Strategic Matter- Spring 2012 V1

SPRING 2012

The Cost Is Right Investigating the Di erence Between Achieving Good Pricing and Better Cost Recovery Strategy

Firmwide Contracts Why Consistency is King

An Opportunity in Alternative Fee Arrangements Price Competition is Here to Stay

Unbiased Support Services Analysts & Cost Recovery Experts

Greetings from Mattern & Associates Welcome to the inaugural edition of The Strategic Matter, a publication designed and developed to o er a strategic view of the legal back o ce exclusively for law rm leaders. You will not nd the information in these articles online, in a blog, or on Twitter. We o er this quality, print resource to you as an industry service—and only to you. We want you to know what we are seeing and hearing as we work with some of the nation’s most pro table and preeminent law rms and hope you can bene t from the knowledge base of your peers. Mattern & Associates has grown its reputation in the indus- try over the past 15 years. We are not only an unbiased consul- tancy proven to strategically decrease law rm overhead, but also a recognized and trusted source of information. We publish widely, are frequent guest speakers at prominent events, and sponsor a widely-regarded, comprehensive survey of cost recov- ery strategies. You are the people who are setting the vision, goals and direction for your rm for the next 5 to 10 years. We are pleased to provide this information and hope you nd it relevant and useful. Last year, Mattern & Associates reviewed the information available to law rm leaders and determined law rm decision makers should have access to two types of unbiased informa- tion: the tactical as well as the strategic sides of back o ce operations. At the end of our review, however, it became appar- ent that while there was a su cient amount of information available for the tactical side of the back o ce operation, there was no resource for the strategic side. We take pride in bringing The Strategic Matter to you. The Strategic Matter is conceived precisely as that unbiased resource addressing the strategic side of back o ce operations. It is the next step in our forward think- ing at Mattern & Associates and a part of our goal to connect with other thought leaders in the industry. In this issue we cover: • The Cost is Right: Investigating the Difference Between Achieving Good Pricing and Better Cost Recovery Strategy • Firm wide Contracts: Why Consistency is King • An Opportunity in Alternative Fee Arrangements In the winter issue we will address business process outsourcing, whether it makes sense for your rm, as well as the results and implications of the Mattern & Associates 2012 Cost Recovery Survey. As always, I amgrateful for the support of our clients and the knowledge and wisdom they impart to us.

Rob Mattern, President Mattern & Associates, LLC

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The Cost Is Right: Investigating the Di erence Between Achieving Good Pricing and Better Cost Recovery Strategy Running the business of a law rm is exactly like the game show The Price is Right: just name the right price for your back o ce support services, and your rm wins the pro ts per lawyer (PPL) jackpot, securing a coveted spot on one of the annual AmLaw rankings–and maybe a brand new car. No? More and more, as a result of increasing client and internal scrutiny and changing work ows that are impacting billable units (e.g., copy moving to print), your rm’s cost recovery strategy and not necessarily your expenses will be the determining factor in whether your rm’s back o ce operations are recovering their costs. The determining factor.

Debunking Price Reduction Bragging Rights Many rms take a great amount of pride in negotiating new contracts to decrease expenses , but when was the last time anyone bragged about increasing their billable percentages? Recently, I was sitting in front of a client at a kick-o meeting for managing their outsourcing Request for Proposal. As part of this engage- ment, my rm is completing a cost recovery benchmarking analysis. is analysis examines each aspect of a rm’s cost recovery strategy, bench- marks their billable percentages, rates and their net realizations against industry and peer standards. Within this framework, we work to imple-

ment a rm wide strategy which will increase the overall net realizations. At that kick-o , however, one aspect this particular rm did not include for analysis in their recovery was their overnight deliveries. When we asked the project team why they had not even submitted this informa- tion, they informed us that the rm had just negotiated a new overnight services contract and were now getting great pricing. e rm did not see the need to take into consider- ation the cost recovery aspect. ey will be shocked.

When preparing your rm’s budget for the year, you take into account the revenue the rm will be receiving, the di erent types of revenue, consider projected contingency fees coming in or project additional work that carries a higher hourly billing rate. And yet, many times, signi cant cost recovery revenue is le on the table, isn’t even taken into consider- ation when examining expenses in support services areas—even when these revenues far exceed any bene - cial pricing model you may negotiate for your back o ce support services. Even if running the business of a law rm were a game about price, this would be unacceptable. But more- over, the business of a law rm is not a game—it is a business. Period.

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The Cost Is Right: ( continued from page 3)

Door Number One

Billable Percentages Taking a simpli ed example, if a hypothetical rm is paying $10.00 for an overnight package, is shipping 20,000 packages per year and billing 70% of those packages to a billable client matter number, their cost recovery revenue and overhead situation is as follows:

However, suppose instead of focusing on price reduction, this hypothetical rm focused on increas- ing their billable percentage from 70% to 85% (Mattern Method® Benchmark). With price remaining constant at $10.00 from the rst example, the results in this scenario would be as follows:

Let’s say our hypothetical rm, having now been apprised of the impact of billable percentage, is able to both increase their billable percentage to 85% and decrease their costs by 10%.

Cost at $9.00 per package, 85% Billable Percentage Cost per Package

$9.00 20,000

Cost at $10.00 per package, 85% Billable Percentage Cost per Package

Packages per Year Billable Percentage Billable Revenue Overhead Impact

Cost at $10.00 per package, 70% Billable Percentage Cost per Package

85%

$10.00 20,000

$153,000 $27,000

$10.00 20,000

Packages per Year Billable Percentage Billable Revenue Overhead Impact

Packages per Year Billable Percentage Billable Revenue Overhead Impact

85%

70%

$170,000 $30,000

is allows the rm to reduce their billable charges to their clients by $17,000 and their non-billable charges (overhead) by $3,000.00. is is a nice improvement, but we can now see the majority of the overhead savings can be attributed to the increase in billable revenue. e above example, shows in a very simpli ed way, that pricing exercises are good, but cost recovery analysis and implementation of strate- gies to increase the billable percentage are better and will have a much greater impact on the bottom line.

$140,000 $60,000

e net result here when increas- ing billable percentage only is a bottom line increase for the rm of $30,000. is result comes directly from increasing the rm’s billable revenue which manifested in a signi - cant decrease of $30,000 to the rm’s overhead charges. In this scenario, focusing only on increasing billable percentage resulted in a remarkable 500% impact in comparison to only reducing the rm’s price by 10%.

Let’s say a er a round of negotia- tions with the overnight vendor, this hypothetical rm succeeds in reduc- ing the price to $9.00, a solid 10% decrease. e rm under this scenario realizes an overhead savings of $6,000 per year and is able to save their clients $14,000. Overall, this would be deemed a successful project and possibly worthy of bragging rights.

Cost at $9.00 per package, 70% Billable Percentage Cost per Package

$9.00 20,000

Packages per Year Billable Percentage Billable Revenue Overhead Impact

70%

$126,000 $54,000

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Door Number Three

Door Number Two

Net Realizations We all hear arguments regarding clients not paying for so or hard cost recoveries, and while it is true that some clients are taking a very hard stance against them, the vast majority of clients will and do pay for reason- able, well-documented charges. is fact, then, leads us to examine the status of hard costs versus so costs. When comparing hard versus so costs, the key is in the net realiza- tion. Net realization is the di erence between what the rm bills and actually collects while also taking into account what is being written o internally by the billing attorneys and externally by the clients. e average net realization on so costs is right around y percent (50%) while the average hard cost realization is approximately 98%. e di erence lies in trust and veri ca- tion. Both internal resources and external clients trust that hard costs are legitimate charges, and trust in the legitimacy of the charges directly manifests in a signi cantly increased collection on the costs.

Mattern Plan B™ Right about now, you should be asking yourself: • Should I be converting my rm’s operations to more of a hard cost operation? • Won't this require a change in the way I sta , equip and manage my rm’s on-site operations? If your rm is outsourced and is su ering from poor realizations, then Mattern Plan B Cost Recovery may be the way you will want to migrate your operation. is is where you convert your on-site operation into a hard cost operation. It may require changing the way you sta , equip and manage your rm’s on-site opera- tions. e advantages of this type of set-up are that it lowers costs, lowers billable rates to your clients, and increases realizations for your rm. Your rm will also be out of the cost recovery business. In the end, change is di cult. If your rm has been operating on price reduction as a lead negotiation strategy, it is di cult to change that concept. If your rm is experiencing

poor realizations and is considering migrating to a more hard cost opera- tion, that, too, will come with changes in the culture that are di cult. But change is only di cult in the short run; in the long run, the business of running a law rm is not a game won in the short term, but one that is managed for the long term with strategies that bene t the entire organization.

Mattern Plan B™ Cost Recovery may be the way you will want to migrate your operation. The advantages of this type of set-up are that it lowers costs, lowers billable rates to your clients, and increases realizations for your rm. Your rmwill also be out of the cost recovery business.

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Firmwide Contracts: Why Consistency is King In every facet of your operation, and if structured properly, rm wide contracts can reduce your costs by 20-30%. The reason is consistency. Just as everyone at your rm uses Word to produce their documents, briefs and correspondences, your networking platforms are run on one of either Windows or Mac operating systems, your letterhead carries the same logo and contact information, consistency exists for a reason. Without consistency, people would be much less productive, your costs would be higher, and your overall legal operation would be signi cantly more di cult to manage. Why do so many rms not extend the laws of consistency to their services contracts? Here are ve common responses–and the answers.

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Common Response #1: No vendor can possibly service all our o ces. Answer: false. While this may have been true 10 years ago, it is not true today and most certainly will not be true in the future. Any legitimate national vendor will be able to service all of a firm's offices either through direct channels or through some type of network of regional dealers or a liations. Ricoh/IKON, Staples or Iron Mountain, for example, have direct, national reach to service all domestic regions; or, on the other hand, consider vendors such as Canon and Xerox for copiers, or NRC—National Records Center—for o site records storage all of whom have full stables of local and regional providers and a liates. ere are pros and cons for both situations, but it is su ciently clear that there are national providers for every area of operation. Servicing your o ces is not the problem. Common Response #2: All of our o ces are so di erent. Answer: true. However, that is true with every rm nationally and internationally. at being the case, it is also true that if the scope of services, performance standards, service levels requirements, and request for proposals are dra ed correctly and the subsequent contract incorporates these di erences, individual anomalies can easily be addressed. Common Response #3: We like to give our local o ces the

decision making authority in this area or we don't like to dictate decisions from the home o ce. Dictate - to prescribe or lay down authoritatively or peremptorily; command unconditionally; to dictate peace terms to a conquered enemy. Answer: not applicable. Autonomy is important as well as respecting the valuable input of the attorneys and sta in your o ces. But, consistency is king. You don't let your satellite o ces determine what word processing so ware to use, though you may listen to the input of your professionals when making a choice between two platforms. I argue this principle ought to be extended to the selection of your services vendors, whether that is for o site records, duplication equip- ment, o ce supplies or outsourcing. If the service is superior, the rm is able to reduce costs by, say, 30%, improve contract terms or, say, reduce permanent withdrawal fees all the while gaining exibility and better pricing, the term ‘dictate’ simply does not apply. Common Response #4: National contracts don't save you money. Answer: false. e only people saying this are the local vendors your rm is currently using or the people who don't want to do the work. In the last twelve months, Mattern & Associates has negotiated national contracts for outsourcing, o site records, o ce supplies and multi-functional equipment. e

average 1st year savings that our clients have enjoyed has been 23%, and there is not one national contract that did not result in savings and improved contract terms. Not one. Common Response #5: We have long-term local vendors and we don't want to disrupt the relationship. Answer: not applicable. Loyalty is important. Many of our clients are extremely loyal to their vendors, and I truly appreciate that. But don’t con ate productive loyalty with blind loyalty. In some situations, your local vendor may be able to service you at a national level through their regional a liations or vendor network. Depending upon the type of situation, your rm’s initiative may be the opportunity that this particular vendor is looking for to expand nationally or into some other geographic region. Alternatively, if the vendor isn't able to service you, then they may be able to recommend vendors who can. Ultimately, however, if the vendor is also recipro- cally loyal and has your firm's best interests at heart, the dialogue will be constructive to all parties. ere’s just no question that consistency is king when it comes to rm wide contracts. National contracts do work and will bring savings to the table at a time when rms are still focusing on expenses reduction. Not to look at this area based upon the reasons outlined above is leaving signi cant savings on the table.

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An Opportunity in Alternative Fee Arrangements

While running the business of a law rm is not the game show e Price is Right, price competition is here to stay.

According to the recent Law Firm in Transition survey conducted by Altman Weil of 238 managers in rms with 50 or more attorneys, an overwhelming 91.6% of the survey respondents con rmed the continu- ance of price competition and, more- over, 80% of these managers indicated that more non-hourly billing will be the trend compared to only 27.9% in 2009. Certain AmLaw 100 rms such as Quinn Emanuel are posting consis- tently high pro ts per partner, not the least of which is attributed to its strategic use of alternative fee arrangements. Which is to say, alternative fee arrangements can be a key strategy in the era of price compe- tition and, so, are here to stay as well. Law rm clients are migrating towards the alternative fee arrange- ment to control the predictability of their costs. is axiom applies in its reciprocal: law rms, too, are migrating towards greater control over and transparency in their costs, and the most successful rms are foreseeing these changes as an opportunity. Decreasing pro t margins across the board are causing law rm leaders to press on all of the pressure points, protecting the rm’s pro tability, creating a ‘leave no stone unturned’ culture. And so, just as the alternative fee arrangement model requires a di erent form of matter manage- ment for the rm, the support services aspect of the engagement

and the billing of so cost recoveries may also require a di erent format. How your rm structures these recoverable and associated costs may be the di erence between winning and losing the engagement, or worse--winning an engagement and it not being pro table. Here are a few key considerations if your rm is maneuvering toward the strategic use of alternative fee arrangements: Know your history. One of the keys to functioning pro t- ably under an alternative fee arrange- ment is to know your hours/costs history during the negotiations of the xed cost or lump sum type of deal. e same can be said for every type of support cost that a matter may incur whether it is litigation support, legal research or plain old copying and printing. Another simple alternative is to know what percentage your support services costs are as a percentage of your labor costs and factor that percentage into your fees. Just as you are using a di er- ent fee model, make your vendors o er an alternative fee arrangement. Depending upon the services to be included, it may be possible to have the vendors supporting your matter provide lump sum, xed fee pricing that can be incorporated into your

proposal. e key for all parties involved is to have a clear de nition of the services to be o ered and a fair mechanism to address discrepancies and changes in scope. Keeping it simple: Hard costs all the way. Another methodology is to just make all recoverable costs a hard cost pass through or direct bill from your supporting vendors. If your on-site support organization can be struc- tured in the hard cost way (Mattern Plan B™), these costs can also be passed through directly to the matter at your cost. is greatly simpli es the recov- ery process and will actually increase the net realization of these costs. Maintain the traditional model as poor as that may be. If appropriate, you can always main- tain the use of the traditional so cost recovery model with the understand- ing that the net realization will be less than 50% on most items. e increasing use of alternative fee arrangements o ers an outstand- ing opportunity to take a di erent tact at the recovery of the support services costs associated with the di erent legal matters. Leave no stone unturned. e right type of vehicle, implemented and managed properly, can be a selling point to your clients and positively impact the pro tability of the matter and the rm.

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