The Marketing Issue

Finance: One Year Into the Pandemic: Does Process Improvement Produce the Perfect Fee Arrangement?

Frederick J. Esposito Jr.

Over the last year, the legal profession experienced a significant paradigm shift moving to a predominantly virtual law firm platform, coupled with reshaping business models and reviewing law firm processes for a more streamlined and cost-effective approach for producing legal work. Overall, the legal profession effectively mastered the paradigm shift. However, as with the recession of 2008, we had many takeaways and the question was always: “Will these changes be permanent?” I think it is safe to say the pandemic of 2020 created many changes and many of those changes will remain permanent. Twice into the breach in 12 years and the mantra remains unchanged—clients want alternative fee arrangements and are steadfast for the value proposition. Law firms must continue to review and improve those processes to produce legal services with less waste, streamline costs while also promoting client value so pricing strategies that address client needs can be developed, as well as produce profit for the law firm.

Is There a Perfect Fee Arrangement?

The short and general answer is no, but individual law firms may find a different answer to the question based on varying factors that may be unique to a particular law firm. For example, every law firm’s economics are different based on practice makeup, size, location, attorneys and staffing, but understanding your firm’s economics will be essential for success. Also, any alternative fee arrangement (AFA) proposed must align with the economic interests of the client and the law firm, and most important, it must create a financial incentive for the firm to reduce costs and create incentives to accomplish specific, identifiable client objectives. The ability for any law firm to arrive at an answer to this question that satisfies the client and the law firm will be contingent upon sufficient empirical data, performance metrics/economics as well as a law firm culture that will embrace these changes. Culturally, the goal is to create a relationship between AFAs and the behaviors the law firm would like to encourage. This is essential and a great place to introduce process improvement methodologies that focus on efficiency and delivering a quality, and potentially, very profitable work product.

According to the Legal Lean Sigma Institute, LLC, the application of Lean allows us to identify and reduce (or even eliminate) eight kinds of waste known as DOWNTIME for improved efficiency and cost-savings. Examples of waste include:

  • Missing filing deadlines, bad drafting or data entry errors.
  • Starting work on matters before they clear conflict checking.
  • Attorneys/parties arriving late to meetings.
  • Interruptions, late responses from clients and attorneys.
  • Poor leveraging.
  • Unanswered or delayed responses to email and voicemail.
  • Poor timekeeping practices.
  • Too many processing steps.

There is no question that there are costs associated with each of the eight examples of waste listed. By using process improvement methodologies, we collect data and other information that can assist us in quantifying the amounts and types of waste that exist in every legal and business process in each law firm and legal department.

Poor Timekeeping Practices

Attorneys who do not keep contemporaneous time can lose a considerable amount of billable time. But more important, the lack of billable time being captured can skew a cost analysis when budgeting for attorney time on a matter to be proposed using an AFA, so contemporaneous time is essential—not so much for the billable hours to be billed, but to have an accurate assessment of the cost involved to produce legal work, especially when determining if a fixed fee arrangement is a viable alternative.

Too Many Processing Steps

Many attorneys have determined their own internal practice benchmarks for how they are producing legal work and will tell you that their work is profitable. Do we really know that to be the case? For example, the practice leader involves two partners and two associates to complete the matter, and the work then must be reviewed by yet another partner. Once the partner signs off on the work product and the matter is completed, the prebill is generated, and the normal process is to have all the attorneys who worked on the matter review the billing before finalized. The billing department finalizes the invoices, but all the attorneys must review the final invoices, then one partner makes more changes, so the invoices go back to the billing department (again or maybe more often). This is the usual scenario for how the practice group produces their legal work and handles their monthly billing. What is wrong with this process? First, maybe there are too many attorneys working on the matter. Perhaps there are too many procedural steps, each of which involves attorney time. The example as presented has too many review and processing steps, resulting in considerable waste and unnecessary expense. Have you seen this in your law firm?

The key is to identify the wastes in the various steps taken to complete legal work and to eliminate them, and in turn, reduce the cost associated with producing the work. This allows law firms to strategically identify a suitable AFA for a specific matter regardless of practice area. Law firms can’t lose sight that process improvement allows us to not only identify, quantify and eliminate waste, but will also provide a framework for improving the existing processes for producing legal work and setting standards to ensure continued efficiency. In this context, continued efficiency is defined as producing the correct results, each time the task is performed, without having to go back and repeat or identify a recurring problem. This is the challenge for most law firms, but the solution is to implement project management to “manage” the improved processes.

Does Process Improvement Produce the Perfect Fee Arrangement?

As law firms continue with their process improvement initiatives, they may not find the absolute perfect fee arrangement, but they will find that by asking the right questions on a client-by-client basis, one AFA might be perfect for one client, but not another. The standard is the firm’s economic position, and the variable is meeting the needs of the client.

Law firms should ask: “What is value in the eyes of the client?” What do we do that our clients might not consider valuable? This creates the platform for constructive communication with clients, but also creates ongoing opportunities for the law firm to fine-tune its processes to promote value and present AFAs that work for both the client (value) and the law firm (profit). 

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. Fred.Esposito@rivkin.com

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