Clients are not the only ones who act as if outside lawyers
are inefficient. Individual outside lawyers censor themselves for inefficiency.
Their firms then cut their time for perceived inefficiency before sending it to
the client. The clients cut their time even further. Everyone seems to agree there
is considerable waste that must be excised from the bill.
The existing economics of law are such that it is easy to
reconcile improved quality and lower costs for clients with better realizations
and higher profits for law firms. Five years ago, I did not know this. I
thought we were playing a zero sum game. Nor would I have cared if anyone had
told me. As detailed in previous posts, I’ve evolved in my thinking about coprosperity.
This change in perspective means I have to work at trying to understand what makes
for a prosperous law firm. In helping me appreciate how realizations and profit
differ from raw revenue, I have to thank Toby and our mutual friend, Vince
Cordo of Shell. Please do not blame them, however, for the simple-minded
drivel that follows.
Understandably, we lack hard data on time that lawyers decide
not to record (let alone how this practice may have changed over time). But my
anecdata (frequently, a lawyer who performed poorly in Basic
Technology Benchmarking would inform me that I need not worry because they
cut their own time) lines up with the few bits of empirical speculation I can
find. These
surveys
suggest that 33% of worked time is not billed. The primary culprit is
identified as administrative tasks but another factor is individual lawyers
deciding “to purposely ‘discount’ the actual number of hours worked in order to
keep clients happy.” Similarly, back when firms reported such things to NALP,
the average associate at DLA
Piper, for example, worked 2,462 hours to bill 1,831 hours (74% of worked
time was billed). To use round numbers then, let’s assume for discussion that an
exemplar lawyer works 2,500 hours and bills 75% of it (1875 hours). Let’s
further assume (I’ve got no statistics on this) that a minority—say 20%—of the
unbilled hours are due to self-censorship.
Lawyer Janes works 2,500 hours of
which 2,000 are eligible to be billed. She bills 1875 hours.
The 1875 hours is what the firm sees. But 1875 hours is not
what the firm sends to its clients. We have good
data that billed realizations—the percentage of the 1875 hours billed to
clients—have dropped from 93.5% to 86.7% in the last decade. But the data does
not tell us how much of the recorded-hours-not-billed-to-clients are due to
writedowns versus pre-negotiated discounts. The concept of standard rate, on
which realization figures are based, is a maddeningly vague, used differently
in different reports, and often reliant on self-reporting (Toby will have to explain).
Because I can find it with Google, I will just accept previous
findings that pre-negotiated discounts account for about half of the spread
(this, admittedly, remains a crude exercise) between time recorded and time
billed. Thus:
In 2004, Lawyer Janes works 2,500
hours of which 2,000 are eligible to be billed. She bills
1875 hours. The firm
has already negotiated discounts that bring her total down to 1813 standard hours.
In addition, the firm writes down her time to 1753 hours actually billed to
clients.
In 2014, Lawyer Janes works 2,500
hours of which 2,000 are eligible to be billed. She bills 1875 hours. The firm
has already negotiated discounts that bring her total down to 1746 standard
hours. In addition, the firm writes down her time to 1625 hours actually billed
to clients.
That is not the end of the story. Clients have grown much
more aggressive in cutting legal invoices since the Great Recession. Or so the story
goes. The story is true. Comparing collected
realization pre- and post-Recession, clients increased the average amount
they cut from bills by 500%. That’s a big jump. But this framing obscures the
low baseline. In 2004, the average client was paying 99.1% of their billed invoices.
In 2014, the average client is still paying 95.7% of their billed invoices.
So:
In 2004, Lawyer Janes works 2,500
hours of which 2,000 are eligible to be billed. She bills 1875 hours. The firm
had already negotiated discounts that bring her total down to 1813 standard
hours. In addition, the firm writes down her time to 1753 hours actually billed
to clients. The firm collects 1738 hours.
In 2014, Lawyer Janes works 2,500
hours of which 2,000 are eligible to be billed. She bills 1875 hours. The firm
had already negotiated discounts that bring her total down to 1746 standard
hours. In addition, the firm writes down her time to 1625 hours actually billed
to clients. The firm collects 1555 hours.
I’ll go Excel on the 2014 numbers and add a $400/hr billable
rate with some additional crude
data on the cost of an associate. And we’ll spread the billed work evenly among
4 clients.
Now, let us imagine an alternative scenario where some
initiative (e.g., a Service
Delivery Review) leads both to (i) actual improved integration of
process and technology into the workflow producing modest BFC
(Better, Faster, Cheaper) results and (ii) a structured dialogue between
the client and law firm that convinces both sides there is less waste in the
delivery of legal services. In this hypothetical, the law firm lawyers, who are
closest to the improvements, are more convinced of the gains than their
clients. Because of the increased efficiency, the law firm can serve more
clients in fewer hours.
These are modest gains. Yet, the client is spending 15%
less, and the law firm is profiting 16% more, while the individual lawyer spends 50 less
hours in the office (an hour per week or a real vacation). The foregoing exercise
also drives home one of Toby’s favorite points: discounts and writedowns come
entirely at the expense of profits. What may only be a small percentage of raw revenue
can be a substantial percentage of total profit. The margins are where the
magic happens.
The above assumes that the law firm has picked up a new
client. It is nice to believe that improvements in quality paired with
reductions in cost would result in additional work and new clients. But even if
the total work is finite, the law firms can still increase profits without
charging their clients more. This, however, means fewer lawyers. While subsisting
with fewer lawyers may sound like a post-apocalyptic hellscape straight out of Mad Max (water, gas,
bullets, and lawyers all in scare supply), it is the world
in which we have lived for the last half-dozen years. Using the preceding
scenarios, compare how many lawyers are required to collect on 200,000 hours of
time and the attendant impact on profits:
The gains can still be shared.
The finite client base can spend appreciably less (i.e., save money) on legal
services while the law firm profits more:
The foregoing is an admittedly
crude explanation of why we are not necessarily playing a zero-sum game, even in an environment still dominated by the billable hour. Client
cost reductions need not come out of law firm profits. Increased law firm profits need not
come at the expense of clients. Structured
dialogue between the two can result in Better,
Faster, Cheaper benefiting both parties.
+++++++++++++++++++++++++++++
Casey Flaherty is a lawyer, consultant, writer, and speaker. He believes that there is a better way to deliver legal services. Better for the clients. Better for the legal professionals. Better for the bottom line. Casey is creator of the Legal Technology Assessment, an integrated Basic Technology Benchmarking and training platform. Follow Casey on LinkedIn and on Twitter @DCaseyF.
See also:
Hello
Strategic Sourcing: The Service Delivery Review
Deep Supplier Relationships
+++++++++++++++++++++++++++++
Casey Flaherty is a lawyer, consultant, writer, and speaker. He believes that there is a better way to deliver legal services. Better for the clients. Better for the legal professionals. Better for the bottom line. Casey is creator of the Legal Technology Assessment, an integrated Basic Technology Benchmarking and training platform. Follow Casey on LinkedIn and on Twitter @DCaseyF.
See also:
Hello
Strategic Sourcing: The Service Delivery Review
Deep Supplier Relationships
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