Long Island, New York ALA Chapter Presentation on Law Firm Profitability: The New Normal
1. Long Island Chapter
Association of Legal Administrators
Law Firm Profitability
Navigating The New Normal
Presented by:
Frederick J. Esposito, Jr., CLM
Director of Administration/Chief Financial Officer
Meyer, Suozzi, English & Klein, P.C.
JFE Boardroom
May 14, 2013
8:15am -10:00am
2. Profitability Quotes
• “Get your facts first, and then you can
distort them as much as you please.”
– Mark Twain
• “Fine art and pizza delivery, profitability
falls somewhere in between.”
– Fred Esposito
3. The Three R’s
Recession/Rhetoric/Reality
Many economists tell us the recession is “officially”
over and we are moving towards recovery
Fact or Fiction?
Impact of the recession on the legal industry
Past, Present, Future
Changed how law firms conduct business
Expense control
Revenue game
“Show me the money?”
“Deal me in!”
4. Where Are We in 2013????
• Roller Coaster Economy
• Law Firm Self-Examination
• Regrouping and Adapting to Change
• Expense Control
• Revenue Building
• “New Normal” “Paradigm Shift”
FIRST BIG QUESTION!
5. What exactly is the “New Normal?”
•Significant Paradigm Shift
•Economic Climate is Somber
•Take Action!
• Reduce Overhead
•New Focus!
• Increased Business Development
• We Have to Do More With Less
Change is In The Air
7. Economic Climate is Somber
• Clients are pushing back more on fees
• More Predictability
• Creative Pricing
• Alternative Fee Arrangements (AFAs)
• Pros and Cons
• Client Perceptions
8. Alternative Fee Arrangements
Just a fad?
• Widespread debate in the profession
• Answer lies between two extremes
• Pricing Evolution
• Clients are as conservative as Law Firms
• Long-term Client Frustrations with Pricing
• Sellers‘ market?
• Volume of work exceeded supply of quality
lawyers?
• Pricing changes came slowly
9. Alternative Fee Arrangements
Communication Gap?
• Client Perception
•Alternative Pricing = Lower Spend
• Law Firm Perception
Potential for Premium
• Challenge?
Balancing interests/needs
• Present Economy?
“Clients Influence Pricing!”
10. Alternative Fee Arrangements
It’s Not All About Price?
Clients only care about price?
Client Concerns About Pricing
• Lack of Predictability
• Perceived Value
• Overall Price
• Simplicity
11. Alternative Fee Arrangements
Lack of Predictability
• Weaknesses in Communication
• Shock and Awe
• Critically important – Budget!
Overall Price
• Total Legal Spend
• Critical Importance
• Repetitive, Predictable, High Volume
• Long Run Transactions/Litigation
• “High Up” Scrutiny of Legal Spend
12. Alternative Fee Arrangements
Perceived Value
• Poor Value
• Rapidly increasing billing rates and leveraging
• Client Perception –Widening gap!
• Rates, Value, Outcome
• Segmentation
• Value Assessments
• Performance Evaluations
• Panel Counsel
“Reconcile Value”
14. Alternative Fee Arrangements
Primary Question For You!
• Do Alternative Fee Arrangements Make Sense for Your
Firm?
Common Questions to Consider
• Is the billable hour pricing model dead?
• What are the choices for AFAs?
• Can our firm make as much profit using AFAs as we have
with our historical hourly billing?
15. Alternative Fee Arrangements
Under The New Normal
“AFAs Have Turned The Tables!”
• Provide More Certainty
• Less Risk For Clients
• Law Firms Share More of the Risk!
• Client Expectations
• Focus on Delivery of Legal Services
– Efficiency
– Cost-effectiveness
– Profitability!
16. Alternative Fee Arrangements
Did you know……..
• CMS Cameron McKenna
– 13th largest UK firm with 800 lawyers
– Launched a marketing campaign around its unique fee
structure.
– Pay what you think it’s worth option
– Discounts for clients placing majority of work with the
firm
– Monthly retainers
– Fixed Fee agreements
• Law Firm Brochure “The Future of Fees”
17. Alternative Fee Arrangements
Four Broad Categories of Pricing Systems
• Hourly Rates with or without Discounts
• Hourly Rates with Discount or Premium based on Results
• Project or Fixed Fee pricing
• Full Contingent pricing
18. Profitability
Navigating Under The New Normal
“Deliver Legal Services in a Profitable Manner”
• Understanding Your Firm’s Economics
– How much does it cost the firm to produce a billable hour
for:
• Each Attorney?
• Each Task?
“If You Don’t Know…
You Better Get Right On It!”
19. SECOND BIG QUESTION!
“How Many Other Law Firms are Playing the Revenue Game
using AFAs to the Point of Achieving Profitability?”
20. Profitability
Navigating Under The New Normal
“How Many Other Law Firms are Playing the Revenue Game
using AFAs to the Point of Achieving Profitability?”
Survey Says………..
• Some Law Firms are Generating Profit
• Some Law Firms Continue to Make the Same Mistakes!
21. Profitability
Navigating Under The New Normal
• Many Law Firms are Engaged With AFA Pricing
– Profitably
– Making Costly Mistakes BUT Learning From Them!
• Law Firms With Successful AFA Pricing
– Understand the Economics
– Monitor the Mechanics of their Respective Practices
– Better Planning, Leveraging and Managing Engagements
22. Profitability
Navigating Under The New Normal
Law Firms Need To Buckle Down!
• Proper Attorney Leveraging
• Maximize Client Value
• Provide More Predictability
• Minimize Expense
Monitor.. Monitor.. Monitor..
Profitability Metrics!
23. Profitability
Navigating Under The New Normal
Profitability Metrics
• Fee Collections
• Accounts Receivable Fee Write Offs
• Attorney Time Write Downs/Write Offs
• Contemporaneous Timekeeping!!
24. Famous Attorney Timekeeping Quotes
“I’m too busy to enter my time.”
“I have to service my clients; that is what is important.”
“It doesn’t apply to my practice”
“Why does it even matter?”
“I can’t be bothered with administrative issues like time
entry and billing rates.”
25. Important!
Keeping Contemporaneous Time
Contemporaneous Time Statistics
Studies show that attorneys who reconstruct their time
weekly tend to lose 25% -30% of their time.
Attorneys who reconstruct their time on a monthly basis,
tend to lose 55% - 70% of their time.
Imagine the lost billable time?
26. Important!
Keeping Contemporaneous Time
Example:
Attorney bills at $150/hr doesn’t capture 15 minutes a
day.
The attorney loses $37.50/day, $187.50/week,
$750.00/month, $9000/year in lost billable time.
Multiply by 25 attorneys?
$225K per YEAR in lost billable time!
It’s a very real number!
27. Important!
Keeping Contemporaneous Time
Importance of Timekeeping
•Firm’s Inventory/Product to sell
•Powerful Planning Tool
•Critical Role in Profitability
Better Timekeeping Practices
•Improved Estimates for Legal Spend
•Better Handle on Firm Investment
•Generating Profit
28. Profitability
Navigating Under The New Normal
Considerations for Law Firm Profitability
• Create Value For Clients
• Efficient, Cost-Effective Legal Services
• Ability to Learn New Skills
• Improve Internal Behaviors
29. Profitability
Navigating Under The New Normal
“What Will Drive Law Firm Profitability?”
•Client Focus
•Client Value
•Law Firm Efficiency
“Who or What Will Be Doing the Driving?”
30. Profitability
Navigating Under The New Normal
PROJECT MANAGEMENT
•Fundamental Cornerstone of Change
•Critical to the Pricing Process
•Management Process
“If we can teach people to manage, we can make
more money”
Problem?
Many lawyers do not know how to manage!
33. Requirement for Implementing
Alternative Fee Arrangements
System Tools
• Historical Time Investment
– Time Required To Complete a Task?
– Task-Based Billing Codes
– Assessing Change Order Conditions
• Case Budgeting Tool
– Based on cost or on billable/time rate
– Project Management Tool
– Client/Matter Profitability Tool
34. Requirement for Implementing
Alternative Fee Arrangements
Training
• Attorney Training:
– Budgeting Tools
– Pricing Negotiations
– Pricing Re-Negotiations
– Managing Projects and Staffing to Budget
• Training all Attorneys to Review and live by a
Budget
36. Requirement for Implementing
Alternative Fee Arrangements
Personnel Management
Help Attorneys to Understand Different Ways of
Approaching Projects
– Communication
• Internal & External
– Team Orientation
– Clear, Ongoing Oversight
– Accountability
– Learning
– Firm Approach
37. Profitability
Navigating Under The New Normal
“Gentlemen, my government has informed me that the
Klingons are expected to move against your planet,
with the objective of making it a base of operations
against the Federation. My mission, frankly, is to, uh…
keep them from doing that.”
– Capt. James T. Kirk
Now What?
38. Profitability
Navigating Under The New Normal
What To Expect?
Billable v. Non-Billable Hours
– Billable Hour is Here To Stay
• Serves Multipurpose
• Planning Tool
Law Firm Profitability
– Balancing Act
• Client Expectations
• Reduced Legal Fees
• Added Value
39. Profitability
Navigating Under The New Normal
What Will Drive the Revenue Game?
•Profitability
•Project Management
“Who’s On First!”
“What’s On Second!”
40. Profitability
Navigating Under The New Normal
Conclusion
•Learn the Rules of the Road
•Set Goals
•Develop Processes to Manage Engagements
•Understand the Economics
•Deliver more Client Value
•Minimize Cost
“Increase Profitability!”
42. Contact Information
Frederick J. Esposito, Jr., CLM
Director of Administration/Chief Financial Officer
Meyer, Suozzi, English & Klein, P.C.
990 Stewart Avenue, Suite 300
Garden City, NY 11530
Email Address: FJE@msek.com
Phone Number: 516-741-6565
www.msek.com