Practicing Business or Business Practice?

Over the last few weeks I have been fixated on the concept of change within today’s professional services. As an outsider to the law firm environment, yet with tremendous contact within firms, I sit in awe of the next call or email talking about the firm’s trials and tribulations. It is amazing how an outsider can see, in real-time, what is happening yet those in the very midst are simply unaware of the metamorphosis that is occurring within their firms.

In the past week I had the opportunity to have a round table discussion with corporate CFO’s on the concept of financial management and budgeting. I was amazed that so few corporations build budgets based on current economic trends and are revising their position each quarter. Often these organizations see the budget as the Holy Grail, and any negative divergence creates frustrations and animosity among the ranks. I also hear of this type of behavior in today’s legal practices. Firms create their budgets for the upcoming year in a vacuum, and then etch them in stone. When the firm doesn’t live up to expectations, frustrations and dissension permeate the ranks.

Since my last posting there has been a lot of news articles hitting the press about what is happening with law firms. For the most part, law firms are facing the same economic pressures every other organization is facing. With these pressures some organizations soar while others sink. The reason for which, each firm reacts differently to these economic stimuli. Their response all dependent on when the ‘realize’ the stimulus, their management, their culture and a plethora of other factors.

On May 28, The Wall Street Journal published an article about a Midwest US firm making the decision to trim their ranks by 124 people. (http://blogs.wsj.com/law/2008/05/28/sonnenschein-lays-off-37-lawyers-plus-87-others/). Since the release of the article several firms throughout the US had meetings to tell their staff that their firm isn’t immune to such cutbacks. Since the melt down of the US real estate market and the subsequent credit fiasco, US law firm trimmings are not uncommon. Each month, some firm steps up to the table and realize trimming ranks is their only solution. This behavior is a direct response to a stimulus in the environment. One could argue that astute leadership would have seen the stimulus coming. I would argue, whether you see it coming or not the reaction may have been the same.

However, one day later an article in legalWeek.com identified a firm whose revenue rose 24% from last year. http://www.legalweek.com/Articles/1130817/Bird++Bird+flies+high+with+24+revenue+rise.html How could that be, here are two firms facing the same economic environment and their response is very different. The answer is definitely not simple and would require a thorough understanding of their practices and their management. On a very simplistic note, change happens and firms have to react to change. How they react is a product of their management and their culture. How they react to stimuli will determine their place on the competitive continuum.

I personally feel that those who change their position on the continuum rest in how they develop a response to a stimulus. A much stayed organization will seek to apply ‘old’ solutions to new problems. As such they will slowly get left behind. It is the progressive firm that steps outside of the status quo, challenging the norm that will leap ahead of others. In a recent webinar by Kevin O’Keefe, (www.lexblog.com), on attorney blogging, O’Keefe made a subtle point of how different firms assimilate attorney blogging. For some firms, it is the taboo because of the social pressures of the other attorneys and the Bar hasn’t made any statement on blogging. While for other firms reap huge benefits. Both firms faced with the opportunity; one stayed and the other innovative.

A great example of a firm not choosing the status quo response was published by LegalWeek.com on May 22. In not knowing the background, one can only speculate the firm had a decline in their litigation practice. When faced with this stimulus, they came up with a ‘cost-free’ litigation program for their clients; which they named CONTROL. http://www.legalweek.com/Articles/1128480/Article.html

Change happens all the time, what happens to your organization rests solely on how you respond to it. You can seek innovative ways or hammer in the ‘tried and true’, the choice is completely yours. Keep in mind, old solutions work for old problems. In difficult times, innovation is the fuel for your organization to gain the competitive advantage. Choosing old solutions is simply business practice. Today, law firms need to be practicing business– treating the practice of law – as a business.

Change Happens, Initiate it or React to it!

In 2007, I realized that after spending almost two decades in professional services it was time to speak what those in firms all around the world were thinking. Looking back on my original writings on this form and in publications, although the topics changed; the theme didn’t. The core theme which I have been professing has always been the same – it’s time for change. Break free of the bondage of your ancestry and lead the pack!

In the academic world there are volumes upon volumes of articles that address organizational change. Everything from being a change master to managing the process of change, some of the great business writers lately have been very bold in putting forth their ideas. With all of this going on, there is one thing for sure – change happens. Several years ago a great little book was written Who Moved my Cheese by Dr. Spencer Johnson M.D. The book took a light-hearted approach in explaining the human behavior of failure to change, as demonstrated through mice in a maze. This is definitely a must read for anyone who feels they are no longer growing or changing.

I have found through the years that society is built up of institutions that assume positions along the ‘habit/status quo’ continuum. There are those institutions that constantly push the status quo, with their developing of the latest and greatest. While there are others who are more stayed in their behavior. Those who push the status quo, evolve more, learn more, earn more, and do more for society. Conversely, those who are stayed they experience decreasing membership in their institutions, soon they wither and die. Several years ago a colleague shared with me his experience with a financial institution that found its roots in the 17th century. When he joined the organization their business processes probably dated back to their origins. During his tenure, the board of directors interviewed for a new president. Throughout the interview, the candidate responded to various questions with the same line, ‘I will change things’. Finally the interviewer asked what will you change? To whom he replied, things. The point to be made here, was that a change was needed, any change. The organization had become stagnant over its life and this visionary saw that a single change will be the precipitate to many changes. Today that organization has now in 120 countries around the globe and in many of those countries, has become the leader in the financial markets.

My contribution of last week precipitated several comments. The one that I feel is most relevant to share is from Ed Poll. I have known Ed for a few years and I have always been inspired by his writings. I feel he is the voice of change in the legal management community. Ed’s closing remarks on last week’s contribution was: “Nevertheless, there is much about the operation of law firms that needs to be examined more closely and then changed if the "institution," called a law firm is to survive and thrive.” Ed’s statement comes at a time, I feel, when today’s law firms are at the cusp of a business management change. No longer can firms continue along the antiquated behavior of doing the same things month after month, year after year, decade after decade and not only expecting the same results… but better results!

The cascading changes that law firms will face will probably come by way of one or two very progressive forward thinking organizations. They will be the fuel that fires the change of the legal landscape. In reviewing the literature of today, I feel this impetus to this type of overwhelming change will come from a smaller firm outside of North America. The seed to change will be from a firm not imbued in processes of their history; they will push the status quo and thereby make change. In the last two years, we have seen considerable change in law firms outside of North America. One such firm, an Australian law firm went public. Currently in the Asia Pacific regions, companies are no longer accepting the status quo for legal services and legal fees. Corporations are undertaking statistical and probability analyses to identify their return on investment in legal engagements. It is this type of analysis that will determine if they proceed or halt the engagement.

On May 7 LawFuel, a New Zealand publication, ran an article entitled Are Lawyers getting away with Blue Murder on fees? The author cites that there is a considerable increase in outside consultants who review the legal engagements and assist in getting the costs ‘seriously trimmed’. I feel these two incidents are very important to the future of law firm viability as we see it today. One firm, taking a proactive approach in adopting more business behavior through outsiders objectively examining their business management, while there is a growing malcontent in the market that will push law firms to change. One firm is taking a more proactive, non-status quo approach, while the others are being subjected to increasing pressure to change. Either way change is happening and the institution of the practice of law as we have come to know it; is ripe for change.

No matter what you choose to do, you will be affected by change. Metaphorically, you can lead the pack or get trampled by it. At this point, the choice is yours. However, when market change begins, and it will fast and pervasive, you will be in your defined spot and will have to suffer the consequences. Maybe it is time for firms to empower their business managers to critically examine the firm and make it part of the change and not let it fall victim to being a product of change.

A MAP got us in this mess, only a GPS will get us out!

Over the last couple of days I had an interesting opportunity; I was asked to comment on a friend’s homework who is working on their MBA. For many this would not be considered an exciting opportunity. However, I saw it as such. Other than my personal research into my own ‘pet projects’, this was an opportunity for me to be academically challenged. After working through the assignment and speaking with other students in the class I realized that a decade has passed since the completion of my MBA. However, what really struck me was the immensity and diversity of business thought currently being presented in the academic world.

As I pondered the experience a statement that I had heard from a Nobel Prize winner a few years ago came to mind. The statement goes something like ‘…there have been more advancements in science, technology and insight in the last century than in all preceding time’. As I thought on this, I could name many of the greats of the last century, but I would be hard pressed to go back much further. The deduction I came away with; knowledge seeds knowledge and to that end, we will continue to see increasingly more ideas presented in our world.

With all of these new ideas it shouldn’t be amazing how the world continues to change so rapidly. These changes are the result of people assimilating new ideas and changing their world one tiny bit and as a whole the effect is commutative; hence more pronounced change. However this isn’t the case with everyone and every organization! There are a plethora of reasons why people simply do not assimilate new ideas. These could be self-imposed or a product of their ‘perception’ of the world; either way the gradation leaders and laggard continues.

A few of my recent readings have challenged me to make sense of why some organizations tend to be leaders and some laggards. I feel this gradient of success is a result of self-imposed limitations or narcissistic traits. Interestingly enough, in my career, I have visited organizations that continue to hold their place along the continuum of success, given the wealth of business knowledge at their fingertips they continue to run as they did a century or more ago.

In a recent article in The Lawyer, one of the London City firms had decided to increase rates by 11%, while other firms have upwardly adjusted their rates by 4%. While at the same time, more peripheral firms have refused to alter their rates while some have shed some associate staff, while on the other side of the globe, in Australia, a new industry is blossoming; that of legal advisory. Australian commercial clients are engaging advisors to determine a fair and reasonable cost for their legal work. The clients then present the findings to firms to see who will accept it for the specified rate. While several large US firms have trimmed staff and stabilized their rates. This radical divergence of behavior at a time of economic contraction is indicative of how people assimilate, the current thought and how others continue in their historical belief.

In my career and travels I have found that in the case of law firms, the non-US law firms are more amenable to change. Even though some continue in their pre-Cambrian ways, they still undertake change; often begrudgingly. In my 2007 contribution Taxation the best Collection Motivator, I addressed why countries who have a Value added Tax system and those governments who impose accrual accounting on professional services firms are much more focused on current asset (WIP and AR) management. In the US firms hide under the veil of cash basis accounting and a much more lenient taxation structure. It is the lack of external forces in the US firms that diminishes the urgency for betterment.

Throughout history professional services was the ‘class’ of the elitist. Those of professional designation could hang their shingle, acquire clients and get financing without any formal business constraints; other than those imposed by their professional association. It is within this self-perpetuating comfort zone that professional services continue, often oblivious to what is going on around them. They operate without a clear vision of where they are going or a clear mission of who they are. This is made clear through the diversity in reactions to an economic softening of the global economy.

Interestingly these are the same organizations that maintain a mantra of higher rates equates to higher profits per partner, when in fact profit is a multi-faceted entity comprised of billable fees, related costs, overhead costs and write offs. It never ceases to amaze me how these ‘head strong’ leaders simply overlook all of these components to profitability. During a conversation, earlier this week, with Ed Poll, author of many works on how to manage legal practices, I was reminded of statement Ed had made quite some time ago “…in many law firms collections is almost an afterthought with as much as 30-40 percent of their billings are collected in the last two months of the fiscal year”. It is surprising with all of the knowledge out there, so many firms continue in their historic practices; the fire fight mentality. While the rest of the world has assimilated the ideas that profit is the culmination of many components and requires a multi-pronged approach for its growth.

This position is the result of, what I perceive, a misaligned accountability process (MAP). Simply put, it is the failure of all of the firm’s partners to be held accountable for their contribution to the firm’s profitability. Since there is no external body like taxation, corporate organization or Sarbanes-Oxley to instill a methodology of accountability the historical practices continue. One would argue that the professional services regulatory body would set guidelines for behavior. However, in my experience this has proven to be ineffective. The article Learning the Hard Way, by Stephanie Ward from the May 2008 issue of the ABA Journal, gives insight as to why some firms continue to act as they have always acted. According to Litigator Michael Burke “Lawyers often think they are smarter than anyone else”, the article continues with many examples of how some lawyers’ self-empowering narcissism has pushed them to the top and caused them to crash and burn. I feel this makes a tremendously powerful statement when one fails to understand why firms resist change.

I feel it is high time that change enter the professional services market. The change that is required must begin at the partner level, first through the deflation of ego followed by the assimilation of ideas into the practice. Firms have to empower their highly educated support group to read market indicators and bring forward new and exciting ideas that will not only catapult the firm forward but begin to erase the negative stigma in the market place. Today’s professional service organizations need a good strategy for survival and growth that comes as a direct result of reading the market indicators, assimilating new ideas and acting in a concerted accountable approach that will yield success. This great practical strategy (GPS) must be the new insightful technology to lead the firm forward, as the MAP has really gotten the firm in a quagmire.

Gauging our Relationship

For the past week I have been stuck on the topic of this week’s contribution, as I felt there was more to say. For this week, my first thought was to explore credit report analysis, which is a growing activity in commercial entities. However, the need to put closure to last week’s contribution on efficiency had been overwhelming. Over the past week I thought the analysis on collections efficiency was fair, but what about billing efficiency and how the two should relate to one another.

As a starting point, the article of last week Law Firm Business Model-Realization, defined billing realization as the ratio of time and cost recorded versus time and cost billed. The author defined this as ‘efficiency’ in billing; the realization. In legal practices today we can see this figure assume a value of less than 1 to greater than 1, depending on how the billing partner identified the value of the work undertaken.

Taking a step back and recognizing that the transaction to billing and ultimately to collections are not sterile, like the purchase of a gasoline or even a meal. These transactions are rooted in a ‘relationship’; the attorney client relationship. If you care to, go back and read some of my writings in 2007 about the nature of these relationships. Relationships are a very complex phenomenon, in that both parties must contribute something to the entity in order to both derive benefit. With that said, Ed Poll in his book, Collecting Your Fee, addresses a means by which the attorney can gauge the relationship. Ed’s statement is “…the client who genuinely respects you and the work you do will pay your bill in a timely manner”.

Poll’s point is synchronous with the cash collection realization concepts developed last week. In that the client who has a respect for the relationship will pay in a timely manner, the timely manner being the time sensitive cash realization. The question remains, how do we assess the attorney side of the relationship? Once we are able to quantify the attorney contribution to the relationship, we then have a yardstick by which to assess the relationship.

According to Poll, the attorney’s contribution to the relationship is based on quality work, in a reasonable time, and which meets the terms of the engagement letter. Conceptually, if the work produced is in alignment with the expectations embodied in the engagement letter, one could reasonably assume that the quality of work is ‘reasonable’. However, price reasonableness, although tied to the engagement letter, is the result of basic economics; supply and demand. Pulling these concepts together, the amount billed to the client should be a ‘reasonable’ reflection of the, engagement letter dictated, quality of work done. Therefore, during the billing process, if the attorney believes that the amount of WIP is a fair and reasonable assessment of the quality of work done, then she should bill it at 100%, if not it is either discounted or set to a premium. The concept of premium billing, to me, seems a bit odd. Basically the statement being made is “… the quality of work that I have done exceeds the value I have placed in WIP.” As this concept, I feel, is rooted more in psychology than economics, I will shelf I for the time being.

With that said, billing realization is a reflection of the attorney’s contribution to the relationship and cash collection realization is an indication of the client’s contribution to the relationship. Therefore the product of the billing realization and the cash collection realization should be a bell-weather to the attorney client relationship. By way of an example, let’s take a look at this.

Paul Partner accepts a case which is consultative in nature. During the course of the month he and his colleagues record $1,000 in fees and $525 in costs. In believing there was some redundant work, Paul produces a bill for $1,400 and sends it to the client. After 45 days the client is contacted and is disputing a charge on the bill, a courier charge of $30. Paul agrees to write the amount off and within 15 days the firm receives payment of $1,370. Ignoring the concept of timing, the relationship gauge becomes:

Billing Realization X Cash Collections Realization

1,400 ....X.... 1,370 = 89.84%

1,525 ............1,400

(note, periods are added to the formulae to maintain correct spacing in html)

Therefore the attorney client relationship, as a whole, is probably running at about 89% efficiency. You should be asking, why the calculation is based on a product and not the average of the two realizations. As this is all theoretical in nature, I feel that an average raises one party’s value while lowering that of the other party. However, in real life that isn’t the case. When two people are disenchanted with one another, at a distance they are fine they have their respective degrees of disenchantment, however when they are together the tension increases, as each acts against the other and there is a combined effect.

Now taking it a step further and realize that this entire scenario is not operating in a timeless vacuum, we need to add some reality to the calculation; the concept of time! In Paul’s firm the rule to billing is that 80% of all WIP must be billed within the first five days of the new month; following the month worked. We must assume, to keep the calculation controllable, that 80% does not entail any division of a particular file, but rather 80% of Paul’s entire portfolio on a per file basis. Let’s say that Paul produces the bill on the 45th day; 10 days after the billing cut-off. In addition, the firm’s policy is payment is due 30 days from date of invoice, if we add 5 days for processing, the firm should expect payment on or about the 35th day. However, payment came in on the 60th day.

Using the same logic, as last week’s contribution, on looking at the impact of time on efficiency, the calculation now becomes:


1,400 X [1/(45/35)] X 1,370 X [1/(60/35) = 45.37%
1,525 ..............................1,400

With the inclusion of time, the relationship gauge is almost half of it was without time. Is this realistic, of course! The reason is both sides in the relationship are governed by time to meet their respective obligation, and they both failed! The attorney failed by ensuring timeliness and correctness in the billing. The client responded by not paying the bill in a timely manner, thus the compounding effect of the relationship degradation.

In closing, attorneys and clients are in a relationship, by virtue of the engagement letter, each must fulfill certain obligations. When either side fails, the probability of non-payment of the bill increases; dramatically! Maybe now is the time to check the vitals in your relationship.