September 11, 2019
Legal Margins Tighten in 1st Half 2019
Expenses outgrew revenue in the first six months of 2019, according to a recently published article from Law.com titled, "Law Firm Margins Tighten as First-Half Expenses Outgrow Revenue.” The article, by Gretta Rusanow and Jeff Grossman of Citi Private Bank's Law Firm Group, discusses the legal market in the first half 2019. “Revenue growth of 4.1% in the first half of 2019 was driven largely by lawyer billing rate growth of 4.6%, as demand grew 0.1%,” notes the article. Unfortunately, expense growth was 5.9%, though down from 6.5% in the first quarter, it still sits very high for the year.
“Lawyer compensation growth of 7.3% continued to drive much of the increase in expenses, and was driven in part by lawyer head count growth of 1.7%. The greater pressure comes from the mid-2018 associate compensation increases, which are now mostly priced into the expense base. Operating expenses were up 4.8%, but have moderated since the material first quarter 5.9% increase, helping to manage the total expense growth result,” the article pointed out.
The results by firm size, the Am Law 51-100 firms outperformed other firms in revenue and demand growth, up 5.1% and 1%, respectively. By contrast, the Am Law 1-50 firms saw largely flat demand growth. Am Law 1-50 billing rate increases continued to outpace other segments, up 5.2%. “Second Hundred firms and other firms had a challenging first half of the year. Both segments were well below the industry averages in terms of revenue growth (both up 2.8%) and lawyer billing rate growth (3.4% and 2.8%, respectively). Second Hundred firms saw demand grow 0.4% while other firms saw a material decline of 2.6%,” according to the article.
“The first half of 2019 saw slower revenue growth than we saw through the same period in 2018. While the demand environment improved from first to second quarter, demand for the first six months remained essentially flat compared with the first half of 2018, with a return to high levels of dispersion. We expect 2019 to be a decent year. However, as we wrote in May, it will be challenging to build on the success of 2018, and many firms will fall short of that goal, possibly driving continued market consolidation,” concludes the article.
Do Law Firms Understand Their Economics?
In an article published in Thomson Reuters, titled “How Well Do Law Firms Understand Their Own Pricing Economics?,” author Frederick Esposito, Chief Operating Officer of Rivkin Radler LLP, argues that many law firms don’t really understand their costs structure, which is affecting their pricing and ultimately their profits. “Leaders often don’t know what it costs to produce their billable hours; they don’t know how much effort it takes to do and deliver specific kinds of work, they aren’t able to identify and address waste and undesirable variation; and they don’t understand where and how to improve their processes for maximum efficiency and greater value – to the firm and the client,” notes Mr. Esposito.
The author suggests that firms need to evaluate their businesses from a process improvement and project management standpoint. Meaning, firms should focus on improved efficiency and waste-reduction, and even fundamentally re-evaluate how they do legal work. “One way to foster this mindset is to make sure that firm leaders realize that their firm’s economics should not be focused so much on the rates they charge (or eventually receive), but on the cost to produce the work they sell and how to profit from efficiency,” offers Mr. Esposito.
As an example of the wrong way to do pricing, Mr. Esposito gives the example of pricing a Request for Proposal (RFP). Most firms will price at a fixed fee and accept multiple restrictions and conditions. Ultimately, the firm will lose money on the deal and be forced to discount or write-off the work. “If firm leaders really looked at – and understood – how much money they are losing to write-offs or discounts over time (in addition to the already bad timekeeping practices), and the impact it has on the firm’s profit margin and effective billing rates across the board, many would be stunned. And, if they want to make themselves feel worse, they can deduce how many more hours that people are going to have to work to make up for all that time that was written-off,” states Mr. Esposito.
Firm leaders need to know where they are wasting time and money and eliminate or reduce the waste. To do this, firms need to understand the entire workflow process. They need to know what each timekeeper is doing and how long it takes them to complete each task. From there, the firm can work to eliminate waste and improve efficiency. “To some extent, that’s where the pricing mechanism fell apart for law firms. They weren’t watching what was going on. Their lawyers were doing the work, but nobody was monitoring anything to make sure that the time being invested in the work was commensurate with the fee that had been quoted, especially for flat fee arrangements. Unfortunately, I think that is still lacking in many firms, even today,” adds Mr. Esposito.
"Now, more than ever, law firms have got to step up their game and look at their processes and how they’re managing – and improving – them. Firms must find ways to become more efficient and more cost effective, and then monitor and control their processes. What is going to save the day for a lot of law firms, is their ability to eliminate waste and manage their processes in a way that will allow them to differentiate themselves to clients on both price and on the quality of work product and service," summarizes Mr. Esposito.
Resolving Team Conflicts
A recent article, published by The Ladders, titled “Beyond the bickering: 5 steps to resolving conflict in your team,” by Jono Bacon is a leading community and management strategy consultant, discusses a better way to develop team cohesion and reduce infighting. “You can run the most efficient, well-run company in the world, packed with eager team members clad in your branded hoodies, but at some point, conflict is going to rear its ugly head. While there are various causes of conflict, these situations often boil down to breakdowns in (1) expectations, (2) communication, or (3) perception. If left unchecked, these breakdowns act like a series of paper cuts, niggling away at people, often culminating in an outburst that you need to try and unwind,” notes the author. The five steps:
Step 1: Find a facilitator - The people in the conflict are too close to the flame to be objective, so you need a facilitator to help unwind the situation and evaluate how to resolve it. This person needs to be a trusted third party that both sides of the conflict can have faith in. Ideally, they are a known entity to both parties, but not seen as having a bias towards one side or the other. Great facilitators are good active listeners, are able to manage a meeting without being dominant, and can form objective, pragmatic viewpoints.
Step 2: Identify the root causes - Presuming you are the facilitator, coordinate personal calls with each party in the conflict individually. You need to reintroduce humanity back into the equation, so both parties can hear your tone and you can understand theirs. Expect a whole raft of venting, packed with emotion and exaggeration in these calls. Let them get it off their chest, and don’t pass judgment. As you listen, try to pick apart the key themes that are forming. Is it misaligned expectations? Has there been poor communication? Is there an inaccurate perception between the different sides? Are there cultural elements at play such as a language barrier, different levels of experience, or something else? Note down these observations privately.
Step 3: Design pragmatic solutions - When you have completed these calls and summarized the root causes, brainstorm a set of pragmatic, doable solutions that you suspect both parties will be open to. If a root cause is different expectations of project participation, could you put together a shared project plan both sides can feed into? If a root cause is communication issues, could a set of regular calls with a clear agenda be a solution? The key point here is a set of simple, manageable, and objective solutions designed to mitigate the root cause issues you identified. Now, write these solutions down into a crisp, single-page summary. The solution should be direct, measurable, and focused.
Step 4: Present and get agreement on solutions - Now schedule a meeting with both parties and thank both for their feedback and input. Build their confidence that we can rectify these issues with simple and pragmatic solutions. Walk through your proposed solutions. Ask for questions and solicit feedback, and ensure they feel comfortable with the next steps. If you get some pushback, be responsive, but you may also need to emphasize the importance of compromise in the interests of the broader goals of the company or organization they are part of. If they try to bring the discussion back to the conflict and pointing fingers, redirect them back to the solutions. When the call is completed, make any requested adjustments, and then email the document to both parties.
Step 5: Check-in - Now schedule a regular set of calls to check-in on their progress. These calls are critical. By putting together and getting agreement on these solutions, both parties are agreeing to be accountable for the next steps. These calls are a way for you to check-in, and where progress is not being made, help them to course-correct.
Funny or Not, Here It Comes
Too Young to Die - A 40-year-old lawyer who had been practicing since he was 25 passed away and arrived at the Pearly Gates for judgment. The lawyer said to St. Peter, “There must be some mistake! I’m only 40 years old, that’s far too young to die.” St. Peter frowned and consulted his book. “That’s funny, when we add up your billing records, you should be at least 80 by now!”
Have a Cigar - A young lawyer, defending a businessman in a lawsuit, feared he was losing the case and asked his senior partner if he should send a box of cigars to the judge to curry favor. The senior partner was horrified. “The judge is an honorable man,” he said, “If you do that, I guarantee you’ll lose the case!” Eventually, the judge ruled in the young lawyer’s favor. “Aren’t you glad you didn’t send those cigars?” the senior partner asked. “Oh, I did send them,” the younger lawyer replied. “I just enclosed my opponent’s business card with them.”
Expenses outgrew revenue in the first six months of 2019, according to a recently published article from Law.com titled, "Law Firm Margins Tighten as First-Half Expenses Outgrow Revenue.” The article, by Gretta Rusanow and Jeff Grossman of Citi Private Bank's Law Firm Group, discusses the legal market in the first half 2019. “Revenue growth of 4.1% in the first half of 2019 was driven largely by lawyer billing rate growth of 4.6%, as demand grew 0.1%,” notes the article. Unfortunately, expense growth was 5.9%, though down from 6.5% in the first quarter, it still sits very high for the year.
“Lawyer compensation growth of 7.3% continued to drive much of the increase in expenses, and was driven in part by lawyer head count growth of 1.7%. The greater pressure comes from the mid-2018 associate compensation increases, which are now mostly priced into the expense base. Operating expenses were up 4.8%, but have moderated since the material first quarter 5.9% increase, helping to manage the total expense growth result,” the article pointed out.
The results by firm size, the Am Law 51-100 firms outperformed other firms in revenue and demand growth, up 5.1% and 1%, respectively. By contrast, the Am Law 1-50 firms saw largely flat demand growth. Am Law 1-50 billing rate increases continued to outpace other segments, up 5.2%. “Second Hundred firms and other firms had a challenging first half of the year. Both segments were well below the industry averages in terms of revenue growth (both up 2.8%) and lawyer billing rate growth (3.4% and 2.8%, respectively). Second Hundred firms saw demand grow 0.4% while other firms saw a material decline of 2.6%,” according to the article.
“The first half of 2019 saw slower revenue growth than we saw through the same period in 2018. While the demand environment improved from first to second quarter, demand for the first six months remained essentially flat compared with the first half of 2018, with a return to high levels of dispersion. We expect 2019 to be a decent year. However, as we wrote in May, it will be challenging to build on the success of 2018, and many firms will fall short of that goal, possibly driving continued market consolidation,” concludes the article.
Do Law Firms Understand Their Economics?
In an article published in Thomson Reuters, titled “How Well Do Law Firms Understand Their Own Pricing Economics?,” author Frederick Esposito, Chief Operating Officer of Rivkin Radler LLP, argues that many law firms don’t really understand their costs structure, which is affecting their pricing and ultimately their profits. “Leaders often don’t know what it costs to produce their billable hours; they don’t know how much effort it takes to do and deliver specific kinds of work, they aren’t able to identify and address waste and undesirable variation; and they don’t understand where and how to improve their processes for maximum efficiency and greater value – to the firm and the client,” notes Mr. Esposito.
The author suggests that firms need to evaluate their businesses from a process improvement and project management standpoint. Meaning, firms should focus on improved efficiency and waste-reduction, and even fundamentally re-evaluate how they do legal work. “One way to foster this mindset is to make sure that firm leaders realize that their firm’s economics should not be focused so much on the rates they charge (or eventually receive), but on the cost to produce the work they sell and how to profit from efficiency,” offers Mr. Esposito.
As an example of the wrong way to do pricing, Mr. Esposito gives the example of pricing a Request for Proposal (RFP). Most firms will price at a fixed fee and accept multiple restrictions and conditions. Ultimately, the firm will lose money on the deal and be forced to discount or write-off the work. “If firm leaders really looked at – and understood – how much money they are losing to write-offs or discounts over time (in addition to the already bad timekeeping practices), and the impact it has on the firm’s profit margin and effective billing rates across the board, many would be stunned. And, if they want to make themselves feel worse, they can deduce how many more hours that people are going to have to work to make up for all that time that was written-off,” states Mr. Esposito.
Firm leaders need to know where they are wasting time and money and eliminate or reduce the waste. To do this, firms need to understand the entire workflow process. They need to know what each timekeeper is doing and how long it takes them to complete each task. From there, the firm can work to eliminate waste and improve efficiency. “To some extent, that’s where the pricing mechanism fell apart for law firms. They weren’t watching what was going on. Their lawyers were doing the work, but nobody was monitoring anything to make sure that the time being invested in the work was commensurate with the fee that had been quoted, especially for flat fee arrangements. Unfortunately, I think that is still lacking in many firms, even today,” adds Mr. Esposito.
"Now, more than ever, law firms have got to step up their game and look at their processes and how they’re managing – and improving – them. Firms must find ways to become more efficient and more cost effective, and then monitor and control their processes. What is going to save the day for a lot of law firms, is their ability to eliminate waste and manage their processes in a way that will allow them to differentiate themselves to clients on both price and on the quality of work product and service," summarizes Mr. Esposito.
Resolving Team Conflicts
A recent article, published by The Ladders, titled “Beyond the bickering: 5 steps to resolving conflict in your team,” by Jono Bacon is a leading community and management strategy consultant, discusses a better way to develop team cohesion and reduce infighting. “You can run the most efficient, well-run company in the world, packed with eager team members clad in your branded hoodies, but at some point, conflict is going to rear its ugly head. While there are various causes of conflict, these situations often boil down to breakdowns in (1) expectations, (2) communication, or (3) perception. If left unchecked, these breakdowns act like a series of paper cuts, niggling away at people, often culminating in an outburst that you need to try and unwind,” notes the author. The five steps:
Step 1: Find a facilitator - The people in the conflict are too close to the flame to be objective, so you need a facilitator to help unwind the situation and evaluate how to resolve it. This person needs to be a trusted third party that both sides of the conflict can have faith in. Ideally, they are a known entity to both parties, but not seen as having a bias towards one side or the other. Great facilitators are good active listeners, are able to manage a meeting without being dominant, and can form objective, pragmatic viewpoints.
Step 2: Identify the root causes - Presuming you are the facilitator, coordinate personal calls with each party in the conflict individually. You need to reintroduce humanity back into the equation, so both parties can hear your tone and you can understand theirs. Expect a whole raft of venting, packed with emotion and exaggeration in these calls. Let them get it off their chest, and don’t pass judgment. As you listen, try to pick apart the key themes that are forming. Is it misaligned expectations? Has there been poor communication? Is there an inaccurate perception between the different sides? Are there cultural elements at play such as a language barrier, different levels of experience, or something else? Note down these observations privately.
Step 3: Design pragmatic solutions - When you have completed these calls and summarized the root causes, brainstorm a set of pragmatic, doable solutions that you suspect both parties will be open to. If a root cause is different expectations of project participation, could you put together a shared project plan both sides can feed into? If a root cause is communication issues, could a set of regular calls with a clear agenda be a solution? The key point here is a set of simple, manageable, and objective solutions designed to mitigate the root cause issues you identified. Now, write these solutions down into a crisp, single-page summary. The solution should be direct, measurable, and focused.
Step 4: Present and get agreement on solutions - Now schedule a meeting with both parties and thank both for their feedback and input. Build their confidence that we can rectify these issues with simple and pragmatic solutions. Walk through your proposed solutions. Ask for questions and solicit feedback, and ensure they feel comfortable with the next steps. If you get some pushback, be responsive, but you may also need to emphasize the importance of compromise in the interests of the broader goals of the company or organization they are part of. If they try to bring the discussion back to the conflict and pointing fingers, redirect them back to the solutions. When the call is completed, make any requested adjustments, and then email the document to both parties.
Step 5: Check-in - Now schedule a regular set of calls to check-in on their progress. These calls are critical. By putting together and getting agreement on these solutions, both parties are agreeing to be accountable for the next steps. These calls are a way for you to check-in, and where progress is not being made, help them to course-correct.
Funny or Not, Here It Comes
Too Young to Die - A 40-year-old lawyer who had been practicing since he was 25 passed away and arrived at the Pearly Gates for judgment. The lawyer said to St. Peter, “There must be some mistake! I’m only 40 years old, that’s far too young to die.” St. Peter frowned and consulted his book. “That’s funny, when we add up your billing records, you should be at least 80 by now!”
Have a Cigar - A young lawyer, defending a businessman in a lawsuit, feared he was losing the case and asked his senior partner if he should send a box of cigars to the judge to curry favor. The senior partner was horrified. “The judge is an honorable man,” he said, “If you do that, I guarantee you’ll lose the case!” Eventually, the judge ruled in the young lawyer’s favor. “Aren’t you glad you didn’t send those cigars?” the senior partner asked. “Oh, I did send them,” the younger lawyer replied. “I just enclosed my opponent’s business card with them.”
