Measuring ROI in a law firm - even if it's possible, does anyone care?

Many organizations do a poor job of measuring the return generated by their various investments.  As a result, many initiatives fail to deliver impressive results even while the organizations as a whole are performing well.  Imagine a professional sports team that measures only wins and losses and ignores individual statistics such as points scored, penalties assessed or defensive lapses.  How do the coaches know who needs help?  How does the general manager know who to reward handsomely with a new contract?  How do the players know what skills to hone in the off-season?  Obviously a quality sports team will focus on a myriad of individual elements that, combined correctly, produce wins, and, combined poorly, tend to produce losses.  Measuring the return on investment (ROI) of our various expenditures should be viewed in the same light.  After all, if we don't measure how well or how poorly our many initiatives are doing, how can we improve our performance?  As the late legendary Coach John Wooden used to say, "Failure is not fatal, but failure to change may be." I conduct workshops on this topic regularly to different audiences, including law firm technologists, marketers, directors of finance, partners and in-house counsel.  While the ROI discussion may vary depending on the stakeholder, there are a few common themes.

Measuring ROI may not require heavy math, but it very likely involves stepping out of your comfort zone.  The classic example comes from the advertising world where the creative types at agencies devise compelling advertising that catches the eye but may not provoke buying behavior.  As one CEO scoffed when presented with a visually rich and quite expensive campaign idea, "I don't care about creating art, I care about moving units."  In a law firm, a technologist may feel upgrading to the latest voice-over-IP phone system is long overdue, but given the considerable expense and time needed for a firm-wide upgrade, it may require a financial analysis plotting the cost of maintaining an older phone system against the cost and benefits of the upgrade.  A law firm marketer asked to produce a client alert for a news item that every competitor discussed weeks ago may have to (gently!) push back by demonstrating that the optimal window to maximize "click though rates" has long since passed.  ROI discussions often involve the mastery of different dialects to make the case to others.

ROI is a relative measure, not an absolute measure.  In a basketball game if Joe pulls down 5 rebounds per game and Andre pulls down 6, who gets the coach's praise?  What if we learn that Joe is 6 feet tall and Andre is 7 feet tall?  If all other factors are neutral, we should expect Andre to significantly out-rebound his shorter peers.  In this light his performance is not very impressive.  If a law firm hosts a seminar that draws 15 people, is that good?  If we invest $2 million in three lateral partners and they deliver $2.5 million in new billings in year one, is that acceptable?  There is often not a specific hurdle past which everyone can objectively state that "We achieved a successful ROI."  It's only by comparing the ROI of an initiative to alternatives that we can ascertain whether the ROI is acceptable or not.  If the 15 attendees of our seminar represent top-level decision makers at target prospects, this might be a much better investment than a larger event with 90 client attendees representing staff lawyers with no input on outside counsel selection.  What if we delayed implementation of a key client program by two years in order to invest in our lateral recruitment, but even a conservative estimate of our cross-selling forecast suggests that we could have generated $5 million in new billings from existing clients?  Were the lateral recruits such a good investment after all?  Good organizations compare the relative ROI of various initiatives and the best ideas must earn the capital investment.

ROI can only be measured over time.  Law firms generally operate on a cash accounting basis, which involves counting revenues and expenses one year at a time and distributing excess (a.k.a. profits) to partners annually.  This forces a one-year-at-a-time mindset, whereas most businesses operate on an accrual basis, which makes it much easier to consider investments over a longer period.  Imagine the junior partner, looking to improve his networking at the country club, who takes a golf lesson.  At the end of the lesson if he hasn't dropped his handicap from 30 to 5, he typically doesn't quit in disgust because he recognizes that improvement takes time.  Yet this same partner may sit on a cost-cutting committee that votes to "eliminate the trust & estates practice group because last year it wasn't as profitable as other practices."  But simple analysis may indicate that 35% of our highest-revenue litigation cases come from companies whose CEOs are T&E clients.  And of these CEOs, 60% were T&E clients first, indicating that the T&E practice is an effective feeder for the litigation group.  Removing this feeder skyrockets the "cost of sales" for the litigation group, instantly eliminating any savings from disbanding the T&E group.  Your mileage may vary, of course, but only by studying trends over time can we make these connections.  By viewing ROI as a snapshot in time, we tend to make flawed decisions.

There's so much more to say on this topic and it's particularly needed now, as law firm leaders are scrutinizing expenses across the board and struggling to find the right formula to generate profits.  One universal challenge is that measuring ROI forces us to address sacred cows, those pet expenditures that we just know are good ideas but that no one can prove.  Telling a partner that he cannot continue to invest in a luxury sports box is a lot more challenging for the executive committee than laying off secretaries, after all. But the bottom line is that measuring ROI allows us to make informed choices about where and how to spend the firm's capital... even if some of the final decisions are dumb ones.

For legal technology readers, feel free to join me as I conduct a webinar with ILTA on August 7, 2013 at 12 PM ET on this topic.  For more information and to register, click here.  Others can click here to read a recap of a recent presentation I delivered to legal marketers in Chicago, thanks to Sania Merchant and the National Law Review.

Timothy B. Corcoran delivers keynote presentations and conducts workshops to help lawyers, in-house counsel and legal service providers profit in a time of great change.  To inquire about his services, click here or contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.

The Fallacy of Merger Math

In recent months, trade publications have been filled with breathless accounts of the exciting and unprecedented number and nature of law firm mergers, each of which creates a distinct advantage over moribund competitors and, naturally, the financial outlook of each merger is rosy. Two firms with overlapping global footprints have joined forces to take advantage of the obvious synergies; two firms with not a thing in common have joined forces to exploit the obvious opportunities; two firms with fundamentally different compensation systems have joined forces without conflict by embracing a novel corporate form that eliminates the mingling of profits; two firms whose respective client bases are perennial adversaries have joined forces because the combined industry expertise of the merged firm’s lawyers will outweigh any potential client conflicts; and so on.

There is always optimism at the inception of a law firm combination, since few partners or clients would embrace a combination positioned as "a last-ditch effort to improve partner compensation when all else has failed."

If we were to analyze law firm mergers by plotting client satisfaction on one axis and partner satisfaction on the other, the resulting scatter diagram would reflect a surprising few combinations that were deemed satisfactory after the fact to all parties. This isn’t limited to law firm combinations; indeed, many corporate mergers go awry for similar reasons including poor execution, loss of key talent, loss of key clients, boardroom battles, mismatched cultures and failure to achieve financial targets. So why do law firm leaders continue to pursue mergers at such a furious pace? It’s a basic law of finance — when you have eliminated all other drivers to achieve growth but one, leaders will pursue the remaining driver with vigor, and call it a strategy. Let’s break this down a little further.

Fundamentals of Law Firm Finance

The basic drivers of traditional law firm finance are captured in the acronym R.U.L.E.S., which stands for Realization, Utilization, Leverage, Expenses and Speed (of collections). Each plays an important role in transforming the raw material of lawyer capacity (time) into profits per partner.

Realization

can refer to the relationship between hours worked and hours billed, or between hours billed and hours paid. In both cases, there is a fall-off. Not all hours utilized can be billed, and as clients have made abundantly clear in recent years, not all hours billed will be paid in full.

Utilization

describes the relationship between available hours and hours worked. A high utilization rate means that few timekeepers are idle, hopefully occupied with billable activities.

Leverage

is the ratio between partners and associates or other timekeepers. With high leverage, more work can be pushed down to lower-cost timekeepers. With low leverage, partners tend to retain and bill more work, even work that might not otherwise justify partner rates.

Expenses

are a huge factor in any law firm, and the largest category by far is personnel, notably lawyer and staff compensation. But real estate, equipment, supplies, artwork, coffee, a subsidized cafeteria and any other non-reimbursable expenses are accounted for here. This category tends to receive the most scrutiny during a downturn, although poor utilization and realization further upstream generally have a far greater impact on profits.

Speed

of collections refers to the process of billing and collecting receivables from clients, a process in which lawyers as a profession are notoriously lax. There is lag between doing work and capturing time entries; lag between capturing time and preparing pre-bills for partner review; lag between pre-bill review and customer invoicing; and lag between invoicing and receiving payment. The combined effect on law firm profitability can be enormous, albeit hidden to most.

The ‘Waterfall Effect’

These five factors inter-operate in a sort of "waterfall effect," starting with the self-imposed revenue cap that law firms choose and, as each factor is deducted from this maximum starting point, ending with profits per partner, a simple calculation derived from dividing remaining profits by the number of partners. What’s that, you say? A self-imposed revenue cap? Few partners, even those tasked with managing their enterprises, seem to understand the nuances and limitations of the hourly billing-based financial structure. And this gap in knowledge has led to an increase in merger-as-strategy at the same time it has limited the growth of alternative fee arrangements, in the misguided impression that any such non-hourly structures are by nature dilutive to earnings.

Maximum Revenue

Law firm leaders can calculate the maximum revenue at any time by multiplying the number of timekeepers by their individual hourly rates and the number of available hours. Period. Clients tend to question invoices reflecting lawyers billing more than 16 hours in a day, let alone 24 hours in one day. Clients have for several years now pushed back strenuously on increases in billable hour rates. So what’s left to increase revenue? Increase the number of available hours to bill, which, said another way, is add more timekeepers. In past years when demand was high, adding another timekeeper was synonymous with adding 2,000 (or more!) billable hours. Now the emphasis is on laterals with portable books of business. In other words, adding potential billable hours isn’t enough, we need to add actual revenue-producing hours, and the easiest path to doing so is not to induce clients to hire us more frequently, but to transfer existing billable hours from another firm to our own.

A key challenge with this approach is that mergers tend to be a revenue solution to a problem that most law firm leaders, and partners, would characterize as an issue of declining profits. Imagine Firm A, which is loathe to merge and grow outside its comfort zone. Instead, it focuses on the other financial drivers in order to boost profits. Contrast this with Firm B, which combines a large-scale cross-border merger with numerous fill-in lateral acquisitions that increase headcount and revenue.

Firm A improves its profits per partner by 12% while maintaining the same practice and geographical footprint, culture and values. Firm B doubles in size, creating a cacophony of competing cultures, practices, tools, philosophies and, its leaders realize too late, almost no economies of scale beyond a few redundant staff roles. After all, each timekeeper and staff person requires compensation, a desk, a computer, coffee, et al. Indeed, all the combination has done is increase the size of both the numerator and denominator in the profits-per-partner calculation. What remains are similar, perhaps even lower, profits per partner despite the larger revenue streams because of the larger expenses and higher number of partners sharing in the proceeds.

Improving profits without resorting to the faux ami of a merger can be accomplished by tackling each of the financial drivers. Here are three tried and true techniques that disciplined law firms employ:

1. Identify and isolate sources of realization "leakage."

Most firms allow partners to write down invoices before sending to clients, often because a matter "feels" overbilled. Firms employing legal project management have a clearer understanding of the value of certain tasks and prohibit write-downs when tasks fall within budget guidelines. Similarly, many lawyers fail to capture all hours worked, under the notion of protecting clients from inefficiency, and so the hours captured and eventually billed don’t reflect the actual time spent. However, it’s important to capture all hours and then apply a disciplined review process to eliminate inefficiencies. If an associate spent 10 hours on a task budgeted for 5 hours, it’s as important to capture the 10 hours as it is to avoid overbilling the client. Through proper accounting, the firm can better identify training needs and tweak inaccurate budget assumptions.

2. Link collections to lawyer compensation.

Many firms apply severe punishments to associates who fail to promptly capture time entries, but far fewer have programs in place to police partners’ collection efforts, though they are really two sides of the same coin. Corporations short on cash sell their accounts receivables at a discount to "factoring" companies that then aggressively pursue collections. What makes this practice profitable is the immutable law that with the passage of time the expected percentage of receivables collected declines steeply, so factoring companies that pursue speedy collections can be hugely successful. By contrast, law firms that wait until the end of a quarter or end of a fiscal year to collect outstanding invoices write down a substantial portion of fees in order to accelerate payment.

Clients (or their AP departments) know this and will happily sit on an invoice until it "earns" a 25% or even higher discount. In some firms, the dilutive impact of delayed collections is substantially higher than the higher-profile expenses that cost-reduction committees tend to target, such as staff ratios, travel expenses, etc. Some firms won’t allow draws for partners with receivables over a certain age. Others limit partner discretion in negotiating discounts, or factor steeper discounts into compensation formulas.

3. Monitor leverage for hoarding.

This is sensitive, if only because "hoarding" hours is as much a question of judgment as of analysis. But there are certain tasks that are undoubtedly not economic to be conducted by partners, when a lower-cost associate is available to do so, and vice versa. The lower realization on these tasks is a clear signal that the clients have corrected, after the fact, a misplaced assignment. Again, the firms employing legal project management have a more refined sense of the market value of specific tasks and can more closely monitor assignments. Low leverage tends to lead to higher profits in the short run, because clients are ostensibly paying higher rates. However, analysis tends to reflect the longer-term dilutive impact from price-sensitive clients who fail to return, a result that increases the cost of sales for the next engagement.

The rush to law firm mergers strikes many lawyers and journalists as a tactic that needs explaining in strategic terms, but, in fact, in most cases it’s simply the most expedient way to boost top line revenues, which law firm leaders hope will translate to increased profits. But law firm leaders relying on insightful analysis of their own microeconomics will better understand that magnifying inefficiencies and lack of fiscal discipline won’t boost profits as quickly and effectively as instituting more rigor in the law firm’s business practices.

Partners aren’t typically trained in finance, yet we expect them to make battlefield decisions every day that impact profits. A little guidance and a few carrots and sticks applied in the appropriate areas can deliver both profits and peace of mind to lawyers who prefer to avoid growth for the sake of growth.

A version of this article was originally published in my Leadership in the Law column for Marketing the Law Firm, an ALM publication.

Timothy B. Corcoran delivers keynote presentations and conducts workshops to help lawyers, in-house counsel and legal service providers profit in a time of great change.  To inquire about his services, click here or contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.

The Cost of Getting it Wrong vs. the Cost of Getting it Right

Famed UCLA basketball coach John Wooden is credited with saying, "If you don't have time to do it right, when will you have time to do it over?"  Quite a lot lately I've been hearing a related theme from lawyers struggling with adapting to the new normal:  "We can't afford to get it wrong, but we have no budget to bring in help to get it right."  They refer, of course, to the age-old tendency to suffer with the devil you know rather than take the costly path -- in financial, time or distraction terms -- of trying something new.  How do we know when it's time to devote energy and resources to adapting to the changing legal marketplace?  What indicators should we watch for to indicate the tipping point is upon us?  The stark reality is that when it's abundantly obvious to everyone else, it's far too late to gain a competitive edge.  It may also be too late to survive. I've written previously about the cost of doing nothing.  Simply put, any organization should establish an explicit trajectory for its financial performance.  We made $x last year, next year we will make $y and the year following we will make $z.  This isn't voodoo, it's a calculation based on key performance indicators, both internal and external, that results in a forecast, with ranges based on our confidence in the underlying data.  Most businesses operate with some combination of recurring revenue streams and transactional revenue streams.  In a law firm, repeatable revenue may take the form of retainer arrangements, with established financial commitments for a fixed period of time.  But long-term engagements such as a complex litigation matter that spans multiple years and provides recurring billable tasks can be forecasted with some confidence.  At the other end of the spectrum is revenue associated with new engagements or new clients.  We may know our historic success rate at cross-selling existing clients, and we may know our historic success rate at winning beauty contests for new work, but there are many unknowns so our confidence to forecast this revenue isn't nearly as high.  The point is, one way or another healthy organizations have a clear sense of their financial fortunes and the factors which will impact, positively or negatively, that trajectory.  Without it, how can you possibly know if you're on track or off track?  Like the family that piles into the SUV for a an old-fashioned driving vacation, if you leave without a map and without a destination in mind, how will you know if you're lost or behind schedule?

Based on my long experience providing strategic counsel to law firm practice groups, many readers are shifting uncomfortably as they realize they lack a map, though luckily they have a clear destination.  Allow me to drop a wet blanket by suggesting that meeting or exceeding last year's PPeP is not a destination.  It's an outcome. And it's an outcome we can influence through a variety of financial shenanigans that mask significant under-performance.  It's like stating that our vacation destination at day's end is a nice hotel in a nice location, and strategically manipulating our speed, direction and restroom breaks to ensure that at day's end we have arrived at a location meeting our vague objectives.

Time to be more direct.  The world has changed.  And no, law firm partners, despite the perverse incentives of hourly billing, despite the $1,000 an hour rates charged by some "rock stars" and despite the supposed culture of bill churning by some, you didn't cause this seismic shift.  The balance of power would have shifted eventually.   It's an economic reality that all goods and services are on an inevitable and inexorable march toward commoditization.  Buyers always, and I mean always, seek lower costs for the goods and services they need, and failing that they will seek substitutes.  It's an economic certainty that circumstances change.  It's also, sadly, a certainty that some players refuse to acknowledge that change is possible, let alone that change is upon us.  And this is what causes the reluctance to adapt.  The legal marketplace adds a few multipliers to this impact:  lawyers are generally risk-averse, so working harder at what we know is far easier to absorb than embarking upon a risky new approach to practicing law; and the constant reliance on precedent makes it more difficult to recognize alternative courses of action because we've never seen any.

Time for the upside.  Every industry on the planet, including other professional services segments, have found ways to survive, and often thrive, in the face of a changing climate.  There are lessons to be learned from others.  In short, law firms can rely on deep subject matter expertise to create competitive differentiation; lawyers can charge profitable fees based on the value of the outcomes rather than the cost of production (a.k.a. hours); lawyers can deliver services in the way they know best without clients meddling in the process (e.g., no more restrictions on young associates assisting in matters); lawyers can significantly improve client loyalty through service and work product quality, and not merely by offering discounts.  Don't know how?  Get in line.  It's not that challenging, but you're not expected to know how instinctively, or to read a blog post or two and grasp the nuances.  But you may have to spend some time, and spend a few dollars (or Euros, or Pounds Sterling, for my global clients) to get the help you need.

In a recent conversation, a partner lamented that his practice group's realization rate was 6 points below its all-time high, and 3 points below the firm's average. The net effect was a loss of between $8M and $12M in top line revenue in recent years, despite the same lawyer headcount and the same mix of rainmakers and service partners.  However, the practice group chair was unable to spend any money on a consultant to help address the problem because the management committee had forbidden any extraneous expenditures in order to preserve profits... even investments that would restore the realization rate!  Predictably, the several consultants who were invited to participate in the practice group retreat on a pro bono basis were forced to decline the kind invitation.  A variation on this theme is the request to provide an outline of topics the lawyers can discuss amongst themselves at a retreat, a request I receive several times per month.  My impertinent response to such requests is to ask how often the firm's lawyers agree to such an arrangement with clients:  "Yes, Mr. CEO, we are quite familiar with high-stakes securities fraud investigations and we're sorry to hear that you and your management team are under indictment.  However, we'll send over a couple of our client alerts with some insights that might prove helpful, and maybe we can spend an hour over lunch giving you some tips so you can handle most of the lawyering yourself.  After all, you're smart and this isn't all that complicated." 

Some of you may be chuckling at how preposterous this sounds.  I assure you, it happens all the time.  More challenging is that clients know that some law firms are actively resisting change, and they're shaking their heads in despair and disbelief.  Despite what you may have heard, nearly all in-house counsel and corporate executives I work with are quite happy for their outside counsel to be happy, thriving, profitable businesses.  In fact, many of them need just as much help adapting to the new normal and they're desperate for trusted advisers to provide guidance along the way.

If you don't have a clear sense of your firm's financial future and the factors influencing that future, how will you know if you're on track?  If you don't have a plan to adapt, how do you expect to compete with the many firms who are devoting significant time and energy to delight their clients... and yours?  If you don't have the answers but refuse to spend time, energy or money to find the answers, what are you saving for?  The rainy day is upon us.  Now, more than ever before, the cost of getting it wrong is far higher than the cost of getting it right.

Timothy B. Corcoran delivers keynote presentations and conducts workshops to help lawyers, in-house counsel and legal service providers profit in a time of great change.  To inquire about his services, click here or contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com. – See more at: http://www.corcoranlawbizblog.com.

In-House Counsel Analytics - What do they Measure and Why?

We're aware that some in-house counsel rely (willingly or unwillingly) on procurement officers to make or influence decisions about the selection of outside counsel.  We're also aware that some in-house counsel are as mystified about the changing marketplace as their outside counsel, so in lieu of making wise choices based on predictability, value and subject matter expertise they hire the largest brand-name firm willing to accept substantial discounts.  But while these extremes make for good copy, the reality is there are many excellent in-house legal departments and business managers engaged in informed buying. I have the pleasure to moderate a panel discussion of several of these thought leaders at an upcoming Ark conference event aptly titled "Business Intelligence and Analytics in the Legal Profession."  The conference will be held at the AMA Executive Conference Centre in New York City on Thursday, April 18, 2013.  The specific one-hour session for our topic, titled "How Corporate Legal Departments are Using Analytics to Measure the Value of the Products and Services They Buy," will commence at 1 PM ET.  I will be joined by James Partridge, Chief Counsel of Ally Financial; Bob Ingato, Executive Vice President, General Counsel & Secretary at CIT Group Inc.; and Anne Sonnen, Deputy General Counsel & Chief Administrative Officer, Legal, Corporate & Compliance Group at BMO Financial Group.  We will present and discuss several specific examples of how in-house counsel use analytics to measure and select outside counsel.

From the session description:

As legal departments learn to capitalize on data-driven business intelligence, the opportunity to save money on outside legal spend increases dramatically. It’s no secret, they are using objective data in order to negotiate rates, assess risk, measure skill level, efficiency, flexibility, outcomes—embracing (and using) big data to measure the value of the products and services they buy. Tactical measures have been taken to integrate matter management, e-billing, and reporting systems to access detailed performance information on outside counsel—leveraging “tools of empowerment” to take advantage of an increasingly competitive market for legal services. To compound the challenge for law firms, legal departments have also tapped procurement teams in some cases to assist in-house lawyers with defining the scope of projects, selecting the right suppliers, negotiating cost, and evaluating performance. The client has become quite sophisticated and squarely focused on harnessing the power of their data.

Please join us if you can.  Register here.  Many thanks to sponsors TyMetrix Legal Analytics, IntApp, kiiac, Sky Analytics, Recommind, Thomson Reuters and DF Tech.

Ten Things I'd Do Differently as a Law Firm CEO

There are many good reasons for law firms to adopt business practices from other industry segments.  As has been made abundantly clear, the laws of economics apply equally to law firms as to other businesses.  Faced with declining demand and an oversupply of providers, law firms are experiencing unprecedented downward price pressure and clients are aggressively seeking substitutes.  Law firm leaders who have reduced overhead to maintain profit margins have learned that this approach falters when adverse economic conditions persist.  Many law firm leaders now struggle with what to do next to survive.

 Alternative fee arrangements are still considered necessary evils, rarely embraced but reluctantly accepted upon client demands.  Growing top line revenue through lateral recruiting remains a risky proposition because there is no guarantee a lawyer's clients are as portable as the lawyer.  Too, a lesson most of us learned as teens applies to lateral love affairs:  the pretty girl too popular to commit to one guy is, statistically speaking, unlikely to stay with you for very long either.

Lawyers, not unlike their forbears in other industries facing massive upheaval, tend to do more of what they know rather than proactively seek change, and as a result simple techniques to improve client satisfaction and retention -- efforts that in other industries are generally called "sales" -- are discarded as unseemly or unnecessary for educated professionals to take on. Law firms are not mere factories, churning out countless replicas of a popular product.  Nor are they think tanks focused on producing thought leadership for academics to ponder.  But law firms are somewhere on that continuum, subject to market forces, facing changing client needs, price pressure from entrenched competitors and constant innovation from new entrants.

Few law firm leaders have sufficient experience to navigate this maze.  But there is hope.  Unlike the leaders of, say, print encyclopedias, whose business model was disrupted by the unprecedented speed and force of the Internet, law firm leaders have plenty of corollary lessons to draw on to chart a course from fear to prosperity.  To be clear, I don't believe a law firm should be run primarily as a business.  I've been a CEO of a publicly-traded company and I climbed the corporate ladder in divisions of private and public multi-national corporations and there is a common thread:  the business school maxim that earning a profit is the primary goal is interpreted primarily as a toxic quest for short-term profits above all else, including the long-term health of the business, typically because executive incentive plans are pegged to short-term profit measures.  

A law firm can generate a healthy profit, which is not a shameful goal, while simultaneously improving client satisfaction and work product quality, and building a sustainable culture for the long haul.  But how?

Here are ten ideas drawn from my own corporate experience that law firm leaders can embrace to improve the fortunes of their firms.

Change the governance model.  Let's first dispense with the arcane notion that a partnership is an effective or efficient management structure.  Notwithstanding any potential tax or liability benefits of the business form, it is ridiculous to believe that all partners should have an equal say in the operations of the business, particularly after an organization reaches a certain size.  Nor is a dictatorship acceptable, even when led by a benevolent leader, because such organizations lack sustainable business processes and falter when the leader inevitably departs. Identify a core leadership team at the firm and practice group level and give them the authority to lead.  Stop allowing the blowhard down the hall to substitute his childish behavior for sound business practices.  Stop crowd-sourcing important decisions.  Speed up the decision process by eliminating needless voices.  Let the lawyers practice law and the leaders lead.

Productize the offerings. Every law firm has products, we just choose the collective delusion that legal services are unique and non-repeatable actions.  Sure, some matters require unique tasks, but every legal matter includes tasks that have been done before, usually many times before.  Figure out which products -- or service offerings if you will -- the firm produces profitably and effectively and commit these to a repeatable series of actions.  Repeatability leads to improved profitability and improved quality by reducing variability.  And yes, there will still be plenty of unique matters that only highly-trained and creative minds can tackle.  If you can find a matter or task that's so unique that it's never been done before, bill for it by the hour.  Otherwise...

Strategic Pricing

Embrace strategic pricing.  Here's a revelation: clients will care less about the mechanics of your invoice, whether you bill by the hour, by the word or offer flat fees based on astrology charts, so long as the value delivered is commensurate with the price paid.  The practice of issuing invoices with “services rendered” didn’t die because clients grew smarter; it died because law firms grew stupider and adopted billing practices with perverse incentives.  The idea that a law firm might not need a fax machine if not for client demand, and therefore we charged $1 per page sent or received until the fax machine earned in excess of 100,000 times its cost was idiotic.  Thankfully, we learned the lesson and today don’t charge per email.  Or view legal research as a profit center… wait, what?   Learn what it costs the firm to produce and deliver its legal services.  Accept that there’s no “perfect” way to allocate overhead.  Determine the differential value your firm offers against the competition, if any.  Determine the client’s perceived value, if any.  Establish a price that covers your costs, delivers value and generates a profit.  If you can’t figure this out, hire a new finance team. If you can’t find a profitable price, focus on lowering your cost of delivery, not just your overhead. Or accept that the client may not place the same value on the offering that you do and find something else to offer that has greater value.

Reduce inefficiencies.  Law firms carry extraordinarily wasteful overhead.  If you want fine art in your Italian granite-tiled restroom, go for it.  If you want to sponsor every 5k run or splash your logo on every cocktail napkin offered and pretend it's a wise marketing investment, go for it.  But say no to the partner who demands his own graphic designer and high-capacity printing operation on the off chance he might leave a key proposal to the last second and need to run an after-hours-all-hands-on-deck fire drill to generate a boilerplate RFP response.  Stop running the same conflict checks on the same conflicted prospects, or their subsidiaries, by investing in a data cleanup operation, adding in corporate trees and linking your CRM system to your billing system and the conflicts database.  Improve your RFP win rate by requiring the lawyers adhere to best practices, instead of repeating the same mistakes.  Look at every single process in the firm's back office and find ways to eliminate redundant and wasteful steps.  Don't know how? Hire a firm that specializes in business process improvement (BPI) to do it for you, or to train you to do it.  Or hire a business process outsourcing firm (BPO) and let someone else manage your accounts payable function. On second thought, cease the silly sponsorships unless you secure a substantive speaking role and categorize the 5k run as a charitable donation or brand building exercise, not a business development activity.

Reduce the cost of goods sold.  The way to productize your offerings is to embrace legal project management and process improvement.  The techniques used to identify and reduce inefficiencies in the back office can be effectively applied to a legal practice.  When faced with flat or declining revenues, the sustainable way to maintain or grow profits and to defend against predatory competitors is to reduce costs at a faster rate.  If you've advised 100 clients on over 1,000 class action defense lawsuits, what are the specific factors correlated with defeating class certification?  If you've filed 500 appeals with the state's regulatory authority, what are the specific steps correlated with success?  Whether in litigation or transactions, there are repeatable steps on the critical path to success and excess steps that may be deemed helpful or necessary by risk-averse lawyers, but are not statistically relevant to risk-taking clients.  If all tasks in all matters are of high value to the client, then your realization rates would approach 100%.  If your realization rate is lower than 95% (or closer to the new normal of 85%) then by definition you are billing for steps that are either unnecessary or that the client deems unnecessary.  Learn how to talk to clients about budgets on every single matter -- how can you possibly employ strategic pricing otherwise?  Undergo a rigorous examination of your processes and develop project plans that reflect successful and profitable approaches.

Invest in knowledge management.  Back in the day, knowledge management (KM) meant writing summaries of notable briefs and memoranda and indexing and filing them away in a database for later retrieval in order to save time, which combined a task that no one liked with a result that no one wanted.  KM should be synonymous with a learning curve, or the economic principle that what we've done multiple times we can do more efficiently.  If your pricing analysis tells you the maximum market appetite for service X is $5,000,  then find ways to produce and deliver service X for far less than $5,000, relying on past experience to inform the process.  Poor leaders believe KM is a technology problem and will invest millions in tools that the lawyers happily ignore, but wise leaders recognize this as primarily a cultural problem.  Also, if you're lamenting the decline of associate training fully funded by clients, you'll be pleased to learn that a KM culture both accelerates and improves associate education.

Don't guess.  Forecast.  In countless practice group retreats I hear the same goal: "We'll grow the practice by 20% next year."  Yet inevitably there is little rigor applied to the target, let alone how to achieve it.  Businesses thrive on certainty and generally value repeatable revenue streams over one-time transactions, and corporate budgeting is a never-ending exercise to identify revenues and expenses.  No business can operate without a clear sense of its working capital, cash flow and resource needs.  Yet most law firms employ lagging indicators such as profits per partner to determine fiscal health.  That's like driving a car until the gas tank is empty to determine the gas tank's capacity, which is then retroactively applied to the prior day's agenda to see if we should have refilled the tank before embarking upon a series of errands or perhaps scheduled fewer errands.  Create and maintain a sales pipeline, applying simple methods to target the right prospects and predict not only future engagements but the resources needed, the likely cash flow and potential profits. Implement zero-based expense budgets and hold everyone accountable.  Measure the ROI of marketing investments, and not just the ad campaign but identify the partners whose entire "marketing" spend consists of taking the same clients or law school pals to sporting events with no discernible incremental business resulting from the expense.  Not sure how?  Select a client, any client, and ask them to walk you through their revenue and expense forecasting process.  But buckle in first, as it will be quite a jolt.

Measure client satisfaction constantly. There are many ways to do this.  Hire a consultant; send your managing partner on the road; ask your CMO to conduct interviews; conduct an annual satisfaction survey; conduct an end-of-matter survey after every matter.  Whatever you do and however you do it, study it, sustain it, and act on it.  Most law firms are "too busy" to systematically gather client feedback, naively believing good legal work speaks for itself.  Many who claim to care sit on findings that are too challenging to address, e.g., toxic rainmakers, institutional overbilling, etc.  Even those who measure client satisfaction effectively well tend to do so at too-infrequent intervals.  Take a cue from Disney, Ritz Carlton, even the local hairdresser -- know why clients hire you, know why they don't hire you, know why (and when!) they fire you, know what you do well and what you can improve.  Know these explicitly and implement programs specifically designed to improve performance.

Compensate for retention and profit.  Partner compensation is often described as the third-rail of law firm management.  We can talk all day long about changing the law firm model and improving client satisfaction, but nothing changes unless the partners are compensated for doing so.  Sadly, lawyers often must choose between personal wealth and client satisfaction.  Hogwash.  Partners will obviously act in their own self-interest when there is no alterntative. So let's give them some alternatives that tie improved compensation to improved client satisfaction.  Long-term client value always trumps short-term transactional profit. Huh? Said differently, satisfied clients will generate higher profits over a longer period by lowering the cost of sales (retaining existing clients is always less costly than acquiring new clients), because of a reduced learning curve (see above), because of steady utilization and because many-to-many relationships between firms and clients magnify these benefits.  Contrast this with over-billing a client on a single matter, generating short-term billable hours and high profit, but resulting in client defection and constant utilization peaks and valleys.  Huzzah, the partner hit her billable hours target... but was doing so good for the law firm?  Businesses deal with these compensation conundrums every day.  Do we reward the high-volume hunter salespeople who bring in the most new clients but also the most unhappy clients (because of a poor fit) and who require the highest commissions?  Or do we reward the farmers who nurture key clients over time but generate less incremental revenue?  Do we compensate more for selling high-margin products, often because there is little competition, or do we compensate more for selling low-margin high-potential products, because gaining market share is more critical?  Do we compensate for profits, even though salespeople have little influence on the cost of goods sold?  It may seem complex but relatively simple calculations can help us identify the optimal approach.  At present law firms tend to maximize one factor, originated hours.  By tweaking the formula, leaders can better recognize and reward lawyers who contribute at different points in the process.

Require leadership and management training.  There are terms and concepts above that may be unfamiliar to law firm leaders.  Indeed, many successful business leaders have strengths in some areas but not in others.  It doesn't require an MBA to lead a successful business, but it helps to be consciously competent.  In other words, know why you're successful and how to repeat it.  Many law firms and their leaders have been unconsciously competent for a long time -- successful, to be sure, but no one is quite sure why.  We believed it was because we were good lawyers offering necessary services at a fair, albeit supremely profitable, price.  But as it turns out, years of unlimited demand for legal services may have been more of a factor than our own efforts -- and when that demand disappeared, our best efforts failed.  I sat in a law firm executive committee meeting recently where the partners struggled to understand the nuances of corporate finance so they could better manage the inherent risk of alternative fees.  They were stunned to learn that others could understand, even explain, their law firm business model quite clearly.  They were more stunned to learn that by treating non-hourly fees as a risk to be minimized, they had eschewed significant profits on several sizable matters.  Your own mileage may vary.  But you don't have to do it on your own.  There are educated people who are willing to teach law firm leaders these techniques, and there are many who are eager to join firms to demonstrate from the inside. Stop treating the law firm leadership track as a hobby.  Stop hiring administrators whose primary asset is not rocking the boat.  Cast aside, or at least gently nudge, the unqualified or uninterested from the corner office and replace them with committed leaders -- at the firm-wide and practice group level -- who have or will learn new skills and who will employ experts to advise them along the way.

Contrary to what you may have heard, the law firm model isn't dead.  Nor is law firm growth.  But law firms and law firm leaders stubbornly adhering to outdated models are gasping for their last breath.  The modern law firm can thrive, but not if we pretend it's still 2007.  Or 1995.  Or 1975.  The future is now.  You can't do nothing.  Are you ready to lead?

Timothy B. Corcoran is principal of Corcoran Consulting Group, with offices in New York, Charlottesville, and Sydney, and a global client base. He’s a Trustee and Fellow of the College of Law Practice Management, an American Lawyer Fellow, and a member of the Hall of Fame and past president of the Legal Marketing Association. A former CEO, Tim guides law firm and law department leaders through the profitable disruption of outdated business models. A sought-after speaker and writer, he also authors Corcoran’s Business of Law blog. Tim can be reached at Tim@BringInTim.com and +1.609.557.7311.