HOW ADDING VALUE CAN ENHANCE PROFITS

by Joel A. Rose
 

Partners in the more profitable law firms have learned that delivering quality legal services is merely the price of admission to attract and retain client business in today's highly competitive marketplace.

For many lawyers, the world has never appeared to be as hostile, bewildering or unstable as it does today. These feeling result from the complexities and uncertainties of the changing economic, professional and competitive environment in which most law firms find themselves. Mergers and acquisitions have reduced the number of existing and potential clients. Many business and corporate clients have experienced financial distress, others have joined with larger and better managed organizations and many have gone out of business. Cost conscious clients are less loyal to established law firm relationships. In addition to retaining individual attorneys in different firms to perform specific legal work, it is commonplace for business and corporate clients to negotiate fees, seek volume discounts and for certain types of matters, to propose flat fees and contingency/risk forms of billing.

To cope with these competitive pressures, partners must learn how to position themselves by emphasizing the qualitative differences between their firm and competing firms that are also capable of delivering quality services. To rise above the competition, partners must be prepared to tailor their marketing efforts to satisfy the needs and expectations of existing and potential clients. They may have to "fine-tune" their attitudes about their role in marketing the firm. In some firms this change may require making some modifications to the firm's culture.

Clients retain lawyers to resolve business and legal problems and to assist them achieve immediate and longer term objectives. This means that lawyers must approach client marketing in a way that encourages them to understand their clients' business goals and identify opportunities which add-value to the work performed. This marketing technique is considerably different than "waiting for the client to call with a legal problem."

The author has been retained by many law firms to plan and develop marketing strategies to educate attorneys about how they can utilize their legal abilities and business expertise to resolve clients' legal needs and to add-value to their business objectives.

For many attorneys, switching from the traditional method of marketing legal services to the value-added approach requires a whole new understanding of their clients. They must learn about their clients' businesses, their expectations and trends affecting clients' business and legal problems. Further, attorneys must learn to be creative in figuring out how their expertise and the capabilities of their firm can assist clients satisfy their goals.

Except for those fortuitous instances where highly profitable cases are brought to the attention of those attorneys who just happen to be in the right place at the right time, the consistently successful rainmakers agree that marketing legal services requires the "right mindset". To create this mindset attorneys must constantly be aware of their surroundings and the needs and objectives of those individuals and organizations with whom they come in contact. In simplistic terms, attorneys must keep their antennae extended to scan the environment and be sensitive to opportunities that may be presented, directly or indirectly. Also, they must be prepared to demonstrate how their expertise and/or the accomplishments of members of their firm can add value to the situation at hand. counsel.

The successful marketing of legal services does not happen overnight. A considerable amount of behind-the-scenes effort must be invested to convey the impression that the firm's marketing efforts follow a logical and smooth progression. For example, when preparing written materials which address the firm's ability to meet perceived needs of an existing or potential client, partners should distinguish their firm's ability to perform services of the type needed by the client from other firms as well as specifying the additional value added that their firm will bring to this client over competing firms. When preparing oral remarks, partners should make every effort to identify the individuals to whom they will be speaking and learn as much as possible about their backgrounds. They should try to match the needs of the existing and/or potential client with the firm's capabilities. Attempts should be made to identify the individuals who will perform the work and their suitability for the prospective client's assignment. In distinguishing the difference between your firm and competing firms, partners should stress the importance of the client to the firm, describe the attention the firm will devote to the representation and how the responsible partner will keep the client apprised about the progress of their matter.

In today's highly competitive and specialized legal environment, partners need to be concerned about preserving clients and planning for the orderly transition of clients before those senior partners who have personalized client relationships begin to phase-out of the practice. From the firm's point of view a team effort for marketing and serving larger and mid-size clients is preferable to the Lone Ranger approach for generating and preserving client relationships.

Implementing value-added marketing may, to some extent, require modifying some of the firm's cultural patterns as well as the attitudes of some of its attorneys. Here, then, are some of the issues that will need to be addressed as a firm moves into this new marketing environment.

1. Time demands - value added marketing will take more time of those attorneys involved in planning and managing the firm's marketing activities, and of each of the attorneys charged with implementing the marketing program. During the early stages responsible partners should speak with executives in client firms about what they like or dislike about the firm and how the firm may better assist them achieve their goals. Depending upon the relationship between the firm and the client, some firms involve their clients in the planning stages of these initial discussions. This provides clients with the opportunity to "buy-into" the relationship and shows executives that the firm values their opinions.

2. Incentives offered to existing and potential clients - firms are offering incentives to bond relationships with clients and to foster new relationships with potential clients. Examples of incentives offered to existing clients include a day at the client's business location without charge to learn about the nature of the client's business; sharing of firm form agreement files with staff attorneys without charge; presentations on current legal trends to business staff where appropriate; training for members of the in-house legal staff when presentations are being offered to firm personnel. Where the firm is "betting" on future engagements, incentives offered selectively to potential clients may include free services or discounted services at the present time with the expectation that full rate charges will be provided at a later date; attendance at corporate meetings without charge in return for future representation when the company or a new subsidiary organization is formed.

3. Structuring hourly billing arrangements - Clients are always interested in listening to new ideas about how to reduce legal costs. They are smart enough to understand that fees paid for services rendered must allow the firm to make a fair profit to cover its overhead and earn a sufficient profit to compensate its attorneys. In this regard, many law firms structure billing arrangements to take into account the marketing aspects of their charges by deviating from straight hourly rates charges. For example, a firm may offer a flat rate discount applied to all services for work performed for charitable and not-for-profit organizations. To obtain a greater volume of legal work from particular clients, law firms are offering volume discounts on fees for all or selected types of work, based upon an overall level of fees charged for services performed.

These usually take the form of stepped-up discounts, i.e., fees which exceed $XXX may be discounted by some percentage, fees which exceed $YYY may be discounted at a higher percentage, etc. Many firms which serve clients who may be in a position to refer third parties to the law firm, i.e., financial institutions, etc., offer discounted hourly rates for work performed for the client's account and, with the client's knowledge, add a surcharge to the fees for work performed for third parties. Other approaches being recommended by law firms, as well as their clients, include flat retainers for certain functions performed and hourly rates for other transactions; composite hourly rates charged without regard as to who works on the matter and flat fees charged for performing prescribed tasks.

One of the author's clients has proposed the following fee arrangement to several of its securities clients for deals in which the firm is the principal law firm: the firm estimates flat fees of $XXX dollars. The client pays 25 percent of the fee at the inception of the matter, 25 percent upon signing of certain documents and the balance, which includes a reasonable premium, when the matter closes. In the event the deal does not close, the client does not pay the unpaid balance beyond the second retainer. According to the firm's managing partner, this arrangement has worked exceptionally well, considering the currently distressed economy. To date the firm has closed many more deals than peer firms in its market area.

4. Compensation questions - Compensation cannot be ignored and may indeed, be the pivotal factor that encourages or discourages adoption of a value added marketing program. Plainly stated, to what extent are partners willing to pay other partners to market the firm? Some partners object to paying partners for doing anything but making a "billable hour contribution" now. Other partners believe that since marketing is the lifeblood of a firm, it should not be necessary to pay partners to develop business. Still others may be unwilling to subsidize partners' marketing efforts, i.e., playing a round of golf or taking a client to a basketball game, etc. because these activities are perceived as being "fun" and not work. Taking the time to meet with clients and to educate clients about the firm is an important element in today's competitive world. However, those firms that penalize selected attorneys for not recording an adequate number of billable hours because they are "shaking the bushes for business" may be doing their firm a disservice over the long-run.

There are a significant number of issues affecting compensation which must be anticipated prior to implementing a value-added marketing program including: How origination credit will be weighted? How long origination credit will continue, i.e., permanently, for three years, five years, etc.? How to reward partners who proliferate work from the originated by another attorney? How to budget billable hourly expectations for rainmakers? How much credit will be allocated for marketing efforts, rather than producing legal work? To what extent should the originating attorney share fee credits if another attorney supervises the work? To what extent does an hour of business development time equate to an hour of solid billable time for compensation purposes?

Managing partners and heads of marketing committees who have taken their firms down the value-added marketing path agree that if properly conceived and implemented with care, this new marketing concept will be beneficial for the firm's clients and will increase the synergism among and between attorneys practicing in the same and different specialty areas. Clients will take note of the changes in the attitudes of the attorneys toward helping them.

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