Showing posts with label economics. Show all posts
Showing posts with label economics. Show all posts
Wednesday, October 24, 2012
Ark Conference--The Economics of Law and the Future of Legal KM
I'm here at the ARK conference in New York. It is quite well attended.
Toby Brown is giving the keynote, "The Economics of Law and the Future of KM." I am live-blogging so there may be typos.
Toby challenges core principles of KM. He wants us to do KM differently, where KM might be focused better.
Toby moved away from KM in his career when AFAs started to come up. He gave it up. KM "came back to him" as he knew it would, as it underlies much of alternative fee arrangement work.
He started an AFA peer group about a year ago, initially with five people. Now there are almost 120, and they've added legal project management into the mix. The group's purpose is to increase professional development, have good conversations, and work with the vendors in the space. Contact him to sign up.
What keeps law firm leadership up at night? It's the economics.
Many people at law firms don't understand economics (this gap is his first challenge to KM). How are people at our law firms going to understand and come to a clear definition of what is profit?
What is profit for a law firm?
Definitions of gross margin, contribution, and net margin go to what kind of behavior we are trying to motivate among the partners. What's motivated partners in the past is hours and rates.
What drives profit?
We know what drives law firm profits--rates, realization, productivity and leverage.
Rates
Raising rates 1% typically rates profitability around 2% where realization is 90-110%. The cost rate is hidden. The cost rate (for non-partners) is the expenses (salary, rent) per timekeeper divided by a target annual hours (typically a rate change is around 50-80%).
Realization
A 5% discount will typically drive down profit 10% or more.
Discount, writedowns, writeoffs are three cuts at realization, each of which needs to be tracked differently. Discounts typically reflect market prices; writedowns might reflect inefficiencies in work; and writeoffs reflect inability to collect. KM should think about getting the firm to clearly differentiate between them and to track them separately.
Productivity / Utilization
Number of effective hours per timekeeper (billed and collected). As hours go down, costs per hour go up. Cost rates have less of an impact.
"The rule of three" is that the first third is compensation, the second third overhead, and the third third is profit.
Leverage a/k/a "The great equalizer"
Leverage is ratio of partner time to that other timekeepers (market standard might be around 25%). The net margin for partners is typically negative. This is not a bad thing as it shows that the other timekeepers are making profit that pays the partners.
Who is generating the highest net margin?
If you're leveraging well, you're moving the work down to the lowest appropriate level of staff.
What's happening with these levers?
Rates used to go up 8-10% per year. These days increases are around 3-4%.
Realization has dropped from around 96% to 86% and dropping.
Productivity has dropped around 10%
Leverage--Most firms are overlawyered in the partner ranks.
Toby sees the legal market as competitive rather than a "buyer's" market. He doesn't see the shift as a pendulum swing that will swing back. We've cut costs and mitigated somewhat the usually run in rates. Rate increases have a delayed effect.
Demand for 2012 was up just about 1%, essentially flat. Large law firms increased spend on technology and other matters around 6% with projects like Windows 7 and Office 2010.
bHe sees a huge opportunity. This is not rocket science. If we drive down the cost of providing legal services we can maintain profitability and provide work for less.
A lot of products and services will meet these needs, and some of them are KM driven.
LSA can read and analyze time entries and programatically put time entries on them (I've seen this product and I believe that it is able to task-code with somewhat more than 85% accuracy).
Sky Analytics provides analytics on billing information. Initially they were working for law departments. It can also look at the phases of work and identify the staffing by phase. It can identify timekeeepers repeatedly billing 8 hours a day or working on a lot of weekends.
Another KM opportunity is monitoring. Compare how you said you were doing with how you did.
KM classically has been about documents and people. This will turn KM more towards money, staffing, process, and other things it hasn't focused on to date.
Another KM opportunity is reviewing scenarios and identifying profitability for different phases of work.
Partners don't understand leverage and how increasing leverage can increase the firm's profitability and net margin. This itself is a KM opportunity.
Basic KM tools can be put in place to share information about profitability.
The Finance people may feel threatened by KM efforts. They are getting asked for more and more different reports and are underwater. They need KM but may have a hard time getting out of their blinkered approach.
Redwood Analytics, Aderant, Data Fusion, and others can't present the phase/leverage/staffing information in a usable way.
Tom Baldwin--we need to connect the dots between our efficiency tools and the "soft spots" pointed out by finance and profitability analysis.
Finance people can spot the problems, KM can provide solutions
Friday, October 23, 2009
KM and ROI
I'm at an international knowledge management peer group meeting today, under the terms of which speakers and affiliations are not identified.
My subject line acronyms, standing of course for "knowledge management" and "return on investment," all too rarely appear together either in discussions or strategy. This was in some ways an introduction to ROI at a fairly basic level, but given the relatively woeful state of business analytics at most law firms, investigating ROI may be a real opportunity for KM programs.
People want to believe there is a way to comprehend any puzzling or momentous force. Convince them you are the key to comprehending it and you will gain great status.
Having a basic grasp of finance can give you a leg up in law firms over most people at the firm except perhaps the CFO or COO.
ROI was a misunderstood term of art. KM people took it mean "show us what you are likely to do and how it will help."
We are starting to see a trend of relating KM to profitability or even revenue generation.
As firms have begun to embrace professional managers, it's become much more important for KM managers to establish ROI.
ROI, defined as earnings per dollar of investment, compares solution cost to monetary benefits. Measuring ROI varies between industries. There will always be some black magic behind it. It does not take into account work-life balance. An ROI of 25% means that investment cost plus an additional 25% of the investment is returned.
ROI is calculated first by identifying the solution benefits, less the total costs (not just cash investments), x100 expressed as a percentage.
Utilization rate is the actual hours billed divided by target. So an associate who bills 900 hours with an 1800 hour target has 50% utilization rate.
Realization is collections divided by billings. So a matter in which $200,000 was billed but $100,000 collected would have 50% realization rate.
As KM managers are integrated more and more into the business discussions we need to have a better understanding of the language of business.
Process improvement helps cost savings when a better-articulated, well-documented, more accessible, and standardized best practices reduces the time required for a person to accomplish a goal or complete an activity.
For example, ask attorneys how much time they spend sorting / dealing with email.
It is not as simple as saying that an hour saved is an hour that would have been billed. Tie rather to a firm initiative such as business development investment time. Look for firm initiatives that set goals for new business acquisition, client outreach, cross-selling, and so forth.
Sales metrics; one large legal market vendor tracks sales activity down to the level of clicks in a demonstration. This is not inappropriate but rather is the type of business process necessary to survive in a global economy.
At one firm, five of six projects needed no ROI. On the sixth, the KM manager identified hours that could be used for something else with the new project and used that to successfully sell the project. Another firm will be requiring ROI analysis but has not identified how to do that.
Few firms have assessed ROI on business development.
Value can be defined in a lot of different ways.
The discipline that the "ROI game" imposes helps us better find the business objectives, articulate the goals and objectives of KM work, and communicate better to lawyers about it.
KM taking over the risk management at one firm led to cost savings in not hiring a general counsel. If practice area is servicing more clients in the same amount of time, then you've helped the business of the firm because the firm didn't have to hire more people.
"You will spend less time searching" or "you will spend less time doing X" gives the direction and lawyers intuitively understand that working more efficiently means more time for managing the business or delegating more. Firm leaders may not have spent the time identifying how people should be spending their time.
It drives smart people crazy when business processes are handled poorly. Setting a good example of doing something better proves your value.
One way to get some return on invesment is to do a survey about people's pain points and degree of contentment.
Another way to tie to think about ROI is saving moeny for the client.
One firm has a "precedents" library with metrics about popular precedents, popular users, and unpopular precedents. The parallel "research" library doesn't have comparable metrics. The KM manager's CIO from an accounting firm is asking for an ROI, although the project is required to be in place before metrics measurement can really be done (chicken-egg).
The "wild card" KM managers can play in ROI discussions is risk.
One financial measurement is risk and cost of being sued. Making substantive legal mistakes due to poor precedent or absence of search is a risk and potential cost of having a poor research collection.
KM managers can trace ROI by looking at usage of precedents, derivative works, number of searches, etc.
We can estimate software cost by figuring implementation and consulting may take about 1/3 of the annual cost. Focus on three year period as implementation costs drop off quickly.
Doing calculations can help you identify if your assumptions are incorrect. You won't actually get an ROI of 71% from implementing metrics assessment.
ROI analysis ties well into matter management and alternative fee arrangements.
A major benefit of ROI analysis is a more rigorous business approach.
One commentator said that our firms do not apply rigorous analysis to major business decisions. Most don't even do profitability analysis.
My subject line acronyms, standing of course for "knowledge management" and "return on investment," all too rarely appear together either in discussions or strategy. This was in some ways an introduction to ROI at a fairly basic level, but given the relatively woeful state of business analytics at most law firms, investigating ROI may be a real opportunity for KM programs.
People want to believe there is a way to comprehend any puzzling or momentous force. Convince them you are the key to comprehending it and you will gain great status.
Having a basic grasp of finance can give you a leg up in law firms over most people at the firm except perhaps the CFO or COO.
ROI was a misunderstood term of art. KM people took it mean "show us what you are likely to do and how it will help."
We are starting to see a trend of relating KM to profitability or even revenue generation.
As firms have begun to embrace professional managers, it's become much more important for KM managers to establish ROI.
ROI, defined as earnings per dollar of investment, compares solution cost to monetary benefits. Measuring ROI varies between industries. There will always be some black magic behind it. It does not take into account work-life balance. An ROI of 25% means that investment cost plus an additional 25% of the investment is returned.
ROI is calculated first by identifying the solution benefits, less the total costs (not just cash investments), x100 expressed as a percentage.
Utilization rate is the actual hours billed divided by target. So an associate who bills 900 hours with an 1800 hour target has 50% utilization rate.
Realization is collections divided by billings. So a matter in which $200,000 was billed but $100,000 collected would have 50% realization rate.
As KM managers are integrated more and more into the business discussions we need to have a better understanding of the language of business.
Process improvement helps cost savings when a better-articulated, well-documented, more accessible, and standardized best practices reduces the time required for a person to accomplish a goal or complete an activity.
For example, ask attorneys how much time they spend sorting / dealing with email.
It is not as simple as saying that an hour saved is an hour that would have been billed. Tie rather to a firm initiative such as business development investment time. Look for firm initiatives that set goals for new business acquisition, client outreach, cross-selling, and so forth.
Sales metrics; one large legal market vendor tracks sales activity down to the level of clicks in a demonstration. This is not inappropriate but rather is the type of business process necessary to survive in a global economy.
At one firm, five of six projects needed no ROI. On the sixth, the KM manager identified hours that could be used for something else with the new project and used that to successfully sell the project. Another firm will be requiring ROI analysis but has not identified how to do that.
Few firms have assessed ROI on business development.
Value can be defined in a lot of different ways.
The discipline that the "ROI game" imposes helps us better find the business objectives, articulate the goals and objectives of KM work, and communicate better to lawyers about it.
KM taking over the risk management at one firm led to cost savings in not hiring a general counsel. If practice area is servicing more clients in the same amount of time, then you've helped the business of the firm because the firm didn't have to hire more people.
"You will spend less time searching" or "you will spend less time doing X" gives the direction and lawyers intuitively understand that working more efficiently means more time for managing the business or delegating more. Firm leaders may not have spent the time identifying how people should be spending their time.
It drives smart people crazy when business processes are handled poorly. Setting a good example of doing something better proves your value.
One way to get some return on invesment is to do a survey about people's pain points and degree of contentment.
Another way to tie to think about ROI is saving moeny for the client.
One firm has a "precedents" library with metrics about popular precedents, popular users, and unpopular precedents. The parallel "research" library doesn't have comparable metrics. The KM manager's CIO from an accounting firm is asking for an ROI, although the project is required to be in place before metrics measurement can really be done (chicken-egg).
The "wild card" KM managers can play in ROI discussions is risk.
One financial measurement is risk and cost of being sued. Making substantive legal mistakes due to poor precedent or absence of search is a risk and potential cost of having a poor research collection.
KM managers can trace ROI by looking at usage of precedents, derivative works, number of searches, etc.
We can estimate software cost by figuring implementation and consulting may take about 1/3 of the annual cost. Focus on three year period as implementation costs drop off quickly.
Doing calculations can help you identify if your assumptions are incorrect. You won't actually get an ROI of 71% from implementing metrics assessment.
ROI analysis ties well into matter management and alternative fee arrangements.
A major benefit of ROI analysis is a more rigorous business approach.
One commentator said that our firms do not apply rigorous analysis to major business decisions. Most don't even do profitability analysis.
Tuesday, August 21, 2007
ILTA Day 2, Session 1 (August 21, 2007): Economics of Law Firms
Speakers were Bruce McEwan, a very well-known law firm economist and author of Adam Smith, Esq., and John Alber, KM Partner for the forward-looking firm Bryan Cave.
This session started with CISCO GC Mark Chandler's statement on failures of current economic model:
"The present system is leading to unhappy lawyers and unhappy clients."
Current Market conditions:
This service was presented as an example of client-driven change. It is driven by AmLaw100 firms Orrick, Pillsbury, and Baker & McKenzie (and corporations like Cisco or Sun) and is designed to provide answers to fairly generic questions. It is a work-in-progress, and has social networking features. If you log on, it is presence-enabled, so the user can see if anyone who is a friend is online.
Law Firm Responses To Economic Conditions
· Technology;
· Some growth in fixed fee engagements, risk sharing arrangements;
· Creative technology responses including increased use of business analytics tools to refine pricing, staffing models.
IT people can help lawyers start to understand economics of the practice.
"Trade Zone";
This application is a decision tree addressing international trade issues. While it cost cost $200K /year to run and keep up-to-date, Bryan Cave obtained all of the clients' business, about $1.5 million a year.
Bryan Cave also implemented a Redwood-designed "Attorney Dashboard."
This business analytics package lets a partner plan or budget an engagement by selecting available lawyers, and by automatically calculating rates and leverage, shows profit margins depending on the selection of who does the work. The Attorney Dashboard takes every dollar of expense and compensation and allocates to every fee earner to generate a gross margin.
For instance, an "unleveraged" deal where are a partner did 30 hours of work and the associate 70 can be directly compared with a leveraged deal where are the partner works 10 hours and the associate 90. The margin doubles when the work is leveraged.
Many lawyers assume that if the partner does most of the work, they'll make more money. But the reverse is true.
The Dashboard has apparently functioned as an effective training tool as well as a line business tool. John Alber reported that Bryan Cave's rollout of the Attorney Dashboard has had a measurable increase in leverage, and hence firm profits, among partners who have used it.
If attorneys understand the economics of practicing law, they will have a better access to fixed fee arrangements.
This session started with CISCO GC Mark Chandler's statement on failures of current economic model:
"The present system is leading to unhappy lawyers and unhappy clients."
Current Market conditions:
- Average margin is high 30s;
- Clients are thinning the ranks of firms they choose to hire;
- Creation of very small panels;
- RFPs and tenders are becoming routine;
- Due to extraordinary price and budget pressure, clients are driving change;
- Clients are starting to band together on issues like associate compensation (for instance, Credit Suisse will not pay bills from 1st year associates); and,
- Big clients are starting to reduce the number of firms they work with from 100 to 50 or 20.
Bruce believes that the economics of the business may completely change soon. For instance, two Australian law firms recently announced that they are going public (Slater & Gordon went public May 21, 2007; see also Bruce's own interview with its managing partner, Andrew Grech. ).
LegalOnRamp.comThis service was presented as an example of client-driven change. It is driven by AmLaw100 firms Orrick, Pillsbury, and Baker & McKenzie (and corporations like Cisco or Sun) and is designed to provide answers to fairly generic questions. It is a work-in-progress, and has social networking features. If you log on, it is presence-enabled, so the user can see if anyone who is a friend is online.
Law Firm Responses To Economic Conditions
· Technology;
· Some growth in fixed fee engagements, risk sharing arrangements;
· Creative technology responses including increased use of business analytics tools to refine pricing, staffing models.
IT people can help lawyers start to understand economics of the practice.
"Trade Zone";
This application is a decision tree addressing international trade issues. While it cost cost $200K /year to run and keep up-to-date, Bryan Cave obtained all of the clients' business, about $1.5 million a year.
Bryan Cave also implemented a Redwood-designed "Attorney Dashboard."
This business analytics package lets a partner plan or budget an engagement by selecting available lawyers, and by automatically calculating rates and leverage, shows profit margins depending on the selection of who does the work. The Attorney Dashboard takes every dollar of expense and compensation and allocates to every fee earner to generate a gross margin.
For instance, an "unleveraged" deal where are a partner did 30 hours of work and the associate 70 can be directly compared with a leveraged deal where are the partner works 10 hours and the associate 90. The margin doubles when the work is leveraged.
Many lawyers assume that if the partner does most of the work, they'll make more money. But the reverse is true.
The Dashboard has apparently functioned as an effective training tool as well as a line business tool. John Alber reported that Bryan Cave's rollout of the Attorney Dashboard has had a measurable increase in leverage, and hence firm profits, among partners who have used it.
If attorneys understand the economics of practicing law, they will have a better access to fixed fee arrangements.
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