ANTICIPATING FUTURE SHOCK

Changing The 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environment, sanguinity about fees -- particularly when clients are deeply concerned about value for those fees – is obsolete.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 firm’s 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 that’s 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 today’s competitive environment – and makes a mockery of hourly billing. It’s such an anachronism, and so entrenched, that it precludes such rational billing approaches as value added and enhanced worth or contribution to a client’s business, neither of which is best calculated by the hour. As one sage put it, it’s 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, it’s 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 client’s 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 client’s 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 that’s not abreast of the technology paradigm, and certainly no firm can afford to not equal its clients’ technology.

            But for the professional, individual productivity can’t be enhanced by increasing the number of hours worked by each person. In professional firms, labor doesn’t 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 client’s 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. It’s 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. It’s done in four simple steps…

• Identify the appropriate client. These are clients whose businesses have changed with the economy and new technology, but for whom your service has remained the same. There are also clients whose business have grown, while your relationship with them has not.
• Find a basis to hold a conversation. Essentially, you want an approach that seems rational to the client, particularly if it's someone you haven't been in touch with on a regular basis. The focus is on greater immersion in what most concerned the client. If you are the managing partner, it's not only appropriate for you to contact any of the firm's clients, it may also be flattering.
• Move the conversation from a client satisfaction inquiry to a service information inquiry. The message is “We're very concerned that we're serving you well and efficiently, and meeting your legal and business needs thoroughly and effectively. But we want to better understand more about the dynamics of your business and industry in order to serve you better.” The meeting itself should be informal. The objectives of the meeting are simple …

·        To lead the conversation to a discussion of the client’s business and industry.

·        To listen. And not just listen, but to look for opportunities to better serve that client, such as new problems the client faces.

·        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, it’s 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.

This 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.

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