The Hitchhiker’s Guide to Profitable AFAs

mrynowecer
Michael Rynowecer
President, BTI Consulting Group
Special Guest Post

Far out at the edges of unchartered space exists the mostly uninhabited planet of Profitable AFAs.

This isn’t science fiction comedy. Profitable AFAs do, in fact, exist. We partnered with our friends at Law360 to survey more than 750 attorneys. What we discovered is 22% of partners are prospering in what many consider a desolate land.

BTI_Alternative_Fee_Arrangements_AFAs_2014AFAs are old news. Clients demanding AFAs is old news. Turning a clear profit from AFAs is new.

Nearly 80% of law firm partners can’t figure out how to get to Profitable AFAs. Mismanaged scope, poor budgeting skills, and not enough flexibility to change internal work processes are the most common culprits to undermining profitability in AFAs.

Fortunately, 22% of partners have charted the path to profitability for everyone else to follow. Good tools and processes are the most massively useful things a lawyer can have to reach Profitable AFAs.

  1. Develop detailed budgets to understand and manage costs
  2. Track and monitor budgets like a hawk at least weekly
  3. Assign all work to lawyers on the team with time-specific deadlines and the number of hours budgeted for the task
  4. Review your clients’ objectives with the entire team
  5. Solicit suggestions from the team on how to eliminate unneeded work steps
  6. Discuss case progress with your clients as a normal course of business—a regular dialogue about progress
  7. Track changes in scope or underlying facts and share any budget impact with your clients immediately upon discovery
  8. Actively challenge the team to beat deadlines and deliver early
  9. Develop high trust relationships with your clients

AFAs only work when your client relationships are at the absolute highest levels of trust—not just a good relationship—but a deep, embedded relationship. Part of the simplicity and certainty delivered by AFAs comes from the client believing their lawyer will deliver. Lawyers who have a history of breaking budgets, have infrequent dialogue with their clients (with or without AFAs) or don’t believe in the power of budgets are more likely to end up in make-less-money column—far, far away from planet Profitable AFAs.

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About The BTI Consulting Group, Inc.

We conduct more independent research on how clients acquire, manage, and evaluate their professional service providers than virtually anyone. Our unique methods and approach have propelled over 20 years of fact-based research on buyers and sellers of professional services. We have interviewed more than 13,000 buyers. We benchmark how Fortune 1000 companies buy, how professional services firms sell, and how to manage service provider performance.  For more information visit http://www.bticonsulting.com

The Evolution of the Law Office Infographic

The founders of Smart WebParts have been in the legal industry since the 1970s.   Collectively, we’ve got a lot of history under our belts.  Last month we got nostalgic and created the “The Evolution of the Law Office” infographic. We hope you enjoy it.  What do you remember?

Report: Alternative Fees Continue Snail-Paced Assault on Billable Hour

.by Jennifer Smith
Wall Street Journal Law Blog

Despite all the hoopla about hourly billing going the way of the Edsel, law firms and their corporate clients have been much slower to adopt alternative billing arrangements than many had predicted, according to a new survey.

Loyal Law Blaggers will recall that use of flat rates, contingency fees and other alternative fees is on the rise and continues to grow—an uptick triggered in part by the economic downturn and client pressure to reduce legal costs.

But many in the legal world are just dipping their toes into the alternative fee pool, instead of opting for a full-tilt cannonball immersion, says a new report by ALM Legal Intelligence. It was released Tuesday in conjunction with the legal technology company LexisNexis, which this week is also launching a new data-driven consulting service for in-house lawyers.

The ALM report surveyed 141 in-house law departments and 194 law firms on their use of—and satisfaction with—alternative billing arrangements.

It found that most law firms continue to rely on traditional billing for the majority of their work, and law firms are on whole less delighted with alternative fees than the corporate law departments they serve. Still, alternative billing arrangements are not going anyway anytime soon, and that could force wider shifts in the legal industry, the report warned:

If law firms and legal departments continue migrating away from the billable hour model, both sides will need to embrace profound structural changes, such as training legal staff to manage matters within a budget while keeping an eye on profits.

Lawyers and corporate clients have  different reasons for embracing alternative fees, the report said:  legal departments like the cost savings, efficiency and ability to map out how much they will be spending, while law firms use alternative fee arrangements to attract and/or keep clients or narrow the gap between the billed cost of a matter and the amount they actually end up collecting.

Other highlights from the report:

• ”The Billable Hour Still Drives the Boat,” it says, and many law firms remain much more comfortable with the status quo. Just 6% of law firms surveyed said they used AFAs for more than half their legal work in 2011, and only 12% of law departments reported using them for work assigned to outside counsel.

• Bidding and reverse auctions, once a rarity in the legal world, are on the rise. One-fifth of law departments reported using them for high-volume and repetitive work, while just over one-third of law firms said they had participated in those processes.

• In-house law departments and outside counsel are at least in agreement on their favorite types of alternative fee arrangements. The top three: flat fee (89% of law departments like them, and 93% of law firms); blended rate, where  all lawyers on a matter charge one agreed-upon hourly rate (47% of law departments, 89% of firms); and capped fee (57% of law departments, 83% of firms).

LexisNexis® Law Firm Billable Hours Survey

LexisNexis®  just published it survey on law firm billable hours for the small firm segment.  The survey was conducted in May of this year and included nearly 500 responses.  Survey participants ranged from sole practitioners to 20+ attorney firms.

Besides demographic data, the survey asked two key questions:

  • How many hours on average do you work per day?
  • How many hours on average do you bill per day?

The survey reported the following results.  “The average for all 499 respondents: The average hour worked on a daily basis was 9 hours; whereas the average hours billed on a daily basis was 6 hours.  The 33% difference in hours worked vs. hours billed can be caused by a number of factors:

  • Not utilizing and/or leveraging staff for non-billable functions
  • Inefficiency of managing and billing client work
  • Goodwill issues such as: Lawyers spend some of their time engaged in networking, business development and other non-billable activities – particularly when business is slow.  Some lawyers believe they cannot bill all clients for all hours worked so they purposely “discount” the actual number of hours worked in order to keep clients happy.

According to the survey, we found that attorneys were not billing all the time they worked. There are opportunities to increase billing efficiency whether by improving capture techniques or delegating non-billable tasks to others.

To get a copy of the full survey report  click here.

Clients falling back on ‘safe’ hourly rates

Clients are requesting, yet rejecting, innovative fixed-fee arrangements, lawyers at the NSW Practice Management conference heard last week.

The managing partner of Freehills, Mark Rigotti, shared his firm’s experience of the trend for alternative fee arrangements (AFAs) with an audience of around 20 at his presentation: Challenges to profitability and financial issues.

“[We] lay it out, a smorgasbord, on the table for them and they go for the chicken every time because it’s safe,” said Rigotti (pictured).

Richard Wood, the Adelaide principal of boutique insurance firm Gilchrist Connell, shared a similar experience.

“In every tender … in the last 10 years we’ve been asked to put up alternate fee proposals, which we’ve done, and none have been accepted,” said Wood.

“There’s a lot of hysteria about hourly rates and moving away from it and [I] don’t quite know who’s driving that because I speak to corporate counsel who don’t use them and my insurers don’t use them.”

Rigotti suggested that most general counsels (GCs) have “been brought up on a diet of hourly rates … that’s how [they] think, measure value and compare” and, provided they deliver what their organisation requires, the method is up to them.

“They know they want something different but they’re not sure what they want and if it all gets too difficult they’ll go back to what they know,” said Rigotti.

According to a Mallesons Stephen Jacques (now King & Wood Mallesons) survey of 374 in-house lawyers – 44 per cent of which were GCs –  50 per cent of respondents said fees billed at an hourly rate make up over 90 per cent of their total legal spend.

The survey, released in August last year, showed 66 per cent of respondents were happy with their current billing arrangements and only 29 per cent had reduced their use of billable hours in the past two years.

“You’ll see [from that survey] the top three AFAs were around fixed fees, capped fees and volume-based discounting. None of those are that innovative,” said Rigotti, adding that this indicates clients want certainty and that they were struggling with the difficulty of monitoring AFAs.

Pricing mixed up with sales

Rigotti said Freehills was experimenting with innovative AFAs with a “good client” and that there had been mixed experiences.

“Sometimes they like it, other times they think ‘let’s just get on with it’,” he said.

The firm, however, still captures all the time actually being spent on those jobs, to check wether they were profitable; a process, Rigotti admits, is “probably the wrong way to think about it.”

“It’s having an each-way bet,” he said, adding that the ultimate future is to unlink the sales and pricing conversations.

“Sometimes the fixed price is actually a negotiating piece of work upfront to win the job rather than a fully transparent dialogue with the client to appropriately price what they expect. If you could reach that [open and transparent] nirvana I think that’d be fine [but] quite often it’s mixed up with the sales proposition.”

In another fee experiment aimed at articulating the value of legal work, Freehills asked a client to pay what they believed the firm’s advice was worth.

Without negotiating any price upfront, Freehills gave the client a print out showing how much time it had spent on the matter and the client came back with 95 per cent of what was on the hourly timesheet.

“It put us at risk … but it allowed us to zero in on that the five per cent [which] was down to things they didn’t really need because they had in-house capabilities on particular parts of this contract. Normally that would be hidden in a discussion ‘oh the bill’s a bit high can you do something about it, can you bring it down?’.”

The New Normal – Alternative Fee Arrangements and Project Management for Lawyers

Frederick J Esposito, Jr.
ABA Law Practice

The big question many law firms ask is how many other law firms are actually achieving profitability by using AFAs? According to the recent Altman Weil 2011 Law Firms in Transition survey, alternative fee arrangements (AFAs) are used by 95% of all participating firms, and by 100% of firms with 250 lawyers or more. Also, the amount of non-hourly billing in 2010, measured as a percentage of revenue, increased in 58% of all participating firms, and in 81% of firms with 250 or more lawyers. Two-thirds of law firms reported their use of AFAs is primarily in response to client requests, while only a third offer AFAs proactively as a means of creating a competitive advantage.

There is no question under the “new normal” that clients are interested in AFAs, but trends would suggest that hourly billing arrangements are not going to phase out completely. While there are arguments about the pros and cons of AFAs versus hourly billing arrangements, the issue comes down to clients perceiving a widening gap between the amounts they are charged for legal services and the value of the services provided. AFAs have turned the tables, providing more certainty and less risk for clients, up front, AND law firms now sharing more of the risk.

Under the new normal, law firms must deal with the realities of client expectations and focus on delivery of legal services in an efficient and cost-effective manner. Law firm management is faced with the challenge of shifting from an hourly rate-focused paradigm to that of an efficient-focused business. Therefore, proper and thoughtful planning will be key to making AFAs, or any other billing arrangement, viable and successful. Law firms that preemptively think through the issues of internal efficiency and utilizing project management skill will be prepared to deliver projects more profitably.

Timekeeping will continue to play a critical role. Clients can perceive the value of AFAs, but law firms must continue to track the time it takes to accomplish tasks. Timekeeping data will become a powerful planning tool, rather than something that is passed on to the client in the form of a monthly bill. Law firms will get better at estimating fees to be charged for services and get a better handle on firm investment and generating profit.

There are five key elements to consider when making the shift to AFAs:

  1. Focus on historical time investments. Lawyers should be recording time using task-based billing codes. This will enable law firms to determine how much time is required to complete specific tasks and will assist the firm in developing sound AFAs.
  2. Improving time management. Law firms that use AFAs must pay serious attention to their lawyer/other timekeeper capacity and utilization. This is an area where project management skills will become essential. Firms will need to get serious about the proper leveraging of lawyers/other timekeepers to maximize client value, provide more predictability and minimize firm costs.
  3. Adhering to budgets and time-tracking procedures. Lawyers will need to be trained to review and live by case or matter budgets. Again, this becomes a project management issue. Despite the many perceived imperfections of recording time, tracking time is a logical means of measuring the firm’s effectiveness in efficiency and managing productivity.
  4. Evolution of AFA systems. As law firms learn more about their costs and better understand client concerns, they will refine their pricing strategies. Pricing systems might include blends of hourly rates, fee caps, menu, project and portfolio pricing. The key is to keep the AFA as simple as possible. Many law firms develop pricing systems that are often too complex and clients become frustrated and lose interest.
  5. Profitability. Understanding how much it costs the firm to produce a billable hour per task and per lawyer is essential to AFA success. Successful firms are heavily focused on efficiency and value, and have been successful in changing the paradigm not only in terms of timekeeping and economic monitoring, but in changing internal behaviors.

The big question many law firms ask is how many other law firms are actually achieving profitability by using AFAs? The short answer is some firms are making more profit, but many law firms repeatedly make mistakes that vastly reduce profits. There are already a large number of firms engaged in large scale AFA pricing, and doing so profitably. However, many of those firms made costly mistakes, and learned from those mistakes, before becoming successful.

Some of the mistakes when implementing AFAs include:

  1. Firms/lawyers don’t currently use AFAs, or have done so haphazardly.
  2. Firms/lawyers that have implemented AFAs, failed to place conditions on work or enforce change orders (i.e. changes to the terms of AFAs based on changing events in the matter), or failed to manage their teams effectively or failed to approach the AFAs methodically, or
  3. Firms/lawyers became intimidated by clients when there was resistance to pricing changes.

Those that have been successful with AFAs understand the economics and understand the need to pay more attention to the mechanics of their practices through better planning, organizing and managing of their firms and engagements. Examples include:

  1. System Tools. As noted above, law firms perform historical time investment analysis and determine how much time lawyers have historically taken to complete specific tasks, and creating criteria for assessing change order conditions, e.g. identify potential obstacles that could impact and require modifying AFAs.
  2. Training. Lawyers receive training on budgeting tools, pricing negotiations and assumption building, pricing renegotiations, project management and managing projects and staff to budgeting. Law firms train their lawyers to review and live by a budget, or to contact an in-charge/supervising partner when budget assumptions are being violated. Regular monitoring becomes critical to success.
  3. Resources. Lawyers are provided with resources such as pricing personnel, generally non-lawyer personnel, which can include a firm’s Executive Director or CFO, to assist the lawyers with preparing profitable AFAs. Other personnel include project/team managers that are responsible for monitoring the progress of matters and implementing initiatives for completing a matter timely and profitably.
  4. Personnel Management. Law firms have the challenge of helping lawyers understand the systems tools, training and resources, and they provide guidance for approaching matters in a different way. All of these tools assist law firms with improving internal and external communication, team building and accountability.

Two significant benefits of personnel management include clear, ongoing oversight of a matter, with the goal of creating value for the client, and completing the matter in an efficient and cost-effective manner, and the firm’s ability to learn new skills to improve internal behaviors and build success.

AFAs and project management are not a passing fad. Many law firms struggle with the balance of making the practice of law satisfying and financially rewarding. Now, under the new normal, the balancing act adds client expectations of efficiency, reduced legal fees and added value to the mix. The balancing act becomes more complicated, but not insurmountable.

Project management requires identifying a problem, setting goals and developing a process to keep matters on track. Law firms with this edge will understand their costs, be able to provide accurate estimates and deliver more value to their clients in a timely manner at a lower cost.

Clearly, lawyers and management staff that possess project management skills will gain a competitive advantage.

The 7 New Rules for Effective Law Firm Timekeeping

Todd Gerstein
Founder & CEO, Smart WebParts

In this competitive world, it no longer works to have a disorganized approach to your firm’s timekeeping. Firms that don’t make effective timekeeping a priority – from both the business process and technology angles – are losing money, increasing attorney frustration and compromising timesheet quality.

Based upon our experience and research, I’ve come up with a list of “new rules” for our times. The rules boil down to achieving these objectives:

  • Improve the timekeeping experience
  • Enhance the accuracy of the entry
  • Ensure all hours are booked

With those objectives in mind, here are the new rules for effective law firm timekeeping.

1. Stop trying to change your timekeeper’s behavior

A timekeeper’s behavior is very hard to change. (It is easier to influence new associates, but what about everybody else?) Timekeepers are human, which means they have different personalities — and therefore different behaviors — that are intrinsic to who they are. Our pediatrician used to tell us our kids came factory wired. Ditto for lawyers.

For 25 years, the conventional wisdom has been to compel everyone to keep their time contemporaneously. That never happened. Our research proves over and over again that contemporaneous timekeeping hovers around 40% of the population.  The new rule calls for fitting the tools to the timekeeper’s behavior, whether they be  contemporaneous, reconstructionist or collaborative timekeepers. This enables every behavior type to find timekeeping success.

2. Offer different timekeeping tools for different types of behavior

Trying to force contemporaneous software tools on a reconstructionist just won’t work. It’s not just inconvenient or difficult for the reconstructionist – it’s impossible.

Knowing this, you realize that if you want accurate, compliant timesheets, you need to find a system that offers a spectrum of software tools to suit all behaviors. Time capture to help the reconstructionist. Timers for contemporaneous behavior. Desktop systems for the attorney while they are in the office. Mobile systems for timekeepers who are out of the office or on the go.

3. Make time capture essential

No matter the behavior, the timekeeping tool that helps most and must be a component of any timekeeping system is time capture. This is the only way to ensure that all hours worked are booked into the system.

Time capture increases revenue by capturing billable time that is missed or underreported. It does this by monitoring firm systems and the desktop for documents, phone calls, email, appointments, research and more. It then provides the timekeeper with a journal of the day’s activities.

While reconstructionists benefit most from time capture, other timekeepers can use it to improve accuracy, and find lost units when they’ve been particularly busy multi-tasking or out of the office. Think of it as a timekeeping safety net. Not to mention the benefit of making it feel easier to enter time.

4. Prioritize accuracy

The attorney-client relationship is changing, with clients wanting more transparency and value than ever before. That’s why it has never been more important that bills accurately portray the activity and value of the work completed. The information provided by time capture will help the attorney compose better time entry narratives.

5. Enable your timekeepers to keep time anywhere

Without a doubt, the world has gone mobile. Everywhere you go, people are working and communicating using mobile devices like Smartphones and tablets. Whether they’re in court, on the road or at a soccer game, attorneys are working many hours outside the office and need their timekeeping software to be available everywhere. That’s now possible, either through a remote connection into the firm (for desktop applications) or on a smartphone or tablet.

Attorneys are busy people with many demands on them outside the office. But billable hours should not go unbooked because of a timekeeping system that lacks the flexibility to keep time anywhere.

6. Focus on technology

The technology to handle such a long wish list of features is now available to law firms. (Disclosure and shameless plug: We offer a product called Smart Time that fills the bill.) And, more than ever, updated technology must be a part of addressing the inefficiencies and challenges of law firm timekeeping.

Simply, great software technology can improve the timekeeping experience. Since timekeeping  is a major source of pain for timekeepers, whatever you can do to limit and reduce that pain will bring a huge and immediate return on investment for the firm and relief to your timekeepers.

7. Create a culture of compliance

To get timesheets in on time you’ve got to have a plan  that is non-negotiable, consistent and has explicit  expectations. Culturally, firms that have made timesheet compliance a priority are the most successful at achieving compliance.

Those who struggle have problems with inconsistent methodologies, unclear expectations and a culture that doesn’t value timesheet compliance.

A system can help a great deal, offering the right tools for a variety of behaviors. But without the culture, nothing will stick. We think the most effective strategy is that timesheets are due weekly, each Monday at noon for the prior week.  At month’s end, they are due the next day by close of business.

Conclusion

With these rules in mind, any firm can substantially improve both the business process and the actual technology of timekeeping.

We are at one of those moments where technology can revolutionize something that has been inefficient and painfully for  as long as the profession has existed; there are no more excuses for doing things “the way they’ve always been done.”

Apply these rules and find more billable hours, more accurate entries, fewer late timesheets and happier attorneys.  A true renaissance in timekeeping.