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For years now, law firms have struggled with the all-important question: How exactly does better legal service lead to a better bottom line?

Lawyers historically have been less concerned with "customer service" in the traditional business sense and more focused on billable hours. To some degree, there was a delicate balance between a firm's goal to bill a client more hours and the client's goal to be billed fewer hours. Minimal attention was paid to the customer experience and client satisfaction (other than perhaps delivering fantastic catered lunches in palacious conference rooms).

However, the market has tightened tremendously in the economic downturn. Companies use fewer law firms each year, and as a result, they're being highly selective of who they work with. In light of this, law firms are now honing in on how exceptional client service can translate directly into more profitable legal operations.

The better legal service/better bottom line question was recently examined by Michael Rynowecer of The BTI Consulting Group in a webinar called World-Class Client Feedback: Driving Revenue in a Down Market. Although the session was focused specifically on the client feedback loop, it also articulated - based on BTI's annual research surveying over 1,400 law firm clients - how client satisfaction leads to higher billable rates, increased revenue growth, and even lower business development costs.

This compelling webinar presented the case that out of 505 law firms relied on by Fortune 1000 companies, only 42 firms (or 8.3%) possess what has been described as "client allegiance" or client loyalty. This means that their clients would go back to them for more work and recommend that firm enthusiastically to their peers. Keep in mind that most clients are using 11 law firms for their work - so if you can get more of that work, it really matters.

To boot, BTI's research shows that firms with client allegiance charge a 20% higher billable rate ($409/hour v. $342/hour) and grow 35% faster than other firms (13.4% v. 9.9%). Would that appeal to most law firms? Would the partners at your firm like to charge a 20% premium per hour and grow 35% faster? Absolutely. So, how do you get there?

According to BTI, client satisfaction is the key prerequisite for enjoying these client allegiance benefits. The two key measures that BTI uses to rate client satisfaction are whether the client would:

1. Recommend a firm over other firms; and
2. Rate a firm as providing superior service.

What can a firm do to increase its clients' satisfaction? Well, BTI identifies 4 firm attributes (out of 17) that strongly correlate to favorable client relationships. These are:

1. Demonstrating client focus;
2. Understanding the client's business in-depth;
3. Demonstrating a genuine commitment to help; and
4. Providing more value for every dollar.

The webinar then presented various feedback methods firms can use to determine if they have these characteristics, or if they must take steps to put themselves in a better position.

At Two Step Software, our customers tell us that having immediate access to client information and documents can have a direct impact on 3 of these 4 attributes: client focus, commitment to help, and value for the dollar. When clients experience first-hand a firm that has instant access to entity and ownership records--and are therefore more productive, can make better decisions, and reduce the risk of error--they know they are getting more value for each billable hour. When a law firm has done the legwork to maintain accurate corporate records for its clients, it shows that they are committed to helping clients achieve their goals.

Scott Glickson, a Two Step customer and Co-Chair of the Technology and Business Department at McGuireWoods LLP, sums up his experience nicely: "I can't tell you the number of emails we receive where people request documents and we email the documents right back to them — a copy of their stockholder agreement, a charter, whatever it is — and the number of emails we receive back that just say, 'Wow!' One word — that's it, just 'wow!' — because it's so fast."

So, how does BTI suggest you get started with improving your bottom line? Begin by asking three simple questions:

• How does our firm compare to other firms?
• How do our rates compare with other firms?
• How does our number of client recommendations compare to other firms?

After that, look at the following four financial metrics and evaluate whether the trend at your firm is heading in the right direction:

• Total revenue by client for major clients
• Net effective rate per client
• Net effective rate by practice group
• Client retention rate for top 25-50 clients

If you want to learn more about how greater client satisfaction can lead to premium billable rates and increased revenue growth, check out BTI's research and presentations. If you want to make it a reality, take a look at Corporate Focus to discover how this powerful tool has already improved the client satisfaction scorecards at many firms.

On my way to the International Legal Technology Association's 2009 conference, I read the Wall Street Journal's front-page article, "Billable Hour Under Attack - In Recession, Companies Push Law Firms for Flat-Fee Contracts," with great interest. The initial talk about a change in the ways law firms bill their clients came as the financial markets were on the brink of collapse. Now, almost 12 months later, the evidence shows that there is a real shift taking place-and it may not be as temporary as the current economic downturn.

Some interesting facts from the WSJ article:

• Pfizer will save 15-20% on outside legal fees "largely through flat-fee arrangements"
• Cisco uses fixed fees or other alternatives to the billable hour for about 80% of its legal work
• American Express has not had any firm tell them they would not consider alternatives to the hourly billing model
• $13.1 billion has been spent on alternative billing arrangements so far this year, compared to $8.6 billion in the same period last year (BTI Consulting Group survey)
• Lawyers reported average cost savings of 15% from using alternative billing arrangements (BTI Consulting Group survey)
• 63% of the 370 in-house lawyers surveyed plan to increase their use of alternative billing arrangements (BTI Consulting Group survey)

With this type of compelling data supporting the use of alternative billing arrangements, it's clear that the tide has turned. Whenever appropriate, companies will be asking their outside counsel for billing options that align the interests of clients with those of their counsel. This is in stark contrast to the traditional hourly billing model which favors the law firm at the expense of the client.

Firms are Shifting Their Focus to Productivity

Pfizer's General Counsel, Amy Schulman, articulated the new legal billing mindset, stating that she did not want a discount on hourly fees, but a fundamental change "that will last beyond whatever people think they have to tolerate because of the economy." 

This change is pushing law firms to look for ways to work more efficiently since, unlike the hourly billing model, they will now have an incentive to get more work done in less time. As an example, the WSJ article says that Orrick, Herrington & Sutcliffe in San Francisco has tripled the revenue it generates from alternative billing arrangements "but has maintained profitability through efficiencies," according to their chief client-service officer, David Fries. How do they do it?  Among other things, the firm employs workflow technologies that substantially increase productivity. 

Now, this is not rocket science. Aren't these essentially the same types of productivity enhancements that have become standard practice at most businesses (that aren't working by the hour)? Implementing technologies that help you get your work done faster and better simply makes good business sense.

In working with hundreds of corporate law firms over the past 15 years, we at Two Step Software have seen remarkable productivity improvements in the more routine areas of business law, such as:

• Calculating capitalization tables and managing ownership information
• Searching for minute book records and historical filings
• Creating documents, stock certificates and standard forms
• Tracking compliance information and generating alerts
• Sharing information and documents with clients

One example is our Corporate Focus customer Macfarlane, Ferguson & McMullen which is now "able to complete an organization from start to finish within 30-45 minutes" instead of the time it used to take to complete the process. The attorneys get the documents faster- which means their clients also get them faster, at a lower cost, and with fewer errors. (We've captured more of these examples in our Law Firm Productivity Kit.)

In the end, legal clients will shift more work to firms that offer the greatest value for every dollar billed. There's no going back to the days when hours were not monitored carefully or alternative billing arrangements were not an option. External pressures from increasingly sophisticated clients are shifting the legal landscape in ways that were never even dreamed of five years ago. 

As I spent the past week at the 2009 ILTA annual conference, I spoke with CIOs from leading law firms across the country and discussed ways to improve the levels of efficiency and client service at their firms. Everyone is on the same page now and it's an exciting time to be looking at how technology can help make a profound difference in legal productivity. 

I'm a big fan of Paul Lippe's legal column for The Am Law Daily called “Welcome to the Future” and have been reading it regularly for the past six months or so. I noticed that the final paragraph of his recent interview with David Baca, chairman of the Seattle-based law firm Davis Wright Tremaine, summarized so much of the buzz that has been going around lately on the potential for real change, death of the billable hour, and profits per partner as a metric—which have all been frequent topics of Paul's, as well as so many other "oracles" of the legal market. (For disclosure purposes, DWT has been a customer of Two Step Software for the past 5 years.)

In Lippe's February 17, 2009 column, “Welcome to the Future: A View from the Left Coast,” Baca offers the following insights:

"There is no question in my mind that technology will upend the legal industry. Clients aren't going to keep paying for information they can get for free online. They will pay for judgment, for talent aggregation, for things that increase their profits or peace of mind. But we're going to have to redefine what our "service" is and how we deliver it. As with all industries that technology has upended, some firms will end up doing really well and some will struggle or cease to exist.

Most law firms, including ours, aren't doing as well as they should using technology to create more value for clients. In most cases, we all haven't felt the same sense of urgency that our clients have. Candidly, the dominance of the billable hour model has meant that there has been very little reason for law firms to innovate or to use technology to enhance efficiency. Moreover, the structure and decision making processes in a large partnership makes change hard and slow. The status quo has been pretty good to most of us. And a lot of firms have wasted a lot of money on technology projects that weren't thought through or properly executed, which makes people more skeptical."

I’d like to highlight parts of Baca's statement that speak to the current upheaval in the legal market and what it foretells:

1) Technology will upend the legal industry. This sentiment has been heralded for many years by practitioners and thought leaders alike. To quote Richard Susskind in an earlier interview with Lippe (in which he calls Susskind "the world's pre-eminent legal futurist"): "In 2000, I was urging lawyers to adopt some exciting technologies which would support the way they worked. Now I am saying lawyers must adapt because new technologies that are coming through are 'disruptive.'”

Susskind predicts that lawyers who are unwilling to adapt will "struggle to survive." We've seen it with records and iTunes; we've seen it with newspapers and digital media; and we’re currently watching it unfold in the auto industry. With the powerful impact of technology on efficiency and choice, it's never a question of whether, but only a question of when.
 
2) Clients will pay for judgment and not information they can get free online. Lippe previously mentioned a business model used by Jeff Carr, the General Counsel at FMC Technologies, which breaks legal services into four categories: counseling, advocacy, content, and process. Carr says that firms excel at the first two categories, but that clients end up paying mostly for content and process because they consume so many hours. 

Lippe explains that since many firms have bundled all four categories, they've been able to overcharge for content and process, "failing to apply the kinds of process and technology innovations that are common among their clients." In better days, this may have been acceptable, but as clients become more savvy and cost-conscious in the economic downturn, they will find alternatives in which they’re paying primarily for the high-value components of legal services: counseling and advocacy.

3) Most firms aren't doing well to create value for clients. Marc Chandler, General Counsel of Cisco, may have said it best: "The greatest vulnerability of the legal industry is a failure to drive models based on value and efficiency and to make information more accessible to clients. The good news is that greater efficiency will create more value for clients. The bad news is that higher levels of efficiency by some raise the bar for others in a competitive market.”

4) The billable hour model has given law firms little reason to innovate or to use technology to enhance efficiency. Increasingly, in-house counsel at major clients have been pressuring law firms to accept alternative, value-based billing methods. Other firms are offering new and innovative ways to lower their hourly rates when it makes business sense. The glacial pace of change may have been dealt an asteroidal blow this past December, when the presiding partner at Cravath Swaine & Moore, Evan Chesler, wrote his "Kill the Billable Hour" article for Forbes magazine. From that point forward, the topic reached the front page of every major business publication and got stuck in the frontal lobe of every CEO and General Counsel nationwide.

5) The structure of law firms makes change hard and slow. As Baca explains, there is something about the decision making process of a large partnership that contributes to slow change. Having worked as a vendor to hundreds of law firms over the past 15 years, I can attest to this. However, lawyers are leaving firms in droves in the current economic market, forced to start new firms and specialized boutiques. These new “high-quality” firms will put pressure on larger firms to change as they tear away just enough business to make an impression.

Don’t Miss the Two Step Webinar on March 3rd

Paul Lippe is the founder and CEO of Legal OnRamp (www.legalonramp.com), a legal online community, and will be one of the featured speakers at a free Two Step Software webinar being held on March 3, 2009, entitled: “Productivity, Service, and Partnership: What They Mean to Your Law Firm's Future.” If you’re looking to understand how marketplace change will affect your law firm’s odds of success or even survival, it will be worth your time to attend.

I also encourage you to be a part of the ongoing discussion by checking out Lippe’s “Welcome to the Future” column and joining Legal OnRamp. The future has a way of sneaking up on you if you’re not paying attention. It's happening now, so get on board—or get left behind.

Over the past year, a perfect storm of events has brought legal fees under scrutiny like never before, affecting both law firms with skyrocketing new associate salaries (some reaching $160,000 per year) and clients facing hourly attorney rates as high as $1,000. At the same time, in-house counsel are eyeing their legal fees more closely, looking for flat-fee billing options, better case management tools, and more diligent reporting on legal bills. 

And finally, legal work at law firms has decreased substantially over the past 6-12 months. This is a direct result of the economic downturn, led by declining activity in real estate, lending and corporate transactions. The combination of these factors has contributed to the recent spate of attorney and staff layoffs at law firms across the country.

In a Boston Business Journal (BBJ) article entitled “In-House Counsel Pay Closer Attention to the Bottom Line” (Feb. 15, 2008), Fred Krebs, President of the Association of Corporate Counsel (ACC), said: “In-house counsel are taking note of the rise in hourly rates and associate salaries and are holding their outside firms accountable.” The article points out that according to a survey by ACC and Serengeti Law, “half of the respondents terminated a relationship with outside counsel during the prior year for failing to perform according to client expectations, high costs, and poor work product or results.” 

In a follow-up BBJ piece entitled “In-House Counsels Push Back on Large Legal Bills” (July 18, 2008), a number of attorneys noted that in-house counsel are looking for discounted rates, volume discounts, flat fees, and project pricing. Local firms are getting the message: Gerald Hendrick, the partner-in-charge of the Boston office of Edwards Angell Palmer & Dodge LLP, says that his firm now offers some of these options to its clients.

And just as there appears to be greater scrutiny of legal fees, the market falls out for some of the most lucrative legal work: corporate transactions. As noted in the Oct. 3-9, 2008 issue of Mass High Tech, the number of corporate transactions in 2008 is far down, emphasized by the September arrival of the “financial crisis.” The numbers paint a grim picture: in the first half of 2008, seven New England venture capital funds closed funds totaling $1.6 billion, down from 11 firms that raised $2.8 billion in the same period in 2007, according to Dow Jones VentureSource. 

The Good News

So what’s the silver lining to be found in all of this bad news?  It’s the fact that the current marketplace shakeup gives the best law firms—those that emphasize efficiency, productivity and client service— the opportunity to rise above the fray. Clients are generally willing to pay for high-quality legal advice. But to survive in today’s tough economy, law firms must be able to deliver it in the most efficient manner possible and work to drive every dollar of waste out of their systems. 

The ultimate goal, law firms will eventually realize, is to make clients themselves more productive through self-service and collaborative technologies. Why shouldn’t clients also have access to any client information that the attorney would use? Say, for example, that a law firm’s CFO client wanted to know what percentage of stock ownership an employee had in the company. That CFO would be much happier if he could log in at 8pm on a Wednesday night to get the answer, as opposed to e-mailing his attorney and waiting for a response, which he may not get until Thursday morning (if he was lucky).

Likewise, imagine if an attorney’s access to information was like Google so that all client data could be obtained instantaneously. Instead of racking up billable hours searching for records and making calculations, all of that attorney’s time and energy could be devoted to legal analysis, negotiation, and advice. Thus saving the client significant money and improving their satisfaction.

In both scenarios, the client wins. As clients demand increasingly stellar service and more reasonable fees from their legal counsel, law firms must make productivity a top priority. Without a doubt, those that can rise to the occasion will rise to the top.