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  • Melanie Farquharson and Paul Longhurst

Business Transformation in the Legal Sector – why is it so hard?

3Kites Consulting is setting up a networking forum at which the challenges of bringing about change in law firms will be discussed. This article sets out the background and some areas for discussion. Inevitably the article relies on generalisations about law firms and the legal market and there will be some notable exceptions (and in particular, we have not focused on volume practices here). However, our experience of working with over 40 law firms enables us to generalise with some confidence.

Much has been written in recent years about changing the way in which law firms deliver their services. Firms need to adapt to take account of changing client demands in an economic downturn and a changing regulatory environment which facilitates new entry into the market. Many firms have endeavoured to bring about change, focusing on efficiency improvements and the way in which lawyers manage matters for clients. However, success has been hard to come by.

Background – do law firms need to change?

Without wanting to go over old ground, it is important to acknowledge some of the context, and in particular:

  • Law firms in the UK have been phenomenally profitable businesses for decades. Against this background, it is not credible to say that they have been ‘getting it all wrong’;

  • Nevertheless, in many areas client satisfaction with the way legal services are delivered and the value for money they obtain from law firms is not as high as it could be. Against the backdrop of the recession clients have imposed price pressure on law firms;

  • In certain particularly price sensitive areas (such as personal injury, debt collection, domestic property) case management systems have been implemented in law firms enabling work to be ‘processised’ and improving efficiency. However, this approach has not spread to ‘higher end’ work;

  • Many law firms have to write off significant amounts of fee earner time, typically for the following reasons:

  • the client will not pay the full amount, because (with hindsight) the work was not handled in the most efficient way possible, owing perhaps to poor delegation, a lack of effective knowledge management or work being handled at an inappropriate level; or

  • a fixed fee was agreed, but the firm spent more time than was estimated, either because of poor estimating of the likely costs, deliberate price cutting in order to retain market share, poor management of the matter or changes to the scope of the work which were not identified and notified to the client, making it difficult for the firm to extend the fixed fee.

  • In the current and foreseeable economic climate it is unlikely that clients in general will become less price sensitive. Having gained the bargaining power to require law firms to lower their rates and/or agree fixed fees, clients are unlikely to relinquish that power back to the law firms;

  • The regulatory changes brought about In England and Wales by the Legal Services Act and its equivalent in Scotland allow new entrants to come into the legal market. Although these changes have yet to reach their full impact, in practice relatively few genuine new entrants have emerged, particularly at the top end of the market. This may be because providing top end legal services in a truly different way is harder than was first imagined, and because the existing players have a strong hold on the market, assisted by dramatic price cutting in order to retain market share. Whether this situation will be maintained indefinitely is doubtful.

As a result of these factors law firm profitability has suffered. The results announced for the financial year 2011/12 appear to indicate that average profits have recovered amongst the top 50 firms. However, this may be in part due to the effects of reductions in costs and in partner numbers, which may alleviate the situation in the short term, although there are limits to the extent to which cuts can be made in order to improve profitability. If there are inefficiencies in the delivery of services, there will be a significant competitive advantage for firms who can address these inefficiencies and deliver services profitably at a lower price.

Some may take the view that law firm partners have been overpaid for many years and that a correction is overdue. But if some firms can keep levels of profitability high they will attract the best talent, to the detriment of those whose profitability has fallen.

Against this background therefore, it seems to us that law firms do need to ensure that they are delivering legal services as efficiently as possible in order to satisfy client demands and preserve profitability. In most firms this requires change.

What needs to change?

Lawyers like to be specific and have dismissed general calls for change for several years now. Talk of efficiency has resulted in improvements to back office processes in some cases, but change has rarely been radical. For years firms have been talking about legal project management (PM), and at least the concept is now recognised. Nevertheless perhaps it is still rare to find lawyers approaching the management of their work using PM techniques. This is partly because of a perception that time spent on managing the matter is not as valuable or as interesting as ‘real’ chargeable time. Similarly, process used to be a dirty word in law firms. Now it is recognised, though often with the caveat “but not in my practice area”.

Several firms have created the role of Director of Business Transformation (or similar) with the idea that the person in that role will be the driver of change. This is not an easy task, and it can be a lonely and unpopular one. Identifying areas for change and actually bringing about that change are two different things. Changing ways of working takes strong leadership, huge amounts of energy and a lot of time. After all, lawyers are trained to identify the flaws in an argument and will do so all the more inventively when they feel their position is under threat. In some cases the firm’s management may have decided to create a business transformation role precisely because they do not themselves have the energy or leadership ability to bring about change. But without active top level support the Business Transformation role is doomed to failure.

In law firms there are many disincentives to working efficiently, including the fact that lawyers are commonly appraised on the basis of the chargeable (rather than billed) time, and the fact that slimming down or reshaping the workforce in order to support different patterns of working is perceived as a radical and risky approach. Group heads may be penalised more heavily for low utilisation in their group than for using lawyers for paralegal work (and having to write off costs as a consequence).

Lawyers may rightly question ‘what’s in it for me?’ especially if they fear their work will become less interesting. Being part of a more profitable and sustainable firm may be too woolly an incentive, especially for non-partners. Enabling them to focus on the important issues, rather than on mundane tasks may be more appealing, but is likely to be met with natural lawyer cynicism.

Techniques and approaches

At our networking forum we will discuss techniques and approaches for bringing about business transformation. Areas for discussion will include process re-engineering and financial management.

Process mapping/reengineering

The people best placed to map out the process involved in delivering a particular type of legal service are those who deliver it. However, lawyers often struggle with this, as they quickly identify so many variables that they succumb to the temptation to believe the task is impossible. A good starting point is to focus on areas where realisation rates are particularly low (thereby avoiding having to argue about whether anything needs to change at all). Legal training does not make people good at blue sky thinking. It therefore helps to have looked at some ‘typical’ matters and identified who does what at what stage.

The task of process mapping needs to identify:

  • The phases of the matter and the different tasks that need to be carried out at each phase;

  • The documentation generated as part of each task (both internally and for external consumption) and the extent to which this could be standardised;

  • The factors that affect how long the tasks can take;

  • The likely issues that can arise;

  • The information needed in order to carry out each of the tasks;

  • The extent to which clients value the different tasks and the level at which they are performed, as well as the role they prefer to play in the overall delivery of the service;

  • The legal experience needed to carry out each of the tasks and how far can this be provided in the form of know how and checklists 1 so that paralegals or resources in less costly jurisdictions could be used;

  • The extent to which technology, in the form of workflow and document automation, could be applied to control and automate aspects of the work.

  • We do not underestimate this task. If it were easy lots of firms would have done it before.

Pricing and financial management

Estimating the costs of delivering a piece of work efficiently is one thing. Delivering against that estimate is another, and it may require a more rigid approach than firms are used to. If the estimate has been based on using a team of paralegals in a low cost centre, the work must actually be delivered that way and not by junior lawyers in the principal office who happen to be underutilised at the time.

Managing matters against a fixed fee or estimate requires up to date information about the costs as they are being incurred. Very few firms are able to give their lawyers access to this in a useful way, especially when managing large teams across departmental and office boundaries. In particular, even if the firm’s finance system can hold a fixed fee or budget number for a matter and alert the managing fee earner when a certain percentage of that fee (say, 80%) has been built up in WIP, this may be of little use. If the matter consisted of several stages and 80% of the overall figure has been incurred in stage one, this may mean that the matter is irretrievably off track before the fee earner receives any notification.

Few firms have (or use) systems that enable time to be recorded against phases of a matter. This requires additional work when the matter is set up and potentially an extra click for each time record (although if it defaults to the last phase against which the individual recorded time on that matter it is simply a question of not altering the default) . However, it would enable much tighter and more effective management of matters against budget.

One option which, to date, does not seem t