Walker Clark Worldview

While attending the mid-year officers meetings of the International Bar Association last week in Copenhagen, Denmark,  I had an opportunity to conduct my informal, unscientific semi-annual survey of some of my  colleagues in the IBA Law Firm Management Committee. I relied on the time honored methodology of casual conversations among professional friends.

Although it was expressed in a variety of ways, the top concern of these law firm managers and leaders was how to protect — and maybe even improve — the profitability of a law firm’s internal operations in increasingly price-sensitive markets. This concern prevailed among law firm managers and leaders from law firms on every continent, from small firms to some of the largest in the world, and in a broad range of practice specialties.

There was also a recognition that one of the most cost-effective methods of managing the profitability of internal operations is through an increased emphasis on quality assurance. This was expressed in a number of interesting and insightful ways.  For example:

Clients are no longer willing to pay us to fix our own mistakes.

Clients won’t subsidize our learning curve.

We have to start looking inward to improve our profitability; continuing to raise fees no longer works.

We have to find a way to avoid making mistakes in the first place, rather than relying on fixing them after we make them.

We get only one chance to get it right.

Quality assurance is Walker Clark terminology for the application of Total Quality Management to the practice of law. It affects both back-room and support operations, such as clerical support and billing, and the actual delivery of legal services by lawyers and paralegals. Members of our firm, including me, have been advising and assisting law firms, corporate law departments, and government legal agencies about quality assurance concepts, tools, and methods for more than 20 years. Our experience demonstrates that quality assurance is the most cost-effective profitability tool that a law firm can use; because it works in the core operations of a legal practice, where the great majority of waste, inefficiency, and unnecessary costs are to be found.

For more information about quality assurance programs, please contact me by email or telephone at +1.239.466.8370.

Norman Clark

The people who do the work are in the best position to improve it.

This is the third in a series of posts about the characteristics of successful quality assurance programs in law firms.

Many law firms assume that the installation of an effective quality assurance program will require hiring a platoon of expensive external consultants to set up and administer the system. Actually, this is the wrong way to do it.

Law firms already have the internal quality assurance “experts” that they need — their own people.

Quality assurance requires a firm-wide approach and enthusiastic executive-level leadership. However, the “real work” is done by fee earners and support staff in the practice groups and project teams. Most risks arise from a relatively small number of specific weaknesses in the way that work is performed every day.

The people who do that work every day are usually the ones who can best diagnose the causes of problems in work processes. Therefore, a major component of a successful approach to quality assurance is to provide knowledge, tools, and methods to people working in departments, practice groups, and teams. This empowers them to take responsibility for improving the quality of their work.

Although we recommend firm-wide infrastructure and consistent procedures to manage quality, the intense focus must be at the working level. The key persons in are the lawyers who are managing client matters day to day. This working-level approach is almost always more successful and less expensive than solutions imposed by senior management or outside consultants, who arrogantly believe that they “know the business” better than the people who work in it every day.

When Walker Clark, LLC, assists a law firm with the development of a serious quality assurance program, we contribute tools, methods, measurements, and program management structures. The real improvement comes from the people who do the work.

Norman Clark

It only takes one hole to sink a ship, not a hole in every compartment.  If one practice group — or even one lawyer — has a vulnerability, the same or similar weaknesses probably exist elsewhere in the firm. A firm-wide approach to quality assurance therefore usually produces the best return on the investment of time, resources, and attention.

To carry the maritime analogy forward, we observe two principal types of “leaks” in law firms with poor quality assurance. Like many leaks, each one can go unnoticed for months or years while it does major damage to a law firm’s financial seaworthiness.

Reduced productivity

“We can always find time to fix our mistakes, but we can never find time to prevent them.”

Most law firms rely primarily on after-the-fact inspection to catch and correct mistakes, particularly in documents. Such rework can consume as much as 40% of the time of fee earners and staff. Since most clients are unwilling to pay the law firm to correct its own mistakes, every hour spent in rework represents a revenue-producing opportunity that is lost forever.

Law firms that have introduced serious, systematic quality assurance systems and procedures have found that the resulting improvements in productivity can produce substantially increased fee revenue without proportional increases in staff. This results in dramatic improvements in profitability.

Loss of clients

“We get only once chance to get it right.”

This comment by one of our firm’s clients, a practice group head in a mid-size firm in the United Kingdom, summarizes what law firms everywhere are experiencing.  Clients today have decreased tolerance for poor quality. By the time the client actually complains, it might be too late to save the firm’s credibility with the client.

This leak is more subtle than the client who fires the law firm midway through a case or matter. One of the most important diagnostic indicators of a systemic quality assurance problem is the relatively low percentage of clients who return to the firm for subsequent legal services.

Interestingly, there also appears to be a correlation between poor quality assurance and poor recovery. Firms that lack a quality assurance system also tend to be inept at responding promptly to client complaints. At best they tend to placate the unhappy client for the moment, but do little if anything to prevent the problem from arising again.

Norman Clark

Quality assurance will be one of the most important factors in law firm business strategy in the decade of the 2010s. It will have profound effects on law firm profitability by reducing the causes of poor productivity. Law firms that do quality assurance well will also have a powerful competitive advantage over those for whom “quality assurance” is little more than crisis-to-crisis improvisation in response to client complaints.

The current state of quality assurance

As my colleagues in Walker Clark, LLC, and I work with our clients in law firms, we observe six serious deficits in quality assurance. These are particularly acute in small and midsize law firms, but they can apply to law firms of any size. They also appear to be worldwide.

1. The lack of a consistent, firm-wide quality assurance infrastructure in the firm and in practice groups
2. Little or no awareness of the basic principles of service quality in the delivery of professional services
3. Inadequate data upon which to make risk management decisions
4. Inadequate practices and procedures to delegate legal work and manage its quality
5. Over-reliance on after-the-fact inspection of work product as a quality management procedure, rather than reducing or eliminating the causes of error
6. Inconsistent project management skills and practices

In tomorrow’s post, I will begin a six-part overview of the core elements of an effective quality assurance program.

But for now, ask yourself: “How many of these six deficits exist in my law firm?”

Norman Clark

During the past eight years, my colleagues and I in Walker Clark, LLC, have had the privilege of working with some of the most successful law firms in the world.  We have also had the challenge of advising law firms who want to turn around chronic disappointing performance.

One of the common elements in both types of law firms is performance objectives.

Successful law firms typically use them. Unsuccessful firms usually do not.

Properly managed performance goals produce clear, measurable benefits to a law firm’s financial performance and market reputation. These usually include:

• Higher fee revenue per lawyer
• Lower operating costs
• Improved quality assurance
• Higher lawyer and staff morale
• Lower lawyer and staff turnover rates

The bottom line is the bottom line: substantially improved and sustainable profitability.

This is why I continue to be amazed by otherwise intelligent, sophisticated law firm partners who say that individual performance goals, and the ongoing coaching and feedback that are needed to make them work most effectively, are a waste of time. This curious, old-fashioned notion is refuted by the real-world experiences of progressive law firms that have introduced performance objectives and manage them well.

Norman Clark

What can law firms expect in 2010? Here are two points to factor into your planning for the new year.

• Most of the world will see economic recovery in 2010. Most Latin American economies will recover to, and surpass, 2008 performance — especially in GDP growth. We also expect to see recovery by the end of the year in every other region of the world. Recovery will be significant and sustainable, even in the United Kingdom and the European Union; although it might not be until 2011 that some national economies see a return to 2007 levels of performance.
• The picture is not as optimistic for the United States, however, where business failures and personal bankruptcies are likely to continue at record levels. Recovery in the U.S. will also be hampered by the dysfunctional economic policies of the Obama government, and its stubborn failure to acknowledge candidly and address honestly the issues that have decayed the foundations of the American economy and the American political system over the past 30 years.

What will this mean for law firms?  The answers will be highly firm-specific and will vary by jurisdiction, law firm specialty, and size.   There are four issues, however, that I am hearing discussed frequently among our clients and professional friends in law firms worldwide:

• Profitability.  Small and midsize corporate and commercial firms in the United States will continue to struggle with profitability issues, particularly on the revenue side.  Cash flow and management of working capital will continue to be problems for many firms.  We also expect to see continued business failures, downsizing, and partner departures, especially in local firms with fewer than 50 lawyers.
• Outsourcing.  There will be a renewed interest in outsourcing of administrative, marketing, and some lawyer functions in order to control costs.  Some of these efforts will work very well; others will be disappointing.
• New players in the international market.  2009 was a year of retrenchment for large international law firms.   In 2010, we expect to see a renewed interest in carefully selected international expansion. Look for some significant international law firm mergers, some of them involving firms that have not previously been considered to be major international players. We also expect to see regional firms, particularly those based outside North America, enter the international market.
• Quality assurance. There will be renewed interest in the quality of client service and in the efficiency of internal client service operations, not only as competitive advantages but also to reduce operating costs.

These are not the only things that we expect to happen in law firms in 2010, but they are interesting examples how progressive law firms are planning their responses to the economics of 2010, as we perceive them now.

Norman Clark

We are now in the last two weeks of 2009, which, for many law firms, means the last two weeks of the fiscal year.

It is not too late to make significant improvements in your firm’s profitability for 2009, even at this last minute.

Focus on collections.  This money is already yours.  Other than the cost of a telephone call, the added fee revenue is pure profit.

Here are four tips:

1. Pay close attention to unpaid expense reimbursements. Even if the client is unable or unwilling to pay the fee, you can appeal to the client’s sense of fairness by asking the client at least to pay the expenses that you or your partners have already spent on the client’s behalf.
2. Offer to settle accounts receivable that are more than 180 days old at a deep discount, provided that you receive payment by 31 December. Your probability of ever collecting these balances without compromise has already fallen below 50%. Moreover, a substantial percentage of your long-overdue balances are probably from relatively small accounts.  You can possibly write off as much as 50% without a significant negative impact on overall profitability.  Why not take what you can get this year, rather than carry forward an account that will probably never be paid in full?
3. Offer an end-of-the-year rebate for all accounts receivable.  For example, if the current fee balance is received by 31 December, you will apply a rebate equal to payment of 5% or 10% against the next invoice in 2010. Although this will reduce your revenue a little in 2010, it could make a significant difference by the end of this year.
4. Pay special attention to clients that are having cash-flow problems or other financial difficulty.  Ask them to make a significant partial payment by the end of the year and a commitment to a payment plan in 2010.  In return, agree to write off a significant portion of the total balance — perhaps as high as 30% or 40% — if they complete the payment plan as agreed. You know (or, if you are doing your job properly, should know) which clients are in financial trouble. Most of them will respond positively and will also become more loyal to your firm.

These techniques work. Most clients see these as favors from you, not just last-minute bill collecting. They also can put a significant amount of additional profits into each partner’s pocket.

Norm Clark

This has been a rough year for many law firms. Managing partners continue to tell me about the worst cash flow problems since their respective firms began, and which do not show signs of improving before the second quarter of 2010. Others are still trying to adjust to new economic conditions that show signs of becoming permanent realities.

What should be the top management priorities for law firms between now and the end of their current fiscal years? What would produce the best return on the investment of time, attention, effort, and resources?

Let me suggest one action that every law firm should consider as a possible high-priority management action between now and the end of the year.

Understand the forces that drive your firm’s profitability.

Your law firm’s profitability is a unique mixture of a variety of forces in the market, in the client base, and inside the firm.  Understanding these forces is not an arcane or complicated process. It is essential, however, if you want to sharpen the focus of management attention on those factors that really will make a difference for your firm. Many firms spend far too much time and money chasing the latest legal management fad, only to learn that it had little value for them.

Because law firms have profound differences in culture, structure, and operations, there is no universal formula or methodology that will produce accurate, reliable results for every firm. Walker Clark, LLC, for example uses a variety of analytical methodologies, each one tailored to the specific characteristics and circumstances of the law firm.

This is not an arcane, complicated, or expensive process. For some law firms, however, it will be essential to plotting and following a course to economic recovery. For firms that have weathered the Great Recession well, it can be a high-yield investment in building on the firm’s strengths and improving its financial and market position even more.

Norman Clark

A few moments ago, I received a great little commentary from The Lawyer‘s daily e-mail feed.  The full piece apparently is not available on their site, so I will quote it in its entirety.

Ostrich farm

One of the features in this year’s The Lawyer UK 200, published next month, will be an analysis of how similar firms’ 2008 LLP accounts were to the figures they provided us with last year.

Why? Because we’ve become used to the criticism that the figures we publish are not accurate. Firms, critics say, have inflated – or in some cases been overly modest about – their figures to suit their (usually PR-related) purposes.

Common sense suggests that the prevalence of LLPs these days and the theoretical transparency that brings should stop any firm from feeding the market bull. After all, a few months down the line it’s going to have to publish its accounts for the world to see.

But then, who ever said lawyers were sensible?

The news that Cobbetts LLP has declined to state its 2008-09 profit (see story) points to a curious line in PR at the very least.

As The Lawyer editor Catrin Griffiths says in her leader today, “It’s hardly as if Cobbetts is alone in having a hard year”.

Yet while the majority of firms have had no difficulty reporting their results, no matter how bad, Cobbetts felt unable to do so. And, sadly, it’s not alone.

The research process for this year’s The Lawyer 200 has been characterised by the number of firms saying they’d decided not to “participate” – as if reporting year-end results were some sort of optional parlour game rather than an annual function of grown-up, transparent business life.

In previous years, we’ve always felt it fairer not to identify which firms provided figures to protect those that do. But now, in our own mood of post-LLP transparency, that policy has changed.

This year, for the first time, we will identify the firms that have not provided figures.

Our aim, as always, is to be as accurate and as fair as possible. Naming and shaming may be the best way to achieve that goal.

This raises the question of the utility of public reporting of law firm financial performance, whether for publication by outlets such as The Lawyer and The American Lawyer, or for use in the various surveys of law firm economics.  It may be gratifying to publish, for example,  your average profits per equity partner — a figure that I always view with great skepticism — but does it make good business sense in the long term?

Walker Clark, LLC,  does not have a position on this issue.  We advise our clients to  consider the are good arguments for and against; and each firm must make its own decision about whether to participate in compilations such as The Lawyer UK 200.  They are useful, but participation does carry risks that a firm must be ready to assume as part of the deal.

Once a firm embarks on a policy of publishing its good economic performance, there are are definite costs associated with a change in policy.  The article quoted above makes a good point:  You can’t be “transparent” one year and hope that nobody will notice when decide to become opaque.

Has the current economic crisis changed the economics of legal practice for the next ten to twenty years?

Some of the clients of Walker Clark, LLC, tell me that they have not noticed a significant reduction in the volume of legal work, except in a few areas, such as real estate and mergers and acquisitions, which traditionally are particularly sensitive to business cycles.  In some practice areas, such as restructuring, litigation, and bankruptcy, the volume of instructions has actually increased.

What is different, however, is that clients now expect lower fees and more responsive service than before.  They are challenging fees and demanding better value.

These are not just short-term responses to cash flow issues in the clients’ businesses.  It is becoming clear that many clients regard these adjustments in fee structures and rates as a permanent change in the relationship with their legal service providers.  As one partner in a firm in New York told me recently:

We don’t like to admit this, but we know that our “discounts” are really permanent price cuts.

This poses several interesting — but by no means academic — questions:

• Has the traditional partner-managed law firm become obsolete?
• Can law firms continue to expect multi-million dollar profits per partner?
• Will law firms need to change fundamentally the way in which they deliver legal services?
• Can the global mega-firms survive a legal market of lowered financial expectations?
• Can small speciality law firms survive a legal market of  higher service-delivery expectations?
• Will we see a surge in the size and scope of practice of in-house corporate law departments?
• Can today’s law school graduates expect the same highly-paid lifetime professional prospects that their parents’ generation have enjoyed?

What questions would you add to this list?

Norman Clark