Billing Structure And Enhancing Per-Partner Value
Out of crisis and chaos, such as an Enron/Andersen fiasco, can come significant advances in ideas and concepts. Chaos is a wakeup call that anachronistic and obsolete structures and practices are long overdue for change. And while the most significant changes arising from Enron/Andersen are most likely to affect accounting firms in the foreseeable future, it would be unrealistic to expect law firms to be exempt from scrutiny and ultimately, reexamination of the traditional practices that now pervade the legal practice. What may well emerge are some new ideas that can help move the professions and your firm forward.
We now live in a world in which globalization permeates commerce at warp speed, in which information proliferates far more rapidly than it can be either absorbed or applied, in which technology changes concepts of time as well as the sheer mechanics of practice, and in which the single most pervasive factor in contemporary law practice management is competition. In such a world, can the traditional edifice of the legal profession continue to stand against the changing tides of commerce and society?
There are questions raised, the answers to which that can help you define what you can do now to stay on the leading edge of the profession in the future. For example, in this competitive environment, sanguinity about fees -- particularly when clients are deeply concerned about value for those fees is obsolete. Can such traditional structures as the hourly rate and partnership as a form of governance continue to serve the changing needs of the marketplace?
Probably not. We are seeing cracks in these structures. For example, the Andersen strategy to deal with its legal problems was substantially impeded by the time it took for all the partners to participate in approving or disapproving the strategy. How, then, will partnerships deal with the next crisis?
Can a firms success, in this economic environment, continue to be measured solely as a multiple of the billable hour? The billable hour, a practice used only since the early 1960s, has become an artificial device that ill serves both professionals and clients. It divides the time of the accountant and lawyer and consultant into parts, turns each professional into a bookkeeper, and creates such profound guilt for every working hour thats not billable that important non-billable firm needs are inadequately addressed. It affords the opportunity for the worst kinds of excess, such as padding hours, thereby increasing revenue without supplying value a short-sighted practice bound to backfire. It makes no distinction between the hour spent on trivial activities and the hour spent on substantive matters. Moreover, if the client perceives that there is no added value in the hourly bill, the general practice is to renegotiate the fee, which is becoming a common practice in todays competitive environment and makes a mockery of hourly billing. Its such an anachronism, and so entrenched, that it precludes such rational billing approaches as value added and enhanced worth or contribution to a clients business, neither of which is best calculated by the hour. As one sage put it, its a virtual cartel in which every firm seems to arrive at the same billing rate, even though quality of service is not consistent from one firm to another. Or even from one partner to another in the same firm.
Can the legal profession, under the billable hour structure, find a way for each partner to increase per-partner revenue, and for individual partners to contribute a fair share of revenue to the firm? Not easily.
While change in the professions moves slowly, there are still at least two steps you can take now that can make your firm more competitive, efficient and profitable reintroducing value added billing to ultimately replace the billable hour, and enhancing partner value by increasing revenue per partner. Both are part of the same process.
Value Added Billing
An alternative to hourly billing that is often used, and that was popular before the billable hour practice became ubiquitous, is the lodestar formula, in which a reasonable hourly rate is multiplied by a reasonable estimate of the number of hours it would take to do the assignment. But this, too, eventually falls prey to the same problems caused by the straight billable hour. Most significantly, it offers no foundation for assessing value relative to cost.
The value of a service or matter for a client, its important to remember, is the value to the client not to you. Assigning value, therefore, is not arbitrary.
The best approach to fathoming the value of a task may be found in a clients answer to the question, If your problem could be resolved, how would it help you? It is a subtle but powerful question. It asks the client to think of the value of the solution, not just the cost of it, an important shift in emphasis. As the client struggles to answer it, the following happens
· The issues that concern the client become more clearly defined and focused.
· As the core of the issues become more clear, the nature of the issues become more urgent.
· Assigning a dollar value to the solution moves from an hourly rate to a value rate.
You already have some sense of the cost to you of dealing with the clients problem, of your overhead, and of the margin of profit your firm needs. This, of course, must be factored into the price. But by having a clear definition of the problem, and an understanding of how important the solution is to the client, the cost of the solution you offer becomes more readily acceptable.
At the same time, the client
realizes the freedom from the evils of the billable hour, such as billing the
same for trivial matters as for important ones, and for the incremental costs of
each phone call. Value billing is exactly that charging for the value of the
solution, and not for the mechanics of the process.
Increasing Per-Partner Revenue
Inherent in the process to increase per-partner revenue is the concept of productivity and its relation to value billing. Increasing individual productivity is the key. The greater the value of the solution to the client, the more can be charged. If the new, more valuable work can be done in the same time as the old work, the greater the productivity, and the likelihood of greater profit. As they say in the horse business, it costs as much to feed a bad horse as to feed a good one.
A person mowing a lawn can increase productivity by walking faster, or by using a bigger or better machine. The only way a professional can increase productivity is to increase the value of the work being done for a client.
To a large degree, professional firm productivity is enhanced by technology, and today, few practices are not automated. Consider, for example, what Lexis/Nexis has done for case preparation. Word processing, e-mail and e-mail management, intranets, data storage and rapid retrieval all have been integrated into the practice. Rare is the firm thats not abreast of the technology paradigm, and certainly no firm can afford to not equal its clients technology.
But for the professional, individual productivity cant be enhanced by increasing the number of hours worked by each person. In professional firms, labor doesnt solve problems skill and professionalism do. The answer, then, lies not in more hours, but in increasing value to the client of the solution, and thereby increasing revenue for each matter. This can be achieved by better understanding client needs, and by better understanding the value driven core of a clients needs. The better the understanding the greater the likelihood that more ways can be found to better serve the client.
In fact, there is a process to achieve this understanding. Inherent in every client business may lie a way to mine as much as 20 percent more business than you now have from that client now. Its a technique and a process that systematically projects you into a business-oriented relationship that increases your value to the client, and enables you to add that new business to existing matters. Its done in four simple steps
· To lead the conversation to a discussion
of the clients business and industry.
· To listen. And not just listen, but to
look for opportunities to better serve that client, such as new problems the
· To reach a point at which you can ask
the magic question, If we could help you resolve that problem, how would it
help you? Not would it help you, but How would it help you?
The crucial point to remember is that you're not there to sell -- you're
going to ask questions -- systematically, and in ways that lead the
client to expose areas in which you can increase your service.
Realistically, changing the structures of the profession will not be done
by any radical or rapid process, but rather by an incremental one. Thee is too
much comfort and advantage in sustaining the current systems, as irrational as
they may be. But time and attrition are the forces that usually generate change
in entrenched structures. Change will come, as it inevitably does, from the
needs and demands of clients, and not always by fiat from the firm itself. But
the firms that push to change the structures, to be innovative, are the firms
that invariably excel.
This is not only a changing environment for law and accounting firms,
its an increasingly competitive one. And while professionals have been
exhorted for years to listen to clients, careful questioning and careful
listening now become the single most effective device for increasing
professional productivity. Increased productivity, in turn, increases partner
value to the firm and obviously, increased profitability. These are the
forces for change in a changing environment.
article originally appeared in the excellent publication, Law Firm Partnership
& Benefits Report, edited by the estimable Silvia Coulter and published by
Law Journal Newsletters. It is reprinted with permission.