The purpose of the recent second edition of the Legal Ombudsman’s Guidance on Good Costs…
Surveys of lawyers at smaller law firms (less than 20 fee earners) in the U.S. by LexisNexis have shown that lawyers there spend between two and four hours per day on non-billable time. According to the survey data the activities which take up most of the non-billable time are tasks related to practice management and administration. It is fair to assume that similar results would be found from a survey of comparatively sized U.K. law firms.
Two to four hours is quite a long time in a working day. The default charging mechanism by lawyers is of course based on recorded ‘chargeable’ time, with hours divided into 6 minute units for recording purposes. So this much non-chargeable time can also be expensive. Assume a firm of 20 fee earners, with an average charge out rate of £175.00 per hour ‘lose’ an average of two billable hours a day. If those two hours could be recovered and billed the firm could make an additional £1.6 million profit per year (assuming 48 working weeks in a year). Let’s suppose, more realistically, the firm goes on an efficiency drive and aims to recover and bill just four of those 20 (6 minute) units a day ‘lost’ by fee earners. According to my maths, the firm could still make an additional £336,000.00 profit per year.
This sounds attractive, so where to start when reviewing practice management and administration activities? Observation and experience suggests that a lot of waste and duplicated effort could be squeezed out of the typical law firm billing process. Just think of the paper trail, which might involve something like: fee earner prints off a billing guide; fee earner reviews billing guide; fee earner decides to write down an interim bill; fee earner (or, more likely fee earner secretary) creates the draft bill in a word processing document; fee earner reviews draft bill; billing guide and draft bill then get sent to a partner for approval; partner decides to write off more time due to ‘higher level client pressures’; partner annotates the draft bill; draft bill gets taken back to the original fee earners secretary who then amends draft v2; secretary prints out draft bill v2; fee earner reviews for a second time…and so on…all this before the draft bill even reaches the finance team who will invariably query some aspect of it, so starting off another paper chase. One need not be an expert in process design to realise the potential for squeezing out some waste somewhere in convoluted billing process. Furthermore there is the likelihood of reducing the amount of non-billable time further by not just streamlining the billing process, but changing some fundamental aspects of the process, perhaps drawing upon improved use of, or functionality in, legal practice management software.
Once the process review and re-design mind-set has taken hold it soon becomes possible to see where further improvements can be made. Why, for example, are billing write downs made in the first place? The answers will probably be something like ‘over research on the file’ or ‘inappropriate (too senior) fee earner working on the task’ and so on. Based on these insights it should now be possible to focus on eliminating this kind of wasted effort as well, which should result in greater realisation rate by all grades of fee earner. You might now have lean administrative processes supporting lean legal processes.
Most commentators seem to agree that, generally, about 80% of law firm revenue is based on the billable hour. So it should certainly be worthwhile for law firms to streamline processes supporting core legal work (such as billing) and then moving on to streamline the processes involved in the delivery of legal services. Becoming more efficient is a good way of becoming more productive, and everyone quickly gets the point: becoming more productive is a direct route to increased profitability.
One problem though is that once investigative questions start to be asked, it can be difficult to know where to stop. Why do clients engage lawyers in the first place? Deep down, we all know the answer: clients want problems solved or to be able to realise new opportunities which are legally valid. Most clients only become really interested in lawyers’ time when they are billed in line with the time spent on their matters by their lawyers. Clients are primarily interested in outcomes and generally clients are willing to pay what they regard as a fair price to achieve desired outcomes. This now takes us into the realm of Alternative Fee Arrangements (AFA’s) and, in particular, value pricing, about which I have written before and will doubtless do so again. From a value pricing perspective the project management question then becomes, in the words of Ron Baker:
What costs can we afford to incur on this project given the price obtainable from the client and still earn an adequate profit?
This formulation is not predicated on estimating costs and then pricing. Rather it is a call to arms for the containment of delivery costs after the value of the service has been agreed with the client. This is a more reactive than prescriptive view of costs. How then can one react to contain costs within the pricing parameters agreed with the client? Looked at this way, an obvious suggestion is to adopt an Agile approach to case (matter) management. There was much discussion about applying Agile techniques to law a few years ago, but this seems to have died down and relatively little can be found on it recently. I wonder why? I will investigate and discuss Agile legal project management in my next post. Arguably, for certain types of legal work, an Agile approach has the potential for best supporting pricing based on value rather than time.