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March 18, 2010 5:23 PM

Teaching Lawyers How to Manage: Can It Improve the Bottom Line?

Posted by Ed Shanahan

By Jim Hassett

When a law firm agrees to handle a matter for a flat fee, it must find a way to meet the client's needs within that fixed budget. Assuming the client is satisfied, the less a firm spends, the more money it will make. But, as the CFO of a firm with more than 1,500 lawyers explained in a survey I conducted recently on alternative fees, most lawyers have worked their entire careers under the billable hour model, in which "the more hours that got charged, the more money [they] made. And so they've never really had to manage [budgets]."

Several other participants in my survey pointed out that project management principles could help lawyers who need to deliver quality solutions within fixed-fee arrangements. The chairman of a firm with more than 800 lawyers, for example, noted that "in the world of construction, architects, engineers, and contractors have been working on a fixed-price basis...for a long time....There is a body of learning...about how to estimate, how to contract, how to define scope, how to manage changes, allocate risk, how to manage fee disputes, delays, [and] changes in scope [that could] be adapted to the legal profession."

But how should this body of learning be adapted to the legal profession? One approach, which Orrick, Herrington & Sutcliffe is using, is to create a career track specifically for project managers, both lawyers and nonlawyers. Orrick reports that this helps control costs and meet client needs. But this is a radical solution that is unlikely to succeed unless it is part of a bigger shift in a firm's business model. If other firms try to hire project managers without implementing this shift, they may find themselves investing a great deal of money in developing plans that partners will ignore.

Another, more moderate approach is to work within the existing culture of each firm, using tactics that help lawyers identify project management principles that fit each practice and personality. That's what we did in a recent workshop at Warner Norcross & Judd, a 222-lawyer firm in Grand Rapids, Michigan. Senior partners first reviewed this list of eight project management areas and then selected the one that was most relevant to their immediate needs:

1. Set objectives and define scope

2. Identify and schedule activities

3. Assign tasks and manage the team

4. Plan and manage the budget

5. Assess risks

6. Manage quality

7. Manage client communication and expectations

8. Negotiate changes of scope

Next, they reviewed a list of project management practices related to that area, and selected one or more for implementation. For example, one lawyer picked "assign tasks and manage the team" from the list above, then decided to focus on asking team members to set a goal for the number of hours they would take to complete each task. He noted that the firm already did this with law students in their summer programs. When summer associates were given a new assignment, they were asked to estimate how many hours it would take before they began. If the estimate seemed out of line, the supervising lawyer discussed the task with the law student to figure out how to finish the task more quickly. The lawyer from our workshop is now adapting this technique to working with his partners on alternative fee matters.

Another principle discussed in the workshop was just as simple and even more likely to quickly impact the bottom line: "Hold difficult conversations before money is spent, not after." Anyone who has been involved with law firm finances knows the importance of the realization rate, the percentage of billable time that is paid for by clients. The realization rate calculation typically includes work that was completed but never billed (e.g., if a junior associate runs wild on a research assignment, the relationship partner might never bill the client for that work), and expenses that were billed but not paid. Unpaid bills are lost income that could have gone to the bottom line.

There are many reasons write-offs occur, but poor communication is frequently the key. Consider this scenario from a senior partner of another 800-lawyer firm in our survey: "[The client asks,] 'What's it going to cost?' and [the lawyer] says 'Oh, I can't tell you, we don't have enough facts. But normally a deal of this size would run $120K-$150K.' The client hears, 'You've promised me $120K.' And then that's it. That's your fixed fee. And you don't know that, of course, because you thought that you said, ‘This is what it costs on average.' And at the end the client would say, 'Gee, this cost $200K, how is that possible?' And you think, 'Well, you know, your CEO got fired in the middle of the deal. The deal dragged on for three years. It turned out you got sued. Yeah, it cost $200K.'"

In the same interview, the COO of the firm commented that "You can't wait until the end to talk about all the change orders. You really have to not be afraid to address these issues. A lot of partners don't want to do that." If the lawyer in this scenario had discussed the issues with the client early in the process, she might have gotten a larger payment, or perhaps she could have satisfied the client's true need with fewer billable hours.

Low realization rates have always been a problem for law firms, and they are getting worse. By applying this single project management principle, large firms could improve realization rates and make a significant improvement to their bottom lines.

Law firms have different needs and different cultures, and as they adapt to the new demands of fixed-price work, the precise ways that project management is applied are likely to vary both from firm to firm and among practice groups. Whatever firms try, it is clear that they can benefit from applying proven techniques to manage projects. As the CFO of the 1,500-lawyer firm in my survey put it: "If we teach our people to manage, we can make more money."

Jim Hassett is the founder of LegalBizDev, a consulting firm that focuses on project management, alternative fees, and business development.

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