It seems that legal project management is not often implemented consistently and thoroughly as part of law firm strategy. Why not? The value of legal project management should not be hard to discern.
A fundamental premise of legal project management is that work is allocated to appropriately qualified staff. In his book Implementing Value Pricing: A Radical Business Model for Professional Firms (a highly recommended read), Ron Baker notes that Maister and McKenna have said that, based on information supplied by their clients, in professional services firms up to 50% of work done by senior personnel could be done by more junior members of the firm. This is an astonishing figure and the scope for improving productivity of senior staff simply by allocating work more effectively must be considerable. I suspect that something similar is replicated throughout law firms, with, for example, qualified legal staff doing some work that could be done just as well by unqualified staff – a trickle-down effect of inefficiency. One consequence of this of course is that not all time recorded is billed to clients. Fee earners tend to write-off time rather than bill for work which, in retrospect, they have difficulty justifying having done bearing in mind their charge out rates.
Let’s assume that because a firm has implemented legal project management principles, it increases its work allocation effectiveness such that all fee earners are able to bill 5% more of their time, rather than write it off. Even this is not particularly efficient, but it may be a realistic starting point. Time for some basic maths. Let’s say that fee earners should be charging out 60 units per day. I am still trying to be realistic here, and this is based on a 6 hour chargeable day (a 7.5 hour chargeable day as standard could in theory be possible). Five percent of 60 units is 3 units per day, which means that a fee earner could bill an additional 15 units a week. Assume a 25 fee earner firm averages a charge out rate of £200 per hour. All fee earners consistently billing 3 additional units per working day at this rate comes to an additional £360,000.00 per year (based on a 48 week working year). Given that there should be no significant increase in costs, this is actually bottom line profit. Still can’t see the value in legal project management?
Increasingly law firms are moving away from relying solely on the chargeable hour to some form of Alternative Fee Arrangement (AFA). Value Pricing is a fascinating subject, and I cannot hope to do it justice in this blog post. Suffice to say that Ron Baker, value pricing evangelist and eloquent critic of the chargeable hour, has explained that if professional service firms focus on delivering client value they can fix their fees with confidence and increase their profitability. In his latest book, referred to above, Ron relates that during a seminar in Australia a group of lawyers formed the view that, by focusing on value and reducing client risk exposure, law firms could attach a “value price premium” of between 10% – 18% over and above prices they would have charged for work based purely on chargeable hours. The interesting point about this exercise is that the hourly charge out rates became a floor, rather than ceiling, of price assessment. I will continue to be cautious and take the lower figure suggested: a 10% increase in pricing as a result of billing based on value rather than time. “Proper Project Management” as Ron Baker would have it, is absolutely essential to making a value pricing model work. To take the most obvious illustration: a fixed price can be quoted with confidence against known scope, but if the scope changes, then so must the price. Hence being able to scope work properly and manage Change Request orders become essential skills. Consider how the 10% “value price premium” would impact on your firm. Still can’t see the value of legal project management?
More law firms are offering fixed prices for certain types of work, but they seem to be competing on price alone – in a downward spiral – and this is not healthy for anyone, including the ultimate consumers. Law firms, and their clients, should give greater consideration to “value” when discussing pricing, and proper project management should be an integral part of the value proposition. Moreover I would suggest that project management can also play a part, perhaps the leading part, in helping firms make the transition from hourly billing to value pricing. The transition should itself be seen and managed as “a project” and the common element between the two modes of pricing should be the effective project management of matters. Once this is in place the move to value pricing should be much easier. As Ron Baker notes, “project management is necessary, regardless of how a firm prices”. Whatever the system of pricing and billing in place, it is always necessary to manage costs, resources and scope.
All the above has been concerned with billing for work done. Nothing here about other benefits such as improved quality of work, improved turn-around and internal cost savings – all things which can be achieved by the deployment of legal project management. To take an example, consider Solicitors’ Professional Indemnity Insurance (PII) premiums. According to the Law Society’s Law Management Section Financial Benchmarking Survey (April 2011) the cost of PII insurance premiums range on average between 2% – 5.5% of total fee income for small to mid-sized law firms in the U.K. A significant cost overhead. Generally over the past few years PII premiums have increased, but it is well known that some individual firms have bucked this trend and have had their premiums reduced. Many factors need to be aligned to secure PII premium reduction, and the most important factor will always be claim history. Nevertheless there is widespread agreement that an effective risk management strategy is one of the more significant factors to be taken into account when assessing premiums. I know of firms who have saved considerable amounts on PII premiums recently and some firms are on public record as saying they have saved over one million pounds in premiums over a period of 3 years, using a combination of targeted risk management (ie with processes and procedures appropriate to their particular risk profile) and workflow technology. Ultimately premiums reflect the circumstances of individual firms, but there should be no doubt that creating a project with the aim of reducing PII premiums can result in spectacular rewards if executed properly.
There is clearly a lot of scope for legal project management to have a positive impact on the bottom line of law firms. So why do many firms seemingly not appreciate the part legal project management can play in generating and capturing value? Perhaps I am being too harsh and there is such appreciation. If so, one must next wonder whether the appreciation gets articulated clearly and / or acted upon decisively as part of law firm strategy. I will consider these issues in my next post.