Finding the Future of Finance

As one of our panelists succinctly put it, “There is more to the practice of law than ‘the law.’” How true that is in  firm finance, an eye-opening education most lawyers receive only on the job. Our panelists agree that an understanding of the business of law is more important than ever before, and firms need to devote resources training lawyers about the dollars and sense of law practice. In addition to realizing how alternative fee arrangements impact the bottom line, lawyers must be cognizant of the ROI for time spent not just on client matters, but also marketing, HR and other firm expenditures.

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Today, alternative staffing arrangements are helping firms control costs while retaining quality and increasing efficiency. At the same time, lawyers are seeking more ways to commoditize, systematize and automate legal practice, relying on sophisticated technology designed specifically for law firms.

This month’s roundtable features thought leaders on law firm finance steering their firms and clients to profitability by adopting both tried-and-tested and novel business methods and tools.

Our Moderator

GaffneyNicholas Gaffney (NG) is a veteran public relations practitioner in San Francisco and is a member of the Law Practice Today Editorial Board.

 

 

 

Our Panelists

James Latchford (JL) is the managing director at AArete LLC. He has extensive global operations management experience, and is a recognized leader in achieving successful change management in the legal services industry and global banking/capital markets. He is a member of the Loyola University Maryland Board of Trustees, where he has held several key committee Chairmanship roles. He is a member of the Board of the Waterford Institute, Salt Lake City, Utah. Jim is a member of the Financial Executives Institute and CEO Trust.
James Goodnow (JGO) is a partner at the Lamber Goodnow team at Fennemore Craig. He is a Harvard Law School graduate, and a member of the five-person Fennemore Craig Management Committee, the firm’s senior leadership team that oversees its 200 attorneys and 400 total employees in seven cities.  He is a regular national legal commentator, having appeared on CNN, Good Morning America and many other national outlets.
James Gast (JGA) is a law firm technology, cybersecurity and marketing pro, speaker, author and CEO of SpliceNet Legal Tech, where he has worked with more than 150 law firms in the last 20 years.  He is an expert in growing the productivity and profitability of small to mid-size law firms through the intelligent use of technology and social media. Since 1997, he has instructed at the University of Cincinnati and Capitol University in their Paralegals Study departments and holds multiple Legal Technology Certifications making him one of the most certified professionals in the country.
Anthony Marrone (AM) is an estate planning and elder law attorney at the Marrone Law Firm in Syracuse, New York. After leaving his mid-size firm in March 2015, he opened his own practice to address the needs of the elderly and aging in Upstate New York.
Joseph W. Hovermill (JH) is president of Miles & Stockbridge. In this role, he serves on the firm’s board of directors with primary responsibility for the firm’s practice strategy and operations, including the financial activities of the mid-sized firm. He also is a senior member of the firm’s products liability and mass torts practice and leads its national coordinating counsel practice.

NG: How have fee structuring and billing practices evolved over the last decade? For example, as some firms move away from the traditional hourly billing structure, do you foresee more progressive billing practices like flat-fee and value billing becoming more commonplace?

JL: The expectation of a move away from hourly billing practices dates back to the late nineties. Yet the progress has been slow and limited. In fact, most estimates of the use of alternative billing practices is 5 to 10 % of total billing occurrences (the percent of total dollar volume is somewhat higher as flat-fee billing (with or without success fees attached) for large transactions or litigations and arbitrations occurs more often).

Many corporate general counsel are pushing for value billing, but first they want greater transparency over the processes and law firm billings. Today, the demand from corporate clients is total transparency through the use of detailed project and matter management software tools and continually updated estimates as the legal matter progresses. It is quite common for corporate general counsel to have online access to the daily/weekly hours being incurred by lawyers on each matter being addressed by the law firm.

Where significant change has occurred which effects billings, is the use of staff attorneys (non-partnership track) by law firms. All law firms now use in-house staff attorneys on client matters, particularly commodity and routine work. The compensation for the staff attorneys (including highly experienced staff attorneys) is low and the billing rates relatively high, but most importantly, lower than normal associate and partner rates. This work generates profit margins of 55 to 80 percent. Some major firms (more than 500 lawyers) now have more non-partnership track than partnership track lawyers).

JGO: There has definitely been a movement away from traditional hourly billing. The movement, however, has been slow and steady. For years, experts have predicted the floodgates will open on the alternative-billing front. In our experience, that hasn’t happened yet. Instead, it’s been a gradual progression in that direction.

JGA: Having helped over 150 law firms in the last 20 years, I’ve seen competition drive this change. To be more competitive in the legal marketplace you have to answer the needs of your clients and they want more simple, more predictable bills. The need to lower the barrier of entry to retaining your services you must be more creative than the next firm and flat-fee and value billing definitely give a firm the advantage. Most firms fear losing money on an individual client or case; however, what they fail to see is that what really matters is the overall bottom line. With flat-fee structures you may lose on some but as a firm matures its billing practices, it will get better at predicting the effort and will start to win more than lose. I suggest putting ourselves in the client’s seat. Hourly billing makes our client feel just like we do when we take our cars to a mechanic for service. We hate their surprises, just like our clients dislike the ones we have to drop on them.

AM: I’m a relatively young attorney, but I see the billable hour as being on death’s door. Clients do not like it, and many attorneys hate it. I am convinced the only reason it still exists is to haze younger attorneys. A progressive fee structure, whether value-based or flat-fee, is becoming the norm in many practice areas. I think what the experience of Uber, Airbnb and the new unicorns that hit the tech market every day is teaching attorneys is that we will be left behind in the new economy if we do not figure out a way to commoditize our services and stop selling time. The traditional law firm model worked well because every year the firm would increase the hourly billable rate for partners and associates as they aged and obtained more experience. This worked well for some time, however, with the advent of the internet expanding the marketplace for legal services, firms face stiffer competition for hourly rates among their peer law firms. Those firms that have figured out that selling time is a losing proposition in the new legal economy are the ones we will still be talking about when this roundtable is convened decades from now.

JH: Requests for alternative fee proposals have become commonplace for us over the last decade. Most RFPs request them, but so too do our existing clients. Even clients with long-established hourly billing arrangements have been open to exploring innovative fee structures when we suggest them. Regardless of the structure chosen, we have found that conversations with our clients on alternative fee arrangements open the door to larger pricing and project management discussions that ultimately enhance our client experience through improved transparency, predictability, accountability and value. We have adapted inside Miles & Stockbridge to have the information, a variety of metrics, and practice management software in our toolbox to propose innovative structures that provide the client with real value and allow us to handle the matter profitably.

NG: Have client expectations changed alongside fee and billing practices?

JL: Yes, the expectations have changed, but not extensively. Since the 2007 financial crisis, the level of regulation has increased. And companies are frightened of getting things wrong, so they will continue to spend on legal services. This is particularly true where they enter new markets. There is a fear factor; people are prepared to spend money on the unknown. When a company goes into a new market, there are new risks. There is a danger of brand damage. Where change is occurring is the introduction of technology into corporate law departments and the law firms that support them. Yes, there is a push to achieve lower costs, often using fewer law firms, and project management tools offering greater transparency, but in terms of the use of technology for the practice of law, we are at the beginning. NextLaw has introduced the use of artificial intelligence to legal research, done by lawyers; Riverview Law is working with general counsel functions in the use of digital dashboards, highlighting the risk profile of any legal matter, who is working on it (level of attorney) and how long it will take. Lastly, the use of predictive data models for legal matters (not just litigations) is growing.

JGO: Client expectations are absolutely changing. Clients are becoming increasingly sophisticated with the management of their legal service budget; many have a better understanding than some law firms as to how much it costs on average to produce a given type of legal work. That level of knowledge carries with it an expectation that firms will also educate themselves in this area and set their pricing accordingly.

JGA: Of course. Everyone wants it better, faster and cheaper, but unlike the old saying, “you can only have two of the three,” clients are expecting all three. Specifically, clients are expecting higher levels of communication by email, social media and text, and more individualized attention, which each of these inherently provide. Firms need to find newer more advanced ways to communicate via more than just phone and email. Generational change will make it so the firm that does not use Facebook Messenger or similar tools will not get or keep their new clients. Along with these type of customer service features the client also still wants a predictable bill so new automated methods of communication and the like will be paramount to the firm. For example, some law firms can automatically send text messages to their clients to remind them of dates and appointments, or to review a document the firm created on a client-facing secure site.

AM: I have the good fortune of representing individuals, families and corporations. In my experience, all three sets of consumers have become incredibly more savvy with regard to fee structure. My clients know what the market rate is in New York state for an estate plan. The financial institutions I represent know what trust counsel’s hourly rates should be in a given jurisdiction. What this introduces is the need for attorneys to be able to respond to client demands. For most clients, attorneys no longer have a blank slate to produce monthly bills without a structured and pre-approved budget. What this should force the attorney to consider is how to maximize efficiency for that client within the budget and structure of the client’s demands. The absolute wrong way to think about this issue is to continue hourly and traditional billing practices, which are resented by both the client and the attorney as service provider.

JH: Yes. Due to the increased transparency, many clients now expect to be involved in developing the scope and assumptions of matters to better control the predictability and ultimate value provided by legal services. The “no surprises” rule predates the advent of non-traditional fee structures. However, having a better defined scope and assumptions helps us work with our clients to identify which events are in fact “surprises” and to create clearer expectations on unanticipated developments. Many of our early client-initiated alternative fee proposals seemed to have a one-sided bias—“reduce our spend to a fixed amount and assume the risk that the fee assumptions are correct.” Clients today seem more willing to assume some of the downside risk in an arrangement if things do not go as planned and to share some of the upside when they go better. This is particularly true for clients who are experienced with alternative fee arrangements or the scope and assumptions of matters. In both scenarios, they have taken part in ongoing conversations about how everything worked out along the way.

NG: How should attorneys introduce clients to nontraditional billing practices?

JL: First, these practices are well known to corporate general counsel and other corporate executives. No introduction is necessary. I recognize that there are always tweaks. The concepts which must be sold to clients today are “value,” realizable value in all legal work being performed, and transparency over the process for each matter. Today most large law firms (AmLaw 200) have in-house chief pricing officers and teams of senior analysts who monitor and measure all client work. The client general counsel must now have similar teams and abilities to control the costs and manage the expectations. As they build this capability, they do and must demand from their law firms access to all analytics that the law firms are utilizing.

JGO: There is no one-size-fits-all answer to discussing alternative billing arrangements. I think the best way for lawyers to introduce clients to the subject is through an honest discussion of the pros and cons of various billing arrangements. In some cases, hourly billing may be superior for the client because it’s familiar and or because there’s a chance that a project can be quickly completed. That said, in some instances a fixed fee, success fee, project fee or even a phased fee—a flat fee by stages or phases—can better serve the client’s goals of predictability, budget management or risk avoidance. The real key is setting up an accurate scope of work and aligning that with a budget—then having a definitive conversation with the client to make sure everyone is on the same page. Lawyers must understand their client’s business and needs in order to have this type of effective conversation on this front.

JGA: Before they even know who you are! It should be in the firm’s marketing and sales practices. Since few firms are actually using non-traditional billing practices, they are still considered a competitive advantage in the marketplace. Of course you have to be mindful of professional conduct rules that dictate what is said, however, find a way to say what you can about it. Consider what many personal injury attorneys advertise today, “we don’t get paid unless you do.” This was probably one of the best phrases of its time, and helped many firms convince their client that you would work harder for them because your paycheck is on the line too. It worked and still works a little, but it’s been heard for so long now that we have to find better ways to say the same thing. Marketing in general has changed in that we now want to lead our clients and prospect only so far but not give them the answer. We need them to become self-discoverers and think the answer or idea was their own.

AM: I think value billing or flat-fee billing makes a lot of sense. To my clients I am very clear from the beginning. This project will cost you $5,000. It does not matter how much time it takes me to complete it, it does not matter how many meetings you want. I will complete the project as we agree in an engagement letter and you will never get another bill above the initial $5,000 flat-fee (deposited in advance of my commencement of the project, of course). I do not believe anyone has balked at my candid approach. I do have some clients who look at their budget and are honest with me and say they will need to circle back to start the project when they have the funds available, but at least we are on the same page from the beginning. I think where lawyers get into trouble with hourly billing is that they may have an idea of what a project will cost at the outset, but as the project unfolds, the increased costs the project is incurring is not communicated to the client in a way that they sense the intrinsic value proposition. Flat-fee or value billing reduces this as an issue. To be clear, we spend a lot of time at our firm reviewing time entries for completed flat-fee and value engagements to continue to revise the cost structure. I have not eliminated time-keeping from my practice, I’ve simply eliminated passing along my direct time entries as a fee to my clients.

JH: Many clients and law firms tend to think about alternative structures for large matters or a large volume of similar smaller matters. Whenever possible, present different pricing options for small pieces of work—whether requested by the client or not. This can work especially well when you have a history of handling similar matters with the client, so both parties can see how the non-traditional billing practices would have worked retroactively.

What is the best way to educate young attorneys about the financial underpinnings of a law firm and varied billing practices?

JL: Today, law firms introduce in house business education for associates routinely. These educational seminars are usually staffed by professors from graduate business schools. There are very good firms out in the market that have active practice areas focused on law firm economics and billing practices, and offer these educational programs. Lastly, all mid-sized to large law firms utilize client and matter profitability models, on which their attorneys are trained. I attended my first in-house law firm business seminar, taught by professors from the Harvard Business School in 1998. I have attended numerous others.

JGO: Several steps are involved in ensuring that newer attorneys understand firm finances and alternative billing practices. The first step is education: training attorneys on basic financial information and types of billing arrangements. At Fennemore Craig, we’ve hired a chief talent officer (CTO) who oversees attorney training. One of the goals for our CTO is to make sure firm attorneys have theoretical and practical training in the area of law firm finances. For too long, the legal industry primarily encouraged young lawyers to focus on billing hours. Now, firms are starting to recognize that it’s in the interest of the law firm to make sure that its future leaders are trained and ready to adapt to the rapidly changing legal market ahead of them. We believe that having a CTO can help on this front and gives us a competitive advantage in getting this critical training to new lawyers.

JGA: This is a tough one. Let’s address the “elephant in the room” first: the good news is that for the most part, the generational concerns of the “entitlement mentality” that most industries face do not apply the same in legal. The investment a young lawyer has to make and the ever increasing competition with their classmates naturally eliminates the “entitlement mentality.” So unless your compensation is on the line, then you just won’t get it or if you do it will most likely not be top-of-mind. If they do understand how their efforts and results affect the financial underpinnings of the firm, they’re typically on their way to opening their own firm if partnership opportunity is not given to them. However, in any case all attorneys need a cursory knowledge of the firm’s finances as they are the direct drivers of it. I suggest sharing certain aspects of firm financials and have them involved no less than monthly in KPI (Key Performance Indicators) discussions. These KPIs should be easily viewable by them at any time rather than having them wait for the 30-day review. A marathoner measures pace throughout the race rather than waiting until to end.

AM: I think transparency from the beginning is key. I started in a law firm where transparency was frowned upon, and as a result, our associates were, by and large, underperformers. I don’t think it is vital to open all your books to young attorneys, but you need to recognize that most attorneys have no business training. Law schools are not doing a great job at preparing lawyers to succeed in private practice in the face of the new legal business models. It is incumbent upon law firms to provide this education if they expect their millennial attorneys to succeed and develop into strong producers.

JH: We regularly meet with our young lawyers to discuss how our firm develops our annual budget, generates revenue, sets our cost structure, and approaches different “profit” concepts. We also strive to make sure all of our colleagues understand the client’s budget, the scope and assumptions underlying it, and the billing partner’s expectations for the task assigned before it is undertaken. Write-downs from budget overruns or inefficiencies create opportunities to discuss performance, approaches and client satisfaction.

What advice about law firm finance would you give to a young attorney?

JL: There is more to the practice of law than “the law.” Learn and understand how a law firm operates, inclusive of the financial aspects. Take CLE courses. Understand the concepts of realization, utilization, and confirm in advance all billing estimates before discussing with the client. This is the “beginning.”

JGO: I would advise new attorneys to devote time to learning the financial side of the practice. Most lawyers don’t receive business or financial training in law school. As a result, any training that is gained is either on the job through experience or by self-study. Understanding law firm finances is important on many levels. As a future law firm owner or leader, it’s critical for new attorneys to have the skills needed to help the firm continue forward. And if that’s not enough, there’s a more personal reason: lawyers who understand firm economics and alternative billings will have the opportunity to develop larger, more profitable practices that will no doubt contribute to building a successful career. The added benefit to understanding basic finance is that you are better positioned to understand a client’s business, and from a client’s perspective, that is invaluable.

JGA: Have revenue and profits targets for each year, break them down by quarters, then fight to make those numbers a reality. Determine what your KPIs are right now. Don’t wait, because if you do it’ll take more energy later to put them in place.

AM: If your law firm is not giving you enough education on the finance and business side of the equation, you need to develop those skills elsewhere. Gone are the days where an attorney stays at one firm forever, so do not be reluctant to enhance your education out of a sense of loyalty. When I was an associate I consumed all of the outside content I could on law firm business (blogs, LinkedIn posts and groups, Twitter posts from relevant business leaders). I also sharpened my skills in business by continuing to study and read all of the top non-legal, non-fiction books and resources I could get my hands on. I followed popular sales and business gurus, I read up on tech startups that were successful and those that failed. You basically want to do your own homework and extrapolate information and tips from sources, whether they are highly-relevant and on-point or might be a little outside of the box.

JH: Ask questions! Not every firm may be as transparent on their firm economics and finances, but get as much information as you can so you understand and appreciate how your hard work fits into the firm’s financial picture. On the client matters you handle, ask about the time assumptions or expectations for the task assigned to you and the matter as a whole. Make sure you understand the “big picture” client goal for the matter and how your work fits into it. Keep track of how much time you are actually spending on a task or project and check in with a more senior lawyer if you are getting off track with the budget. Check in after you have completed your assignment to get candid feedback on the value of your work and what the firm ultimately charged for it and why. Finally, we have found that our younger attorneys have great out-of-the-box ideas on how to use technology or rethink a process to get to an outcome more efficiently. Do not be shy about sharing those ideas with the more senior (and sometimes less-adaptable) attorneys with whom you work.

When attorneys think about practice expansion and business development, what financial factors should they take into consideration?

JL: Business development is the life blood of a law firm, whether it is expanding existing client opportunities or new client opportunities. The key financial factors are the opportunity costs, inclusive of free or discounted rates upon entry into a new matter or new client; measuring and communicating to new or potential clients in financial terms the value being realized for the law firm’s efforts (and hours), and the profitable utilization of the law firm’s attorneys. AArete is positioned to help either the law firm or the GCs reach transparency and optimal value for both parties.

JGO: Long-term competition and market saturation. As attorneys look to expand business, it’s important for them to identify areas that may be more immune to rate pressure than others. At a basic level, work for which there are many qualified attorneys is more likely to be subject to lower rates. As a consequence, firms are wise to examine the number of lawyers who may be qualified in an area and the potential size of the business. Work in the technology sector, as an example, tends to command high rates simply because there is not a large pool of qualified lawyers who can handle the work.

In addition to the type of work you take on, it’s critical to think about managing staffing. More and more, firms are looking to new types of arrangements beyond just associate and partner. At our firm, for instance, we now work with practice group attorneys and we are exploring virtual attorneys. These new tracks allow us to ensure the highest quality work is produced as efficiently as possible.

JGA: Many firms only consider the revenue, expense and profit and attorney/staff profitability/productivity, but there are many other commonly overlooked numbers that are more “departmental” and should be considered. At least two are sales/marketing and HR:

  • Sales/Marketing Department: many firms do not seriously consider the ROI on their sales/marketing efforts. They throw money at a website but forget to evaluate what they need to spend to drive traffic to it. For those that already do, consider working your marketing and sales efforts backwards considering the end goal first. What is the monthly value of a client in a particular practice area? How many of those new clients do you want each month? What is your consult “closing” rate? How many consults do you need to have each month? What is the percent that retain you if they have a consult? What percent show up to the consult? How many calls or website form fills do you need each month to get the number of consults you need? What are your “oil wells” to drive calls and how is it affected by spending more money on it? And finally, how much more money or time do you need to spend on that marketing oil well?
  • HR Department: what is the average lifetime value of a particular staff position (secretary, paralegal or associate attorney) and how much should we invest when attempting to attract new talent, what should we invest in keeping the “good” ones and how quickly we should divest in the less than desirable ones? Marketing spend for good associates and staff is just as important as spending on attracting clients.

AM: I think the number-one thing attorneys should think about is how and where can we systemize and automate our processes so we can scale up at a faster pace? I really think attorneys fail to understand how businesses are grown in our new economy. Uber, airbnb, even Facebook and Google are changing the traditional growth structure for business. I’m not saying that I think there will be an Uber for legal services next year, or that type of service will be a multi-billion-dollar idea (I see you Avvo and Legalzoom), but I’m suggesting that lawyers are not putting the principles that grew those businesses into practice. The thoughts about growth and expansion should focus on two things: where is there a high-frequency need and what systems or processes do we or can we put in place to address that need better than the next law firm?

JH: They should take into account factors that affect the potential return on their limited business development budget, such as rates, leverage, timing and the potential volume of work. Attorneys should make a conscious decision about how best to allocate their time and cost investment between growing the “bread-and butter” areas of their practice and pursuing novel, leading-edge areas that may be critical to the long-term growth of their practice.

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Which factors should attorneys and firms both consider together when looking to expand a practice?

JL: The current and detailed understanding of the client’s business and its industry and customers. Know your client’s business; become his or her trusted advisor. Together you will grow the practice. Insure that your client understands continually “the value” you (and he) have created for the client. Be transparent, insure that the client understands in detail the work that is leading to the “value” created. Work with your client to achieve greater benefits from your team’s legal work in the future and your understanding of the business.

JGO: Although it should probably go without saying, the first factor in considering practice expansion is demand—period.

Firms and lawyers also need to consider factors such as scalability and succession planning. As a practice area ramps up, the firm needs to make sure that it has a plan for expansion. What infrastructure or capital expenditures are needed to make the practice strong? How much will have to be spent on marketing to get the word out about the project? Will additional lawyers be needed? These are critical questions that need to be examined at the outset. Firms shouldn’t haphazardly expand a practice or move into a new area without considering how it fits with the current firm strengths. At the same time, the firm and the lawyer involved need to think about succession planning — identifying future leaders for the practice early on and training those lawyers to help with the practice and eventually take over the work. At our firm, this type of succession planning is a critical part of how we provide continuity for clients and ensures the firm’s long-term strength.

JGA: Do you want to continue to work “in” the business of the firm or work “on” the firm? Should you plan to continue practicing law at the same level or should you hire a someone to develop and manage your firm? What are the strengths of you and your partners? Most businesses, including law firms, succeed when someone is focused on growth. Sadly, we can’t duplicate ourselves so eventually we will come to a turning point where decreasing the time we spend on cases may be essential. Maybe you’re a rock star at getting the phone to ring or “closing” consults. If that’s true, you have to ask yourself how much more could you make the phone ring or how many more clients could you “close” if you had associates or junior partners practice law. At the end of the day all that matters is that find a balance between what is best for ourselves and the firm, with the end game in mind to make money and successfully represent clients.

AM: Again, I think it is imperative to consider overall need within the niche marketplace you are looking to expand. Is there a lot of competition in the area (whether geographic or practice area), and do we think we can meet that need better than others in the space? When looking at how law firms are expanding now, there is a lot of what I call “Field of Dreams” mentality. Long gone are the days of first putting the team in place and then hoping to execute on a plan to serve a particular niche. The modern response requires lawyers and firms to identify an unmet need within their catchment area, and then figure out what is needed to fulfill that need better than anyone else.

JH: The reality is that firms, like individual attorneys, have limited business development resources and time. We all have to prioritize. Firms should realistically evaluate their practice strengths and focus on those practices among them that have the strongest potential for profitable growth. “Expanding” a practice can mean many things. Adding clients and attorneys in a targeted area is typically how firms think of expansion. However, firms also can tap the information, metrics and practice management tools for alternative fee structures to evaluate how to “expand” the profitability of certain “flat” or even declining practices.

What are the most significant trends in law firm finance? How are they changing the practice of law?

JL: These are the factors defining the practice of law today:

  1. The extensive use of staff attorneys (in house) by law firms; many of these staff attorneys have extensive law firm and corporate experience. The profit margin on this work is very significant.
  2. The use of project management and matter management tools and software to better estimate, measure and monitor the progress and cost of a matter.
  3. The use of chief pricing officers to ensure that all matters are profitable, and the training of lawyers and the use by lawyers of matter and client profitability tools.
  4. The introduction of technology. Some say “that the practice of law has carried on as if technology had never been invented”. The post -crisis regulatory pressures have increased legal costs for corporates, and tools are being developed which will turn the practice upside down. AArete specializes in predictive case analytics and building the data platforms for both law firms and GCs when appropriate.

The changes in the practice of law have only begun. Clients generally continue to pay significantly higher rates for legal advice. Increases in billing rates of $200 per hour by law firms in January 2016 for “go to” litigation partners or regulatory partners, or cross-border M &A partners were common. And clients are routinely paying these higher billing rate invoices.

JGO: It’s not just about the revenue. Historically, many firms focused on revenue to the exclusion of other financial data points. The actual profit margins of certain types of work were not examined in any great detail. Why is this? It’s a complicated answer—because it’s hard to imagine any other business focusing primarily on revenue and not profit. The answer probably lies in the classic view held by many lawyers that law firms aren’t businesses; they’re professional service organizations where practitioners simply do good work and the rest works itself out.

You don’t need to look any further than the lockstep compensation model that dominated the legal industry for decades to understand the aversion many U.S. firms had to delving into profitability. In most cases, the reality is that philosophy just won’t work in today’s world. Competition is higher than ever, and lawyers have more mobility than ever before. As a consequence, firms are wisely focusing on profit in order to stay competitive and to attract and retain talent.

At Fennemore Craig, we’re fortunate to have a leadership team and a partnership that respects and honors the traditions that have helped our firm succeed for over 130 years, but that also embraces innovative financial best practices and processes that will allow our firm to continue to thrive for the next 100.

JGA: Law practices have always had difficulty in developing flat-fee billing and recurring revenue models. However, these are the future and must be embraced to remain relevant against the competition. They will require smarter, predictive, out-of-the-box thinking and force firms to start focusing on not just the practice of law but the delivery of the “law product” their client’s needs. You clients want an “experience” rather than just a service. The firms that provide that experience while maintaining the same excellent legal representation will be the firms that will persevere.

AM: To me, the most significant trend is and will be the commoditization of legal services. How will Avvo Advisor, Legal Zoom and other products coexist with traditional law firms. I know that the big law firms think these services could never supplant their top-tier attorneys, and as that marketplace exists right now, I think those big law firms are right. But these products are already having a major impact with small and mid-size firms with a retail consumer base. It is only a matter of time before some really bright attorneys figure out how to make those systems steal clients away from the biggest law firms. I really think some of biggest and most forward-thinking law firms will see that the way to stay ahead of that curve is by turning the traditional law firm model on its head, and using their expertise and experience to revolutionize the way we all provide legal services to clients.

JH: As law firms focus more and more on running their firms as businesses, we must apply increasing levels of financial planning and management to the matters we handle, the administration of our practices and our internal and external firm processes. As this focus on efficiency and profitability increases, each firm must find ways to preserve the identity, culture, results and client service that distinguishes it from other firms.

 

Feature Image Credit: Bloomua / Shutterstock.com

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