. The group has a paralegal to organize the materials, a resources page on the practice group's intranet and access to the firm's enterprise search engine. Still, group members are constantly e‑mailing around asking for good examples of certain documents, insights into certain issues and experience with certain types of transactions and disputes. This triggered the voicing of similar concerns by several other practice group chairs. It was resolved that the problem was sufficiently pervasive within the firm that an initiative needed to be undertaken.
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.
How to improve law firm efficiency? Pt. 2 – Ask the lawyers about priorities, but don’t ask them to help
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.
While Keith believes that getting lawyers to file e‑mail is his biggest e‑mail problem, he's also concerned about the daily deluge of all-lawyers e‑mails. They ask if anyone knows local counsel in State X? Or if anyone has ever worked on a thus-and-such transaction with the following unusual features? Or knows about a certain type of transaction in a certain industry? Or knows of an expert witness in a specified subject matter? n today's part, Keith addresses a different e‑mail problem – how to reduce the flood of e‑mail sent to all lawyers and other broad groups within the firm. Those e‑mails are annoying to 90% of the recipients, and replies-to-all are even more annoying to those recipients. Those all-lawyers e‑mails are of great interest, however, to the other 10%. Moreover, that 10% is also interested in the replies, which they often don't see when a respondent replies only to the sender.
After speaking with other law firm leaders and some outside consultants, Keith decides that his first step should be to identify the various reasons behind his lawyers' non-compliance with the firm's e‑mail filing policy. This involves interviewing a sample of lawyers of different seniorities, offices and practice areas. It turns out there are many reasons, and therefore many solutions to be devised. No single solution applies even to one lawyer. The insights that come out of these discussions are ...
Keith Mayfield, chairman of an AmLaw 100 firm, is sick to death of e-mail. It's not that there's too much (which, of course, there is). It's the risk and the waste. (1) Lost client advice. Every hour his lawyers send dozens of e-mails containing valuable client advice and don't save them anywhere central, depriving the firm of needed records and denying their fellow lawyers access to useful work product for their research. (2) Lost research. The same thing happens with internal research. (3) Annoying all-lawyers e‑mails. Intrusive All-lawyers e-mails are sent within the firm many times a day asking who knows the answer to a particular legal question, looking for an outside expert or asking about local or foreign counsel. What's worse, the answers and any follow-up questions aren't seen by the lawyers who are interested or kept anywhere central. (4) Incomplete client files. The e-mail traffic generated during a client matter isn't systematically reviewed, with the important ones organized and saved as a record of the deal, the way paper used to be.