Corcoran's Greatest Hits, Volume 1

A long time ago when I was a radio and club DJ, I owned a lot of Greatest Hits albums and CDs so I could fulfill listener requests for popular songs. Some of these collections were hastily compiled by an artist's record company in order to fulfill a contractual obligation. But sometimes the collections were compiled with care and enthusiasm and included never-before-released songs from the vault, liner notes from the artist and other material to appeal to the true fan. With that in mind, I present the top five posts from this blog over the past year along with additional insights of my own and public and private reader reactions. Legal Project Management Q&A - For quite some time I've been writing about the need for law firms to embrace business concepts to improve operations.  Last year I adapted some of the concepts and techniques I learned in my corporate life and developed a curriculum for educating lawyers about project management.  Turns out there's a whole discipline growing on this topic, now dubbed Legal Project Management, and there are some quality trainers offering insights.  But there are also a number of folks hopping on the bandwagon.  In my view, one can obtain certification in a discipline, one can even teach the concepts, but one doesn't really know the topic until one applies these techniques in a commercial enterprise to make money.  Ask your project management consultant for real commercial examples of these concepts in action.

In addition to imbuing my approach with real-life experience, I also focus on the big picture and keep away, at least initially, from the statistical and quantitative basis that others believe is necessary to commence a project management process.  One Six Sigma Black Belt criticized my approach, exclaiming in disbelief that no program that addresses project management and process improvement could possibly succeed without a heavy dose of analysis and math.  I disagree.  Well, at least I disagree insofar as I'm confident few law firm partners will sign up for a course that's heavy on math and analysis.  But many will sign up for a workshop such as mine (and hundreds have!) where we cover the basics, whet participants' appetites for how project management skills can be applied to a law practice and generate sufficient interest to go to the next level where -- surprise! -- we get deeper into the underlying math and analysis needed to truly benchmark and track performance.  On a few occasions my colleagues and I have replaced a consultancy that specializes in engineering firms, or that applies a standard Six Sigma methodology to any business process with little customization.  I've learned that the practice of law, while not as unique as some lawyers would have us believe, does require customization and care to ensure that the concepts are properly applied.

If you lead a law firm and you're convinced that with an improving economy everything will go back to the way it was, and this is a good thing because it's right that lawyers should demonstrate value primarily by billing time, and it's right that lawyers should treat each new engagement as if it's the first of its kind because this is the only way to ensure the client receives the most thorough work product, then you don't need project management.  But write down these beliefs and note how firmly you believe in them, and then let's talk again in a couple years.  I'm certain your views will have changed, because once everyone else has adapted you will too.

A Note on Reducing Law Firm Compensation - This post generated a number of emotional responses.  It's also one of the most commonly searched topics on the blog, suggesting that it's a hot topic elsewhere.  When I wrote this post, quite a few large law firms were conducting public and stealth layoffs of staff, associates and even non-equity partners, and just as many were reducing compensation of these same groups.  Popular legal gossip blog Above the Law teamed with Law Shucks to track these layoffs, and according to their research as of today's writing there have been nearly 15,000 job losses in the legal sector.  This is an unprecedented statistic in a business segment that is typically known to perform well in good times and bad.

It's challenging to write academically on such an emotional topic while the lives of real people are so significantly impacted, but the original intent of this post was to provide some context for why the same market dynamics of supply and demand that influence other industries are certainly factors in the legal profession.  In short, when demand for a product or service declines, there tends to be an oversupply of the product or service, and this drives prices down.  When product or service producers experience lower revenues from lower prices, they look to reduce costs in order to maintain profitability.  It should have come as no surprise that associates and staff, the lowest members on the Biglaw totem pole, would experience the greatest pain when demand dropped and law firms cut costs.  But as I said then, when demand returns, hiring and compensation will increase.  And it is, and they are.

That's the thing about markets -- they tend to operate efficiently when you look at the big picture.  Unfortunately, real people and their livelihoods were sorely impacted, often through no action or inaction of their own.  Which is why this blog is intended to help business leaders make smarter choices, to run more efficient and effective businesses, so we can enjoy profitability while also delighting customers and attracting quality employees.

Law Firm Leaders: Save Money Now By Cutting Marketing - The title is ironic.  I would not counsel any business leader, especially a law firm leader, to limit the organization's visibility to its target audience, particularly when there's a good possibility that buyers are actively seeking new providers.  But I figured the title would catch the eye of leaders looking to do just that, because after all, isn't marketing a nice-to-have, not a must-have?

There were a few different points in this post.  First, every marketer will claim that one should spend more on Marketing during a downturn, but like a politician who's developed a nice ten-word sound bite but doesn't know the next ten words, i.e., the substance behind the rhetoric, many marketers repeat this mantra without offering salient details such as when, where and how to increase marketing in a downturn.  As marketers, we can't just try to protect our jobs without regard for the consequences, like auto workers refusing to negotiate labor rates even if it means the plant must close.  We should be thoughtful and prudent in our spending during a downturn, because while surely there are opportunities to be had, there are also a lot of people willing to take our money in return for a lot of empty promises because they too are suffering.

I also wanted to take on the lazy business leader who applies cuts across the board without regard to growth potential or profit contribution.  In tough times we all need to tighten our belts.  But if Mom loses her job, do we sell the car to save money, and now Dad can't get to work and he loses his job too?  A corny analogy, but in effect many business leaders our of some misguided sense of fairness try to spread the pain evenly.  Hogwash.  The current and potential growth engines might need relatively greater investment in tough times, and the slow growth or cash cows might deserve nothing, so long as we're willing to acknowledge that this will effectively kill them.

The other point was to distinguish between marketing as defined by many lawyers and marketing as defined by experts.  Just the other day I was reminded that this is a long-term battle.  A Biglaw partner asked me if I could help the firm get its RFP response approach "right."  I suggested we might have very different views for what is "right."  An elegantly bound booklet full of deal lists, league tables and lawyer bios, accompanied by boilerplate responses to an RFP's standard questions is very often a waste of everyone's time.  An RFP that addresses the client's business challenges and offers potential solutions along with a project plan and a budget is very often a winner, even if it's a tenth of the size and weight of the alternative!  But lawyers want the former (and so do many marketers).  If a law firm leader wants to cut marketing costs, my suggestion is that in addition to reviewing the marketing budgets and org chart, he should look in the mirror and identify the silly things lawyers do under the guise of Marketing.  And the marketers can help.  After all, we're in this together.

Addressing the Martindale-Hubbell Question - I receive calls nearly every week from law firms big and small asking if I'll help them negotiate their Martindale-Hubbell contract.  Many, but perhaps not all, readers of this blog may know that for a period of time I led the large law, international and corporate business for Martindale-Hubbell.  Obviously I know where the bodies are buried and how to negotiate against my old team (actually, now that LexisNexis manages the business, nearly everyone I knew is gone).  But I have no interest in doing so.  Despite the unethical, short-sighted, juvenile and profoundly incompentent manner in which I was treated when I left the organization, I spent too many years building its brand to take any joy in knocking it down.  Besides, the leaders of the parent company need no help from me or other alumni to harm the franchise.

Of more interest is that when it comes to directories, everyone continually asks the wrong questions!  There is no list of "good" directories and "bad" directories.  Even comparing Martindale to Ted's List of Blond-Haired Left-Handed Lawyers of Southern North Dakota is a misnomer, because one is a multimedia network connecting buyers and sellers, and the other is a vanity listing which lawyers buy to feel good.  But I'll leave it to the Martindale marketers to tell their story.  Despite the title, the post is about how one measures the impact of any legal directory to influence your prospect's buying decision.  After all, isn't that what it's about? 

The calculus is fairly simple: define your target market, identify the ways to reach this market, identify the manner in which they make buying decisions, and then be in those places and do those things.  If the cost to do this effectively is too high, seek out proxies.  If a legal directory has access to the target market and influences a buying decision --and it can prove it -- then perhaps an investment of a dollar there gets you ten dollars of return.  If not, move on to the next tactic.

Marketers are just as bad as lawyers when it comes to judging legal directories, just on the opposing side of the argument.  Typical legal marketer discussion of directories:  "Does anyone use the Tall Lawyers of Montana directory?  One of my delusional lawyers thinks it's an important investment.  I've tried to tell him that all directories are a waste, and he should spend time developing a Facebook fan page instead because I think it's a better investment."  In Biglaw land, few buyers will identify, evaluate or select a law firm based solely on its representation in a legal directory (or network), but sometimes it can be a differentiator when all other factors look the same.  It's important to know when this is the case and when you're throwing your money away.

Web 2.0 / Social Media Update - I've long been active in social media, before we even used those terms.  I had the good fortune of joining Steve Brill's team in the early '90s when Counsel Connect was launched as a sort of AOL for lawyers, which was several years after I joined AOL and participated in its chat groups, which was a year or two after I joined Compuserve.  For many of you, these names mean nothing.  That's okay.  Suffice it to say, I've long been a fan of learning from experts wherever they hang out, and occasionally I'll have something to say that I think others might find useful.  The venues change, but the concept still applies.  In this post I shared the many legal and non-legal blogs I read daily, and the legal and non-legal social networks where I spend time, as part of my effort to stay connected and stay informed about the changes in my chosen field.

This was an enormously popular post a year ago, and while untold millions of users have joined the social networking bandwagon since then, I suspect many are still looking for a roadmap of what's good and what's a waste of time, from the point of view of someone who's been there.  Rather than point people to the year-old summary, I'm updating the post and I'll publish that shortly (Update here).  My daily reading list has expanded yet the frequency of my commenting (on this blog and elsewhere) has declined somewhat as I try to strike the right balance between studying my field and working in my field.  I know that I'm not alone in seeking this balance.

So there you have it.  The top 5 posts from this blog in the past year.  I hope you enjoyed them the first time, perhaps enjoyed reading them a second time, and I hope these liner notes were helpful additions.  Feedback is always welcome.

Legal Project Management Q&A

In recent months I've trained hundreds of Biglaw partners on project management principles.  In some of the earlier sessions, a handful of partners would sheepishly acknowledge that they had no idea project management was a term of art, that it referred to a disciplined approach to managing a series of interrelated complex tasks.  Few now will admit to this blind spot, though among those who've heard the term most still don't know what it means for a law practice.  To help demystify the concepts, my colleague Pam Woldow (now with Edge International) and I presented a webinar recently on Legal Project Management.  (Click here to order the CD.)  Of the many webinars I've presented, this session had one of the most active audiences.  The questions were flying in from almost the moment we were underway.  We addressed many of the points during the session, but I'll expand a bit more here.  The commentary below is primarily addressed to those who've viewed the webinar or who already have a basic grasp of the concepts. First, what is Legal Project Management? Legal Project Management, or LPM, is the practice of applying tried-and-tested business practices used in other fields to the management of complex legal matters, both litigation and transactions.  While designing and constructing a large skyscraper is very different from defending a corporation against claims of IP infringement or assisting a private equity firm to acquire a majority stake in a closely-held technology business, in many ways the techniques to manage budgets, to deal with scope change and to communicate expectations among stakeholders during the engagement mirror the challenges faced by lawyers managing these legal matters.

Doesn't Legal Project Management apply only to commodity practices? LPM doesn't reduce the practice of law to a series of rote exercises that can be performed by any low-cost lawyer, ignoring all creativity and years of accumulated wisdom.  In fact, LPM very clearly embraces such experience by ensuring that legal matters benefit from this learning curve, rather than treating each legal matter as if it's the first of its kind.  Of course it's easier to take a systematic approach to legal matters if the matters are routine to begin with, but let's not kid ourselves.  Very few legal matters introduce completely new concepts.  Most law firms acknowledge this themselves by showcasing their lengthy deal lists and league tables.  If they only handled truly new and unique matters and cases of first impression, then little of that past experience would be relevant.

Then isn't Legal Project Management really just another name for Case Management or Matter Management? The concepts are related, but generally speaking Case Management and Matter Management are approaches to keeping track of the many aspects of legal matters with a particular emphasis on tracking costs.  LPM casts a much wider shadow.  The intent of LPM is not merely to track costs, but to control costs, to identify areas of variability in order to get in front of scope change before it happens.  LPM emphasizes performing the right activities to achieve the desired outcome and not more, while being mindful of one's duty of care and the client's risk tolerance.  Doing necessary work that a client will pay for is more efficient than doing unnecessary work that manifests itself in low realization rates.

So Legal Project Management means sacrificing quality for lower cost? Not at all!  We illustrate this challenge in our webinar in more detail, but these graphics are a good start.  Imagine the firm that begins lawyering up when the client initiates a new matter, without properly understanding the client's needs, scope and budget. What results might be the 3-tiered wooden swing when what was needed is a simple tire swing.  At times, clients do a poor job of articulating what they want; at times, chief legal officers don't fully understand what the business leaders want; at times outside counsel leaps to the conclusion that this client's fact pattern looks a lot like a prior and similarly-situated client's fact pattern, so work begins.  To belabor the metaphor, the associate builds a wooden seat, and the senior associate demands two wooden seats, and the partner demands three wooden seats because eliminating risk means doing more work and because "clients hire us to be more thorough than anyone else."  Is it compromising quality when we eliminate all lumber and woodworking from the matter, and instead provide the simple tire that fully meets the client's budget and expectation?

Why would we involve clients? Won't they always demand more for less? That's one way to look at it.  If your client doesn't trust you to do the necessary legal work at a fair price but no more, then of course given the opportunity the client may very well instruct you to do less work and therefore charge less.  This happens all the time.  Does the following sound familar?  "We will not pay for first-year associate time."  When you purchase a Mercedes (or a Honda Accord) do you feel the need to dictate who may staff the production line?  Clients impose their will on the process because they often don't trust that their outside counsel fully appreciate the need to balance legal risk with budgets.  Imagine, though, that the client is involved at the earliest stages and that all parties share common expectations for what legal tasks are necessary, for how long and at what cost (approximately), and imagine the client is fully aware of those areas where scope change of a significant magnitude is likely to occur, e.g., during due diligence, review by the regulating authority, if class cert is granted, and so on.  Clients demand more for less when they believe absent any control we'll do more for more.  LPM helps to manage expectations because everyone is aware of what's necessary in advance.  Of course, we can never eliminate surprise but the client who feels fully informed at all points in the process will be far more tolerant of change than one who's surprised every month when the invoice arrives.

So Legal Project Management means we'll bill less, and be less profitable? I'm a big believer that a financially healthy law firm is good for everyone, and there's nothing wrong with the Biglaw focus on profits if this focus doesn't interfere with the clients' needs.  But let's clear up a few misperceptions.  Just as many of us grew up with the notion that our home values will always increase, Biglaw partners have grown up with the notion that profits only result from high billable hours multiplied by ever-increasing billing rates.  There are even some who believe the ACC Value Challenge will result in lower compensation for outside counsel.  Hogwash!  Every other industry in the world operates under an assumption that another equally viable path to profitability is by lowering costs.  And we're not just talking about eliminating free soda.  If a client were to pay less because the firm put the client's interests first and determined that the legal issue doesn't need as much lawyering, we'd very likely see an increase in realization rates, we'd reduce the opportunity cost of assigning lawyers to tasks that ultimately will not be billed, we'll engender client loyalty and reduce our cost to acquire the next matter (the cost of sales).  These are plenty of ways to apply simple grade school math to illustrate this point.  To be clear, things are changing.  But change doesn't have to mean lower profits.

Does Legal Project Management help or hurt under an Alternative Fee Arrangement? As described above, the new math of law firm profitability means lowering the waste and inefficiency we create by performing legal work that cannot be realized.  Imagine if there's a capped fee in place, then any waste and ineffiency directly reduces the firm's profitability.  While there are many flavors of Alternative Fee Arrangements (AFAs), essentially they all require that the firm operate more efficiently, and absent a disciplined, rigorous approach like LPM then it's likely, bordering on guaranteed, that the firm will experience profit dilution and view AFAs with skepticism.  For my consulting practice, an AFA is a primary catalyst for embracing LPM; but the concepts apply equally as well in a billable hour scenario, even more so in an environment where the competition is creating downward fee pressure.

Do we need certified project managers?  Can our staff do this? The first caution is to understand that LPM is not a technology initiative, it's not something that can be delegated to someone else in the same way that law firms hire experts to handle Public Relations or to update the website or to manage the cafeteria or to tend to the grounds.  So often law firms treat business processes as technology initiatives.  Knowledge Management (KM) is about capturing and sharing knowledge to better train our lawyers and serve our clients, yet most law firms treat it as a database problem for the techies to figure out.  Client Relationship Management (CRM) is about understanding our clients, yet most law firms treat it as a mailing list issue owned by Marketing.  LPM is about better serving client needs by setting proper expectations, by providing the right legal services, and by dealing with change.  These are not tasks to be delegated, but tasks that client-facing partners must embrace.  Of course, when LPM involves creating pretty charts and graphs to show our progress on the project plan, then of course there are qualified people on staff who can do this more efficiently than a partner.  Some firms have hired certified project managers, but by and large their focus is on understanding the historical costs of delivering legal services, an effort designed to inform the partners when making pricing decisions.  LPM tasks can be delegated, but the partners must own the business process.

Legal Project Management

I've been spending a lot of time in recent months conducting workshops in Legal Project Management.  What is Legal Project Management, you may ask?  Simply put, it's the process of adapting business process improvement, resource allocation and predictable budgeting techniques to the delivery of legal services.

Some lawyers believe that the practice of law is not like other professions or business disciplines, and that therefore project management principles which work in other areas do not apply.  These lawyers are wrong.  That's not to say one can manage a complex legal matter as if it were an automotive assembly line.  But every legal matter doesn't have to be treated as a completely unique confluence of steps that has not occurred before and will not occur again.  Each of these steps can be broken down and analyzed, and when the opportunity arises for this step to be included in an engagement, there can be a greater understanding of the cost drivers. 

Understanding the assumptions that influence the cost of delivering legal services is critical to setting fees, and clients understand this.  After all, they go through a similar process when establishing their own cost and revenue budgets. My former colleague Pam Woldow and I have (literally) traveled the world delivering Legal Project Management workshops to law firms big and small, to law departments big and small, to corporate lawyers and litigators, to partners and associates, to finance and marketing staff... and our workload is increasing. 

We will be offering a webinar on Tuesday, March 23rd, 2010 at 1 PM ET to share our insights into Legal Project Management, and to address questions from those who are experienced Legal Project Managers as well as those who are just starting to explore this new frontier.  For more information, click here.

Legal Project Management is critical to managing legal work more profitably, but it's also an excellent way to achieve client satisfaction and to develop associates' skills.  We'll touch on all of this in the webinar.  If you plan to attend and wish to submit a question in advance for us to address, please post it in the Comments below.

Legal Budgets and Corporate Budgets - Why Predictability Matters

I recently met with a group of law partners to discuss the feasibility of increasing the firm’s billing rates for the coming year.  Normally this doesn’t require a discussion; the firm traditionally raises its rates 5-6% every year.  And normally this takes place in January once the prior year's books are settled.  This year, however, and to the partners’ credit, they questioned the optics of raising rates at a time when most of their clients are still suffering from the impact of the global economic meltdown, or the Great Reset, as Bruce MacEwen calls it. As we debated the pros and cons, it was apparent that the partners had very little understanding of the impact an increase to their billing rates might have on a client.   In fact, none of the partners had worked in a corporate setting previously so they had no real insights into the typical corporate budgeting process.  Perhaps a peek behind the curtain may help inform this discussion, as it’s a process full of surprises to law firms that often have rudimentary budgeting processes in place, if at all.

The first surprise is when budget discussions commence.  Assuming the fiscal year corresponds with the calendar year, most businesses start preparing budgets in August.  Yes, in August prior to the budget year.  It takes time to develop a budget from the ground up.  In days past budgeting may have been approached as an exercise in what’s different or, in other words, starting with last year’s budget and merely adding new items and deleting old items.  No more.  Now there’s an expectation that every budget must start at zero, and from this starting point we add in each and every cost until we identify the total budget needed.  And then we start paring it back.

Many lawyers operate under the delusion that the practice of law is inherently and infinitely variable, meaning that unlike other business functions one cannot predict legal costs with any certainty.  This opinion is often held by outside counsel and in-house counsel alike.  Imagine the plight of the General Counsel:  she doesn’t know how many deals the business executives may initiate in advance when even they don’t know.  She has no insight into what product liability suits the company may face, or what type of employment actions will be raised.  For litigation already underway, she can’t possibly predict the next move the adversary may make, so by definition she can’t budget for how she’ll react.  And even acquisition due diligence may reveal complications that are impossible to predict.  These are reasonable concerns, but they fly in the face of the number one rule in business: no surprises.

One can make mistakes when climbing the corporate ladder.  One can make some mistakes again and again.  One can even make colossal mistakes that cost the business money.  But the one mistake anyone aspiring to reach the board room can’t make again and again is surprise.  Corporations, both public and private, thrive on certainty.  Forward-looking statements to shareholders and analysts must be based on a reasonable estimate of future performance, or else the stock price will suffer in the market.  Even private companies that don’t publish earnings must have predictability to properly allocate capital.  For business leaders to establish priorities they must have the facts, and the worst crime is to provide inaccurate information because this leads to making poor business decisions.

Another surprise may be that erring on the side of caution can be as egregious a mistake as overestimating performance.  Imagine the Senior Vice President of Marketing who submits a revenue forecast estimating $275 million in sales, knowing full well that the business is on track to deliver $280 million in sales.  On paper this looks clever, because bonuses increase with overachievement, and everyone looks good when we beat the targets, right?  However, it’s not uncommon for the CEO and CFO to punish the business leader who builds in too much revenue cushion, because we might have made different decisions about our allocation of capital if we knew that we had more to work with.  A critical project with great long-term potential may have been delayed or tabled because we didn’t have sufficient investment available.  (The worst offenders allocate a reserve that benefits only themselves.)  Obviously there’s also punishment for missing the targets, particularly when it results from poor planning rather than external market events.

But how do they do it?  How do corporate executives weigh numerous variables to establish an accurate forecast?  After all, don’t most business functions carry some level of uncertainty?  Think of the head of manufacturing who must predict costs despite the possibility of critical supplies being hijacked by Somalian pirates, or labor unrest in the fields of South America, or political unrest in the Middle East impacting oil prices which in turn have a material impact on the costs of transportation in our supply chain.  And what about the corporate treasurer who has to predict the impact of currency fluctuations or interest rates on the company’s cash flows, in order to hedge against this.  Our head of Marketing has to examine multiple products across the spectrum of the business cycle, use a little game theory to predict what the competition might do in response to our new product launches, potentially even identify which customers are at risk before the customer even begins to explore substitutes, and build a revenue forecast amidst ever-changing market demand.

There’s no magic formula.  These business leaders build their forecasts block by block, inch by inch, starting first with the known – in the case of sales, perhaps we first identify guaranteed revenue from committed customer contracts, or in the case of manufacturing maybe we look at commodity materials where we have multiple suppliers to ensure sufficient flow and predictable prices.  We then move on to the harder calculations, one by one looking at product revenue in each jurisdiction, perhaps customer by customer; or examining links in our supply chain where we have limited redundancy and therefore greater risk.  Piece by piece we establish a forecast that builds from certain to less certain, but even with the less certain we identify the likely ranges and provide confidence levels based on identified risks.

So you can imagine the amused chuckles in the board room when the Chief Legal Officer throws up his hands and tells his colleagues that the legal function contains too many variables to possibly establish a budget, so instead he’ll take last year’s budget and add 20% -- to accommodate law firm rate increases and other variables – and he’ll only come back and ask for more if something changes.  Gone are the days when this was amusing.  Now a General Counsel may be shown the door if he can’t apply some rigor to the legal budgeting process.  This also explains the increased involvement of procurement officers in the selection, and management, of outside counsel.  This is a clear sign that CEOs and CFOs don’t fully trust their lawyers to extract more value at a lower cost from the in-house legal staff and suppliers, so they’re putting someone at the table whose sole objective is to reduce costs.  Or they wish to, as the saying goes, trust but verify.

These budget calculations and conversations start in August, are debated endlessly through September, and begin moving up the approval chain in October.  There are numerous revisions, typically, as you might expect, requiring all cost estimates to go lower and all revenue estimates to go higher.  But there’s a balance to be achieved between optimism and realism.  Newly anointed business leaders tend to believe that they can extract unnecessary costs that their predecessors overlooked, or that they can rally the troops to commit to higher revenue performance.  Entrenched civil servants throughout the corporation strenuously object to these stretch goals, and work diligently to maintain the status quo, with sufficient safety valves in place for when something goes wrong.  This can be invigorating, and it can be confounding, but in the end the corporation signs off on its revenue and expense budget for the coming year, typically by early November.

As my group of law firm partners discussed corporate budgeting, a few light bulbs appeared above their heads.  One corporate partner recalled receiving a letter in late October from a key pharmaceutical client indicating that they would not accept fee increases from any outside counsel in the coming year.  She recalls wondering why the letter was sent in October, months before most law firms issue rate increases, but it now occurred to her that the corporation’s budgets must have been locked by then.  Another partner realized that even when the economy is humming along nicely and law firms have the latitude to increase rates, the fee increase letters are potentially six months out of sync with the client’s budgeting process!  “No wonder clients claim we don’t understand their business,” he observed.  One of the partners added some levity by suggesting that the annual fee increase letters should go out earlier, say in July.  Another had us rolling in the aisles when she suggested that since law firms always raise rates, and clients know this, perhaps it’s the client’s obligation to build in these expected increases in their August and September forecasts.  When we realized she was serious, we ended up rolling our eyes.  In some segments in some industries, the suppliers can set the price and require the buyer to meet the price, or else not get the product.  (Have you ever tried to haggle significant savings on a Mercedes?)  There are a few law firms with such pricing power.  Let’s be clear: despite your desire to occup this space, the odds are your firm is not one of these.

But does this budget process really result in certainty?  After all, we’ve all seen – or we’ve owned stock in – companies that miss earnings forecasts.  In reality, one never eliminates surprise.  But we can get a lot closer by minimizing it.  There’s a formal process to deal with the inevitable changes that occur in most corporations.  It’s called a reforecast.  It may come as a surprise that most companies begin revisiting their revenue and expense budget numbers in early January.  After all, what can go wrong in the first few weeks of the year?  However, think back to when we began compiling our forecasts.  We weren’t even done with Q3, let alone Q4, so many of our assumptions for the coming year relied on assumptions for how we’d conclude the current year.  And guess what, things have changed since we incorporated those assumptions.

A reforecast is a formal process to revisit our assumptions, to look at costs that exceed expectations and revenues that fail to meet expectations.  And vice versa.  In many corporations this process repeats itself several times a year, often corresponding with the quarterly earnings report in public companies, and in recent years this process might happen 6 or 7 or even 12 times a year.  And it’s not simply indicating that revenues are falling short or that expenses are trending high and then receiving forgiveness on the goals.  That would be cool.  No, instead every functional leader has certain levers to pull to meet the agreed-upon expectations even when there are material changes in costs or revenues.  On the revenue side, perhaps we launch a sales contest, or lower prices to increase penetration.  On the cost side, perhaps we seek alternative suppliers, squeeze the suppliers we have, or reduce costs elsewhere by reducing staff.  Often the reforecast process surfaces significant trouble in one division that will be impossible to make up, so other divisions receive an involuntary revenue or cost surcharge to make up the difference.  This can be painful.  No business leader in the midst of stellar performance, overachieving on every goal, or even those barely meeting expectations, likes to terminate valued employees or table a valuable project because some other division failed to meet expectations.  But it happens.

To add more enjoyment to the budgeting process, most corporate executives have a portion of their annual compensation based on their ability to manage to their budget.  For example, the company may exceed its revenue and profit targets, the share price may exceed analyst expectations, the division may have enrolled a record number of new customers, but the divisional leader will lose 30% of his bonus because costs were over budget.  Those running the legal function are late arrivals to this party, but it’s becoming a material factor in their compensation now.

Recently I observed a panel of General Counsel discuss their likes and dislikes with outside counsel.  One GC remarked, much to the amusement of the roomful of outside counsel: “If my legal budget goes over plan, at least we’ll save money on my bonus.”  The GC didn’t laugh.  He was deadly serious.  The message he was trying to convey is that the late invoice, the one you generate only at the end of the billing period, the one that reflects billings 40% over the original estimate, the one that you’ll accompany with a brilliant, well-crafted memo explaining the 58 reasons why costs exceeded your original estimate, may literally cost him his family’s summer vacation rental, or a semester of his daughter’s college tuition, or the swimming pool he planned to install in the Spring.  Just as with the General Counsel who remarked, “If I don’t find a way to manage the legal function with a lower budget and without compromising quality and throughput, they’ll find someone who can,” your client needs you to be part of the team.

Perhaps these insights into the corporate budgeting process will shed some light on why your clients are so darned insistent on predicting legal costs.  In many cases, predictability trumps total spending, or, in other words, you can charge premium rates as long as you ensure that the fees are not surprises.  You may also question whether a fee increase is necessary this year, particularly since your client has fewer levers available to adjust for your increased cost.  Perhaps you can do a better job of estimating legal costs for your next project.  The project management techniques used in other business functions apply to predicting and managing legal costs, but that’s a topic for another day.

As another General Counsel said to me recently, “I know a lot of firms that are capable of handing my legal work.  I’m sure there are many more that I don’t yet know.  What wins me over isn’t always low rates or discounts, it’s finding a firm that really understands that challenges I face in my business – and this includes not just the legal issues I face in my marketplace, but how I have to manage my legal department as a business.  If I can find a firm that understands what life is like in my shoes, that firm will win my loyalty.”

What do you say, are you up for it?