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Lessons from the new-model law firm: how to cut costs, increase revenue and improve profits

Traditional law firms face considerable competition today, particularly from new-model law firms that operate and structure themselves in very different ways, according to Ron Friedmann, an expert in law practice management and partner at Fireman & Company in the Washington, DC area.

Many clients are moving work in-house to save money, says Friedmann, who notes that the cost of in-house counsel is more than one-third lower than that of a traditional law firm.

Another source of competition is new-model law firms which often offer fixed alternative fees and operate with low overhead, with lawyers either working from home or in small centralized offices. These firms take technology seriously and offer flexible work schedules and the opportunity to work part-time.

“They continue to do well and they continue to take (market) share from law firms because they have industrialized these high-value processes and they may use lawyers, but those lawyers aren’t necessarily practicing law,” says Friedmann.

Alternative providers

Also in competition with traditional law offices are alternative providers, including legal process outsourcers who do compliance work, contract management work and document review work.

Some companies appear to be law firms, but they are actually legal services companies.

Friedmann says they hire qualified lawyers, often from large law firms, who have years of experience. They are given long-term temporary assignments and are often paid at much lower rates than equal services would cost from a large law firm.

“The point here is that even if you are a small firm, these changes might start to affect you,” he says.

Technology is enabling new-model law firms to thrive.

“It’s one thing to bring work in-house and to pay an in-house lawyer less than a law firm lawyer, but it’s another to work differently. We’ve seen an explosion in (legal) technology that allows lawyers to work differently,” says Friedmann.

Examples include technology software that automates the assembly of high-volume documents and legal project management software that lets companies apply the concepts of project management to the control and management of legal matters.

More with less work

Using transformative technology allows new-model law firms to work much more efficiently and actually do less work to accomplish the same outcomes as traditional law firms.

Technology-assisted review in discovery not only saves a great deal of time, but also increases the quality versus a human-review approach, according to Friedmann.

Other examples of new technology giving new-model law firms a competitive edge include:

  • Contract drafting and management tools which help a law firm take a number of similar transactional documents and find common elements and variations in clauses. This allows not only a better understanding of documents, but also variations in documents and the chance to put together a preferred document.
  • Technology that enables firms to manage deals more effectively.
  • Technology that provides interactive legal advice.

Losing market share

For every dollar spent on alternative law service delivery, more than $3 is lost to a traditional law firm, according to Friedmann.

“I do think that losing (market) share is a real risk. Everything I read, every conference I go to, every private conversation I have, says that clients are looking for more value and that search for value invites new competition.”

Is market-share loss a risk for your firm? Friedmann says that depends on your matter mix and price sensitivity, which is the degree to which your clients react to changes in price.

“If you increase your rates by any percent and you lose business, that’s price sensitivity,” he says.

If your firm handles a lot of bread-and-butter cases that help pay the bills, along with commodity work, you will definitely face price competition from new-model law firms.

“If your matter mix is price-sensitive, how do you protect your share? You have to offer higher value, you have to improve service delivery and you may have to reduce costs (in order) for you to maintain your profits,” says Friedmann.

What you can do

To improve value and protect your market share, he says your firm should be looking at:

  • Outsourcing to give your firm access to tailored technology and processes.
  • Deploying lower-cost lawyers, both full-time and part-time.
  • Doing less law and focusing more on providing preventive services to clients.
  • Re-engineering your legal processes to reduce costs by changing the way that lawyers work.

“If you are faced with profit pressures, you can always cut costs,” he says.

You might consider adjusting staff ratios, opening low-cost centers, streamlining and centralizing support services—especially secretarial and word-processing services—and outsourcing certain services to third parties.

Friedmann says streamlining allows your firm to eliminate unnecessary work, improve processes, substitute technology for labor and assign appropriate skills for each task.

“Start by understanding your matter mix. If you are doing work that’s very competitive, then you first have to identify that. Then you need to talk to clients and understand what they are looking for; assess what your competition is doing; and create a plan of action to deploy lower-cost lawyers, to deploy technology, and improve your processes.”

Friedmann says this process is a journey, not a one-time experience. It’s not easy, but it can pay big dividends.

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