Mining Your Data
By Tom Collins
Alternative billing, value billing, flat-fee arrangements—there are various schemes for lawyers and clients to share risk and reward. But you have to do some hard work to come up with workable alternatives to the hourly rate. All the alternatives require that you know the costs of handling different kinds of matters.
Firms that use alternative pricing strategies can be successful at it if the strategies are based on a sound knowledge of cost. So, where do you start?
Breaking Matters into Categories
To examine pricing options for future matters, you need time and expense data for the types of practice matters you handle. You may already have this information at hand. Some law offices have software applications with built-in reports designed precisely for tracking and identifying the cost of closed matters by style of case. Otherwise, you can build reports with standard productivity tools like Excel or Access and report writers like Crystal.
The information you assemble won’t be useful, however, unless you have done some basic things to allow analysis. First, you need to decide how to break down the various kinds of cases you will track. Here is an example of how to break down various categories or styles of matters:
1. Domestic: Divorce; wife; one wage earner/husband; children and grounds
2. Domestic: Divorce; wife; two-wage earners; uncontested without children
3. Domestic: Divorce; husband; two wage earners; children and grounds
You can identify these as DW1, DW2 and DH2.
Now, within your business software, you need to assign style identifiers to the matters set up in the firm’s billing software. Different programs have different coding capabilities, but almost all have user-defined fields. Select a user-defined field for the purpose of entering the case style I.D.s when you set up a new matter. If your software does not have user-defined fields but does have a field for practice class, consider using the style I.D. as your practice class.
Coding by Tasks and Phases
Now you can start assembling information to help identify cost by style of case. To get more sophisticated, you can also code time and expense entries to gain insight into the composition of costs.
There are a couple of approaches. Most software lets you assign task codes to both time and expenses. There are industry-standard codes for bankruptcy, litigation, project and consultative engagements. You can create your own task codes for other styles of matters. You’ll find a set of the standard codes at www.juris.com.
As an alternative, you might break matters into logical phases. Take the example of Divorce Phase 1, 2 and 3. Some software lets you assign phase codes to time and expense transactions, and will even default to the phase indicated in the client/matter records. If your software doesn’t accommodate phase codes, you can insert the logical phrases in user-defined fields. Or, you can put the phase right into the transaction description. For example, enter "DP1:" at the beginning of a time entry for Divorce Phase 1.
Coding transactions by tasks and logical phases of the work can be quite helpful. It provides insight into questions such as "what went wrong?" or "what did we do right?" in cases that deviate from normal cost patterns. Also, such coding can help identify the issues or events that may be unpredictable—in essence, "what happens if . . . ?" This leads to engagement agreements that provide a fixed price up to a point, but also provide relief to the law firm if certain what-if scenarios occur.
Analyzing the Collected Data
Now it’s time to assemble and analyze your data. Let’s take a very simple approach. Assume you collect the following information on about 40 closed, uncontested divorce cases in which no children were involved. In this assumption, let’s say one case was clearly not representative. Exclude it and any others that are off the scale in either direction. (And make sure your engagement agreement protects you against the contingency that apparently caused those few cases to spiral out of control.)
After excluding nonrepresentative items, the four most expensive cases (10 percent) average $5,125. The least expensive 10 percent average $3,825. The 80 percent of cases in the middle of the price range average $4,371. The least expensive case was $3,200, and the most expensive was $6,400. The difference between these two, while significant, it isn’t likely to drive the firm out of business. Thus, this style of matter is a good candidate for fixed-fee pricing.
Let’s assume that clients whose cases fall within the 80 percent in the midrange are willing to pay up to 10 percent more for certainty in their legal bills. You then implement a fixed-fee arrangement of $4,800, which is the median between the least and most expensive cases. If the firm had actually billed all 40 cases at $4,800, it would have billed $192,000 versus the $187,160.
In the new fee arrangement, the firm faces added risk—but the fixed-cost approach puts the firm in a position to profit even more if it can improve efficiency. It’s an opportunity unavailable with traditional hourly billing.
Are You Willing to Win?
The preceding example, while oversimplified, should bring home the point: There is no great obstacle preventing firms from mining their data to develop pricing methods beyond the hourly rate. If you have the right kind of practice area, alternative fees can be a win-win strategy that gives you a competitive edge. But it’s like everything else in this world—there is no gain without a little pain. You have to be willing to do the groundwork.
Tom Collins (firstname.lastname@example.org) is President of Juris, Inc., supplier of Juris law office business software.
[SIDEBAR, p. 43]
Mining Tools: Time & Billing and Case Management Software Sites
A NUMBER OF LEGAL SOFTWARE PACKAGES let firms track data and run reports on the time and expenses invested in types of matters. Here are some of those programs:
• Abacus Law: www.abacuslaw.com
• Amicus Attorney: www.amicus.ca
• CaseMaster: www.stilegal.com
• Juris: www.juris.com
• PCLaw: www.pclaw.com
• TABS III: www.stilegal.com
• TimeKM: www.pensera.com
• Time Matters: www.timematters.com
• Timeslips: www.timeslips.com