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INCREASING PROFITS

How to make 2015 the year you improve value, cut costs, and increase profits

Are you prepared to handle the competition of 2015? Do you know who’s elbowing in on your firm’s share of the legal market? Are your firm’s partners even aware that there’s a risk?

Ron Friedmann, a consultant with the legal industry-focused management consulting firm Fireman & Company, has spent over two decades improving law practice and legal business operations with technology, knowledge management, and alternative resourcing.

And according to Friedmann, in today’s market, there are a few factors that are putting law firms of all sizes at risk of losing their share. These factors include:

  • Bargain-hunting clients;
  • “New model” law firms; and
  • Legal process outsourcing providers and document review companies.

Friedmann was one of the first non-practicing lawyers hired by a large law firm, Wilmer, Culter & Pickering (now WilmerHale) to manage practice support. He pioneered legal process improvement, knowledge management, electronic discovery, virtual law libraries, law firm portals, and online legal services.

In November 2014, Friedmann shared some of his strategies with Law Office Manager subscribers through his webinar, “Lessons from the ‘New Model’ Law Firm: Proven Ways to Cut Costs, Increase Revenue and Improve Profits in Today’s Highly Competitive Legal Marketplace.” If you missed the webinar, here are some of the highlights.

Is there really a risk?

Let’s say you work in a law firm that has a great relationship with its clients and that provides a good service. You’re not that concerned about competition because you feel your firm delivers above and beyond what the others offer. But is that what your clients want? Are you willing to bet the business?

If you’ve noticed that the competition is offering comparable services, lower hourly rates, more flexibility, and/or better service delivery, it’s likely your clients have noticed, too.

At a time when your strategy should be as much about protecting and preserving your business as it is about growing, maybe it’s time to take an honest assessment of your practice and look to where you can improve value and reduce costs.

Identifying your matter mix

Your first step, of course, is to assess your risk. Friedmann suggests you either identify where clients are pressuring you the most or you figure out your most price sensitive work.

To do this, Friedmann recommends that firms take a close look at their legal matter mix and break it down into segments according to whether or not these segments are price sensitive; that is, does the price for these services affect your clients’ decision to use your services?

“Matter segmentation and the risk of market share loss are distinct concepts,” says Friedmann. “A matter segmentation that I like and use on consulting engagements has four categories, from least to most price sensitive:

  1. Bet the company
  2. High stakes
  3. Run the company
  4. Commodity”

According to Friedmann, a firm can operate in one or all segments and face risk of losing share if it is not delivering value appropriate for that segment.

“Today, I regularly hear off-the-record reports from friends at law firms of work lost due to being priced too high—in any segment. And pricing here does not just mean rates; it goes to the total bill and service provided. Thinking a client always wants—and will pay for—a Cadillac when it really wants a Buick is a poor business decision.”

So, says Friedmann, the first step in protecting share is offering the right value for that segment of work.

A good approach to assessing a firm’s mix of business by segment is to survey lawyers and senior staff, asking them to estimate the percent of the firm’s (or a practice’s) work in each segment. That is easy and inexpensive and at least provides a starting point for thinking about a firm’s matter segmentation.

An early warning sign of risk is where a firm or practice sets prices as if work is less price sensitive than it actually is.

“For example, consider a firm that thinks most of what it does is high stakes or bet the company,” says Friedmann, “but the work is actually run the company or commodity. That firm will be providing service and charging rates inappropriate for the nature of work. That firm is at a higher risk than it would otherwise be of losing the work to competitors who understand the real price sensitivity.”

How to keep or gain your market share

When you’ve done your analysis and identified the price sensitive segment of your matter mix, you have a few options:

  • You can cede your share;
  • You can protect your share of the market by offering clients higher value and improve your service delivery; and/or
  • You can reduce costs to maintain profits.

If ceding your firm’s share is not an option, then you need to improve value to protect your share. But keep in mind that improving value is not about reducing your fees; it’s about reducing client costs.

For example, you could outsource some of your work by deploying lower cost lawyers to conduct document review.

The advantages to outsourcing are that the costs are variable instead of fixed; the rates are lower; and the operations have tailored their technologies to conduct these processes. Document review companies also offer 24/7 coverage and have established metrics. Outsourcing also allows you to eliminate recruitment, while gaining business continuity.

The disadvantages to outsourcing are that the firm loses the capability and control of the service; you may experience disputes with the outsourcing vendor over scope of the project; and the firm will see little or no profit on the work performed. There’s also the risk of delivery problems or continuity issues if the vendor shifts their business strategy.

Another route many large law firms are taking, and which might be an option for smaller firms, is to outsource work to a contract or part-time lawyer. Not every attorney is on a career path to the corner office. By matching a task to a part-time lawyer who charges lower fees and perhaps works from home, you can provide more value to the client and have greater flexibility in the files you take on.

One word of caution if you’re considering outsourcing to either an LPO or contract lawyer: be sure you research and understand the ethics of marking up services. The rules allowing a firm to “reasonably mark-up” fees vary according to jurisdiction and it’s not clear if disclosing the use of these services to a client is sufficient. It’s also not clear what “adequate supervision” means, nor, in B2B lawyering, who the rules protect. If this is a route you’re considering, Friedmann recommends retaining a legal ethics expert first.

You can also improve value for the client by simply doing less. As mentioned earlier, if your client was expecting a Buick and you delivered a Cadillac, they’re not necessarily going to be thrilled with the accompanying bill.

Look at how the work gets done

An important aspect of reducing costs is re-engineering how your lawyers work and enabling technology for efficiency. “Look for different ways of doing the work,” says Friedmann. “Improve your processes, deploy technology, use lower-cost people.”

Take a look at the life cycle of a file. Map out the processes and identify where you can reduce waste. Are there ways you can streamline projects to eliminate unnecessary work? Is it time to consider legal project management services? Are your lawyers doing secretarial tasks? Ensure that each task is assigned to a person with the appropriate skill.

And move beyond Word and email. “It’s time to substitute silicon for carbon and increase the use of technology,” says Friedmann. “Take a look at the D. Casey Flaherty technology audit and find an opportunity for lawyers and staff to improve their skills.”

How to reduce costs to maintain profits

When you have implemented steps to improve value and reduce client costs, it’s time to turn your attention to reducing overhead to protect your profits.

For many, “reducing overhead” is synonymous with “cutting secretaries.” But Friedmann suggests you consider other ways to adjust your staff ratios. “Many firms have cut secretaries, but some may have cut too far,” he says. “It’s important to think carefully about what lawyers do versus staff. Areas I see that can be improved at many firms include billing, matter intake, HR, admin., etc. All of these areas need better processes and technology, and more standardization.”

Another way to reduce overhead is to streamline and centralize your operations, and cluster like staff in the same location, either in the main office or at a separate low-cost location.

Related reading: Redesign the office to keep up with industry and technology changes

Who’s going to do all this?

Who do you need to call to implement these changes? “It depends on what you want to accomplish,” says Friedmann. “Some firms have hired directors or chiefs of “innovation” or “strategic initiatives. At other firms, the CKO or CIO takes the lead. Or you can look to an LPO, managed services, staffing or tech company for help.”

Or, of course, you can contact a consultant like Ron Friedmann.

Conclusion

Face the competition head-on this year. Protect your market share and your profits by improving value, reducing costs, and streamlining your processes.

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