This article is Part 3 of a four-part series focused on subscription-based services for law firms.  READ PART 1 and PART 2.

Law firm pricing

Developing a pricing structure for subscription based legal services can be difficult, especially if your law firm is geared to hourly billing.

For existing clients – historical data and knowledge of the client’s needs can make it easier to set subscribed services fee levels.  Other factors, however, can make the process strategically difficult.  Concerns can range from setting a price that causes a client to include new competitors in the process to opening oneself to internal scrutiny – “the new deal is not as good as the hourly deal.”

Arriving at a pricing structure for a new client will initially rely on client-supplied data, which I have often found to be limited. In other service industries, it is typical to conduct an in-depth analysis of a prospective client’s current costs and service level expectations. In the legal market, however, due to confidentiality and attorney-client privilege concerns, prospective clients rarely share any data beyond estimates of their total legal spend, types of matters, and possibly a projection of future service needs. A client may provide more information if they believe it will benefit them in developing a credible fee level.

Finally, small and mid-sized clients (legal spend and needs) may not have any organized approach to their legal spend. In these instances, modeling based on assumptions is necessary. Other sources of data may include running simulations on similar current clients and discovery questionnaires designed to organize the evaluation process.

Economically justifying subscribed services fee agreements can rely heavily on removing administrative costs that include billing, collection, the speed of cash flow, other savings related to automating workflows. Efficient staffing models, which include the freedom to assign any appropriate resource to the task, should also provide additional cost efficiencies and better realization (value for time spent). Firm’s who primarily bill hourly can struggle with cost allocation for non-hourly billing approaches.

It is also important to gain agreement on the cost savings that the client can realize, which include reduced bill review, matter management, and payment processing.

A Trial Run

Such clients will require a more fundamental business case:

  • clients who do not have an organized process for managing their legal spend,
  • clients who do not take a strategic approach to their legal spend or
  • clients who do not yet understand their legal needs will require a more fundamental business case.

To insulate the client and firm from the risk of a bad agreement, I suggest a trial period with a reassessment opportunity. The length of the trial period can depend on the scope and complexity of the agreement.

Focus on Efficiency

Finally, considering compensation drivers and incentives for timekeepers working on subscribed services accounts is necessary. The focus must shift to efficiency and adherence to service levels from billable hours based compensation and pay.

Accounting

Keeping time on on subscribed services accounts is still necessary for internal measurement purposes. The type of services provided can inform the level of detail needed, but a code based timekeeping system that is tied to matters, projects, advice or another logical schema will work. Recall that one element of an SSA is to reduce administrative burden.

A code based timekeeping system that groups like tasks can facilitate advanced metric analysis including  efficiency analysis for each timekeeper, timekeeper experience level, task level, and several others that can help identify improvement areas.  The data should also indicate potential staffing issues, client-side inefficiencies, and  key profitability metrics.  All of these data can inform operational decisions, timekeeper compensation and incentives, and future pricing decisions.

A predisposition to hourly billing and profit measurement is a major challenge to the creation of a successful subscribed services model in many law firms. A well-developed cost accounting process and profitability measurement system can encourage partners to allow the time needed to perfect a subscribed services model.

Check back on our blog soon to read more about subscription based legal services, including:

  • Challenges of this type of billing model.

This article is Part 2 of a four-part series focused on subscription-based services for law firms.  READ PART 1.

Subscrition services law firm As a consultant who rarely bills hourly, I have had my trials and tribulations with scope development and client expectation management. I have even considered if the concept was workable. Achieving a sustainable market-fit approach has taken creativity, the patience for trial and error, and a level of flexibility in the early stages.

Our experience finds that a subscribed services approach is still considered too risky by many lawyers, but some lawyers are earnestly probing for the right approach economically and ethically.  If you or your firm are considering a subscription based pricing strategy, apply the following fundamentals to increase your success chances.

Scope Development and Expectation Management

Perhaps the most difficult element to perfecting a subscribed services pricing strategy is to develop a scope of the agreement. “Scope creep” occurs when clients request additional services not covered by the agreement without also offering to pay additional fees.  This can destroy profitability since most lawyers are eager to please their clients and provide these additional services without much resistance.  Scope creep will be further discussed later in this section.

When a subscribed services agreement (SSA) includes a well written scope, terms and conditions, and pricing, success is more likely.  It is also important to adhere to the provisions which requires discipline and excellent communication skills.

Developing a Scope: An Example

A scope of basic services included in an agreement is easy to develop. For example, your firm may agree to do the following for a client:  manage human resources compliance efforts, review and support hiring and termination processes and decisions, and to oversee management training twice a year. An experienced employment lawyer can easily write an adequate agreement scope.

Under this agreement, “pressing the scope” could occur if the client requests a lawyer to participate in the termination process of an employee. Wanting to keep the client happy, the lawyer agrees.  The termination process goes so smoothly that the client decides it is a good idea to have an attorney present at all difficult terminations.

When creating the initial scope, the lawyer never anticipated offering this level of service, which is often time intensive and comes with potentially more risk. And while the client is pleased in the short run, these added services quickly become an expectation and profits begin to evaporate.

If we were advising our fictional lawyer, we would recommend the following:

  • Immediately analyze the agreement to determine how well the pricing fits the expanded services offered. We will address accounting issues later, but for now, assume the data exists to perform the recommended analysis. Next, determine how the additional services impact the pricing model built for the agreement.

 

  • If the impact is material, contact the client and review the initial scope. Gain agreement that additional services are beyond the scope and offer solutions.

 

  • Think of solutions: It is in this area that creativity is needed. For example, instead of raising the price, you may consider eliminating a service from the initial scope as an offset. You may determine that you can handle a limited number of additional instances and propose an incremental fee for every instance beyond the allotted number. Finally, you may decide that the solution is a fee increase.

In these situations, it is important that clients see an honest effort to manage the cost of the agreement.  Your firm’s credibility will increase if it can propose alternative that do not involve a fee increase.

With experience, future scope agreements will anticipate potential additional service requests and inform pricing agreements.

Expectation management

Managing client expectations is important regardless of pricing agreement or service model. An advantage of hourly billing, although slight, is that clients receive a detailed record of the service provided on their invoices. When a subscribes services invoice only includes a line item for the monthly fee, clients may not appreciate all the work performed during the billing cycle or over the course of the agreement.

To communicate the value received under such agreements, an alternative communication process is necessary.  Borrowing from the IT world, I like adaptations of the help desk ticketing systems.  For example, bespoke versions of Zen Desk or Fresh Desk (several similar systems exist) can help manage client expectations and measure a firm’s service level performance. Further adaptation of these systems includes a web-based client portal process that allows clients to submit requests for legal services online.

Once initiated in the system, tracking, approval and reporting processes can occur.  Depending on the type of agreement, I recommend that lawyers use these data to measure performance and communicate with clients periodically. For example, a firm may review the number of legal requests submitted during the period, the status of each request, any items that need client action, and any other items that can improve the quality of the agreement. As necessary, standard narrative case reports can supplement a metric based reporting system.

A formal process for managing client expectations is an essential part of a successful subscribed services agreement.


Check back on our blog soon to read more about subscription based legal services, including:

  • Pricing (Setting Fees)
  • Accounting
  • Challenges of this type of billing model.
This article is PART 1 of a four-part series focused on subscription-based services for law firms. 

To meet the changing needs and demands of clients, law firms everywhere are rethinking the traditional per hour billing model. While this often means offering clients a fixed or flat fee approach, some law firms are considering subscription based billing for their clients.

A subscription based legal services model may be worth considering if your firm:

  • Wants to simplify time accounting
  • Reduce billing to a monthly technological event
  • Build a sustainable book of recurring business

 

Realities about hourly billing and business client relationships

Reality #1

Hourly billing can be frustrating for everyone involved. Lawyers dislike keeping time and rendering invoices.  Clients grow frustrated receiving invoices with legalistic time descriptions in fractional increments.  Displeased clients often question charges for seemingly worthless tasks, delay their payments or push for lower billing rates.

Reality #2

Clients who do not regularly engage in the legal process typically do not include legal fees in their operating budgets. They do not utilize  preventative legal services. Rather, they  wait until they have a serious issue to involve their lawyer.  This type of clients can require a lot of immediate attention, producing large legal bills in the initial stages of engagement.  Since lawyers are typically sheepish about securing large retainers or negotiating payment plans early in the representation,  they may find themselves ethically bound to continuing the representation of nonpaying clients.

Understanding your client, their challenges and their disposition toward legal services can help avoid many of these situations and lead a productive, profitable and rewarding legal services relationship.

Subscription Based Legal Services, Law Firm Consultant

The Ideal Client

A subscribed services model can work effectively for small and mid-sized companies who can’t afford or do not want an in-house legal team. Typically, these clients have an immediate or growing need for uninsured legal services. While they may not have have legal issues every month, they have enough going on to appreciate spreading out their legal fees over the entire year. Larger clients may benefit from this subscription based approach with the right value-added services. It is more likely, however, that the in-house legal team may resist or compete internally.

General counsel services can cross many practice areas and can create work for other lawyers in a firm. For example, general corporate services can lead to intellectual property, labor, real estate, litigation and other types of legal services, which can fall out of the basic agreement scope.

Since it likely that a subscribed services client will  have legal needs beyond any one firm’s capability, we recommend offering to manage the interface with the additional firm. To ensure that a client makes its  first call to  the firm for any legal need requires the firm to willingly recommend appropriate counsel. This even means suggesting another firm.

SSM’s can also work for discrete parts of a client’s total legal need. For example, loan closings, collections, labor and employment support, and intellectual property. If a clear scope is attainable, the work is consistent, and an outside law firm can provide efficiency, cost advantages or improved quality beyond in-house solutions, an SSM can work.


Check back on our blog soon to read more about subscription based legal services, including:

Pricing, law firms, RFP, Client DevelopmentBefore responding to an RFP or a proposal for legal services outside of a formal bidding process, you must first assess the likelihood of winning. Lawyers usually have a good sense about their chances of succeeding in a bid process. If you have never succeeded in bidding for the prospective client’s work,  have never represented them, or have never made a concerted effort to marketing to this potential client, your chances of winning are slim.

Why then should a firm bid at all?

Why not just concentrate on current and prospective clients who are better bets?

To answer these questions, a firm must decide whether the impact of representing the seemingly out of reach client is material enough to warrant a long-term bid process. For example, responding to a an RFP in such a way that it shapes future RFP’s resulting in an advantage to your firm.

Before going for a strategic win, honestly assess the following factors:
• Your firm’s qualifications to excel at solving the client’s legal problems;
• Your firm’s demonstrable track record in the relevant practice areas or skill sets;
• Your firm’s relevant available capacity to dedicate to the client’s account;
• Whether you can offer a unique qualitative advantage to the client;
• Whether you can gvie a real price/cost advantage;
• Your plan for addressing your firm’s perceived weaknesses on the client’s part;
• How you can best remove any perceived risk on the part of the client associated with giving your firm an opportunity.

Carefully articulating each of these points may not win the business. But if the answers to these questions are compelling enough, it may spur a deeper evaluation of existing counsel and may inform future bids.

Many solicitations (RFP’s, formal bids, panel applications) require strict adherence to the form of the proposal or bid documents. These documents often favor incumbent firms for, no other reason than, prior experience with the prospective client’s cases.  Clients may try to compare submissions, making it difficult to evaluate and compare proposals that do not follow bid guidelines.

Enlightened clients may allow for alternate submissions in addition to the proforma bid or proposal response. In these instances, it is much easier to affect the bidding process strategically. Clients who allow additional alternate submissions suggest that they are open-minded to creative approaches and want to learn from their own processes.

Clients who do not solicit alternate responses may not appreciate a firm’s efforts to include an alternate proposal option. Just because they don’t ask, however, does not mean someone who can influence future decisions won’t read it.

Taking this down to a more practical level, you can apply these same concepts to smaller opportunities and clients, or clients that do not have a formal procurement process.  For example, if you have cultivated a great relationship with a prospective client, but your competition is strong and has a long-standing relationship with the desired client. Or if a client has a difficult time adding new law firms a list of approved counsel. In both cases, immediate success is not likely. However, if you can change the conversation to an innovative pricing strategy, a technological advantage, or a forward-thinking approach to the legal work, you may create an advantage for yourself.

Takeaways

Before bidding or proposing on new legal work, give an honest assessment of your firm’s chances of winning. If the existing process favors you firm, comply with the requirements of the bid and submit your proposal.

If winning the new work is determined to be a long shot,  comply with the proposal requirements, AND consider an alternate submission. An alternate approach is more likely to succeed if your firm can convey its real advantages that may create future opportunities.

Strategic approaches take time and often don’t pay off, but they are often the only chance a firm has to secure a prospective client’s work.


Pricing legal services is a complex and evolving topic. PerformLaw posts have recently covered the following points:

Please look for our future posts on the following topics:

  • Contract General Counsel services
  • Technological value adds to build client loyalty
  • Effectively communicating cost savings related to various billing approaches
  • The impact of pricing and cash flow considerations on pricing

law firm, flat fee, fixed price, alternative billingThe demand for value-based billing options presents law firms with opportunities to propose a flat fee approach for their legal services.  Law firms can improve their chances of success in developing this sort of approach with a full-featured model.  Larger firms may have the benefit of in-house pricing professionals, but smaller firms may need outside support. Regardless of who is supporting the data analysis process, a comprehensive approach is necessary.

We recommend building a model that contains the following features:

  1. An estimated hours distribution by timekeeper type for a typical case;

  2. A frequency component that allows the testing of several assumptions;

  3. Historical data for comparison to assumptions;

  4. Volume assumptions;

  5. Capacity analysis;

  6. Payroll and overhead cost per hour;

  7. Contributions to overhead and profit; and

  8. Before and after rate comparisons including a rate uplift feature.

  1. Estimated Hours Distribution

We suggest creating a chart with a vertical listing of all the elements of a typical case and a horizontal listing of either the assigned timekeepers or timekeeper types used in a typical matter.  Next, fill out the grid with the estimated timekeeper hours assuming that all cases run entire indicated the course to conclude.

Law_Firm_Flat_Fee_Approach

  1. Frequency Component

When determining price, law firms should also include a frequency component that estimates how often a particular element of a case may happen.  Estimating frequency is important since it introduces the element of risk into the model. For example, if a firm simply prices work based on the maximum estimated hours per case, clients will likely oppose the proposed price. With good data, experienced and skilled lawyers can more accurately assess the likelihood of certain events happening, resulting in more risk tolerance.

  1. Historical Data

In an optimal situation, firms can test assumptions based on real case data. An experienced firm can use historical case data to run scenarios to find opportunities to improve. This firm will have a pricing advantage. If a firm has no historical data, a client may offer some help or suggest using certain assumptions, but this is less than optimal. Another idea is to consult with a peer firm or colleague in another state or jurisdiction for insight.

  1. Volume Assumptions

Understanding the impact of volume on the firm’s cost per hour is important. Volume can temporarily reduce cost per hour. Eventually though, continued volume increases will encounter rising costs and declining profits. Alternatively, too little volume may also cause cost per hour to increase and profits to decline.

When compensation plans pay on gross fees and not contributed profit, additional issues arise. Developing a profitable pricing strategy requires a true comprehension of the impact of volume at an indicated price point.

  1. Capacity Analysis

Considering the firm’s available capacity is another component of pricing. A firm with a lot of available relevant capacity may choose to price more aggressively. The reverse is true for firms that have minimal capacity available. Firms should consider that not all hours are the same. For instance, a firm may bid more aggressively bid on a certain type of work if its potential is better than existing work.  Additionally, some firms may try to cure a work slow down with a short-term strategy of picking up filler work.

Here is an excerpt of a simple capacity analysis, which only indicates available capacity and does not consider skill set matches to the proposed work. We consider skill set matches separately.

Regardless of strategy, firms should carefully consider the impacts on available capacity in the short and long term.

Non-hourly fee arrangements can transform a firm for better or worse.

  1. Payroll and Overhead Cost Per Hour

Testing the impact of any new work on payroll and overhead cost per hour is an important element of creating a profitable non-hourly billing proposal. While predictability and simplicity of billing are attractive elements of non-hourly billing agreements, the burden of efficiency falls to the law firm.

Sophisticated clients will compare their ultimate cost of hourly and non-hourly billing agreements. While inefficient firms who bid too high may win in the short run, they eventually sacrifice the entire client relationship. Firms with efficient cost structures are better suited to non-hourly billing approaches.

  1. Contributions to Overhead and Profit

When building a pricing model, a firm must first identify the direct costs associated with any proposed work. Covering direct costs enables a contribution to overhead and profit. Many firms fall into the trap of believing that covering direct costs adds to profit. On the weakest of levels covering direct overhead helps, but firms that price this way have no future. Firm’s that do not account for overhead in their pricing models run the risk tying up their available capacity on unprofitable work, which can transform a firm for the worse.

  1. Before and After Rate Comparisons and Rate Uplift

Law firms sell solutions to legal problems. Solving legal problems takes time. Law firms have limited time to sell and should maximize the return on the time they expend. An hour is a common unit of measuring time and should inform a non-hourly billing analysis. Accounting, finance, economics, marketing, and good instincts all important tools in the pricing process.

Including a rate uplift feature in a pricing, analysis can help reverse engineer a process to achieve a targeted revenue. For example, a smart firm that sets a target rate for a particular type or piece of work can work backward through the process to find cost efficiencies, some which may add value on the client side. Consider the savings that come from eliminating bill audit or the value to the firm of stable and predictable cash flow. Smart firms look for value everywhere.

Takeaways

A simple, well-built pricing model can offer true insight into a firm’s ability to compete for non-hourly billing opportunities. In some instances, a creative billing approach can be the only the chance a firm has for securing desired work.

Invest the time in creating a pricing template for your firm. If the resources are not available in-house, look to the outside for support. Subscribed PerformLaw clients should know that these templates and services are available to them at no additional charge under most pricing plans.

Close enough may work in a game of horseshoes. Miss the mark by 5% – 10% in a pricing decision, and your firm may not get the work. Or worse,  you may win the bid and suffer the loss.


  Thinking about a non-hourly billing approach

or have a proposal opportunity?

PerformLaw can help. We offer basic templates, analysis support and pricing advice starting at $750.00.*

CLICK HERE TO LEARN MORE

* These templates and services are available to subscribed PerformLaw clients at no additional charge under most pricing plans.

 


 

Law firm, bidding process, client development

Our law firm clients report an uptick in their requests for non-hourly billing agreements. Requests range from phased approach flat fees to a per case flat fee for similar cases.  Other requests include a bid document in which the lowest bid in the first round only meant you earned the option to submit a lower bid in a successive round.

In other instances, the prospective client reserves the right to compare the firm’s actual effort expended to the agreed upon fee.  Typically, however, there is no corresponding provision that allowed the law firm to request additional fees if a phase was higher than anticipated.  This provision essentially equates to hourly rate competition in disguise.

I believe most clients know who they want to win.  I’m not suggesting nefarious, just that the legal service relationship is very personal.  When clients include current firms in their bidding process, red flags should exist for the other firms. A client’s existing lawyers are familiar with the client’s approach to case management and likely have strong relationships with the primary decision makers.  While a uniform set of assumptions for all bidders to follow makes the process fairer, the veteran firm will still have a better sense of the complexity and duration of the requested services.

Too high, too low, or just right

Bidding for legal work is a much about data and numbers as it is about a firm’s experience and instincts. A firm bidding for client work must review all relevant data and decide to bid a certain amount, which is ultimately a judgment call.  If a firm or lawyers are risk averse, a maximum possible fee offering is typical, which is not likely to succeed unless the firm’s implied hourly rates are substantially less than the other bidders.

Bidding the work too low can also lead to poor results.   A client may attribute a firm’s low bid to a lack of experience and reject it to avoid the possibility of poor representation. On the other hand, if a client happens to accept a firm’s low bid, the firm may get a poor return for the resources expended or even end up with an actual loss of money.

It is important for firms to understand the difference between a reduced realization on a standard hourly rate and an actual loss of money.  Many lawyers define losing money as the difference between their standard hourly rate and the realized rate on a matter. In a sense, this is true if the firm or the lawyer is at full employment and would forgo work at standard billing rates.  If the firm or lawyer is not at full employment, a reduction in hourly rate is not likely an accounting loss, which occurs when the actual cost (payroll and variable overhead) is greater than the revenue received.

Behind the scenes

Law firms must also recognize when a client is just fishing for a better effective hourly rate. If a client’s RFP instructs bidders to price matters based on identified levels of hours per phase or task, there is very little room for differentiation except on rate.

A firm should also consider the reasons for its inclusion in the bidding process. Is there a previous relationship?  Has there been any targeted business development with this client? Does the firm or lawyer have high profile expertise? Does the firm have a solid reputation for handling similar matters? The list could go on, but understanding how the client perceives the firm or its lawyers value can inform your response.  In many bidding situations, firms are included to set the upper and lower ranges. Knowing where your firm fits in the bidding process will allow you to create a more relevant response.

Please look for our future posts on the following topics:

  • Actual win versus strategic win
  • Advanced bidding features
  • Pricing designed elicit more information
  • Contract General Counsel services
  • Technological value adds to build client loyalty
  • Effectively communicating cost savings related to various billing approaches
  • The impact of pricing and cash flow considerations on pricing

As a result of increanon-hourly billing agreementssing client demands for efficiency and cost control, many law firms are considering ways to offer non-hourly fee pricing to clients.  Some of the friction causing some law firms to remain hesitant about implementing a non-hourly billing approach include:

    • An hourly culture and mentality;
    • Fear of losing money;
    • Fear of changing existing client relationships;
    • Administrative systems and procedures all built to support a billable hour practice;
    • Compensation systems that reward individual production as measured in hours;
    • Lack of pricing support and knowledge;
    • Fear that clients will not embrace a fixed fee approach; and
  • Philosophical differences.

Any one of these challenges is enough to sink a non-hourly billing initiative, and without client pressure, law firms are resistant to change.  How then can entrepreneurial lawyers pursue non-hourly billing approaches without running afoul of firm management?

Non-hourly billing approaches have existed in some practice areas for many years, but for firms who have never done them or applied them to a broader range of practice areas, the fee setting process is uncomfortable and sometimes beyond their internal capabilities.

Let’s discuss some of the more challenging aspects of moving beyond the billable hour for most defense firms.

An hourly culture and mentality

In most defense firms, hourly billing is the dominant billing method and has been for decades. If fact, many clients are increasing their investments in software and personnel to manage hourly billing agreements. The focus of many of these investments includes ensuring adherence to billing agreements and controlling legal expenses by evaluating costs at the task level.

Smart law firms have responded by improving their timekeeping systems, improving time descriptions, training lawyers to describe their time correctly, and adjusting cost structures to offset reduced realization rates. Some have gone as firm far has hiring outside bill review services.

The battle seems never ending and not likely to abate soon. Some lawyers, however, are actively searching for solutions that address client legal cost concerns while allowing for more professional judgment regarding the defense or prosecution of a client’s case.

Trying to mesh hourly billing and non-hourly billing cultures is difficult, but requiring time accounting across all billing agreements is a one way to at least ensure that an accurate comparison between approaches can occur.

Fear of losing money

In our experience, the definition of losing money can differ among law firms. Some consider a fully loaded (collected fees minus salary, benefits, and overhead) profit calculation, while others consider a gross margin approach (collections minus salaries, and benefits), and others only compare realized rates to a standard rate.

Defining profitability using an opportunity cost approach (comparing effective rate alternatives) is okay assuming the opportunity costs are real. Additionally, when using cost approaches to evaluating profitability, it is useful to consider any cost efficiencies related to a non-hourly billing method.

For example, the absence of billing and possibly collection costs (carrying costs and invoice follow up) can reduce overhead. Use of different levels of timekeepers at the firm’s discretion may also provide staffing efficiencies leading to lower payroll costs.

A quality cost accounting system can provide needed data for setting fee agreements. A comparison of actual costs to estimated staffing and overhead costs will enable a firm to refine pricing algorithms over a series of cases. Making these comparisons requires a different approach to time accounting. Instead of detailed time entries designed to pass billing muster, it is more important to track hours by task or phase of a case. For example, grouping all time by timekeeper and task within the discovery process can provide needed data for future fee estimates.

Law firms can mitigate the fear of losing money with a good pricing process, accurate cost accounting system, and a comprehensive data collection and reporting approach.

Fear of changing existing client relationships

The cliché “if it ain’t broke, don’t fix it” comes to mind when considering wholesale changes to the pricing model for an existing client. The problem is the many firms are in unprofitable relationships and do not realize it. Overcoming a firm’s resistance to running and detailed profitability analysis on a client is often very difficult. It is even more challenging when a client is large and when there are potential compensation implications.

Firm’s that have a well-developed profitability reporting system have an advantage. Partners in these law firms benefit from knowing how much profit they are risking when entering a non-hourly pricing discussion with a current client.  Even with this information, it’s hard to accept change. Many lawyers prefer cutting costs and increasing production requirements to changing billing models.

Firms that link compensation to profitability incent partners to improve results. Firms that combine rewards based on contributed profit with the freedom to take educated pricing risks can help their partners overcome this fear of change.

Administrative systems and procedures all built to support a billable hour practice

As with most people, administrative personnel can find change difficult. Imagine coming to work day and having to change many of the current systems, processes, and procedures. On top of all the daily pressures, who has time for an experimental change? As unappealing as such an administrative undertaking sounds, it is often necessary.

Lawyers who do not bill hourly, need different types of information and different reporting metrics. For example, a lawyer who is using a fixed fee pricing model would likely prefer metrics that indicate efficiency defined by who is completing tasks in the least amount of time. This lawyer may want base rewards on speed and accuracy instead of gross billable hours.

Administrative systems must adapt to the information needs of non-hourly billing practices. Compensation formulas, policies, and procedures must allow for the assignment of premiums and discounts on cases. Salary and bonus programs may need alteration.

Depending upon the actual billing method used, a firm’s workload distribution, and potentially different support needs, administrative systems and procedures built to support a billable hour model must change.

Firms that do not fully support differing billing methods run a risk of losing valuable partners to more accommodating competitors or even a new start-up.

Compensation systems that reward individual production as measured in hours

Perhaps the most significant obstacle for lawyers who want to move past billing hourly is a firm’s compensation system. Many firms reward for personal production defined in hours or timekeeper collections, origination collections, profitability, equity and other factors.

Firms that pay based on profitability have an easier time handling different billing methods. All that these firms need are policies regarding cost accounting and the assignment of any positives and negatives related to over and under realization.

Firms that consider billable hours, gross individual and origination collections may have a harder time compensating partners with different billing methods.  Resentments can surface when partners with low personal billable hours generate high profits and command high pay. Many lawyers are thoroughly ingrained in a billable hour mind set and will resist paying market pay to partners with low billable hours.

To overcome compensation challenges, we recommend that law firms shift to a system of paying based on contributed profits.

Lack of pricing support and knowledge

Pricing in most small and mid-sized firms is usually not a refined process. Most rates are set based on what the lawyers believe clients will pay. In some instances, our clients ask us for cost and profitability data. Overwhelmingly, these law firms request information about profit assuming certain hourly rates.

Typical questions include:

  • What is the lowest hourly rate we can accept and still make money?
  • If I staff a client’s account with a particular set of timekeepers, how much will I make?
  • A client has offered more volume in exchange for a discount; is it a good or bad deal?

Periodically, we encounter law practices with non-hourly billing methods. Plaintiff representation, collections, certain estates and trust work, and individual loan closings frequently billed at a fixed amount. Even in these well-established areas, however, pricing is either dictated by the market, statutorily set, or based on authoritative guidance and professional norms. The science, if there ever was any, was applied long ago.

It has been our experience that most law firms do not consider pricing as a professional discipline. Often it is thought as a financial concept only, which is a mistake and leaves out important strategic elements. This lack of pricing support and knowledge handicaps many firms and stalls efforts to move to a non-hourly billing approach.

Smart firms who are committed to a more informed pricing approach, even with their hourly clients, seek pricing support in the professional services market.

Fear that clients will only want the best elements of a non-hourly billing approach

The predisposition that many clients and lawyers have is that a non- hourly billing agreement will end in either the client or the lawyer winning or losing.  This mentality can make it hard to negotiate an appropriate legal fee.

Lawyers who are in demand and have experience setting legal fees can better communicate the value of their services.  Clients can assess the lawyer’s track record, consider the importance of their legal issue, and effectively lean on the market to set the price.

Alternatively, a sophisticated client experienced at setting fees can reassure less experienced (pricing) lawyer by referencing previous deals with their competition. In these instances, one party has experience, and one party does not. Reputable attorneys and clients understand that if they drive too hard of a bargain, it will harm the long-term relationship and potentially the result.

When both client and attorney have experience, the situation is optimal. When neither party has experience, failure is more likely. To address the higher likelihood of an adverse pricing agreement, we recommend negotiating safeguards. For example, a firm may set a price for the discovery phases of a litigation matter but convert to billing hourly if a case goes to trial.

Philosophical differences

The philosophical differences related to billing clients can make it difficult for firms to change billing methods. It has been my experience that lawyers who do not bill on an hourly basis resist keeping time records. In some instances, they may believe that recording time on client matters and setting future fees based on these time records is a way to mask hourly billing.

Further, they may feel pressure to cut the bill if they can achieve a result for a client in less time than anticipated. Fundamentally, many non-hourly lawyers price based on the result delivered and not the effort expended.

Others believe that keeping time may incent cutting corners when the hours reach a certain level. Finally, the evaluation horizon for a non-hourly pricing agreement may include more than a single engagement, and trying to “make money” from each case can undercut an implied bargain.

Lawyers who are committed to an hourly billing model believe that it is fair for the client and themselves. These lawyers view pricing as a function of effort expended expressed in units (fractions of hours). Lawyers who bill hourly may believe that non-hourly fee agreements are acceptable for certain types of work, but are not a mainstream approach for all legal work.

When a lawyer’s value expressed as dollars per hour, it is tough to move away from hourly billing. Many clients are also conditioned to focus heavily on price per hour more that the total case cost or ultimate result.

For these reasons, it is just easier for many to stick to the billable hour method. Essentially, it is what most clients want, and it makes no sense to try to change billing approaches.

Regardless of philosophy, we believe that both (hourly and non-hourly) can work if the right data is available. Most defense firms are not good at setting non-hourly fees. Many of their systems, procedures, and rewards support hourly billing. Hourly firms tend to oversimplify the estimating process and lack the training and support to implement more efficient case handling approaches.

Combine all of this with a substantial amount of client hourly demand, and there are more reasons not to change billing methods than to try something different.

We believe that defense-oriented law firms should at least try non-hourly billing approaches in instances where a client relationship is not working economically. Clients on tight legal budgets may appreciate a legal billing agreement that saves them money by eliminating the combined cost (Client and Law Firm) of reviewing legal bills.

Law Firm Recruiting, Lateral Hiring

Lateral hiring normally makes the top 5 list of priorities for law firms desiring growth. Some firms follow a process for lateral hiring that focuses on preserving its culture and values.  Other firms believe that it is more important to break down entry barriers and seek laterals at an expedited pace.

Regardless of a firm’s approach to lateral hiring, a process that is too rigid will scuttle most deals.  A process that is too loose normally ends in unmet expectations – or worse. To temper these extremes, I recommend that firms create a process that includes the creativity of art and the discipline of science.

Specifically, firms desiring to improve their lateral hiring success should consider the following factors:

Cultural attributes

A firm with a strong history of successful results is likely to maintain its dominance in a lateral transaction, but even these firms may benefit from the thinking of lateral hires. Firms that are most successful are open to incorporating the ideas of lateral hires into their culture. Having just evaluated the firm from a buyer’s point of view, lateral hires are positioned to provide a firm with valuable external market insights.

Economic attributes

It is important to understand how a lateral transaction is supposed to be accretive to the firm. Some firms believe that laterals must contribute actual profit to the firm while others are satisfied with help covering fixed overhead. Laterals may also be accretive in terms of new client and or new practice area opportunities. As for timing, I recommend that firms plan on 18-24 months before any real economic benefits are derived.

Recruiting attributes

Firms that are actively seeking laterals are more inclined to engage the services of a recruiter while firms that are in a more passive mode are more likely to be patient and work through their existing network of contacts. Regardless of whether a firm is in an active or passive mode, it is essential that they have a clearly defined approach to engaging a lateral when the opportunity arises. Any ambivalence or ambiguity on the part of the firm will likely scare laterals off.

Implementation and follow up

It is essential to incorporate laterals into the mainstream of the firm as soon as possible. As with a new client procurement, consistent execution is what separates the good from the great. Well executed implementation not only increases the potential for success of an existing lateral transaction, but the ability to have previously recruited laterals assist in the courting process for new laterals is a real edge.

Results evaluation and course correction

There is much to be learned from objectively reviewing the results of a lateral transaction. Skipping this process is a missed opportunity to improve future transactions and to make adjustments to the current situation if necessary. A predefined evaluation process and system for making adjustments will remove the emotion from these decisions and will have the added benefit of encouraging laterals be more candid about their expected future performance.

Lateral hiring will never be without risk. The consequences of a bad deal may include economic loss, morale loss and damage to the firm’s reputation. Creating a process that considers the attributes described above will help to increase a firm’s likelihood of success.

 

law firm, strategic plan, consultant, New Orleans, Louisiana

I am frequently asked whether a strategic plan really makes a difference in firm performance. As I have encountered many firms without strategic plans who have achieved high levels of success, this is a fair question.

The reality is that the survival instincts and talents of the partners in many firms are the primary drivers of their success. These firms operate at very high energy levels, emphasize clients and cases, and measure success in mostly economic terms.

As firms mature, however, it becomes more difficult to compete using this two dimensional approach. To be consistent winners, firms need a strategy to identify opportunities that allows for real growth in capacity and capability.

A strategic plan is most effective for achieving the following:

  • · Sustained success in the long term;
  • · Alignment of leaders and future leaders;
  • · A basis for choosing between opportunities; and
  • · A basis for measuring performance.

Education Before Plan Development

While many attorneys agree that a strategic plan could make a positive difference in their firm performance, they fear that the process of creating a plan will not result in meaningful change. Having read a number of strategic plans that were never implemented, this also seems be a valid concern. I recommend a process that consists of education before actual plan development.

The main areas of concentration include:

  • · Marketing and client service
  • · Attorney development
  • · Staff development
  • · Recruiting
  • · Technology
  • · Finance
  • · Succession and transition
  • · Leadership development
  • · Short and long term incentives

Partners and other key personnel who can view issues from a common frame of reference are more likely to produce a meaningful plan. A plan built on a solid understanding of the market-based fundamentals that includes sustainable incentives is more likely to be embraced by the full firm.

Determining Value of law firm

As any other business, a law firm can have market value to the remaining partners. Determining its actual value can help a firm to make informed decisions involving transition planning.

Valuing a law firm can seem complicated, but mainly, it comes down to three elements:

  1. Book Value of Equity

  2. Platform Value (going concern value)

  3. Value of any transitioned business

 

1. Book Value of Equity

Book Value of Equity is the easiest of these to calculate and most firms can get to this number without too much difficulty. To calculate, a law firm needs:
–  An updated A law firm needs an updated balance sheet as of the valuation date
–  Current accounts receivable
–  Unbilled Sub-ledgers

Most small and mid-sized law firms maintain their books on a cash or modified cash basis. Revenues are recognized when received, and expenses are recognized when paid. Income and expense accruals beyond the current year pension liability are rare.

Book Value of Equity is a simple calculation the includes subtracting total liabilities from total assets.

total assets

Most firms reflect this difference in each member’s capital account.  Given the tax structure of the typical small and mid-sized law firm, all income is allocated each year and flows through to the individual members.

The equity section of a typical law firm balance sheet includes any fixed capital contributions and the undistributed earnings (income less draws and payments on behalf of partners) of the members. Accounts receivable and unbilled fees are typically not included unless a firm prepares an accrual basis financial statement.

Many firms have provisions governing dissolution, withdrawal, disability, retirement, and death in their operating agreements.  In our experience, the most common approaches to handling unallocated book value at retirement include:

  • None (no buy in /no buyout);
  • Stated amount (agreed value among the partners);
  • Based on retirement year equity; or
  • Based on a measure of originations or profit.

Regardless of the method, allocating book value is the easiest to understand.

2. Platform Value (going concern value)

Assigning a value to a law firm as a going concern can include tangible and intangible assets.  Admittedly, valuing a law firm is not likely to follow traditional business valuation approaches, and will probably lack any fair market value comparable.  Paying retiring partners for anything beyond book value and shares of future client receipts is rare, but in some instances, we believe there is a legitimate case for paying for the value of a going concern.

Comparing the costs to start a new firm, which includes cash outlays and lost time, to the cost of buying retiring partners interests is an initial starting point.  One challenge can include the reality that the existing platform is inefficient and lacking in competitive advantage. In these instances, it is necessary to include modernization costs and difficulties into the analysis.

The items that can add going concern value include:

  • Any client master service or panel agreements that can potentially survive a transition;
  • Marketing automation system contacts, workflows, blogs, resources, infographics and any other unique client or contact engagement data;
  • Website and SEO rankings;
  • Billing and financial histories;
  • Document management infrastructure, document histories, and document creation templates and utilities;
  • Efficient accounting and billing systems;
  • Trained staff;
  • Branding and name recognition;
  • Reputational advantages with clients and judiciary;
  • Office leases;
  • Difference between the book value of equipment and the cost of buying new equipment;
  • Established trade credit and banking relationships;
  • Repeatable processes and procedures; and
  • Ability to buy increase errors and omissions insurance.

While this list is not all-inclusive, it does indicate several potential advantages for evaluation. Firms who have built an efficient platform can offer junior partners compelling reasons for paying retiring partners for going concern value. Firms who do not score well in these areas have a difficult time convincing junior partners to assign a value premium to the going concern.

Assigning a value to a going concern requires a careful analysis and comparison with the benefits and costs of starting a new firm.  Developing a 3-year profitability model that compares the results of maintaining the current platform to those associated with starting a new law firm.

As mentioned previously, paying a retiring partner for going concern value is not an exact science. Each situation will differ and depend on the clarity of advantages.

3. Value of Transitioned Client Accounts

Paying retiring partners for clients that a firm retains is handled in several ways, but in small and mid-sized firms, we prefer individual agreements between retiring partners and those benefiting from the transitioned client relationships.

For example, if a retiring partner facilitates a client transfer to a junior partner, the junior partner would absorb the cost any compensation paid to the retiring partner for any transferred clients.  If more than one partner benefits from a retiring partner’s clients, each partner will participate in defraying the cost of the retiring partner’s compensation in proportion to the benefit they receive.

Firms that have client and matter profitability readily available have an advantage and can negotiate sustainable agreements retiring partners.

We recommend paying retiring partners over a period of years (3-5), depending upon the role of the retiring partner and the transition period. We recommend compensating based on each client’s contributed profit before transition costs.  The level of payout that retiring partners receive can vary based on profitability.  Many law firms do not run client level profitability and paying based on gross fees is common.  Paying based on gross fees can create an unprofitable situation if the payouts are more than the profitability of the transitioned work.

A firm can set guidelines on how much a partner receives on a percentage basis and the duration of the payouts, but each retiring partner agreement can differ.

Other approaches to paying retiring partners include:

  • historical compensation based formulas,
  • arbitrary stipends, no benefit,
  • founder’s bonuses,
  • and other guaranteed payments.

Additionally, most small and mid-sized firm partners receive performance-based compensation throughout their careers, and many firms do believe that additional post-retirement compensation is justified. In these instances, partners are likely only to receive their capital account balances.

Transitioning clients requires planning and active participation on the part of a retiring partner. Creating the right incentives can increase the likelihood of perpetuating the firm.


A progressive approach to developing and executing a transition plan requires a sustained focus, which is often difficult for administrators and lawyers who must manage daily business demands and be pressing client service issues. Outside support, working in conjunction with in-house resources, ensures that the planning process remains focused and deliberate.

Law Firm Best PracticesTo read more about developing an effective transition plan for your law firm,  click here to visit PerformLaw’s main website.