In the early 1900s Daimler conducted a survey to determine the future market for cars. The conclusion: no more than one million, because no more than a million chauffeurs would be available. This view may seem ludicrous now, but it demonstrates that markets evolve. The legal market, as with most other professional services markets, exists in an environment of continuous evolution driven by changing client requirements and expectations; as well as changes in regulations, technology and economics. Law firm leaders face the challenge of adapting to these changes to maintain healthy profitability.
Top law firms chase the 20% of legal work which has the highest value – winning this business requires them to be innovative, collaborative and informed – and offers the opportunity of premium billings. Much of the remaining 80% of legal work represents a profitable opportunity for those firms who are prepared to focus on the efficient processing of matters. Continued success for law firms depends on their ability to manage their long-term sustainable profitability, which can be driven by:
- increasing internal efficiencies so as to reduce the costs and risks of providing traditional legal services
- looking at new ways of conducting business and providing services to new and existing clients
- adding value to new and existing business relationships
- reducing the reliance on hours billed to produce revenue for the firm
- increasing the expertise, quality and job satisfaction of lawyers so as to maintain the most important asset of any law firm – its quality people
- differentiating the firm from its competitors in the marketplace so as to win and retain the right, profitable work.
Law firm executives should exploit the collective knowledge within the firm to enable them to meet these challenges. This collective “knowledge” is broad – incorporating an understanding of the law itself and required legal process, the client’s business and industry, and fee earners’ personal knowledge and experience. Such collective knowledge can enable a firm to increase its efficiency (thereby reducing the costs of providing its services, whether or not these savings are passed on to the client), manage the risks of ‘getting it wrong’ and provide a source of new business innovation.
This article summarises the presentations and discussions from the recent
Managing Processes
Whether in relation to “pre” or “post” matter activities (eg pitches and costs recovery respectively), “front office” activities (such as generating documents, creating and briefing a team or estimating fees), or “back office” activities (such as conflict and money laundering checks, matter debriefs or the creation of matter bibles), managing business processes more effectively can reduce costs, improve client service and positively affect profitability.
Business Process Management (“BPM”) is a technique used to improve business operations and organisational processes. Very few law firm leaders would suggest that their firm is ‘optimally’ organised (most would admit that this is far from the case) – although the potential value to be gained by the better management of business processes is substantial. Merely talking about ‘process’ within a law firm environment can engender negativity, with lawyers often feeling that all aspects of their work are highly specialised, requiring years of training and hands-on experience. Tied in with this view is an inherent sense of self-protection that is dismissive of any attempt to “commoditise” legal work processes or product. This attitude does not reduce the benefit that can be gained from the effective review and potential evolution of business processes; but it does highlight the need to manage carefully the human element of any process review.
It must be acknowledged that implementing BPM solutions can be both cost and labour intensive, as well as politically difficult. A good example of this is in the area of document automation, where the costs of identifying, marking up, coding and processing relevant documents (not to mention the IT aspects, which often necessitate bespoke in-house development) need to be clearly measured against the benefits for each document produced. The value of automating high volume or high risk documents is demonstrable, the cut-off point for leaving document production as a more ‘manual’ process will need to be assessed by each firm on a case-by-case basis.
Another practical aspect of the implementation of BPM systems in the law firm environment is that of cross-function coordination. Whilst we all like to believe that all departments, whether fee earning or support, work in harmony, this is often at odds with the reality that different areas of a firm often have very different objectives, pressures, resources and skills. Cross-departmental coordination can become a political “hot potato” and require skills even the most experienced diplomat would struggle to muster.
Partner Leverage
Partner leverage (sometimes referred to as gearing) is one of the “health” factors identified by David Maister in “Managing the Professional Services Firm” that contributes to Profit Per Equity Partner (“PPEP”), a common measure of law firm profitability. The graphic below provides a simple example of the financial impact of higher partner leverage.
For this simple analysis, full capacity/utilisation and fixed charge-out rates are assumed. The low leverage model comprises one partner charging £200 per hour for a full 35 hour working week with a supporting associate at £100 per hour at 30 hours (one could rightly argue that the associate should be working more but that’s another story). On this basis the partner contributes (income less allocated costs) £7,000 and the associate £3,000, providing a team contribution of £10,000 per week. In the high leverage model, the partner has three associates working at the same level as in the first example but the partner’s hours are reduced to 30, on the basis that there will be more time required for management, mentoring etc. Suffice to say, the difference in per partner profit contribution of £5,000 per week (a 50% increase in this example) will have significant impact on the profitability of the firm when extrapolated over the financial year!
Increasing partner leverage has the potential to increase the level of business risk for the law firm, since more work is being delegated to less experienced lawyers or paralegals. To address this, firms will need to provide a support system to mitigate or cap this risk – a “knowledge” support system. This knowledge support system will need to help those overseeing, managing and doing the legal work – providing a level of transparency and collaboration relating to the execution of a matter beyond that normally experienced. In particular, the knowledge support system will need to provide the know-how, know-who, know-what, know-when and, potentially the most important from a staff development perspective, know-why to the more junior staff working on the matter. Examples of the support required include:
- access to resources (eg precedents, checklists and updating materials) so that more junior fee earners have support systems in place to compensate for their relative inexperience
- contact and expertise information to ensure that those working on a particular matter have clear channels to the firm’s experts when they are needed
- established best practices so that all individuals working within the firm work consistently in accordance with guidelines set down by the partnership
- increased matter transparency to clients, for example through e-billing, secure collaborative environments (‘deal rooms’) etc; and, significantly,
- incorporating and addressing risk management issues in transaction processes.
Table 1 summarises the requirements of different levels of users for a higher partner leverage support system.
|
Group |
Requirements |
|
Partner |
· “God’s eye view” to monitor what is being done at any particular time on any of the partner’s matters · Business intelligence capabilities, such as historical performance analysis and human resource management · Quality control management capabilities · Strong communication and collaboration capabilities · Simple or intuitive use of technology · Enables fee earners to ‘hit the ground running’ · Extends to clients to increase collaboration and deepen relationships |
|
Senior Associate managing engagement |
· Access to precedents, checklists and “know-who” information · A single, seamless interface for internal and external resources (processes must be part of everyday work, not in addition to it) · Integrated project management tools |
|
Junior Associate/Paralegal working on matter |
· Ability to identify and collaborate with subject matter experts · Access to structured information on management of matters · Greater focus on project plans etc (formalised processes) |
Table 1: Developed by the
Knowledge Products
Knowledge support systems can support higher partner leverage by incorporating upgraded business processes and providing lawyers with a supportive working ‘environment’. At the conclusion of a matter, this working environment contains the documents, tasks, commentary and context for that type of matter – the essentials and essence of a knowledge product. Such a knowledge product establishes the credentials of the firm for that type of matter, and efficiently wraps together, and enables the delivery of, the routine aspects for future engagements of that type. This knowledge product supports the greater delegation required by higher partner leverage and also provides an asset, the use of which can be evaluated and charged for.
There are many examples of law firm knowledge products already on the market in the public domain. Examples include e-learning and online training, collaboration facilities, access to electronic bills, contacts lists etc, updating services, online advice services and expert systems. A number of the earlier offerings mirrored services that could be provided through legal publishers, although there appears to be an increasing acknowledgement that such “non-differentiating” activities are unlikely to produce a real return on investment.
Table 2 summarises the thoughts of the
|
Group |
Positives |
Negatives |
|
Client |
· Cost · Speed · Quality · Transparency |
· Concerned about the de-skilling of lawyers with whom they have contact · Relies on IT infrastructure robustness · Only works for certain practice areas |
|
Firm (“Executive”) |
· Profitability! · Client opportunities · Potential to facilitate desired cultural shift |
· Investment required in technology and infrastructure, knowledge systems, resources, skills training, etc. · Potential to create an undesired cultural shift, especially without better technology, communication and project management skills · Increased risk profile · Need to reassure high performers that their promotion prospects will not be affected |
|
Fee Earner |
· Depending on type of work, could enjoy greater independence · Could help with career progression · Could focus on high quality work |
· Work could become process oriented · Creates a “sink or swim” culture · Issue of whether experience would help if moved to another firm (NB could be a benefit) · Less learning by example, working directly with partners · Will quality work be delegated and will time be dedicated to mentoring or supporting junior staff · Less chance of partnership in highly leveraged firm · Requires partners to have management skills |
Table 2: Partner leverage pros and cons. Developed by the
The use of knowledge support systems, the emergence of knowledge products and the push from clients for greater collaboration with their law firms are pushing the need for standardised methods of storing and sharing legal matter data. For a number of years there have been discussions in the media and knowledge management circles relating to standards for certain legal product offerings. Examples of such initiatives include the LITIG e-billing standards, and the agreements that have enabled the construction of the Banking Legal Technology Group knowledge portal, which brings together content from five major law firms for the benefit of their banking clients.
There is little doubt that the legal marketplace is changing and these changes must be client led. Technology continues to provide new and exciting platforms through which law firms can connect with their clients (and potentially one another). The legal profession also continues to evolve, both in response to client demands and changes in regulation, such as those initiated by the recent review of the legal profession by Sir Peter Clementi.
Even supermarkets have now started providing, albeit at a low level, legal knowledge products. Law firms need to learn from corporate evolution before advertising slogans such as “Looking for help with the law? You may be able to handle the problem yourself.” (see http://www.tescolegalstore.com/) find a wider niche.
To close with some wisdom from Jack Welch, at the time Chairman and CEO of General Electric, “The Internet is the Viagra of big business”. Following the proposals to allow corporate investment in law firms made in the Clementi report, the next few years may see a change of who supplies legal knowledge products unless law firms adapt and focus on ‘Profiting through Knowledge’.
Justin Harness is Head of Operations at the Solutions Lab® at Bird & Bird. Simon Levene is a consultant, Baker Robbins & Company.
This article represents the personal views of the authors rather than the views of their respective firms.
