By: Mike Lowe
This is Part I of a two-part series by Mike Lowe, a strategy and management consultant whose firm HardingLowe works with law firms to improve their efficiency and profitability.
By now, it is widely understood that the marketplace for legal services is undergoing a major transformation. Clients are more cost-conscious and are demanding an unprecedented level of efficiency, flexibility, and transparency. Firms are struggling to adjust and work in ways that are unfamiliar, if not completely counter-cultural. Merger integration, outsourcing, and alternative fee arrangements are adding to the already complex and competitive business of law.
While this transformation may feel new to law firms, it is actually quite familiar to other professional services organizations, like consulting firms, that have been going through a similar transformation for more than a decade. Based on my experience at both a top-tier consulting firm and top-tier law firms, I can say that the lessons learned in the management consulting world over the past ten years are highly applicable to the legal context.
First, some history. When I joined Accenture (then Andersen Consulting) in 1998, we were turning work away. The economy was strong, the competition was limited, and companies were willing to spend. Big companies were installing enterprise-wide systems and mitigating Y2K risks. Small internet startups needed advice and technical support. I remember my first office-wide meeting in which they discussed only taking on the “right” kind of work, because there was so much work from which to choose.
By 2001 much had changed. The dot-com bubble had burst, and Y2K had passed without incident. Lower cost competitors were emerging domestically and from abroad. Aspects of our work were becoming commoditized. Clients were demanding alternative fee arrangements and were pushing us to reduce our fees and our expenses. At the same time, the firm split from its accounting side, changed its name and went public. Some competitive firms merged. Others were taken over. And some did not survive.
Accenture eventually emerged stronger, with a solid balance sheet, increased market share, and a sustainable business model. In the process, I learned some lessons that law firms must consider if they want to come out of this current transformation stronger and more competitive.
Alternative Fee Arrangements are about risk, not cost
My law firm clients treat AFAs as necessary evils rather than as opportunities, because they see them as client ploys to lower costs. At consulting firms, we grew to prefer AFAs over billable hours contracts, and found that we actually made more margin on them. The key was understanding that our clients were seeking AFAs not to cut costs but to eliminate risk. In fact, they were willing to pay a slight premium to have the certainty that a project cost was capped. Based on our familiarity with the work, we were better positioned than they to assign a cost to the risk we were assuming, and include that in our fixed price.
Unfortunately, successfully employing AFAs requires major changes in how law firms estimate, price, plan, staff, and deliver matters, and how they measure and reward attorneys. Moving from a billable hour model that rewards inefficiency to a fixed price model that requires the opposite is no easy task. Despite the difficulty, however, law firms need only to look to consulting firms to see the value of AFAs. At Accenture, our success in AFAs not only differentiated us from our competition, but led us to develop additional value-centric pricing constructs like gain sharing, share in revenue, and transaction-based pricing.
The “cost of poor quality” must be minimized
As discussed above, AFAs are about transferring cost risk from the client to the firm. As AFAs grew in prominence at Accenture, it became clear that we needed to expend more energy mitigating the risks that we were taking on. Several deals that were either poorly negotiated or poorly executed (or both), were affecting our bottom line. As a result, Accenture created a leadership position that was focused exclusively on quality – both in estimating and in delivering projects – and put in place processes and Key Performance Indicators for learning more quickly about projects that were heading South. A friend of mine who is the COO at a top-rated law firm in Washington DC told me that he must approve whenever a partner wants to engage in an AFA. That’s a good start. How does he evaluate the AFAs? “I mostly just look at the track record of the requesting Partner.” That’s not so good. And how does he know if an AFA is not going to be profitable? “We frequently don’t know until the matter is complete.” That’s a recipe for disaster. Firms need to put in place the systems for tracking the progress of a matter against schedule and budget baselines, so that problems can be detected early and corrective actions can be taken.
Even complex work can be standardized and measured
When I started at my first law firm client, I was surprised to learn that they did not employ methodologies to guide their work. The justification for this was that all clients and matters are different, and require different approaches. The end result, however, is that matter teams are constantly reinventing the wheel, just because that wheel is slightly different from the thousands of other wheels they’ve already invented. In consulting, we came to realize that the only way to grow, maintain quality, drive efficiencies, and offer AFAs was to focus on those things that were common across our projects, rather than on those things that were different. As a strategy consultant, my clients and the problems they asked me to solve were vastly different. Nonetheless, the overall process that I used to solve their problems was the same. Understanding and documenting that process allowed me to better estimate, plan, staff, and deliver the work.
As a large global organization that seeks to deliver consistent results, Accenture has placed a lot of focus on methodologies. Methodologies allowed us to develop templates for common deliverables and reduce unnecessary rework. They suggested the roles required for each phase so that we could effectively staff. They reduced the lead time for bringing new employees up the learning curve. Finally, by collecting data for each phase from across hundreds of projects, we were able to develop an estimating capability that was necessary to effectively price AFAs.
Next week, Mike Lowe will be sharing more lessons learned from his years in consulting, including the value of strategic sourcing and how to confront resistance to change from within an organization.