Author: RWS_01

Over 20 years’ experience developing and implementing effective business development strategies in law firms across Australia and Asia.

Do you know your ABR?

There has been a fair amount written in recent days following an article published in the Wall Street Journal that ‘Legal Fees Cross New Mark: $1,500 an Hour‘. Most of the published articles I’ve read talk to the outrage of commanding such a high hourly charge-out rate, but this article by Stephen Harper caught my attention.

In the article, citing data from ‘The 2016 Report on the State of the Legal Market‘ by Georgetown University Law Center and Thomson Reuters Peer Monitor, Harper states that:-

“In 2005, collections totaled 93 percent of standard rates, the report found. By the end of 2015, the realization rate was down to 83 percent.”

Although US-based, this sad statistic very much reflects on an issue I touched on in my post on fixed fees in the Australian market yesterday; namely that 25% of Australian law firm revenue is now derived from “discounted” hourly rates.

If we say then that roughly 1/4 of a law firm’s revenue comes from discounted hourly rates, and that the firm is being paid approximately 83c in the $1, [compounded] we have a very serious profitability problem.

On these numbers alone, any law firm looking at its profit margin should be rushing into fixed fees – while admittedly upskilling themselves (including tracking data) on how to do this better.

And part of this process should also include an understanding of, as well as tracking, what each individual lawyer’s Average Billing Rate (ABR) is.

In the many hundreds of tenders I have done and the numerous conversations I have had with lawyers over the years, I have never once come across either a request for what the particular lawyer’s ABR is, nor heard the lawyer freely admit this rate. I have, on the other hand, heard daily the hourly rates that particular lawyers charge as if this were the reason why they were hired (there being an assumption that the higher your charge-out rate, the better value you provide!).

And therein lies the problem, as Harper says:-

“How much a firm bills doesn’t matter; what it actually brings in the door does.”

Too right. So the next time you hear a lawyer talk up their hourly rate, you might want to ask them what their ABR is – because that’s going to be a far better indicator of the value their clients see them providing. And if you get an answer, you might then want to talk to them about the benefits of fixed fee pricing.

23 billion & 24 million

Some time earlier today (16 February 2016) Australia’s population passed 24 million. IBISWorld currently values the Australian legal market at $23 billion.

That means that every Aussie spends, roughly, $950- a year on legal.

Tough, competitive market?

Almost 20% of Australian law firms revenue is now coming from fixed fees

It has been a full six months since the last CommBank Legal Market Pulse (conducted by Beaton Research + Consulting) was published and from what I can tell from this latest publication, not very much has changed in that time.

While some members of the Australian legal publishing world have commented on the rising optimism (note this is “perception”, and this has gone from awful to not quite so awful), what grabbed my attention was a piece towards the end of the report (page 19) that states:

“Revenue is still predominantly derived from hourly rates. However, almost 20% of all firms revenue, irrespective of size, is now coming from fixed fees.”

I don’t have to hand data from 5 years ago that would allow me to do a comparison to see what this means in real terms, but given that IBISWorld puts the size of the Australian legal market at $23BN, that’s a lot of fixed fee generated revenue.

Somewhat surprisingly, there doesn’t appear to be a huge difference in the percentage of fixed fee revenue being derived at “top-tier” and “mid-tier” firms – with fixed fees accounting for 19.4% of revenue at top-tier firms and 19.2% among mid-tier firms.

The types of work for which fixed fees are being agreed/charged is also very similar – 88% for transactional matters at top-tier and 89% at mid-tier.

Notable, and surprisingly, is that top-tier firms would appear to be much more willing than mid-tier firms to offer fixed fees for litigation work – 50% to 33%.

But the test is always in the tasting (for wine lovers at least): so how good are Australian law firms at fixed fee pricing?

Well, not very if the data is to be believed. Asked for the margin on fixed fees relative to hourly rates, the responses were:

higher: 13% top-tier / 15% mid-tier;
lower: 0% top-tier (which seems a little hard to believe) / 56% mid-tier (which is probably being too honest)
about the same: 75% top-tier / 19% mid-tier; and
not sure: 13% top-tier / 11% mid-tier (which should be worrying some managing partners out there).

As well as finding out that Australian law firms are not very good at fixing fees, the report also tells us that over 67% of all law firm revenue still comes from standard hourly rates or discounted hourly rates. Here though, over 25% of revenue comes from “discounted” hourly rates – which begs the question: when do you start saying your discounted rates are your real rates?

Lastly, almost 3% of all law firm revenue now comes from retainer arrangements (2.6% for top-tier, 2.8% for mid-tier). Now that’s certainly something worth keeping an eye on!

Are we seeing the start of shared services within in-house legal teams?

Last Friday, 12 February 2016, the Australasian Lawyer published an interesting article detailing how the in-house legal teams at Telstra and Westpac had ‘swapped’ lawyers as part of a three-month pilot secondment program.

That this is a fairly novel and innovative approach shouldn’t come as a particular surprise: both Telstra – with its fixed fee arrangement with the law firm Gilbert + Tobin back in 2009 – and Westpac – most recently with its hackathon with legal teams from (again) Gilbert + Tobin and its legal start up LegalVision – are seen as being at the cutting edge of developing in-house innovation around legal services.

But… as pointed out in a tweet by leading legal market observer, Mitch Kowalski, on Friday night… what makes this recent arrangement between Telstra and Westpac particularly interesting is that it shows every sign of potentially being the start of shared legal services among Australian in-house teams.

If true, and I cannot see why it shouldn’t be, you have to wonder what the ramifications of this would be more broadly to Australian private practice firms?

Take on board the comment of Rebecca Lim, Westpac’s chief compliance officer & group general counsel that:

“Given the success of this pilot, we are certainly inspired to look for similar forms of ongoing engagement with other in-house legal teams. I believe there is much to be gained from collaborative programs such as this.”

Disruptive springs to mind!

When will a law firm have its Enron moment?

I’ve just read an interesting article about how disruptive Dyson has been. More specifically, the subject of the article was whether #NewLaw (as it is being called) will be as disruptive on the legal industry as Dyson was to vacuums?

But my outtake on reading the article was this: law isn’t ready for positive disruption (innovation), as we’re yet to have a really shockingly bad, client related, negative shock-wave (failure in client service).

What am I talking about?

Simply this, to my knowledge law has yet to have its Enron/Worldcom moment in the same way Arthur Andersen did for the accountants (anyone remember ‘Big 5’?).

More specifically, in our haste to be the “extension of your in-house legal team“, or “your trusted adviser“, or any one of about a million other fad terms out there today, I believe we may be forgetting one of the biggest (if I remember rightly it made #3 on the list) recommendations in the US Securities and Exchange Commission’s “Report of Investigation” into the collapse of Worldcom to [in the future] “… cure the principal failing that gave rise to the fraud: a lack of effective checks and balances on the power of senior management …“:

A corporate culture in which the advice of lawyers is sought and respected; and

So while, as a business developer, I whole support and encourage “getting to know your client better”, in doing so I would ask that you keep at the back of your mind this question:

Are we trying to “pillow talk” our clients?

Because almost two decades after the collapse of Worldcom, my takeout is that we need to have an Enron/Worldcom moment before we have a Dyson moment in order for the profession to move forward.

rws_01

Are the days of being an “extensions of your in-house team” over?

A recurring theme of tendering to in-counsel over the past several years has been the pronounced ability to “act as an extension of your in-house team” – or some variation thereof.

So what can we make of Craig Silliman, executive vice president for public policy and general counsel at Verizon, comments in Bloomberg yesterday that: “We Don’t Need Law Firms At Our Business Meetings”?

Truth is, I’m not sure.

That said,

“One pitch that you sometimes hear from law firms is, ‘We want to be your strategic partner, we want to sit inside your meetings, we want to get to know the business, etc.,’” he said. “That is what our in-house legal team does. We don’t need outside counsel to do that.”

If you’re a private firm or consult – no beating about the bush: that’s scary as sh1t!

But Craig doesn’t stop there, he goes on to say:

“We have a lot of people in-house who are deeply embedded with the business, people who have a good general sense of the business, an ability to issue spot, an ability to support the business on what I’ll call a horizontal basis. By definition, when we’re bringing in outside counsel, we’re bringing them in as a vertical staff, as a highly specialized resource on one particular issue.”
“The best outside counsel understand they are the client of the in-house legal team, and should make that team look good.”
Outside counsel who are best at what they do understand that their one vertical issue fits within a larger strategic framework of legal policy, regulatory, and business issues that our in-house team is supporting the company on. Understanding how their role fits within a larger framework, and therefore the types of decisions we make about how to handle a case, how to move forward on something, have to be viewed through that larger lens.
Related to that, I think outside counsel always serve their clients best when they understand that they are the client of the in-house legal team, and should make that team look good, understanding that the legal team in-house has a set of clients they’re interacting with on a larger basis.

If that weren’t enough , and if you’re like me and work in Marketing, then the following should send splinters up your spine:

“Sometimes part of the marketing pitch from law firms is, “We’re a big global firm. We can be your one-stop shop for all legal services.

That may be useful for some companies, but for us, I don’t think that’s a particularly compelling value proposition, because we have enough feet on the ground. We have enough people in-house that we can actually go out and pick and choose who the specialized resource is in a given firm, in a given country, to provide the needs that we have on that specific issue.

Sometimes part of the marketing pitch from law firms is, “We’re a big global firm. We can be your one-stop shop for all legal services.” For us, I don’t think that’s a particularly compelling value proposition.
Finally, the model of law firms has changed somewhat, as you’ve seen a lot of the work that traditionally was done by first and second year associates — all those document reviews and things like that, which formed the profitability base for law firms — has been automated, or it has been moved to lower-cost legal solutions outside the US or elsewhere.

Take out – every law firm is different: but in a world that is globalizing my view is that local knowledge still trumps.

RWS_01

Launched today – The Asian Business Law Institute

Today, 21 January 2016, the Asian Business Law Institute (ABLI) was formerly launched in Singapore.

According to the ABLI’s website, the:

“…Institute based in Singapore that initiates, conducts and facilitates research and produces authoritative texts with a view to providing practical guidance in the field of Asian legal development and promoting the convergence of Asian business laws.

Among ABLI’s core tasks are:

to evaluate and stimulate the development of Asian law, legal policy, and practice, and in particular make proposals for the further convergence of business law among Asian Countries;

to study Asian approaches regarding business laws and practice in drafting legal instruments, restatements of law or model rules;

to conduct and facilitate pan-Asian research, in particular to draft, evaluate or improve principles and rules which are common to the Asian legal systems; and

to provide a forum, for discussion and cooperation, between the business community and the legal fraternity including, inter alia judges, lawyers, academics and other legal professionals, who take an active interest in Asian business law development.”

With the establishment of the ASEAN Economic Community (AEC) in December 2015 and the formal launch of the Asian Infrastructure Investment Bank (AIIB) this month, there can be little doubt that it’s exciting times with plenty of potential for the legal industry in Asia at the moment so an initiative like ABLI should be warmly applauded.

If you’re on Twitter, the ABLI handle is @ABLIasia. Should be worth a follow.

Growth is not a strategy

I read with interest yesterday‘s news item in the UK’s The Lawyer that Jones Day intends to double in size in Australia – with a particular focus on its Corporate practice following the recent lateral hire of ex-Herbert Smith Freehills (HSF) deputy senior partner Mark Crean.

I am increasingly coming to the opinion that headlines like the one in yesterday’s The Lawyer represent as close as we will get to ‘clickbate’ in the legal industry.

Why do I think this? – because it is now well established that “growth isn’t a strategy, it’s a result“.

So, aside from being potentially good media exposure for the firm – in which case I do wonder why none of the Australian legal press picked up on this story – all this article does is highlight the misnomer that “growth is always good”, when all research around lateral hiring and aggressive purchasing of market share points to the opposite (think Dewey & LeBoeuf).

Going a step further, in a recent (23 November 2015) article in the Am Law Daily, Felix Oberholzer-Gee, professor of business development in the strategy unit at Harvard Business School, argues:

“If you start by saying that we want to grow our market share, or we want to be a particular size, as a strategic goal that is a terrible choice for a number of reasons”…

… “First, and most important, is that market share is not that correlated with profitability. The second is that the most natural way to gain market share is by charging lower fees, which is what we see throughout the industry in this misguided effort to gain size and market share.”

Have to say that I agree with Professor Oberholzer-Gee: – market share [ie, size] doesn’t matter, what matters is if your firm is profitable.

And therein lies the problem: I have yet to be convinced that any firm on an aggressive growth trajectory in Australia – and there are a few out there who are taking the same approach as Jones Day – are any more profitable for it. Conversely, I think that while being larger in partner numbers and office outlets many are probably less profitable with a lot more administrative headaches to boot.

So, while I feel for law firm partners who are continuously being told post-GFC that mergers and market growth are safe haven ways to continue their existence post-2020, I would caution this approach and recommend, at an absolute minimum, that the firm:

take an audit of their client base to see who they do profitable work for;
ask your most profitable client if your firm’s growth plans will have any impact on them giving you greater levels of profitable work and, if so, who you need to bring on board to do that work;
analysis what your increased cost-base (and there will very likely be an increased cost-base) is going to mean in the medium and long term;

and to share this information as widely as you feel comfortable doing with your top clients so there is transparency around your strategic growth plans.

Otherwise you could always remember the idiom:

“Marry in haste, repent at leisure…”

Some thoughts on ‘value’

One of the biggest challenges we face in any professional services organisation is both an understanding of, and an ability to communicate, the value of the service we provide.

To some, “value”…

“…is the difference between a prospective customer’s evaluation of the benefits and costs of one product when compared with others. Value may also be expressed as a straightforward relationship between perceived benefits and perceived costs: Value = Benefits / Cost.”

To others, “value”…

“…is like beauty; it’s in the eye of the beholder (the payer)…it’s not measured by internal costs or profit levels.”

To my mind though, one of the nicest pieces written about the challenges humans face in understanding the value they provide comes from the Japanese artist Mariya Suzuki, who wrote recently:

“I wasn’t very aware of the value of my work until a short while ago. If you asked me about it I would just have said “it’s just a drawing” but now I realise that to get to make that drawing I have invested many years and practice. It wasn’t until people told me not to give everything away for free.

Today, in my starting career as an illustrator, I try to value my work much more.”

Trying to “value my work much more” – getting a better understanding of the overall value my product or service brings to the equation – seems like a good starting point to me.

Report: ‘HSF bets growth on Asia’

The Australian‘s weekly Legal Affairs section is reporting (subscription required) today that global law firm “Herbert Smith Freehills will seek to more closely integrate its Australia and Asia practices.”

Sorry to be blunt, but what!?!

According to the Lawyers Weekly website, HSF officially merged on 1 October 2012 to open as the “largest fully integrated law firm in Asia Pacific based on number of lawyers“.

That was 3 years ago.

This begs the question: are all of the recent global law firm entrants to Australia going through the same issues?

My guess here is “yes”. Even though nearly all of them (arguable K&L Gates used US-Australia as its strategic reason for opening in Australia) made specific mention of using Australia as a springboard into Asia, pretty much none of them – to my knowledge – has a specific liaison Business Development Manger person (or higher) located in Australia who assists with joint business development activities.

As I understand it, there may be cost related issues involved in this (who pays for the resourcing – Australia or Asia). There may also be personnel issues involved.

Who knows; but the short answer is that for the life me I cannot understand how 3 years or more (in some cases) on from when the global firms arrived in Australia they still don’t seem to:

have dedicated Asia-wide practice and support teams
be able to tell you the number of referrals across jurisdictions (inbound and outbound)
be able to tell you which partners are referring work [championing] across jurisdictions
be able to tell you how many referrals are going to other firms within the jurisdiction where they have an office – particularly where there may have been a relationship prior to the merger (in Australia’s case, would you like to take a punt that Gilbert & Tobin gets referrals from international firms with an on the ground presence in Australia?)
know which of their clients are referring work to them across multiple jurisdictions.

To me, this says that both the back-end and front-end operations of the merged firm are still working in geographic and practice group silos (which they most certainly would appear to be from today’s article).

Don’t get me wrong, it’s great that HSFs is seeking to more closely integrate its Australia and Asia practices. I hope other firms follow suit. I’m just frustrated that this initiative is probably about 2 and half years late!