Feature

posted 22 Jun 2010 in Volume 12 Issue 12

Masterclass: Driving Efficiency

Faced with increasing client pressure on pricing, how should law firms be using their KM resources to manage transaction profitability? By Harriet Creamer, director at Outer Circle, and Chris Stoakes, director of knowledge, research and learning at Hogan Lovells.

Four things you will learn from this Masterclass:

1. How to function effectively in an alternative billing environment

2. How to focus and prioritise a law firm’s KM resource

3. How the KM function can improve a law firm’s ability to price effectively

4. How KM can help the firm to deliver transactions efficiently and profitably

Partners claim these days to understand how their law firms operate as businesses. Whether or not they actually do, (1) they know they’re supposed to, (2) it sounds good to say so, and (3) they know that sophisticated clients are more likely to trust lawyers who seem business-savvy themselves.

But the reality is that most lawyers are in denial and it’s about to catch up with them.

In particular, clients are fed up with open-ended hourly rates for what they consider to be commodity work that should be process-based. In short, they are demanding fixed prices. This throws lawyers into a spin, not least because your average lawyer secretly considers him- or herself to be a craftsperson. Each job is a pot and no two pots are the same. Only after the pot has been thrown and fired can you work out its value. Dream on.

Clients are less and less prepared to pay premium rates for commodity work, when there are increasing numbers of process providers (both on- and offshore) which can do this work more cost effectively. Firms will increasingly only be able to charge more than minimum rates for work where their specialist expertise really adds value for the client. Which means that they must put themselves in a position where work which fails to meet the value criterion is either done very cost effectively or by someone else.

Functioning effectively

It is clear that a proper understanding of the firm’s key profit drivers, and the impact of profit on its working practices, is central to a firm’s ability to function effectively in an alternative billing environment. This understanding goes beyond the usual law firm metrics of time cost recovery, gearing and utilisation rates to the heart of the way the firm does business. Without it, the firm cannot be in a proper position to suggest or agree to appropriate, workable alternative structures or to work profitably within the framework of those alternatives, once agreed. Where a particular billing mechanism has been agreed, partners need to understand how the resourcing and other decisions they make will affect returns, and must be supported in getting this right. The firm’s lawyers must understand what drives its financial success if they are to adopt working practices which maximise profitability.

In particular, as a lawyer you need to do two things to adapt to a world where the profit from a job depends on your efficiency in resourcing it. First, at the outset, be prepared for the fee discussion. Second, learn from how you manage the transaction. If you do that, you will be able to price the next pitch more accurately and you will therefore be more likely to win it and a flow of similar types of transactions (or cases), which will improve your processes and increase your market share. In short, you will be a hero.

Role of KM

So what’s this got to do with knowledge management?

Everything. KM isn’t just about updating model documents. It’s also about how you use those documents, and about how you capture and use information about the transactions in which they are deployed.

Increasingly, the more progressive knowledge management lawyers (KMLs) want to get involved in this (most KMLs are client-facing anyway, in writing client bulletins, providing client training and updating client standard forms on occasion). They can help you in acting as internal consultants.

Understanding pricing

The crucial first stage in the process of delivering more effective working practice management is for the firm to make sure its lawyers understand the factors which drive its profitability. This goes beyond the traditional analysis (based broadly on analysing time cost recovery ratios on individual transactions) and requires them to understand where and how profit is made in the course of an individual transaction and where costs build up.

The key is to understand how different resourcing models impact on profitability. Looking at a range of matters run by a range of partners, it is surprising how quickly the effect of different working practices emerges. By doing this exercise across a number of different transaction types – and for a range of clients – the relative profitability and effectiveness of particular resourcing models and working styles becomes clear.

Pricing: The Client Perspective

Broadly speaking, a client will be influenced by the following when assessing a law firm’s pricing:

· Certainty: ideally, achieving a fixed price for the deal.

· Objectivity: that is, comparability with market pricing (where this can be identified).

· Value: the relative importance or value of the deal.

· Track record: how the client will benefit from the firm’s experience, and how this will impact on price.

· Efficiency: how well the firm handles process and project management.

· Trust: how important the client and/or deal is to the firm, and whether its lawyers will go that extra mile on the client’s behalf.

Having understood the firm’s financial metrics, the next step is to make sure that all those involved understand the client’s perspective on pricing (see box above).

Specific characteristics of the individual client must also be taken into account when considering pricing strategies. For example, the firm’s previous experience of the client (how easy or otherwise the client is to work with, how sophisticated it is, and the firm’s own experience of its other advisers) and the client’s previous attitude to cost should be considered, together with the importance of the client to the firm. And, of course, there will also be transaction related issues, such as timing, likely complexity and the range of specialists expected to be involved.

Getting all this right requires a depth of knowledge about the way the firm works and its experience in previous transactions for the client in question, as well as for other clients. This is where the firm’s knowledge function can make an invaluable contribution.

Re-evaluating KM

The firm’s knowledge function is an important repository of information about the firm’s work and its clients. Its knowledge management lawyers (KMLs) are experienced in gathering transaction and client related know-how. Traditionally, however, their efforts have been largely directed towards:

· improving quality and client service and managing risk, through the provision of appropriate templates and the collection and dissemination of know-how;

· participating in business development, principally by providing support on pitches and developing business and sector-specific expertise; and

· developing client relationships, producing publications as well as targeted updates, and providing knowledge services directly to clients.

In an environment where imaginative pricing models and alternative billing strategies are increasingly important, the KMLs can make a much greater contribution to the firm’s business if their skills and experience are focussed on improving the firm’s ability to price effectively, and on developing and supporting its ability to deliver transactions efficiently and profitably in an alternative fee environment.

At a practical level, this will require a number of changes (or, at least, changes in emphasis) in the operation of the knowledge management function. The importance of KML engagement with the firm’s key clients has been recognised for some years. It is clearly right that KMLs should have an in-depth and across-the-board understanding of the environments and sectors in which the firm’s clients operate, the businesses they run and the transactions they are engaged in.

But in the current environment, KML client engagement should also be directed at understanding the pricing influences described above, and at translating those into the way transactions are priced and run, rather than at direct relationships between KMLs and clients. In this way, by focussing on the principles of smarter working practices, improved transaction management and better pricing, KMLs can contribute significantly greater value.

KMLs should be encouraged to engage with the firm as a business. Given their traditional role in relation to standard form and precedent collection and generation, they are ideally placed to consider how work can be delivered more efficiently and effectively, without sacrificing quality.

However, in most cases, a key element has typically been missed – that is, the relationship between transaction processes, prices and profits. If the precedents and other transaction-related material KMLs typically produce are looked at as transaction ‘toolkits’, they can at best only partly achieve their purpose if they fail to take into account the financial impact of the processes they are designed to support.

Analysing data

An important part of the KML role should be the collection and analysis of pricing and profitability data – for instance through post-transaction reviews. With their experience of collecting and collating legal know-how, KMLs are ideally placed to take this on.

Once a better picture of process and how it relates to pricing and profits has been assembled, the firm can identify where improvements can be made, including adopting different working practices and technological solutions or making better use of external resources by buying in commodity material and layering it up with the firm’s bespoke knowledge resources. It can focus and prioritise its KML resource to make sure these improvements are achieved.

This approach needs to be applied to all the key work types in each practice area, deconstructing each transaction to identify all possible process improvements and building up a complete picture of each transaction type – including the processes and tasks involved, resourcing (including the way resource constraints impact on efficiency, cost and recovery), communication, documentation, pressure points and risks.

Going forward, data capture by KMLs should encompass information on pricing, performance against budget and recovery data. This sits neatly with their traditional role as collectors and disseminators of legal and practice based knowhow and will be a key element in ensuring that the firm’s lawyers continue to deliver transactions efficiently and cost effectively, meeting client expectations while continuing to deliver profit to the firm.

If the KML team fulfils these roles, it will be a central enabler of a refreshed and improved approach to pricing and performance within the firm. In the current economic climate, firms should be capitalising on the skills and experience of their knowledge management resources. Their traditional background in knowledge capture, digestion and dissemination and in the production of transaction-based materials lends itself to the work which needs to be done to understand the financial metrics of different transaction types and revamp transaction processes to take these into account. By prioritising their KML teams’ efforts on efficiency in transaction management and focusing them on pricing, firms will make a direct link between knowledge management and profit.

Further drivers

If you need further persuading, consider this. You could make more money (or at least keep the business and clients you’ve got) by outsourcing. Up till now, the emphasis has been largely on back office processes, but increasingly firms are considering outsourcing elements of their transaction processes.

A crucial first step for any sort of outsourcing – whether of legal process or back office functions – is that the firm understands the processes it plans to outsource, in particular as regards their impact on its profitability, and is able to manage them effectively itself. Without this understanding, it is impossible either to make a proper assessment of the likely cost impact of outsourcing arrangements or to manage them properly going forward.

There’s one final reason for doing all of this. The current generation of law firm partners are eyeing up the Legal Services Act. But nobody is going to buy or invest in your firm if you don’t appear to have a handle on business processes and their impact on your firm’s profitability.

– harriet@outercircle.eu

chris.stoakes@hoganlovells.com