Introduction
Utilizing new information technology to improve the delivery of
legal services is impeded by obsolete ideas about law firm
productivity. Analyzing the benefits of utilizing document
assembly, and other specialized legal software programs in law
firms requires that the analyst have a concept of productivity
which generates meaningful measures that can be objectively
evaluated. Most law firms today, other than contingent fee firms
that earn their fees based upon a successful result for the
client, measure output in terms of attorney or paralegal hours
billed to the client. A typical annual objective for a lawyer is
2,200 hours of billable time; although there are stories of
lawyers who bill as much as 3,000 to 3,500 hours a year. It is
obvious that profitability is a function of hours billed times
the hourly rate. Once the maximum number of hours have been
billed per lawyer, for most firms the only way to increase a
firm's profits is to increase the hourly rate.
Since there is limit to the number of hours that senior partners
can bill, most medium and large law firm's have resorted to
increasing their profitability leverage by adding attorneys and
paralegals who are employees, rather than partners, increasing
the gross margin between what these employees have been paid and
what they can be motivated to bill. For many years, the lure of
partnership was sufficient incentive for junior associates to
work extraordinary hours in order to demonstrate to firm partners
their value. Because paralegals have no such incentive, there has
been tremendous turnover in the paralegal profession, with the
most competent paralegals either pursuing a legal education and
becoming attorneys, or moving to business and industry where they
do similar work for more compensation and the chance for
increased upward mobility. Throughout the period of the 1980s the
strategy for increasing profits, for many, if not all medium and
large law firms, has been to add associates -- the more
associates the more net income to the bottom line.
The logic has been that if we can make $100,000 on a single
associate, why not make a $1,000,000 on ten associates. The focus
on hours billed has been a recent phenomenon, and may be
attributed to the emergence of powerful computer-based billing
systems. In the "old days", prior to the use of
computerized financial management systems, firms billed their
clients on a fixed price basis. A typical bill would indicate a
single number -$20,000- and the label: "For Services
Rendered". If the client felt that the law firm's efforts
were valuable and results achieved, then the bill would be paid
and the relationship continued. Although it was unusual for large
corporate clients to switch law firms, there were instances where
if a client was dissatisfied with a result they would seek
alternative counsel.
Billable Hours
Beginning in the early 1970s,
accounting firms and law firm consultants convinced law firms
that they were losing too much money by not billing on an hourly
basis. The fixed price was not capturing all the hours expended
by the law firms. If law firms wanted to increase profits, they
should bill by the hour. Coincident with this recommendation,
were the advent of powerful minicomputers that, outfitted with
the proper timekeeping software, could keep track of the hours. A
few major value-added vendors emerged to respond to this need and
developed financial management software to meet the needs of
medium and large size law firms which were packaged and sold with
the hardware of the new minicomputer manufacturers such as
Digital Equipment Corporation and Data General.
Unfortunately the logic of measuring productivity by hours
generated, ignores the logic of the marketplace, and certainly
ignores the competitive pressures resulting from an excess of
lawyers. Law firms have assumed that hours billed equals
productivity in terms of creating value for the client. For
certain kinds of law practices which require extraordinary
judgment and skill, hours billed may in fact be the measure of
productivity - particularly where the result is uncertain and
what is being purchased is the skill of the lawyer. In these
situations activity -hours delivered- may be identical with
output.
Profitability vs. Productivity
On the other hand, there are many
types of practices where transactions, or parts of transactions
are routine and the output is certain. By equating hours billed,
a measure of productivity as well as profitability, lawyers have
been confusing activity -which has led to increased
profitability- with productivity. The story has often been told
of a discovery hearing where the large firm appears representing
a large corporation defendant, with the lead counsel trailed by
three associates and two paralegals, and a secretary. In
contrast, the plaintiff's counsel, who is often working on a
contingent fee, appears with himself and a supporting paralegal.
The difference in resources can be explained in large part by the
willingness of defendant's counsel to pay its legal fees on an
hourly basis, rather than the result delivered. While this
practice can be justified in a unique litigation situation, it is
less so when used to pay for routine transactions.
As the legal profession becomes more competitive, and
computerization converts certain kinds of transactions from one
of a kind events into modes which are akin to process production,
more traditional concepts of productivity should be used to
measure output in a law firm.
Productivity Defined
The simplest and most useful
definition of productivity, is to measure the productivity of a
function by dividing the labor required to generate the output.
Output is viewed not as hours generated, but by such measures as:
loans closed; documents produced; patents filed; copyrights
filed, and bankruptcies filed. These indicators are measures of
output, as distinguished from activity, or hours generated. One
way to increase productivity is to do whatever one is doing
faster. This could be done by reorganizing the work or just by
working harder.
The second method of improving productivity is to change the
nature of the work performed. To increase productivity one needs
to work smarter, not harder.
The concept of leverage now becomes relevant. For most law firms,
leverage means the gross margin on associate and paralegal time.
Increasing profitability leverage has usually meant increased
delegation of work down the line to more junior employees. This
releases senior partners for more complex work at higher billing
rates. David Maister, an associate professor at Harvard Business
School and a management consultant that specializes in increasing
productivity in professional service organizations, has
identified the key to increased profitability as increased
leverage The problem with many law firms is that there is
insufficient delegation of tasks.
Methods of Increasing
Productivity in Law Firms
In manufacturing factories,
leverage usually means the output generated by a specific type of
work activity. An activity with high leverage will generate a
high level of output; an activity with low leverage, a low level
of output. To increase productivity, one needs to organize work
flow so it is characterized by high output per activity - or in
the case of law firms high output per hour.
One method of increasing output, through increasing leverage, is
to simplify work by reducing the number of steps performed. Much
of the increase in output that results from the use of paralegals
has resulted from work simplification steps, combined with
increased delegation from lawyers to paralegals of lower level
tasks.
A second, obvious method of increasing output is automation.
Automating the production of a document reduces the time that it
takes to produce the document significantly, increasing the
number of outputs (or documents) per hour.
We have had discussions with many firms, and individual lawyers,
who resist automation because they cannot reconcile concepts of
true productivity with their billing systems. They often exclaim
that if they produce more work within the hours, the number of
hours will be reduced, resulting in lower profits - This is the
ultimate non sequitur - let's be more inefficient, because the
more inefficient we are as an organization the more money we will
make.
The law firms that are leading the rest of the profession in
automation have changed their methods of billing to methods of
value-added or fixed price billing for certain lines of services.
Automation has spurred major discussions within the profession to
create alternative methods of billing, other than by the hour.
Corporate clients have also begun to insist that certain
transactions be billed on a unit basis rather than an hourly
basis. One large law firm that in Philadelphia is a typical case.
For many years, estate planning clients were traditionally billed
on an hourly basis. After developing and installing a document
assembly system, it became possible to produce the documents for
an estate plan in 10% of the time that it took to produce the
same plan by traditional methods, and as importantly, a large
percentage of the labor is paralegal labor, rather than lawyer
labor. By investing the lawyer labor in the design of the system in the front
end, the amount of lawyer time expended in the future delivery of
legal services to produce this particular legal product is
reduced.
Thus two kinds of leverage are being applied: labor cost goes down; and a machine helps a human being create more output. Finally, a third kind of leverage comes into play. By reducing the cost per transaction, the firm was able to make an offer to its corporate clients to do low cost estate planning for the client's employees as an additional fringe benefit for middle and upper management. The corporate client, viewing this service as a cost effective fringe benefit, purchased the service for all of its employees.
In this instance, the new technology makes possible the creation
of a new marketing strategy which can lead to client expansion.
Another example of a law firm using information technology to
increase productivity is one that we discovered in Salt Lake
City.. Under the leadership of a firm partner committed to
automation, the firm created a loan documentation package for a
bank client. The firm licenses the software package to the client
for a fixed fee, and the loans are completed by in-house counsel,
supported by in-house staff. The law firm takes back a retainer
on an hourly basis, to keep the software up to date and to advise
on more complex issues should they arise. The legal cost of
producing this particular loan transaction is reduced
substantially from the bank's point of view. The bank is very
satisfied with the service it has gotten from this law firm and
refers more complex work to the law firm which is serviced at
higher hourly rates. In addition, the law firm uses the new
software system as a means of attracting other bank clients. In
the hands of an astute partner, technology is the bait that can
attract new clients who are seeking to reduce their legal bills.
The lesson to be learned from the experiences of these innovative
firms, is that lawyers must begin to analyze the services that
they deliver along a spectrum from unique work, on one end of the
scale, to commodity work on the other. Analyzing legal services
in terms of this model will also help the firm understand its
competitive position. As discussed above, client perception has
little to do with hours.
Some firms have unique expertise which is insensitive to price.
Other firms have a strategy that is based upon the experience of
a few lawyers within the firm that attract clients to a firm
because of the individual lawyer's reputation. Another kind of
firm has a brand name which is able to attract business based on
the firm's reputation. Finally there is the law firm that does
commodity legal work where the main attraction is low price.
Because law firms set their billing rates based upon the overhead
and expected draws of the partners, no firm can deliver services
to all sectors of the marketplace. Lawyers need to understand the
sector of the marketplace that they are aiming at in terms of
price and level of service.
The Myth That Hours Equals Value
Because many lawyers believe that hours equals value, their
experience has been that if more hours can be sold, more money
can be made. Hours do not equal value. Leverage does not equal
profit. Leverage of legal assistants, automation, and accumulated
expertise is a dependent variable. Leverage is a function of the
type of practice of the firm. Thus, to achieve the full benefits
from automating the substantive work of the law firm through
expert systems, the partners of the law firm must define the
scope of work with clients so that all hours worked will not be
billed at the same billing rate for the same person. Billing all
of the firm's work by the hour precludes the firm from realizing
the value of the accumulated knowledge and experience of the
firm. The use of an automated document assembly system by a
paralegal to produce a legal product will produce a product where
the value is not nearly reflected by the time input. The firm
must work with clients to view the work of the firm in terms of
lines of service, and to place the lines of legal service on the
value curve. The firm must assess the transaction process in the
various departments and define the substantive systems that can
produce legal products that have a value unrelated to the time of
the legal assistants and lawyers in the group. Using the proper
mix of talent, automation, and properly defining the nature of
the work to be done, yields the highest profitability and
productivity.