law firm economics: information spend, cost recovery & the bottom line blythe mccoy, west...

Law Firm Economics:Information Spend, Cost Recovery & the Bottom Line

Blythe McCoy, West Librarian Relations ManagerThe West Librarian MBA SeriesAlabamaMay 13, 2005

Law Firm Economics – May, 2005

• Welcome

• Law Firm Economics

• Managing Information Expenses through Cost Recovery

• Leveraging Technology to Optimize Cost Recovery

Law Firm EconomicsAgenda


Law firms, like other businesses, seek to ensure their financial success through maximizing net income

1. Maximize fee income (earnings)• Achieve earnings as close to fee capacity as possible

• Factors include the number of fee earners, hours worked, hourly rate, utilization

2. Minimize costs

• Direct expenses

• Overhead

Law Firm EconomicsOverview


Level of OrganizationNumber of Fee

EarnersTarget Hours

Hourly Rate Utilization Fee Capacity

Equity Partner 25 1560 425 100% $16,575,000

Senior Associate 5 2200 350 100% $ 3,850,000

Mid-Level Associate 15 2200 275 100% $ 9,075,000

Junior Associate 30 2200 200 100% $13,200,000

Paralegal 10 1300 125 100% $ 1,625,000

Total $44,325,000

Librarians are “wild card” fee earners because they do not typically have target hours or a set utilization rate. Regardless, librarians do conduct and bill for work completed on behalf of clients, boosting a firm’s earnings.

“Fee capacity” expresses the maximum earnings a firm can generate if operating at full capacity

Law Firm EconomicsMaximizing Fee Income


Firms can maximize fee capacity by manipulating its components but there are risks

Increase target hours• Associate satisfaction and retention

• May be perceived to promote inefficiency

Increase hourly rates

• Dictated by geography, attorney seniority, type of work

• Hourly rates above norms impact a firm’s ability to be competitive

Law Firm Economics Maximizing Fee Income


Align lawyers’ capacities and capabilities with client demands• Geography

• Industry Specialization

• Practice areas

• Marketing

Manage headcount• Reduce number of incoming new associates

• Typically reluctant to reduce headcount with the same vigor as the corporate business world

Firms also work to minimize unconverted fee capacity

Law Firm EconomicsMaximizing Fee Income


Non-Legal Staff Salaries

16%

Other (Benefits,

Payroll Taxes)11%

Legal Staff Salaries

73%

• Approximately 63% of all expenses

• Approximately 37% of gross receipts

• Consist primarily of legal staffexpenses

- Associates salaries dictated bygeography, seniority, practicearea

Source: Citibank Survey and Blaqwell, Inc.

Direct expenses are costs that can be directly traced to producing specific goods or services

Law Firm EconomicsMinimizing Costs – Direct Expenses


Overhead encompasses costs not including or related to direct labor, materials, or administration costs.

The largest single expenses contributing to overhead are

• Occupancy – 35%

• Technology – 10%

• Promotion – 6%

• Reference – 4%

Source: The 2003 Survey of Law firm Economics, Altman Weil, Inc.

“Reference = library, including books, periodicals, subscriptions, newspapers and research services expense.

Law Firm EconomicsMinimizing Costs - Overhead


Overhead Expenses (22%)

Fee Capacity

(100%)

Unconverted Fee Capacity

Overhead

DirectExpenses

Revenue

Operating Profit

Net Income

InvestmentCosts

ContributionMargin

Firms seek to maximize fee capacity and minimize costs to increase net income

Law Firm EconomicsConverting Fee Capacity to Net Income

Source: Blaqwell, Inc.


Expenses:

Employee CostsLegal staff salaries & bonusesAdministrative staff salaries & bonusesBenefitsOther employee expenses

OccupancyRentMaintenance & RepairsUtilities & other

Office Operating ExpenseOffice copier expensesDepreciation & amortizationStationery, printing & suppliesComputer supplies & softwarePublications & servicesEquipment rental & maintenanceCommunication expensesLibrary expense

Insurance ExpenseInterest ExpenseBusiness & Property TaxesBad debt expensePayments to former partners

Revenue:

Fee incomeContingent fee incomeInterest & other income

Net Income:

PPP

Source: Anatomy of a Law Firm Merger, Hildebrandt International

Law Firm EconomicsTypical Income Statement


$500,000

$600,000

$700,000

$800,000

$900,000

$1,000,000

1999 2000 2001 2002 2003

Average Profits Per Partner for AM LAW 100 Firms

Source: American Lawyer

The most widely publicized measure of expressing law firm success is Profits Per Partner (PPP)

Law Firm EconomicsConverting Net Income to Profits Per Partner

Thirty-two of the 2003 AM LAW 100 firms had

average profits per partner of $1 million or more


• Leverage expresses the ratio between equity partners and other lawyers. Higher leverage typically results in higher PPP.

- For example: A firm with 40 lawyers and 20 equity partners has a leverage of 1 to 1.

• Establishing a tier of non-equity partners is one way to improve PPP

The principal factor affecting the conversion of net income to PPP is law firm structure

Law Firm EconomicsLeverage and Profits Per Partner

Just 23 2003 AM LAW 100 firms had only one partnership tier, compared to 55 in 1994.


Law Firm EconomicsLeverage and Profits Per Partner

Increased leverage typically means

increased firm size

and increased

PPP

20

0

5 5

10

0

5

10

15

20

25

EP Non-EP Sr. Assoc. Mid-LevelAssoc.

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5

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1:1 Leverage

PPP = $297,290

2:1 Leverage

PPP = $429,730


• Welcome






Overhead Expenses (22%)

Fee Capacity

(100%)

Unconverted Fee Capacity

Overhead

DirectExpenses

Revenue

Operating Profit

Net Income

InvestmentCosts

ContributionMargin

Source: Blaqwell, Inc.

Managing Information Expenses through Cost Recovery Overview

Reference costs – including un-recovered online legal research costs – represent 4% of overhead


Library expenses and profitability

• Law firm administrative executives are focused on managing all expenses

• Pre-recovery online legal research costs are typically one of the top five line item expenses for large law firms

• Un-recovered expenses show up in overhead, which reduces net income and profits per partner



Cost Recovery Trends

• Firms under pressure to reduce overhead expenses

• Client “push back” for certain types of expenses

• ABA Ethics Opinion 93-379 – may charge clients as long as it “ reasonably reflects the lawyer’s actual cost”


Online cost recovery and the role of the librarian• Librarians understand the online research tool and

the cost• Online legal research is typically part of the library

budget• Successful online cost recovery can support

increased library budgets / resources



Survey Results

• 12-question survey as part of West Librarian MBA program

• 102 respondents’ answers from surveys administered to attendees of AALL

Managing Information Expenses through Cost Recovery Survey Results



No4%

Don't Know

6%

Yes90%

Percent of firms that attempt to recover onlinelegal research costs from Westlaw and Lexis

N= 102

Librarians

Average Rate of Cost Recovery for

West/Lexis Online Research Costs

68%

(Among those who attempt to recover)


Very satisfied

14%

Neutral21%

Somewhat satisfied

48%

Very dissatisfied

4%Somewhat dissatisfied

13%

Satisfaction with ability to pass through online research costs to clients

N= 92


Librarians


Yes82%

Don't use

other svcs8%

No10%

Firm attempts to recover costs from services other than Westlaw or LexisNexis

N= 92


All Librarians



Satisfaction with ability to track online researchcosts from services other than Westlaw or Lexis

N= 56

Librarians

Very satisfied

7%

Neutral16%

Somewhat satisfied

41%

Very dissatisfied

4%

Somewhat dissatisfied

32%


Satisfaction with ability to pass through online research costs to clients for services other than Westlaw or Lexis


Somewhat satisfied

35%

Very satisfied

5%

Very dissatisfied

4%

Somewhat dissatisfied

27%

Neutral29%

N= 56

Librarians


More33%

Less13%

The same54%

Write-offs this year compared to last two years

N= 92


Librarians


4%

4%

2%

15%

15%

35%

22%

0% 20% 40% 60% 80% 100%

Other

Don't Know

Depends on Situation

Retail Usage Charges w/ NoDiscount

Proportion of Flat Fee (based onusage)

Retail Usage Charges w/ FullDiscount

Retail Usage Charges w/ PartialDiscount

Librarians (N=92)

Primary online cost recovery models



Primary leadership for setting and managing online cost recovery policies

0%

4%

9%

23%

26%

35%

0% 20% 40% 60% 80% 100%

IT

Board/Committee

Other

Finance

Partners

Library

Librarians (N=92)

Note: Percentages do not add to 100% because multiple answers were accepted.



Attempt to Improve

70%

Attempt to Maintain

30%

Cost recovery plans for the coming year

N= 92


Librarians


Cost Recovery best practices reported by respondents fell into five categories, in descending order of frequency (see following slides for examples of responses):

Managing Information Expenses through Cost Recovery Best Practices

Librarians

Attorney Education & Communication

ID Validation

Client Education & Communication

Team Effort/Company Buy-In

Other


ATTORNEY EDUCATION & COMMUNICATION Make copies of invoice/statement to users as part of the

routine. They don't know how much online research costs the firm.

You have to be on top of it and let your users know that you will

follow up on EVERY charge EVERY month. Then they can't hide from you!

Review your monthly quick view report of excluded charges and

meet with those attorneys who are researching out of your contract and determine the reasons why ... need training, need books, free resources for their information.

Tell them that all unrecoverable usage is tracked and will be

shown to their practice dept. chair.



ID VALIDATION Never give up. Set up a monthly program to review all charges

with all users and go after the correct client/matter #.

Not allowing people to sign on without inserting a client-matter number.

Require client billing information in order to access paid online

research. Use a client validation program.

We contact users on a weekly basis for research billed to

administrative, marketing, business development or educational and request client #s and or justification for the non billable cost.



COLLABORATION AND BUY-IN Work closely with your accounting department to make the cost

identification and billing process as seamless as possible. We have little control over the lawyers' cooperation in the process, so we should concentrate on the part that we can control. Make it your business to understand the pricing practices of

online vendors so that you are recognized as the primary authority in interpreting the client charges to the billing partners and can make suggestions to online users on how to keep costs down.



OTHER Be consistent in your mechanisms for application of cost

recovery. Billing the clients at a discounted rate. Non-billable use of databases must be approved by a partner or

done by a librarian. Work with vendors to create an environment that supports legal

research while providing fair charges to clients.



ATTORNEY EDUCATION & COMMUNICATION Find out which partners generally write off charges and then try to educate them on

the cost benefits of online research. Also, make cost-effective research training mandatory to associates.

Encourage use of Research Trail to track searches. Make sure searchers understand that flat fee does not mean "free." Never assume attorneys and paralegals are thinking cost recovery; continuously

send out reminders, tips and guidelines for conducting cost effective research. Obtain reports on write offs monthly and send the information to section heads and

cc: attorneys. Run weekly reports that are reviewed for training opportunities. Teach cost-effective online research so that less is written down or written off. The key to cost recovery is an educated attorney/searcher.

Managing Information Expenses through Cost Recovery Best Practices – All Librarians (AALL)


ID VALIDATION We "charge" attorneys' personal firm accounts for research entered without billing

numbers. That helps speed obtaining client billing.

[Give attorneys ] ability to select billing number from list of approved numbers - not able to enter in bogus numbers or unapproved client development numbers.

Develop post-processing procedures for manually capturing charges when attys do

not enter client codes prior to doing research. Diligence! Get a weekly Quickview of your costs and contact those that are using

non-billable numbers numbers. Letting users know that they can enter identifying information about the

client/research after the required, structured client/matter number information, so they can remember what it was for later (if they didn't have a billable number at the time they did the search) when accounting asks them for the number.

Use a client code lookup table. Use a client validation software.



CLIENT EDUCATION & COMMUNICATION

In initial client engagement explaining how we charge, why we charge, etc. Research Trail … can be used to justify charges to clients. Cost-effective attorneys have less to write off and can explain the process to the

client.



COLLABORATION AND BUY-IN Cost recovery must be a team effort that involves attorneys, paralegals, librarians,

accounting, and IT, if everyone is not on board, it will not work. Get the support of the management. Employ the full authority of the Executive Committee/Managing Partner to mandate

that valid client/matter numbers be entered at the commencement of all research sessions.



• Welcome






How do firms that are successful at cost recovery manage all of this?

They communicate policy…

they reaffirm commitment…

and they leverage technology

Leveraging Technology to Optimize Cost RecoveryCost Recovery Best Practices

Cost Recovery best practices reported by library managers:

• Attorney Education & Communication

• ID Validation

• Client Education & Communication

• Team Effort / Buy-In

• Other



Best practices align with the keys to a successful cost recovery plan:

• Organizational Commitment

• Business Readiness

• Strategy Management

Organizational Commitment is Critical – involve stakeholders early:• Determine policy… e.g. goals by location/ practice group, write-off

discretion, action if goals are not met• Establish a client communication plan (initial/ongoing)• Identify core client billing requirements… e.g. bill centrally or by

location, pricing methodology• Commit to a user education program• Agree on appropriate review process





– Client Matter Identification

– Researcher Identification & Education



Leveraging Technology to Optimize Cost Recovery Business Readiness - Client Matter Validation

Take advantage of client matter options:– Forced Client Entry

– Client Matter Format

– Client Matter Validation

Explore robust validation solutions:– Product Specific

– Multiple Product

– Custom ValidationFirms utilizing robust

validation report averagerecovery of 23% more

Westlaw charges



Highlight: West-Hosted ValidationHighlight: West-Hosted Validation– Allows firms the ability to store their client information on a server

at West– Full remote user support, users can validate their client ID from

any location (e.g. office, home) – No installation required– It’s Free!!

Highlight: Elite Research ManagerHighlight: Elite Research Manager– Provides uniform client matter lookup and validation for online and

local legal research sites– Captures research time/usage, providing an opportunity to extend

cost recovery policies to additional online services





– Client Matter Identification

– Researcher Identification & Education



Be a pre-billing detective

Leveraging Technology to Optimize Cost Recovery Cost Recovery Best Practices – Automate Management Reporting


Leveraging Technology to Optimize Cost Recovery Business Readiness – Researcher Identification & Education

Researcher Identification– Manage passwords online through My Account

– Designate user attributes in QuickView+ to tailor reporting and client billing

• Unique TimeKeeper ID> Employee Number > TimeKeeper Number

• Custom TimeKeeper Grouping > Practice Group > Status (e.g. Summer, New)

> Cost Center > Role (e.g. Associate, Paralegal)

New



Schedule an Auto Report to prompt timely review of clients/matters:


Flexible pricing/reporting options address your unique client strategy:

Leveraging Technology to Optimize Cost Recovery Cost Recovery Best Practices – Streamline Billing Processes

Exclude selected clientsfrom special pricing calculationsRemove clients excluded from

special pricing from the report


Add tax to QuickView+ usage, determined for each charge based on the rate in the jurisdiction where the user is assigned. If applying Special Pricing, tax is determined for the calculated price.



Utilize Auto Reports to prompt review of customized user group reports: > Practice Areas > Cost Centers > Summer Associates

Leveraging Technology to Optimize Cost Recovery Cost Recovery Best Practices – Automate Management Reporting

Westlaw User Name

TimeKeeper ID

TimeKeeper Group

Westlaw User Number


Seamlessly upload QuickView+ usage/charge information to Elite billing and accounting packages utilizing all of the customized QuickView+ functionality you currently employ:


Timesolv ProLaw (Version 9.2 or higher) Elite


Leveraging Technology to Optimize Cost Recovery Elite Research Manager - Summary

Elite Research Manager increases law firm profitability by:

• capturing and enabling the management and recovery of all online research costs

• providing password management capabilities to law firm administration


Leveraging Technology to Optimize Cost Recovery Recovery of Online Research Charges – Law Firm Needs

• Pre-recovery online research costs are a top-five expense for law firms

– 90% recover some or all Westlaw® and LexisNexis charges– 82% attempt to recover other specialty service charges– 5% - “very satisfied” with recovery success this past year– 70% - attempt to improve results next year

• Unrecovered charges reduce library resources, net income and PPP

• Invalid client IDs or inability to assign an ID is top impediment to recovery

Sources: 2004 West survey of library directors; 2004 Am Law Library Survey



• Organizational Commitment• Business Readiness

– Client Matter Identification– Researcher Identification & Education

• Strategy Management– Streamline Billing Processes– Automate Management Reporting




Tailor cost disbursement reports to your recovery plan– Centralized or location-specific billing– Customized information needs– Special pricing

• Allocation of fixed amount– Based on usage value for all included/excluded content– Based on usage value for included content (excluded content charged

separate per unit rate)

• Discount– All included/excluded content discounted– Use of included content discounted

– Apply Tax

Automate billing processes

Thank you!

law firm economics: information spend, cost recovery & the bottom line blythe mccoy, west...

Documents

survey of law firm economics

serviceslaw firm economics

competitivelaw firm

fee incomefirms

number of fee earners

wild card fee earners

administration costs

net incomeoverhead expenses