LPM is Basic Business
Author: Richard Stock - Lexpert (February 2011, Vol 12, No 3)
You can get an estimate for complex dental work. You can get an estimate for home renovations. You can get an estimate for car repairs and European vacations. All of these are credible primarily because of the professionalism of the estimators and their relationship to the client. That professionalism, moreover, is built on experience and good data — and that is especially true if the client’s requirements are complex or unique.
Legal services are no different, and while it is still early days when it comes to applying legal project management (LPM) and detailed matter budgets to legal work of medium and high com-plexity, things are changing.
So far, I have only heard of a handful of firms that have gone out of their way to adopt LPM as a strategic business initiative — one where the law firm provides corporate and institutional clients with increased predictability for legal costs; where it commits to better management of its own resources; and where it actually improves profitability in the wake of the global financial crisis.
Most firms will only discuss LPM once they are prompted by a client, probably because they have little experience with it and because so few recurrent clients ask about it — a classic “chicken and egg” conundrum.
The Recent Past
For the longest time – several decades at the very least – law firms increased their profitability by raising rates and working longer hours. Recently, however, some firms have had to trim their less profitable practice areas, build up their leverage a little and reduce expenses (or at least apply them to other areas more effectively). As a result, there remains little room for the firm to manoeuvre on pricing with a business model that remains, at its core, an hourly model, and when the domestic market for legal services is as mature as it is.
Corporate and institutional clients – these are the recurrent and fairly sophisticated consumers of legal services – have increased the size of their legal departments by in-sourcing work from law firms when specialization and volumes support the business case. The savings approach about 50 cents on the dollar. This configuration is better balanced when one considers the extent to which legal departments control the flow of work to external counsel and how that work has been concentrated over the years with a reduced number of law firms.
Fixed-fee and flat-fee pricing arrangements have been the order of the day for high-volume work of low and medium complexity. All of this about sums up the state of business arrangements today between law firms and their primary clients.
The Cost of the Relationship
“Guessing right” can be hazardous in a business relationship. No doubt, experience, trust, and communications go a long way to ensuring good service and good results in professional ser-vices. But they contribute little to reducing external legal costs and making them more predictable.
In fact, relationship-based sourcing of professional services – in this case legal services – too often makes it seem as though the client is paying too much for service and results. In part, this is because the client wants a particular lawyer to do the work (hire the lawyer, not the firm). Too often, this inhibits teamwork and delegation of tasks within the firm.
The “relationship” between a client and a senior partner may also stand in the way of explicit and timely communication about planning assumptions for the matter or additional resources needed when unforeseen developments occur during the life of the file. The partner either writes down the bill, or the client is presented with an unpredictably large final invoice. Everyone has worked hard and acted in good faith, but the economics of the relationship have taken a beating.
Corporate legal departments are under relentless pressure to reduce total legal spend, especially external spend. Many com-panies have contracted their list of preferred firms and have se-cured freezes in hourly rates for senior partners until the end of 2011. They have in-sourced as much work as possible and can-not get the approval for additional headcount.
Outside of insurance and government legal departments, few companies will invest in developing their own litigation teams. Certain specialties – like regulatory affairs, and labour and em-ployment – can be added to the department, but tax, IP, and work in most foreign jurisdictions will typically be referred to external counsel.
What To Do?
The corporate legal department must do more. Specifically, the company must become much better at forecasting its needs for external counsel at a much more detailed level – by specialization, by number of matters, by region – and for two or three years into the future.
The costs must then be managed at the individual matter level. For this to happen, the legal department must work with firms that are using LPM methodologies and a database to prepare de-tailed matter budgets. The company should ask for detailed budgets by phase and task for files likely to exceed 50 hours. Such a budget contains an extensive preamble discussing the planning assumptions and objectives for the matter. Further-more, it proposes the number of hours for each fee earner for each phase and task to allow the client to see the extent of dele-gation, thus reducing the effective rate.
It should be possible for the company and the firm to become more comfortable and accurate in using LPM after 10 or so files. Conducting systematic debriefings regarding variances is essential to improving efficiency.
But saying all of this does not make it so. Alternative fee ar-rangements (see “The Hybrid Fee Arrangement,” January 2011) are essential to motivate and recognize success in producing es-timates that are respected. Moreover, firms should share in the proceeds of productivity and predictability. Some departments, for example, have introduced key performance indicators (KPIs) for themselves, measuring their success in introducing LPM and in managing their total legal spend. In some instances, KPI suc-cess can be tied to compensation of the company’s lawyers.
The responsibility to introduce advanced business practices when retaining external legal counsel sits squarely with the or-ganization’s General Counsel. The tools are available and some firms are more than willing.