Can Law Firms Improve ROI? - By Nina Cunningham
Quality management gave manufacturers a way to detect and measure errors so that products could be redesigned to deliver products without defects. We saw similar things happen in hospitals and medical service delivery. In principle, the necessary ingredients to achieve Six Sigma are defined objects, measurable standards and a systematic approach.
In the history of Six Sigma, it was believed that for every individual defect a customer found, 10 defects could be caught on the manufacturing floor. Delivering products without defects was far more cost-effective than replacing products that were returned. Returns are costly in tangible and intangible ways. They cost customer satisfaction, consumer loyalty, and market share to name a few. Here it becomes clear that Lean Six-Sigma can be applied to services as well. Business processes, like manufacturing processes, can be improved. Fixing problems in financial transactions, for example, may be more expensive than the original invoice.
But does Lean have real meaning in law firms? And can the IT department help? In an atmosphere of downsizing, right-sizing and cost reduction, Lean makes sense. Doing something right is cheaper and better than doing it over or apologizing for mistakes.
In working with a firm to escape excessive auditing of bills by client, creating a quality contract made apparent that putting a little more time into a case up front could lead to better returns or savings for the client. It did not take much to prove the case.
In the insurance defense environment, the clients wanted to limit the firm's billable hours as well as its hourly rate. We could show this was counterproductive. The effective use of hours turned time into real value for the client by getting more cases dismissed and giving adequate time to those with high stakes. These resulted in more favorable client rulings and a huge reduction in settlements. This was a win-win for both the firm and the client, as the firm charged its desired rate for cases favorably resolved. But they needed to take the proper steps. It also helped the firm abandon the questionable practice of evaluating a case by counting certain words in a complaint. Eventually, the firm decided and the auditing went away.
Opportunity for Improvement
In a law firm, continuous improvement opportunities are everywhere. Most activities are measurable, so it may be a good idea to begin with costs that appear at the end of the month that have a customer service component. The tools for measurement come from technology. A spreadsheet application may be all that is necessary. Many opportunities for improvement can be visually displayed in a graph or chart.
Advertising, marketing and business development together include many people, projects, clients and charges. With some sound project management and performance measurement techniques, habits can be changed to facilitate savings and win greater support. Most firms want improvement, especially if it produces savings.
There are many pieces to the advertising, marketing and business development puzzle, the firm gains a great deal by tracking performance, eliminating waste, and getting a little more accountability. They can then boost resources spent on what matters most. Incentive is important, and seeing dollars work better is a good incentive.
Most firms review research billed to the firm. Some of it can be divided perhaps into client legal research, but also business development, marketing, special marketing, administration, and other. If these areas can be clearly separated and understood, the firm could track the relationship between resources spent and return on investment. There may not be clear relationships, but there will be trends.
To get a baseline for improvement, the number needs to be further broken down and compared to a year earlier and perhaps a year or two before that. This might take some time, but it could be done if the data is kept. Then the IT effort to produce a tracking tool needs only to be done once.
Will it be worth it? If we want to improve the ROI, in this case at least to reduce the overall costs of getting business by, say, 20%, it would be worth it. Gathering the numbers should provide some salient features even the first time it is done. The firm can look for patterns and the standard process of seeking new business can be markedly improved or present an area to watch.
Does the firm really have the right resources to support the new business it seeks? More important, has business been developed from the spending?
The point here is not to make people look bad; it is to get people to join the effort to spend time and money on the right things. This process should result in some dialogue and perhaps a change in goals. The firm should want to become as effective as possible. There can be good reasons why business does not flow from the costs of the effort, but collecting the data and visually displaying the results is the only way to capture a pattern. Opportunity is lost for a variety of reasons: being too slow to respond; having inadequate qualifications; poor pricing; or just not asking for the business. The targeted client may be misjudged or take longer to make decisions. Some behavior change can result.
Answers to these questions may arise, once the data come to the fore. They have the same effect as errors in manufacturing that cause the loss of a sale or return of a product. Both erode the reputation of the firm, and are therefore demoralizing. They cause work to be redone. There is never enthusiasm for rework that triggers costs in labor and opportunity.
It may turn out on analysis that the same attorneys appear consistently with high costs of business development, yet there is no complementary business that results. This may be an opportunity to eliminate this category as a catch-all for non-billable time, and this would be one real benefit to examination, and perhaps a requirement for more documentation in items billed to the firm. The more projects there are of this type, the easier it is to see potential value. Success can make it habit-forming. Since lawyers are knowledge workers, brainstorming for what and how to improve should not be difficult.
About the Author
Nina Cunningham, Ph.D. is an affiliate of GLC Consulting as well as other consulting firms. She also is President and CEO of Quidlibet Research Inc., a global strategic planning and cost management firm founded in 1983. Learn More.