The Economics of Law Firm Profitability

2010 LMA National Conference in Denver

Presented by:

James G. Perkins, Chief Operating Officer, Procopio, Cory, Hargreaves & Savitch LLP Ed Flitton, Former Managing Partner, Holland & Hart LLP Lorri T. Salyards, CLM, Executive Director, Moye White LLP Stephen E. Elsner, Chief Operating Officer, Wooden & McLaughlin LLP

“Strategic Planning, Law Firm Budgets and the Marketing Professional”

• • • By James G. Perkins, COO, Procopio LMA PANEL PRESENTATION – “The Economics of Law Firm Profitability” Denver, March 10, 2010 © James G. Perkins

Strategic Planning and Goals

• • • • A Dynamic Process -"not S.P.O.T.S (Strategic Plan on the Shelf)". We don't need a book on a shelf, but a process that leads to a competitive differentiation and wealth creation. Every organization needs to have a strong focus on their strategic goals. Strategy formulation is an exercise in setting goals for the organization and developing a model, including a financial model, of how achieving the goals would advance the strategic purpose of the organization. If you have more than 5 goals, you have none. You are simply spreading yourselves too thin.

Strategic Planning and Goals (continued)

Some strategic principles: • • • • Get to the Future First -start thinking about the future of the profession, your market, rather than some exotic vision/mission Obsess about your state of differentiation Make practice groups the key building blocks for the firm's future direction Develop a dynamic "Strategy in Action“ – essential ALIGNMENT

Marketing is a Key Strategic Function

• • • • • • Marketing is the identification, creation, communication, delivery and monitoring of client value (and guess who decides the value – the client!) Value is central to the marketing concept Business development is only one component of marketing The basics – the 4 P’s of Marketing -Products, Pricing, Place, Promotion By mastering these, you lead and drive growth so you need to be at the table re-revenue budgets. Your management needs to understand and subscribe to these statements!

The 10 Basic Elements of a Dynamic, and Successful Law Firm Business Model – All Essential in the Strategic Planning Process

1. Vision and Mission 2. Strategic Goals 3. Growing the Business ** 4. Competitive Advantage through Differentiation ** 5. Maintaining Our Reputation ** -Led by marketing professionals Continued on next slide

The 10 Basic Elements of a Law Firm Business Model (Continued)

6. The Action Plan – the Decision Process 7. Client Value Proposition ** 8. Profit Formula 9. Key Resources 10. Key Processes ** -Led by marketing professionals

Growing the Business -A Philosophy

• • • • • • Growth must be a basic "way of thinking" of the firm. It is the strategic acceptance that "growing the pie" is best for all, every shareholder, every employee, every client. The Business Life Cycle curve. Needs to be understood. Most healthy law firms should be actively pursuing some sort of intentional growth plan. Effective growth is also about getting better, not just bigger. Growth Channels: Mergers versus Organic versus Laterals versus Geographical. Does a practice groups have partner/senior lawyer critical mass – strategic additions. Does a practice group have a leadership positions in its market (Rule of 3).

Competitive Advantage Through Differentiation – of something

How to Differentiate in Ways Your Clients Value RULE OF 3 DOMINANCE The “Inner Circle of Firms” that client first thinks about. Each practice group needs to be in the top 3 in your market GAME CHANGER Innovation Inspired Solutions and Services CLIENT RELATIONSHIPS Superior Client Service – the Ritz- Carlton Approach S-CURVE SPECIALIST Best-Of-Breed Capabilities in Selected Practice Areas Move “up” the Value Curve

Reference: Patrick McKenna/James G. Perkins

The Client Value Proposition (CVP)

• • • • • • • • • A successful business is one that has found a way to create value for clients – that’s via the CVP Who is our client (customer)? What does the client value? Our services/offerings – are they want today’s clients want? Try and understand value from the perspective of your client Listen to your customers Everything we do as leaders is to create value for our clients Understanding the Buyer’s Mind-Set and Understanding Your Markets Understand the value range of work the group delivers,

understand the legal service value curve

The Budget Process In Law Firms

• Versus industry generally law firm budgeting is basic – from no budgeting at all to “macro” categories – little if any detailed or “zero based” budgeting. Seldom see “micro” budgets.

• Heavy expense focus, soft revenue focus – expense forecasting is easy – revenue forecasting is difficult. In tough times easy to slash expenses but difficult to develop revenue streams. • Seldom detailed cash flow forecasting • Typically traditional annual budget process – fixed when done

The Budget Process In Law Firms – Managing In Uncertain Times

• • • • • • • • • Law Firms need to follow leading industry trends in the Budget Process: Use scenario planning “rolling forecasts” on a quarterly or 6 month basis Newer models using 6 month rolling forecasts overlaid on 24 month budgets Traditional annual fixed budgets are “out” Don’t use narrow sets of outcomes Revenue budgets should be built up through the practice group level Budgeting and strategic planning are dynamic and have real time interplay and should be in a continuous feedback loop It will all be about revenue generation and growth – a great opportunity for marketing professionals

New Business Credits – How Do They Work

• • • • • • Partner Compensation determined either by formula or discretion of a committee In either event, statistics are important Three most important statistics are (i) fees received for partner’s work and (ii) originations; and (iii) billings Keeping clients happy after they are in the door usually measured by billings Origination credit usually measured by matter, so that different partners can get credit for different parts of client’s representation Sounds simple, huh?

Why It’s Not So Simple

• Did the client come because of firm reputation?

• How long does a partner keep the origination credit?

• Was the client a contact of one partner, but another partner had the specialty which convinced the client to come?

• What if a team of partners brings in the client?

One Option: Abandon The Statistic

• Collaboration is key to bringing in big clients in this economy • Statistical origination credits discourages teamwork and generates fights • Abandoning statistic does not mean abandoning credit – compensation committee interviews all partners • Disadvantages of non-statistical credit: 1. Lot of work for comp committee 2. Partners doubt they get credit 3. Billings become a proxy for origination

Why Does A Marketing Director Need To Understand This System

• Compensation system is the primary driver of partner effort • Marketing director needs to understand the dynamics of partner interaction • Marketing director may need to report to compensation committee on disputes • Marketing director needs to know how to incent partners to market

Alternative Fees – Why all the Chatter

• Client dissatisfaction with rising legal costs • Opportunity for increased risk control/sharing for clients • More billing options and risk sharing equates to greater value for clients • Increased outsourcing opportunities for both clients and firms • Finally seems to be traction at both the client and firm level

Some Common Types of Alternative Fee Arrangements

• Volume work discounts • Fixed fee • Contingency • Reduced rate with a bonus related to outcome (aka success fees) • Blended hourly rates • Etc., etc, etc.

How Alternative Fee Agreements Impact Firm Profitability

• Could be more or less profitable than hourly as firms try to understand how to match risk and reward factors in specific cases • Many variables – some include sophistication of pre-fee analysis and budgeting, area of practice, type of alternative fee, and technology will play a role • Traditional law firm pyramid structure will evolve because of different internal staffing needs, increased outsourcing, and different compensation criteria • Gaining/losing a competitive position/clients in the marketplace

What will be the Future Impact on Law Firm Marketing

• • • • • • • Increased need to understand client frustrations with the billable hour Increased need to understand financial risks involved in various legal matters Possible increased use of and reliance on client surveys Better understanding of financial considerations in alternative billing arrangements Opportunity to assist/propose possible alternative fees Short-term opportunity for increased differentiation with peer firms Possible increased use of marketing professionals on client engagement matters