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    November/December 2020

    Finance

    The “New” New Normal: Pricing, Profitability and a Process Improvement Twist

    Frederick J. Esposito Jr.

    When we hear the phrase the “new normal,” we all flash back to the Great Recession, which began at the end of 2007, and remember the collapse of the real estate market, how credit dried up and how law firms struggled through a most difficult time. The immediate reaction was to cut costs. The profession saw attorneys and staff losing their jobs, and many smaller firms were acquired. The new business model that followed created an atmosphere for commoditized work thus creating opportunities for third-party legal service providers such as LegalZoom. But more importantly, we saw a shift in client expectations and the need for “alternative” pricing. In response, we saw many alternative fee or fixed fee boutique law firms emerging, so the business model for law firms radically changed with a renewed attention to pricing, legal project management, efficiency, business development, more client focus, and the biggest one of them all, value.

    What Do We See Happening During the Pandemic?

    We are seeing many of the same symptoms from the Great Recession as we officially enter the recession of 2020. The 2020 recession was already on the horizon, but the COVID-19 pandemic accelerated a trend already in motion. Clients, particularly with general counsel, continue to push back on fees, looking for more predictability and creative pricing. Again, the Paycheck Protection Program (PPP) and other federal subsidies notwithstanding, there was an immediate reaction to reduce legal spend. Many law firms furloughed employees and, for those remaining, initiated salary reductions that were in some cases as high as 50 percent. As always, the knee-jerk reaction is to cut expenses, but it is still a revenue game, and a focus on productivity should not get lost in the mix. While alternative fee arrangements (AFAs) and legal project management (LPM) have been around for quite some time, they are making another strong comeback, but with an added twist. We are seeing more focus on not only LPM as a tool for managing legal work and AFAs, but we are now adding process improvement (PI) to the new mix.

    "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. 

    Frederick J. Esposito Jr.

    COO

    Frederick J. Esposito Jr. is the chief operating officer of the regional law firm Rivkin Radler LLP and has more than 25 years of law and accounting firm experience. He is an author and sought-after speaker specializing in financial and organizational management and has managed and worked in a consulting capacity with several domestic and international law firms. He is also a senior faculty member and consultant with the Legal Lean Sigma Institute. [email protected]

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