Long Island, New York ALA Chapter Presentation on Law Firm Profitability: The New Normal
Long Island ChapterAssociation of Legal AdministratorsLaw Firm ProfitabilityNavigating The New NormalPresented by:Frederick J. Esposito, Jr., CLMDirector of Administration/Chief Financial OfficerMeyer, Suozzi, English & Klein, P.C.JFE BoardroomMay 14, 20138:15am -10:00am
Profitability Quotes• “Get your facts first, and then you candistort them as much as you please.”– Mark Twain• “Fine art and pizza delivery, profitabilityfalls somewhere in between.”– Fred Esposito
The Three R’sRecession/Rhetoric/RealityMany economists tell us the recession is “officially”over and we are moving towards recoveryFact or Fiction?Impact of the recession on the legal industryPast, Present, FutureChanged how law firms conduct businessExpense controlRevenue game“Show me the money?”“Deal me in!”
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!
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 LessChange is In The Air
New NormalRevenue GameReader’s Digest Condensed Version?
Economic Climate is Somber• Clients are pushing back more on fees• More Predictability• Creative Pricing• Alternative Fee Arrangements (AFAs)• Pros and Cons• Client Perceptions
Alternative Fee ArrangementsJust 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 qualitylawyers?• Pricing changes came slowly
Alternative Fee ArrangementsCommunication Gap?• Client Perception•Alternative Pricing = Lower Spend• Law Firm PerceptionPotential for Premium• Challenge?Balancing interests/needs• Present Economy?“Clients Influence Pricing!”
Alternative Fee ArrangementsIt’s Not All About Price?Clients only care about price?Client Concerns About Pricing• Lack of Predictability• Perceived Value• Overall Price• Simplicity
Alternative Fee ArrangementsLack 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
Alternative Fee ArrangementsPerceived 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”
Alternative Fee ArrangementsSimplicity•Complex Pricing Systems• Difficult to administer/negotiate• Clients lose interest!•“K I S S”• Keep it simple stupid!
Alternative Fee ArrangementsPrimary Question For You!• Do Alternative Fee Arrangements Make Sense for YourFirm?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 havewith our historical hourly billing?
Alternative Fee ArrangementsUnder 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!
Alternative Fee ArrangementsDid you know……..• CMS Cameron McKenna– 13th largest UK firm with 800 lawyers– Launched a marketing campaign around its unique feestructure.– Pay what you think it’s worth option– Discounts for clients placing majority of work with thefirm– Monthly retainers– Fixed Fee agreements• Law Firm Brochure “The Future of Fees”
Alternative Fee ArrangementsFour 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
ProfitabilityNavigating 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 hourfor:• Each Attorney?• Each Task?“If You Don’t Know…You Better Get Right On It!”
SECOND BIG QUESTION!“How Many Other Law Firms are Playing the Revenue Gameusing AFAs to the Point of Achieving Profitability?”
ProfitabilityNavigating Under The New Normal“How Many Other Law Firms are Playing the Revenue Gameusing AFAs to the Point of Achieving Profitability?”Survey Says………..• Some Law Firms are Generating Profit• Some Law Firms Continue to Make the Same Mistakes!
ProfitabilityNavigating 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
ProfitabilityNavigating Under The New NormalLaw Firms Need To Buckle Down!• Proper Attorney Leveraging• Maximize Client Value• Provide More Predictability• Minimize ExpenseMonitor.. Monitor.. Monitor..Profitability Metrics!
ProfitabilityNavigating Under The New NormalProfitability Metrics• Fee Collections• Accounts Receivable Fee Write Offs• Attorney Time Write Downs/Write Offs• Contemporaneous Timekeeping!!
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 timeentry and billing rates.”
Important!Keeping Contemporaneous TimeContemporaneous Time StatisticsStudies show that attorneys who reconstruct their timeweekly 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?
Important!Keeping Contemporaneous TimeExample: Attorney bills at $150/hr doesn’t capture 15 minutes aday. 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!
Important!Keeping Contemporaneous TimeImportance of Timekeeping•Firm’s Inventory/Product to sell•Powerful Planning Tool•Critical Role in ProfitabilityBetter Timekeeping Practices•Improved Estimates for Legal Spend•Better Handle on Firm Investment•Generating Profit
ProfitabilityNavigating Under The New NormalConsiderations for Law Firm Profitability• Create Value For Clients• Efficient, Cost-Effective Legal Services• Ability to Learn New Skills• Improve Internal Behaviors
ProfitabilityNavigating 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?”
ProfitabilityNavigating Under The New NormalPROJECT MANAGEMENT•Fundamental Cornerstone of Change•Critical to the Pricing Process•Management Process“If we can teach people to manage, we can makemore money”Problem?Many lawyers do not know how to manage!
ProfitabilityNavigating Under The New NormalPROJECT MANAGEMENT“Give Us The “Tools” and We’ll Finish the Job!”
Requirement for ImplementingAlternative Fee ArrangementsWhat AFA Successful Firms Need?• System Tools• Training• Resources• Personnel Management
Requirement for ImplementingAlternative Fee ArrangementsSystem 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
Requirement for ImplementingAlternative Fee ArrangementsTraining• Attorney Training:– Budgeting Tools– Pricing Negotiations– Pricing Re-Negotiations– Managing Projects and Staffing to Budget• Training all Attorneys to Review and live by aBudget
Requirement for ImplementingAlternative Fee ArrangementsPersonnel ManagementHelp Attorneys to Understand Different Ways ofApproaching Projects– Communication• Internal & External– Team Orientation– Clear, Ongoing Oversight– Accountability– Learning– Firm Approach
ProfitabilityNavigating Under The New Normal“Gentlemen, my government has informed me that theKlingons are expected to move against your planet,with the objective of making it a base of operationsagainst the Federation. My mission, frankly, is to, uh…keep them from doing that.”– Capt. James T. KirkNow What?
ProfitabilityNavigating Under The New NormalWhat To Expect?Billable v. Non-Billable Hours– Billable Hour is Here To Stay• Serves Multipurpose• Planning ToolLaw Firm Profitability– Balancing Act• Client Expectations• Reduced Legal Fees• Added Value
ProfitabilityNavigating Under The New NormalWhat Will Drive the Revenue Game?•Profitability•Project Management“Who’s On First!”“What’s On Second!”
ProfitabilityNavigating Under The New NormalConclusion•Learn the Rules of the Road•Set Goals•Develop Processes to Manage Engagements•Understand the Economics•Deliver more Client Value•Minimize Cost“Increase Profitability!”
Contact InformationFrederick J. Esposito, Jr., CLMDirector of Administration/Chief Financial OfficerMeyer, Suozzi, English & Klein, P.C.990 Stewart Avenue, Suite 300Garden City, NY 11530Email Address: FJE@msek.comPhone Number: 516-741-6565www.msek.com