Law firm

Why asking someone to work 2,000 billable hours a year will kill their spirit

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According to a post by Casey Sullivan of Bloomberg, earlier this week US law firm Crowell & Moring announced that it would increase its billable hour requirement for associates, from 1,900 hours per year to 2,000 per year. This new target will take effect 1 September 2016, but on the plus side 50 pro bono hours will count as billable.

15 Years ago I would have cried out “all kudos to you”. Back then my yearly billable target for an English ‘Magic Circle’ firm was 1,400 hours and I flogged my guts out to achieve that. So if you can effectively put 50% of billables on top of what I was doing (and trust me when I say I wasn’t going home at least one day a week), then you’re a better person than I (or so I would have said then).

But if you really need validation of what asking someone to work 2,000 billable hours a year means, then I would like to recommend you read “The Truth about the Billable Hour” by no less an institution than Yale University. In that publication, Yale caution aspiring lawyers that if you are being asked to “bill” 2201 hour, you need to be “at work” (includes travel time and lunch, etc.) 3058.

Taking that further, from an Australian law perspective, if you are being asked to bill 2,000 hours a year then you need to bill 8.3 hours a day (assuming a 48 week year and you never get sick; which, if you are being asked to do this, you most likely will be). That means you are very likely going to need to be “in the office” around 12 hours a day – and that assumes no write-off by your partner or leakage.

But here’s the question: “What difference does this make?

I ask this because I wholly agree with the following comment my friend Kirsten Hodgson made when I posted a link to this article on LinkedIn:

“why would you reward the number of hours someone spends working? Surely it would be better to focus on how to deliver value smarter and more quickly. This doesn’t incentivize innovation or any type of process improvement.”

Exactly right, you’re measuring all the wrong things!

Leaving aside the Balance Scorecard argument, asking someone to do 2,000 billable hours a year doesn’t take into account:

  • client satisfaction
  • realisation (it’s a utilisation metric)
  • working smarter
  • innovation

or many other metrics.

And for those who may point out the benefits of this including 50 hours pro bono I say this: the Australian Pro Bono Centre National Pro Bono ‘Aspirational Target’ (ie, where we would like to get to), is 35 hours per lawyer per year.

But probably more importantly than all of this is this:

–  if you ask someone to do this, then you really leave them very little time to do anything else.

This really should be a concern, on the business front because you leave almost no time whatsoever to train them in the business of law – ie, you kill any entrepreneurial spirit they may have. And, crucially, the only metric that really counts to them is that all important 2,000 billable hours (keep in mind that like I was, they’re very young). Which for a profession that has the mental health issues we do, is not good.

For all of these reasons, I’m hoping no other law firm follows this. But sadly I think they will.

Oh, and if you are a law firm client reading this post you might just want to look up whether your local jurisdiction has a “Lemon Law” rule that applies to provision of a service.

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How long before we see a ‘Red Team’ service in #Auslaw?

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Of note overnight (OZ time) was news that Bernero & Press (Wendy Bernero and Aric Press) have launched a service called: ‘The Red Team’.  Described as being “A Lifeline for Marketing and Business Development Departments” the aim of The Red Team is to provide:

“…high-quality, experienced marketing, communications, and business development professionals to law firms on a project basis or to fill temporary needs.”

Sounds very similar to the sort of lawyer placement service we are seeing from the likes of Crowd & Co here in Australia, only in this case the target market is specifically support services.

I have to say that outsourcing back office services such as marketing and business development was something I saw becoming popular in Asia during the Asian Financial Crisis in late 1998 and I have often wondered when we would see such a move take hold in the West.

Today may just be that day.

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AFAs accounted for less than 10% of all matters in the US last year

This month saw publication of the End-of-Year 2015 edition of the Enterprise Legal Management Trends Report by LexisNexis and CounselLink.

Based on data derived from outside counsel invoices – accounting for US$21 billion in legal spend in the USA – processed through the CounselLink platform, to my mind what makes this Report different to others is this: it provides insights others might miss because while talk can be cheap, the numbers rarely lie.

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From an Australian perspective, a couple of surprising statistics come out of this year’s Report.

  • the use of AFAs, to govern the service payment of matters, only accounted for 9.4% of matters processed through the CounselLink platform. Given all the chatter and whining you hear from law firms, I would have expected this rate to be much, much higher.
  • Employment and Labor (at 17.3%) is a fairly significant practice area leader in the number of matters (but not revenue – see below) using AFAs, but Real Estate accounting for something less than 2% of its practice area matters using AFAs seems out of whack.
  • Nearly 10% of Regulatory and Compliance matters are done under AFA arrangements. At first this seemed a little strange (given the grey hair nature of the advice being sought), but then I thought a large number of compliance programs could be sold using retainers, fixed fees and other AFAs.

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Moving on to percentage of “billings” executed under AFAs and things start to get really interesting.

  • at 12.4%, by far the biggest practice area using AFAs by billings is Corporate, General and Tax (excluding Mergers and Acquisitions, which is a separate line entry). Not sure I would have guessed that.
  • Finance, Loans and Investments ranked third highest practice area using AFAs by billings last year. Again, don’t think I would have picked that.
  • by billings, only 7% of Employment and Labor practice area matters are executed under AFAs. So, 17.3% of Employment and Labor matters were conducted under AFAs, but only 7% of billings. Might just be me, but that seems strange and I’d want to dig deeper into why that might be the case if my practice was showing these numbers. Then again, may just be the Pareto Theory in practice!
  • At roughly 2% of practice area billings, who says Real Estate has become a commoditized practice area? Because these numbers aren’t showing it.

Interesting numbers showing through this Report. Lots of chatter around the rise in M&A activity/revenue and the fact that “New Law” isn’t being hired to do big ticket work, but the use of AFAs and rationalization of legal panels (which I may well blog on later this week) were my two big takeouts.

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Altman Weil Flash Survey: Has the era of data driven pricing arrived?

Last week saw the publication of Altman Weil’s 2016 Law Firms in Transition Survey. Now in its eighth year, this survey continues to be a good indicator of the market forces law firms are facing and in recent years it has been a good indicator of the fee pressure clients are putting on firms.

So, how have firms been tracking when it comes to pricing pressure issues?

At first blush – well. When asked: “Is your firm doing any of the following to support its pricing strategy?“, “Developing data on cost of service sold” and “Training lawyers to talk with clients about pricing” rank head and shoulders (in first and second spot) above everything else.

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Clearly moving in the right direction then, reinforced by the overwhelmingly positive response to: “Is your firm proactively initiating conversations about pricing / budgets to better understand what individual clients want?

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until we get to this shocker…

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So, almost half (44%) of law firms are now training lawyers to have the pricing conversation with their clients, a whopping 88% of firms are proactively initiating that conversation – and yet three-quarters (72.2%) of firms only make use of non-hourly based billing methods in response to a client request.

Am I the only one who finds that incredible?

But really, why does it even matter?

Well, here’s your answer:

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There’s a clear lesson here for anyone that’s willing to listen to it: if you want your firm to be more profitable, be on the front foot when it comes to opportunities to provide alternative fee arrangements.

If you haven’t already, I’d like to recommend you download and read the full survey, if for no other reason than it contains this gem…:

 

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Which, if you believe, suggests that around half of all law firm partners are not even aware of the challenges their firms face!

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Exiting the ‘Valley of Despair’: Tips on rebuilding a book of business

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source: Emily Carr:- ‘Practical Change Management for IT Projects

The ‘Valley of Despair‘ is a term used in IT process improvement projects to describe the period of time where productivity decreases immediately after the implementation of a new process. In essence it describes that period of time during which you shift away from what you know and are comfortable with to what is new and unknown (but which will ultimately, hopefully, results in better processes).

Although a term commonly associated with process improvement, to me this has also become a good way to best describe a growing trend in the modern lawyer’s life; namely that particularly difficult period during which a disruptive element impacts on their book of business. Examples would include:

  • economic: with the GFC most securitization lawyers lost their practices overnight.
  • panel: when your firm loses a panel appointment with your practice’s biggest client as a result of the client rationalizing the number of its panel firms.
  • relationship: the key contact at your biggest client moves to a company your firm has no relationship with; or, worse, is promoted to a role where they no longer have influence over who gets the legal instructions.

There are many others, but you get the gist: your performance hits a wall called ‘change‘.

In my experience, partners who face this scenario come face-to-face with Elizabeth Kuber-Ross’ “Five Stages of Grief“:-

Denial —> Anger —> Bargaining —> Depression —> Acceptance

To overcome the Valley of Despair you need a sixth element: a desire to move forward.

  • Step 1: Accept your fate

The first step in any recovery program is accepting you have an issue. Too often law firm partners stick their heads in the sand and refuse to accept that anything is wrong until the Managing Partner is knocking on their door asking them what their plans are for the future (wink, wink: it’s not with us!). By then, you are well and truly in to the ‘bargaining’ and ‘depression’ phases. If you want to rebuild your book of business you need to be much further ahead of the game than that.

  • Step 2: Do an audit

Here’s the thing: things in life are rarely as bad as they first seem. So, as soon as you become aware of a change agent – such as those above – get out your pen and a piece of paper and write down a list of who you know, when was the last time you contacted them, what type of work could you be doing for them, are you already doing that type of work, etc.

In short, take stock of what you have and who you could be doing it for.

  • Step 3: Make a plan

Alan Lakein is reported to have said: “Failing to plan is planning to fail“. I’m not sure if he actually did, but it’s pretty accurate and if you want to rejuvenate your book of business then you will need a plan of how to go about this.

This plan should include the obvious, like:

  1. what type of work do I want to be doing?
  2. who do I want to do this work for?
  3. what do I know [commercially] about these businesses [tip: if the answer is “not a lot”, get a research assistant on to it ASAP]?
  4. who are the decision makers at these companies?
  5. how likely are they to give you / your firm the work [tip: rank the likelihood from 1 – 5 (very – unlikely)]?

Your plan also needs to include things you may not think of, such as:

  1. will my partners give me relief while I try and rebuild my book of business? If so, how long?
  2. what level of fees do I need to generate (cost +, times 3, times 5)?
  3. what rates will I need to charge to generate that level of fees? will the target client accept these rates? if I need to discount, will my partners accept me discounting to win work when their clients are paying full freight?
  4. who is currently doing the work for the target and what am I bringing to the table that would make the target move the work to me?
  5. how will my competition react to me invading their turf?
  • Step 4: Execute on the plan

I’ve heard it said that: “a plan without an action is a wish“. In the world of professional services, we see a lot of wishing!

So, as soon as you have your plan in place you need to get out from behind your desk and start to execute on it. Look at what

  • inbound and outbound related activities you need to do;
  • networking events are taking place and when;

then set yourself a 30-60-90 day action plan to work towards.

Most importantly, always be responsive and never, ever quit.  Building a book of business takes patience and repetition, you cannot adopt a “lottery mentality” as one shot actions nearly always lead to failure.

So if at first you don’t succeed, try again. That way, you’ll give yourself the very best chance of rebuilding your book of business and moving forward.

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Report: Do high growth firms share common traits?

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This month saw publication of the 2016 High Growth Study by Hinge Research Institute. Although not limited to law firms, law firms (along with “Healthcare & Other”) made up 12.9% of the 968 respondents who answered Hinge’s survey and, therefore, the Study’s findings help provide some insight into whether or not “High-Growth” firms share common traits.

First, “High-Growth” was defined as being a firm with:

“Over $1 million in revenue and had an average yearly growth rate of at least 20%”.

Not exceptional. Having said that, of the firms surveyed:-

  • 30% generated over 88% of new revenue growth and were 45% more profitable than their No-Growth counterparts

so most definitely desirable.

So, did these High-Growth firms share any traits? In short, “yes”; and these included:

  • Target Clients: High-Growth firms are 75% more likely to have a highly specialized practice – i.e., not all things to all people or full services firms
  • Client base: High-Growth firms are more likely to target the larger clients (over $10 million in revenue)
  • Research: High-Growth firms are 2X more likely to conduct research on their target client
  • Differentiation: differentiators favoured by High-Growth firms are twice as likely to be easier to prove and are more relevant to clients. Importantly, these don’t include “reputation” and “awards won” (favour of No-Growth firms) and do include “culture” and “people”
  • Marketing investment: High-Growth firms invest 23% less in traditional marketing than No-Growth firms. This is because what marketing High-Growth firms do is targeted and measured

While some of these may surprise, they reinforce that in order to grow in today’s market firms need to have a clear understanding of who they are, who they work for, who they would like to work for, and the value/benefits they provide. In short, they’re focused.

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Medibank Idea Exchange

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For my sins I am a member of Medibank Private Health Insurance. I understand it has something to do with having a young family and the Medicare rebate. Anyhow, regardless the reason I get a lot of emails from Medibank that have always gone to straight to my trash folder. That is, until this morning.

What makes this morning any different? Well, I received an email inviting me to join the Medibank Idea Exchange community. In part wondering why they were suggesting the singular rather than the plural, I thought I would take a look.

What did I find?

Well, while I have no intention of joining, what I found was an offer to join an ‘invite only’ community where I will be able to share my thoughts and ideas on a variety of different topics and issues and:

  • Contribute to discussions and surveys – so you can tell Medibank what you think and help shape future business decisions,
  • Talk with other members – so you can share experiences and handy tips,
  • Earn rewards for participating – that you can redeem on a great range of products and services.

and I thought to myself: “there might be something in this for law firms to learn from“.

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

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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!

 

Forget the Gadens merger, the big news today is Olswang’s announced ‘Revenue Share Scheme’

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Pretty much all anyone involved in the Australian legal sector will read about in the industry news today will be the reported three way tie-up between Global behemoth Dentons, Australian law firm Gadens and Singaporean firm Rodyk & Davidson, which is still subject to a partner vote but you assume is pretty much a done deal.

Although this may have a profound effect on the Australian legal market in years to come, in much the same way as the K&L Gates / Middeltons merger has hardly set the sector alight, I somehow doubt this merger will too.

There is, however, another piece of news being reported this morning that could very well have a massive effect on the local market – and that is the news that Olswang has established a ‘Revenue Share Scheme’ that it hopes will incentivise staff (it is being reported the scheme is open to all employees at the firm, from partners through to business services staff) to refer clients to the firm through a referral bonuses scheme that will pay an employee who introduces a new client who subsequently spends more than £20,000 in the first year instructing the firm, 10 per cent of the instruction fees in the next year.

I worked under a scheme very similar to this is Asia just after the Asian Financial Crisis and I can vouch that provided you get your conflicts worked out (because trust me, this leads to a lot more potential conflict situations), then this type of scheme can be very incentivising.

While I doubt this type of scheme will be introduced widely here in Australia too soon – after all, why do we get paid salaries, I can see this becoming more prevalent and certainly having a more profound effect on market practice globally.

It’ll be left to the test of time however to see whether – in five years time – everyone is discussing their 10 per cent bonus or the Gadens-Dentons tie-up!

‘Drive for show, Putt for dough’

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According to a post earlier this week on the LexisNexis Business of Law Blog:

“A new legal spending trends report finds big law billing rates grew notably – pushing a 6% increase in the gap between the top two tiers of law firms, by attorney headcount, from 38% to 44%.”

Indeed:

“Median partner rates at the “Largest 50” law firms – those with more than 750 lawyers – rose to $711 per hour, based on 12 months of data ending June 30, 2015. That number is up from the last report where median partner rates came in at $675 per hour for the 12 months ending December 31, 2014.”

As I have posted before, however, this [rising headline hourly rates] is absolutely meaningless if your realization rates are in decline – an issue this particular report appears to remain silent on.

I have never understood, beyond ego, why a partner would be more interested in their hourly rate than their average realized billable rate (ARBR). After all, the ARBR amount is the amount that clients are willing to pay you – money in the bank – and is a more accurate reflection of your true worth/value.

Eventually you have to ask yourself which you would prefer: a headline charge-out rate of $1,000- with an ARBR of $700-, or a charge-out rate of $800- with an ARBR of $800-?

And that’s without going into how much easier it is to have the conversation with your clients around rising your realization rather than informing them on 1 July each year that you will be raising your rates by 10% again this year!

Alternatively, you can keep on driving for show and not worry too much about the dough you’re making.