News Archive for August, 2007

Law firms are entirely revenue driven. That is the key take-away from this session describing the economic model and levers of law firms for CIOs and IT directors. The challenge posed is how a given technology project is going to help the bottom line.

Profits per Partner (PPP) was described as an “arms race” among the large firms, and key to acquiring and retaining the best talent. So initiatives that affect this model will be at the top of the list for attorneys and the financial side of the firm.

There was some discussion of moving to fixed-fee pricing as an alternative to the hourly model. The challenge here is tracking the profitability of the engagement, so tracking the hours is still very important. (Other costs being limited and pretty small in comparison to the hours, see the cost breakdown below).

The revenue of a law firm is determined by three factors:

• Rates (Dollars per hour)
• Hours billed
• Realization (% of bills collected)

The average Amlaw 100 profit margin is 37.6%. On the one hand this seems high, but it also means there is revenue pressure. Since costs are pretty fixed, even a 10% loss of “realization” would cause a 10% loss in revenue. This makes minimizing slippage a serious priority for law firms – you must bill, you must collect to drive the business.

On the other hand, expenses at the firm are relatively fixed, and IT investments are limited.

• 65% - personnel (excluding IT)
• 26% - Rent
• 6-7% - Other administrative costs (Apparently including voice phone, excluding data)
• 2-3% - IT.

Law firms cannot compromise on talent, or on AA downtown space in major financial capitals, which makes the discretionary budget limited. Of this, new IT initiatives are only a part. The Executive Director of Paul Weiss was quoted as saying, “If I can’t predict our expenses next year within a percentage point, I am not doing my job”

Equity partners wear three “hats” which drive how they perceive their own value and appropriate compensation.

• Worker - Comparing their income with an equally-talented non-partner to produce the work product.
• Manager – Compare with what a firm would pay a “CXO”-type.
• Owner – Claimant on profits after what everyone is paid.

The concept of PPP conflates all these roles, so one needs to think about how they fit into all three.

In the corporate world, IT and other asset development initiatives are funded out of retained earnings, with an eye toward long-term profits. However, at a law firm, profits are current income for the firm.

“My partners want to strip-mine the firm at the end of every year” – managing partner, AmLaw 30 firm.

Even working capital is a sticky wicket. It is necessary “just to keep the lights on.” Consider that collections are 60-120 days in arrears, while associate compensation and rent, which together are 91% of the cost base, is current. Covering that additional 9% for running the operation, let alone anything beyond that, requires a hit for the partners that they can feel immediately, and so they are going to ask how it will affect PPP in the very short term.

So there is no set R&D budget, and initiatives are judged case-by-case. As one presenter put it, in many cases, “There is no long term strategic plan beyond generating more billable hours.”

It is important to help promulgate a strategy around IT, and into the business. “Strategy means saying no.” The attitude of “We never saw a billable hour we didn’t like” is dangerous.

So “high-value” is defined by those that can drive up revenue, and strategic items are going to be those that drive profitable revenue on a longer-term basis. Those initiatives that will face clients, and those that help their work will have the highest priority. (This is consistent with what I heard yesterday about extranets).

So ask: Have you structured and named (emphasis on naming) your technology in a way that is beneficial to the bottom line?

A lot of major investments don’t, and so will be harder to get through. For example, document management is not revenue-facing (it doesn’t affect any of the three revenue drivers above) and so will be harder to get through, even though they may be long-term important for infrastructural reasons.

The closing theme was that law firms are entirely revenue driven. Try to tie the initiative to a business goal. Efficiency (cost-reduction on a per-capita basis) is not a good selling point, rather one should be looking at improving the revenue through increasing billable hours (in strategic way) or improving realization. Naming and describing the initiative in a way that is tied to top-line goals can be critical to getting the initiative approved.

The example was given of a centralization/templatization initiative that was sold on helping facilitate rapid expansion.

“Your challenge: persuade your partners that IT is filling, not picking their pockets.”

Doug Liens of Boult Cummings did a great demo of Ruby on Rails. He discusses it as a solution to making quick applications when Sharepoint is not going to give them either the structure they need, or at least doesn’t lend itself to soving a problem rapidly.

Props too to Mark’s presentation (didn’t catch last name, but I did catch that he was from Fenwick West) on his many many extranets. Though we are a software company, the issue of managing (really maximizing) frequent communication with our customers is key, and their solution is intriguing.

A very different kind of session, and well worth the time to hear what the internal developers of law firms are talking about!

Clint Moore of Littler Mendelson:

1. KM is not part of IT but is rather related (sister-departmentto the library. They have KM attorneys, and they are not billable, but serve an internal function to guide the knowledge development.
2. They have built tools, including three subscription tools for clients that move on knowledge. Theme of freeing up time for attorneys not answering minor/reference questions, but rather having them focus on the “bigger” issues.

Chad Ergun of White & Case:

1. Secure extranet, White & CAse Universe, for managing relationships with clients.
2. He has a caveat: once you publish your knowledge to the client, attorneys are nervous that they are giving away the store.
3. Chad also has subscription services that are external to the extranet relationship.

Question on pricing: Clint says they base pricing on the number of attorney hours that would otherwise be consumed.

Fiona Gifford Freshfields Bruckhaus Deringer:

1. 20 years of KM development. 80 KM Lawyers (5-10 years client expertise ,now non-billable).
2. 70 KM assistants (maybe younger attorneys) .
3. KM personnel are assigned to practice groups, rather than centralized.
4. KBD - integration of KM and Business Development.
5. KM Strategy: Clients increasingly expect the delivery of reusable knowledge.
6. Business plans and KM plans are intertwined.
7. FBD does not bill for their KM products - it is part of their professional fees
8. Straight content delivery includes extranet, newsletters, and also seminar programs

Question: Why not charge for extranets if the clients don’t push back? Answer from Clint: they charge for content they are publishing outside of their specific work for the client, but the firm down the street is offering free (or no additional charge) extranet communication as part of the service, so thy not them too? Chad: When they were using an external vendor, they passed along fees, but once it was internal, they stopped charging. “It’s like email - who charges for email?”

Key takeaway:

The distinction is between KM publications (new knowledge that can be a reference for the client) and extranets that support attorney-client communication for their work. The latter is expected to be free, but the former is a profit opportunity.

Thought: is there an opportunity to shift the center of gravity from a service model to a publishing model? Or at least does the KM/publishing clarify where the bigger value-add from the attorney is (as per Clint’s point from above about minor/informational questions)

I am liveblogging the conference at the moment and what better place to start than a session on Web 2.0 .

Bruce McEwen, a blogger on law firm issues, is the speaker.

He talks about three stages leading to where we are:

1. Web 1.0 which is about surfing
2. Web 1.5 which is about searching
3. Web 2.0 is about sharing

His point is that web 1.0 is consuming professional content, but the web 2.0 is about user-generated content.

Good phrase: “Data is the next Intel Inside”

Collective intelligence and collaboration - he makes the point (via an example about Wikipedia tracking IP addresses of contributors and showing the resolved DNS) that if you can remove anonymity, value of the data increases, because one understands the provenance.

Blog styles:

1. Short form, which is like a link aggregator
2. Long form - “discursive essay approach”

RSS Feeds - data containing reports

Two types of value propositions for blogs:

1. Internal - to facilitate communication
2. External - Demonstrate expertise and influence public conversation about the firm.

In re negative comments - allow them and don’t get defensive.

Lawyers are clamoring for wikis internall

Blogs at the intersection of

1. KM
2. Business Development
3. Assets (Existing resources)

Best practice for a wiki (though he extends this to all “web 2.0″): “To control quality, don’t lock things down - open them up.”

He makes a note on mashups for strategic advantage, but is not that clear on how that really works and it seems off-track the theme of collaborative technologies.

Question 1: blogging as more reflective, think/write/publish. Wiki being immediate and less control. Bruce then discusses the difference between a newspaper and a book - the first being a “first draft” vs the more considered output. Not sure that this is right though, we are really talking about a

Question 2: problem snapshotting dynamic content (wikis and blogs) for e-discovery. Bruce says this is a great opportunity for a vendor (and it might be).

The bullet that got back to me most was Demonstration vs assertion. The idea that these technologies are about showing one’s knowledge, rather than merely describing it. That is a powerful idea that many firms - including my own - can take to heart.

Element55 President Ray Deck will be at ILTA 2007! If you would like to schedule a meeting with Ray feel free to e-mail meetray@element55.com. Or, if you prefer to track him down in the halls, you can view his full conference schedule at http://www.element55.com/ilta2007. In addition, the maps below show Ray’s planned location throughout the four days. Click on a thumbnail to see a full-size version.