1 Objective To explain the pressures on and the components of profitability for law firms in general but more specifically for IP law firms. Law Firms as a Business • Herding cats − Law firms are now starting to behave like businesses • Why it is important for staff, directors, and managers to understand that law firms are a business
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ObjectiveTo explain the pressures on and the components of profitability for law firms in general but more specifically for IP law firms.
Law Firms as a Business
• Herding cats− Law firms are now starting to behave like businesses
• Why it is important for staff, directors, and managers to understand that law firms are a business
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Bet the Company Litigation
Mergers & Acquisition
Antitrust
Intellectual Property
Employment Law
Insurance Defense
Patent
Lit
Patent
Pros.Trademark
High-Value
Mid-Value
Low
High
Value Focus Price Sensitivity
Commoditized
Market Value Position for an IP Law Firm
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Client’s Perception of Value (in general)
COMMODITY
• Price sensitive
• Steady stream of work
• Not complicated
• Low economic risk
• Suited to processes
HIGH-VALUE
Complex legal matters that have a material impact on shareholder value, core business, or survival
MID-VALUEPrice is secondary, after expertise and experience
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General Trends Affecting IP Law Firm Profitability
Changing Economics
• Patent prosecution work considered a commodity
• Fee Resistance:
− Client does not want 1st and 2nd year associates on account
− Clients seeking discounts
− Clients scrutinizing bill in much greater detail
− Clients are no longer unsophisticated buyers
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Changing Economics, continued
• Increasing amount of IP work being outsourced offshore especially patent prosecution work resulting in lower fees
• Rising salaries
• Rising overhead, marketing, and technology costs
• More smaller boutique firms being used for IP prosecution work – smaller firms gaining brand name
Changing Economics, continued
• Large diversified firms acquiring IP boutiques eroding referral base
− Large firms have litigation and trial experience making the firm a one stop shop
• More work being brought in house by general counsel
− Clients insisting on multiple-year rate schedules
− Reduced premium billing opportunities
• Best practices – use discounts judiciously, clarify scope of project with client, and ensure that value of services provided is consistent with fees charged
2. Utilization (billable hours)
• Reasons for underperformance:
− Not enough work (too much leverage?)
− Hoarding assignments
− Marginal players getting cut out by corporate counsel
− Increased tendency to self-cut hours as billing rates
have risen
− Better technology increases efficiency
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3. Leverage
• Leverage is created when a timekeeper brings in more fees than he/she costs
• It is positive only when timekeepers are productive and profitable
• Successful firms have the courage to take action when lawyers underperform, including counseling them out of the firm
4. Expenses (profit margin)
• Some firms (we believe, most) do not have an expense problem
• When a problem exists, usually due to:
− Rapid, unexpected defections that result in excess space and staffing
− Misjudging a market trend and taking on unnecessary space
− Rapid expansion that causes head of admin to over hire
to meet perceived demand
• View preoccupation with expenses as a warning sign; instead, focus on revenue growth to achieve peak profitability
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5. Speed of Billing and Collections
• Keep daily timesheets, be prepared to submit time sheets at end of the month
− Studies show that billable time slips through the cracks, if not kept contemporaneously
− First step in reducing realization is failure to record time
• Clients tend to pay in relation to the promptness in which they are billed
− The sooner the bills go out, the sooner the cash will come in
• Address bills to a specific person responsible for payment
5. Speed of Billing and Collections, continued
• Send monthly reminder statements
• Provide agings to partners to follow up on collections
• Send letters or use phone calls on specific dates to request payment
• Other items
− Get engagement letters
− Get retainers when possible
− Bills should be easy to read and descriptive
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6. Billing Rates
• Increased rates have been the primary profit driver for several years
• Pressure to commoditize routine legal work makes it increasingly hard to get substantial rate increases for many kinds of work
• Pricing by hours, not disappearing
• “Alternative Fees” often means discounting
− Reasonable to establish/maintain relationship with key strategic client
− Too often partners discount just to get the business
(for compensation purposes)
− Enforce discounts through centrally managed intake process
Other Profit Points
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Other Profitable Pointers
• Important to budget for fixed fee engagements − Monitor on periodic basis− Always evaluate at the end of the engagement
• Any change in scope of engagement should be brought to the attention of the client to determine change in the budget and fee
• Manage client expectations around scope and assumptions − No back of the envelope estimates
Other Profitable Pointers, continued
• Firm needs policies whereby partners cannot approve discounts to clients without approval from the executives or Finance Committee/Managing Partner
• Encourage volume discounting to create more projects – seen more patent prosecution
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Other Profitable Pointers, continued
• Work flow matter management - a must with patent prosecution work
− Need standard approach
− Streamline internal policies
− Need a game plan
− Need management by partners
− Need a budget
− Need to understand the costs (direct and overhead) in order to budget effectively
• Keep an eye on costs− Renegotiate vendor contracts− Review lease with a broker to see if negotiations could lead
to rent abatement− Consider outsourcing some jobs such as:
o Docketingo Proofreadingo Reference management
• Track actual expenses to budget and investigate negative variances
• Check staffing ratio’s to determine if any personnel cuts can be made
Other Profitable Pointers, continued
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• Consider reviewing client profitability and disengage from non-profitable work
• Expand geographic reach
• Organize firm along market segmentation monitor profitability
• Greater use of technology should lead to:
− Greater efficiency
− Less mistakes
− Greater profitability
Other Profitable Pointers, continued
You must understand the hourly cost of your fee earners.
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Overhead Calculation
PARTNER BUDGETED INCOME LOGGED HRS VALUE PER LOGGED HOURS