A Shift in the Financial Landscape for Law Firms

The financial landscape for law firms has shifted as clients have become savvy buyers of legal services. The reality of the sellers’ market for law firms is gone, and likely for good. Clients want more streamlined, affordable services, causing law firms to develop new approaches in the way legal services are priced and sold, how work is managed, and ultimately in determining profitability. While the billable hour is still alive and well, alternative fee arrangements continue to get substantial play. All of these changes have created new challenges and frustrations for attorneys. This month’s roundtable discussion includes a notable team of leaders offering valuable insights and practical ways to address the changing financial landscape for law firms, while staying profitable, and accommodating the client’s financial needs and expectations.

 Round Table Moderator: Nicholas Gaffney (NG) is a member of the Law Practice Today Board and is a veteran public relations practitioner.

Our Panelists

Jeffrey Dennis (JD) has been managing partner with Newmeyer & Dillon since 2012, located in the Newport Beach office. Jeff specializes in a variety of litigation arenas, including construction, real estate, insurance and business litigation.

Marlene Laro (ML) is a partner and the chief operating officer of Potomac Law. As the COO of a new model law firm, Marlene develops and implements innovative solutions to support the operation of the firm, working to provide an efficient infrastructure for the best legal representation to their clients. She is also a member of the firm’s tax practice, advising companies on international and domestic restructurings and transactions, as well as providing clients with more general tax planning. She possesses international expertise, having taught comparative tax law at Georgetown University Law Center, providing technical assistance to foreign states on tax matters, and serving as a frequent lecturer at international tax law conferences in Moscow, Russia.

John Niehoff, CPA (JN) leads the law firm services practice for Baker Tilly, a full-service accounting and advisory firm with specialized professionals who connect with businesses through refreshing candor and clear industry insight. John has 30 years of experience serving law firms ranging from large international to smaller boutique practices to help them navigate the financial, tax and general business challenges facing the legal industry.

Randall G. Rueth (RR) is a patent attorney and partner at Marshall, Gerstein & Borun, an intellectual property law firm in Chicago, Illinois. Randall’s varied experience includes domestic and international patent portfolio management, patent validity and infringement analyses, due diligence analysis of patent portfolios, IPR and opposition practice, and pre-litigation management of patent disputes. He is a strong leader who serves as chair of the firm’s Electrical and Software Engineering Group and leads the firm’s Finance Committee.

Steve Wingert, CLM (SW) is a 20-year veteran of law firm administration, past president of Association of Legal Administrators, a principal of Nesso Strategies, and co-founder of the Legal Leadership Institute. A forward-thinking leader, he understands the leadership and management challenges within law firms. He develops leadership talent, assesses needs and issues, and facilitates collaborative and successful solutions. Steve holds master’s degrees in human resources and business administration, and has extensive post-graduate studies in leadership, management and communications.

NG: How have attorney attitudes and understanding of client pricing expectations and approaches evolved?

JD: This has been a big area of change in the legal industry. Clients continue to be faced with increasing pressure to cut costs in a rapidly changing, competitive business market. Clients are looking to law firms to do the same. These client pricing expectations, along with a tight legal market, has driven the need for law firms to re-examine their pricing structures. In today’s legal pricing world, many forward-thinking firms have evolved from the traditional hourly billing model to various alternative fee arrangement (AFA) structures. Some firms have moved beyond AFAs to set a price for clients based on more cutting-edge pricing strategies, such as cost-plus pricing or value pricing. In cost-plus pricing, a profit margin is added to the cost of delivering a service, while value pricing focuses on the client’s perception of the value as the driving factor. Regardless of the pricing structure used, attorneys now understand that pricing should be based on client needs and objectives, not necessarily what is the “best” model for the firm. Attorneys who base their billing practices on client-centric models understand the pressures clients face and focus on what clients want: better communication, certainty in billing / pricing, and complete information from which to make key legal and financial decisions.

But even under these new pricing models, many questions remain. For example, how much risk should be shared with clients? How can you effectively break down cases into definable measurable pieces? How can a firm mine its own historical data to accurately set pricing, measure efficiency, and staff cases? These are the real questions which remain for attorneys to grapple with as their pricing approaches evolve. Fortunately, technology and billing systems continue to evolve to assist with answering these questions, and developing more creative solutions. However, at the end of the day, attorneys need to become leaders and lead clients to the most efficient, meaningful pricing structure based on the client’s goals and objectives.

ML: Client pricing expectations have shifted dramatically over the past several years. Clients are increasingly seeking real value and certainty with respect to outside legal spend. They closely scrutinize bills and are less willing to pay for junior associates’ training time, lengthy memo writing and “extras” that offer little direct benefit to the client. Accordingly, successful attorneys have adapted by providing more efficient services, reducing overhead, and increasing predictability.

JN: Attitudes and understanding have moved from early recession denial that pricing and approaches were anything other than a short-term demand blip, to acceptance that fundamental changes have occurred in many practice areas resulting from: reduced demand, general counsel legal budget constraints, new non-traditional legal service providers or legal component providers, and enhanced strategic planning amongst law firm management to compete in a post-recession marketplace. Surveys, conferences, and media reports all point toward greater recognition of pricing and methodology challenges from the management level in law firms, and this recognition is filtering down through individual attorney ranks.

As further evidence, some large law firms are starting to encourage innovation and project management initiatives that are slowly migrating into subjective compensation discussions for partners and associates.

RR: Attorneys have developed a much better understanding of clients’ needs with regard to fair and predictable pricing. Understanding clients’ needs and goals allows attorneys to not only complete projects that meet a qualitative level of client satisfaction, but also permits attorneys to implement performance metrics to rate overall success in achieving those goals.

SW: Attorneys increasingly recognize it is no longer a sellers’ market, and that as buyers, clients are more and more in the driver’s seat. Access to data via electronic billing, and a wealth of data and systems to compare pricing and value across law firms, has allowed clients to make more educated decisions, and demand more concessions from their firms. Law firms are becoming more skilled at pricing as a part of the sales and client service processes, rather than giving concessions without understanding what the client expects. The billable hour is still alive and well, but attorneys now recognize the importance of clear communications to understand client expectations, offering options, and understanding internal metrics and processes, are all key components to the pricing process.

NG: What are effective ways to educate attorneys on these new financial dynamics?

JD: The key to attorney education is simply communication. Note that I did not say simple communication, as explaining financial reality to a group of lawyers can be a challenging task – especially given that the traditional hourly model has been firmly ingrained in the legal community for many decades. One effective way to educate attorneys is what we call a “reverse brown bag lunch,” in which a client is invited to the firm for an informal discussion with attorneys about the realities faced in the business world by today’s general counsel. Hearing directly from clients can greatly assist attorneys in truly understanding the financial dynamics of our clients. Attorneys also need to appreciate that change happens, but involving the attorneys in the process of this change goes a long way towards generating “buy-in” to the revolutionary changes happening in law firm pricing. A pro-active approach that includes attorney education, along with an organic, collaborative decision-making process, are key steps toward success. In addition, top-down leadership on these concepts helps dramatically.

ML: To prepare attorneys for these new financial dynamics, law schools and law firms should emphasize the practical nature of an attorney’s work. By tradition, many attorneys are trained to provide extensive memos in response to every client question. However, business people rarely value lengthy responses heavy with legalese and case citations. Attorneys should spend time understanding how their legal advice fits in the context of their clients’ business needs. At the same, law firms need to consider absorbing attorney “training time” and adopting new technologies that enable attorneys to work in a more cost effective manner.

JN: Share industry trends and individual firm experiences to demonstrate the new financial dynamics. For instance:

  • Average fee realization surveys note a decrease from around 93 percent in 2005 to around 83 percent in 2014.
  • RFPs often request alternative fee arrangements and demonstrated systems in place to support attorneys with project management.
  • Increased hiring of management professionals for pricing and project management within law firms and legal departments.
  • Substantial growth in legal consulting firms, contract lawyers, document review specialty firms, e-discovery and other vendors competing for components of legal services.
  • Additional competition from legal providers ranging from low-cost alternatives in India to high-cost Big 4 CPA firms with large international legal departments.

Those are generic examples to help demonstrate new pressures. But the most effective means for educating attorneys are going to be from stories within their own law firms regarding increasing write-offs of unbillable time or client expenses, and lessons learned from recent experiences. One firm leader recently noted that practice area meetings used to focus on discussing new “wins”, while the recent focus of meetings has changed to debriefs on pricing issues, project management, how work was completed, and how the process can be improved.

RR: The best way to educate attorneys on the new financial dynamics is to have them talk to each client about the financial pressures they face, how they are addressing them with other firms, how those strategies are falling short on either side and what else they think might work. It is also helpful to encourage attendance and participation in seminars and webinars that are offered outside of the law firm as well as within the law firm. Numerous resources are available that can educate attorneys on the different types of alternative fee arrangements, including fixed fees, hybrid fixed fees for complexity tiers, capped fees, milestone formulas, risk/reward billing, value-based billing, etc.

SW: Practical hands-on application, using examples from within the firm, are essential. Pricing is not one size fits all, as variance between clients and even within the same type of matter exists. However, examples of pricing approaches that worked for a type of matter and a client type, and what didn’t work, can be powerful. Educating attorneys on how to identify the variances, and how to construct pricing around those parameters will be needed to address the financial dynamics, as will a deeper understanding of the internal metrics (cost to do the work, realizations and profitability). Again, this is all in the context of process, matter type and task, and client communications.

NG: How do you train attorneys on strategies to competitively and smartly price legal services?

JD: Training attorneys on pricing involves true collaboration. In other words, attorneys will allow themselves to be trained if they become part of the process and are given access to the financial information as seen through the clients’ eyes. Providing attorneys with an outline of the true costs, not only to the client, but also the firm, encourages “buy-in” and engagement. As with most changes in law firms, attorneys must be inspired to believe that pricing strategies are good for the firm, themselves, and the client.

Once the belief in the pricing strategy exists, firms must teach the attorneys to price legal services using a variety of tools – both in terms of technology and historical trend data — so that the attorneys can efficiently develop a pricing scheme which brings comfort to the client, but also protects profitability for the firm. An added tool would be to give attorneys margin goals, just to make sure that pricing remains competitive for the firm.

ML: By working in a low-overhead environment, our attorneys have the flexibility to price legal services significantly lower than their comparably credentialed peers in BigLaw. Our firm also embraces a variety of innovative fee arrangements, including flat fees, hybrid rates, and performance-based fees, depending on the needs of the client. Clients value the predictability of the alternate fee structures and perceive that these types of fees more closely align their outside counsel’s interests with their own. Although there has been much discussion about alternative fee structures in the legal community, we have found that most clients still prefer the simplicity of a reduced hourly rate, particularly if the rate is low.

JN: This is an interesting challenge. As one managing partner noted, beginning with law school, attorneys are used to autonomous research to develop legal strategies, while he observed MBA students working collaboratively across various disciplines to solve problems. So, attorneys need assistance, at least in these early stages of change, to develop collaborative strategies that meet their client needs.

Training should involve understanding specific client needs as internal counsel are looking beyond old relationships and demonstrated legal skills, to include how work can be segmented, delegated, and what systems are in place to manage the ultimate cost of services. Attorneys need to be more informed by their finance departments regarding the costs of services to be performed, net profitability rather than just gross revenues, and the key variables in any legal service that may provide opportunities for collaborative approaches with clients to achieve desired results at a manageable and planned cost.

RR: We provide large group and small group seminars to educate attorneys on various billing strategies as well as profitability issues. We try to share information on pricing needs of clients, or individuals at clients, to help us price better. Pricing of legal services can often be structured creatively in a way this is a win-win for both the client and the law firm. We keep a depository of the many creative billing arrangements we have used with clients in the past.

SW: Helping attorneys to understand where work is similar or the same, and how it can be priced and managed similarly, is a good starting point. This requires analysis of metrics, relative to matter tasks, and concepts of how to improve processes and manage the work and those doing the work. Attorneys also should recognize how change is required to respond, as continuing to give pricing concessions, without making changes where change is possible, simply compresses the margin.

NG: Are the concepts of process improvement and project management being accepted as standard tools to manage pricing pressures and costs? Why or why not?

JD: To date, these have not yet become mainstream in mid-size, growing firms such as Newmeyer & Dillion…but the entire industry is moving in that direction. Frankly, project management is a foreign concept to most attorneys, and is certainly not a skill taught at most law schools. These tools run contrary to traditional pricing models, which view profitability as having a linear relationship to high hours and increased hourly rates. For these reasons, pricing pressures have not been managed with these tools. However, I believe that law will move in the direction of medicine, in that the management of cases will become similar to how medical care is now managed. Legal project management is simply a matter of planning and communication, and can be a very powerful method to control client pricing pressures and expectations.

ML: Gradually, yes. In-house departments are run more like divisions than cost centers today, and things like process, organization, structure and decisions about outside legal spend are under scrutiny as never before. Some of the larger consulting firms like McKinsey have developed practice groups focused on advising large in-house departments and law firms on organizational and efficiency considerations, introducing process improvement tools and project management techniques in the process to an industry that has historically resisted them. There is no doubt mindsets are changing.

JN: It depends! Certainly large law firms have experienced the pricing pressure from corporate clients and are hiring project management professionals, pricing directors, and requiring greater collaboration with finance professionals in order to address process, pricing and project management principles. However, broad one-time training programs may not lead to acceptance and implementation at the individual attorney level. More success appears to be gained with internal policies and process maps that require early collaboration that provides incremental improvement that builds with each assignment.

Smaller firms are still grappling with acceptance of process improvement and project management since their clients have not been quite as demanding toward change. However, those firms that adapt more quickly to how their unique specialty areas and expertise can foster process improvements within their practice to drive routine costs lower, while providing more time for valued-added attorney advice and counsel, will be rewarded.

RR: Yes, definitely. Our firm has always used the least expensive resources where appropriate to complete tasks and lower costs. More recently, our firm has implemented Legal Lean Six Sigma concepts to streamline many of our processes and make them as efficient as possible. In-house counsel tend to see outside counsel as inefficient, which raises the costs of their legal spend. In our experience, the opposite tends to be true, as outside firms commit significant time in analyzing and improving their processes and invest heavily in the latest technologies to maximize efficiencies.

SW: Yes, process improvement and project management are and will continue to gain traction in firms. To maintain and improve margins in the face of pricing pressures, matters must be analyzed to ensure workflow and staffing make sense, and as necessary, redesigned, measured and managed to ensure waste is eliminated. Failure to actively supervise or manage the process, will not produce the desired or needed results, and margins will suffer. The same approach to matter management in the face of pricing pressures, is not compatible with the expectation of maintaining, let alone improving margins.

NG: What other strategies can firms implement to analyze, package, and manage client expectations around legal service costs and value?

JD: A variety of other strategies can be implemented to manage expectations related to cost. However, the absolute key is open communication. Attorneys should discuss pricing early and often with clients, particularly as specified benchmarks (whether they be budgetary or task-specific) are approached or reached. Mandating that attorneys use a budgeting process for their cases can be invaluable. Again, this process involves setting client expectations through benchmarking, and then following-up accordingly with clients. All attorneys should remember that clients are driven by a need for certainty, as they are constantly asked to provide financial projections (for legal services) for their corporate leadership. If attorneys can properly budget, manage and communicate to in-house counsel, this will allow our corporate colleagues to make decisions and recommendations as the scope or direction of a legal matter unfolds. Our job as attorneys is to provide clients with the information and tools needed for them to make the best decision for their company.

ML: Managing client expectations is a key aspect of a successful relationship. Considering past experience in comparable matters serves as a strong starting point for a discussion about pricing. Of course, each case is unique, so communication throughout the engagement regarding the legal costs is essential. In addition to the traditional methods of communication, firms and clients may now utilize software that enables the client to track attorney time (and expenses) in real time, thereby avoiding unpleasant “surprises” at the end of the month.

JN: Obtain regular client feedback through post matter surveys and interviews. Promote and reward predictability (project management) and efficiency (process improvement). Review processes with clients to address their risk profile in relation to costs. Develop workflows to include early planning regarding issues and responsibilities, recurring engagement team meetings, process monitoring and client progress communications through post matter assessments. Recognize that how the work is completed and what the cost of the service is to the client is now as important as the result of the legal work.

RR: There are many ways that law firms can assist clients with legal service costs and value. For example, law firms can meet early with their clients to ensure there is an accurate understanding for a project with regard to potential risks, potential rewards, stakeholders and an agreed upon timeline. It is also important for law firms to understand the importance of a project to the business, which may be different from the purpose of the requested task. Law firms can also assist clients with benchmarking to enable clients to understand how their legal service costs compare to other businesses. Law firms can also provide client access to electronic portals to streamline and improved communication. Lastly, law firms that handle multiple and diverse projects for a client can package the firm’s total estimated work for a particular future time period, such as a month, a quarter and a year.

SW: Communications, communications, communications. Just as it is necessary to educate and train the attorneys and staff, consistent and deep communications with the client around pricing expectations, value, process and cost are critical. Discussion with clients in advance, rather than guessing or making assumptions about what the client expects makes sense. Clients don’t want surprises, nor should the attorneys. Is it a discount the client wants, and if so, how much? Who makes the decision when it comes to pricing – the general counsel or the financial side of the client? These types of questions can only be answered through ongoing dialogue to understand the client expectations, their needs and strategies. Client service teams, can also help to ensure all involved on client or matter understand expectations, and are working in concert to provide the best service and value, and that process and cost are actively, effectively and efficiently managed.

(Image Credit: ShutterStock)


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