"Without data you're just another person with an opinion." —W. Edwards Deming
There is no question the recent pandemic has precipitated many changes as well as opportunities for law firms. Change management has become the buzz phrase, and the need for current and new performance metrics is increasing. Law firms have followed David Maister’s Rules of the 5 Drivers: Realization, Utilization, Leverage, Expenses and Speed. All these, with some variations, are key performance indicators for profitability. But with the changes in the law firm business environment taking place at an increasing rate, law firms need to take deeper dives into client, employee, competitor, financial and technology data, and much more to fully understand how their law firms really work. With respect to pricing and profitability, law firms need data from these areas to understand the factors that contribute to the cost of producing legal services. Also, law firms need to understand what their competitors are doing so they can differentiate their firms in a legal market that is looking for firms to address inefficiencies and waste in their delivery of legal services, and change their legal service delivery model to increase the value being delivered. Trends suggest that law firms in general have not demonstrated or have been very slow to move the dial in focusing on improved practice efficiency. More important, law firms need to understand how they are measuring profit. By firm or practice group? Client or matter? Originating or working timekeeper? How are expenses allocated? Law firms can discuss income statements and financial performance, but do law firms have the aforementioned data to analyze and address the issues of cost to produce legal services, qualify and quantify firm risk, and ascertain predictability in spend for clients? And, do clients perceive the value of the services provided for the AFA proposed? Law firms need to exercise aggressive adaptation and leadership to initiate these “process” changes to stay competitive. Herein lies significant opportunities for law firms.
Under the new normal, law firms will need to rise to a new level of operational proficiency to effectively price legal services. Some of the metrics to consider in our ascent: efficiency, client retention, legal market, collaboration, leverage and fiscal hygiene.
Change Management With Process Improvement
The pandemic abruptly threw law firms into change management mode, which many firms were not ready for, but it is clear many firms have risen to the challenge. While there is now a rebirth of AFAs and LPM, there is also more of a focus on efficiency with law firms working in a virtual market. During the last recession, AFAs and profitability could be hit or miss. This was attributed to a lack of formal structure or deep focus on pricing strategies other than going through firm historical data and trying to get in line with legal service budgeting. One of the benefits of working virtually has been the added perspective of being able to see inefficiencies or “waste” in preparing and providing legal services, which in turn can produce excessive and unnecessary costs that impact pricing and profitability.
Many law firms will immediately implement “quick fixes” due to the urgency with delivering timely work product, and whether law firms realize it or not, they are diving headlong into a process improvement and management mode. Process improvement is the added twist that allows us to consider how we are producing legal services and what we can do to improve how we create and deliver value to the client.
For law firms, process improvement is a systematic practice of analyzing how work flows and the steps taken to produce the current outcome. Law firms analyze the steps searching for issues, problems and opportunities, which include the review of data as noted above, and then solving those problems by creating opportunities that are then developed and implemented for a more improved and efficient workflow. LPM steps in so we can manage the new process for continued optimum performance. It is clear the relationship between urgency and arriving at innovation has created opportunities for law firms to make needed process changes that will benefit firms operationally, but even more so strategically, with improved processes for better pricing and maximum profitability.