In September 1787, in the city of Philadelphia during the Constitutional Convention, Benjamin Franklin was finishing the work of drafting the new Constitution for the United States. On the final day, as the last delegates were signing the document, Franklin gestured to a painting hanging on the wall nearby and observed that it can often be difficult to distinguish the differences between a rising sun and a setting sun. “I have often in the course of the session, and the vicissitudes of my hopes and fears as to its issue, not known whether it was rising or setting. But now at length I have the happiness to know that it is a rising and not a setting sun.”

A New Day Dawns for Lawyers

Franklin’s observation rings true about the current status of the legal profession. Evolutionary currents are sweeping us all along, and our markets and methods are changing. However, ours is not a profession that embraces change easily. As lawyers, we are trained in the value of precedent, and therefore we often underestimate the potential of new trends. When our traditional systems appear to still be working, and especially in the absence of proven alternatives, change can be particularly uncomfortable.

We do know there is plenty of evidence that the pace of change in the legal profession is accelerating. In 2009, consultants Altman Weil surveyed law firm managing partners and found that only 42 percent expected to see more price competition; by 2012, that number had climbed to 92 percent. Similarly, in 2009, less than 30 percent thought fewer equity partners and more nonhourly billing arrangements were permanent trends, whereas by 2012 that number had reached 80 percent. In Altman Weil’s 2013 “Law Firms in Transition” survey, law firm leaders identified further pending industry changes, including more price competition, a focus on improved practice efficiency, more non-hourly-billing arrangements, and more competition from nontraditional service providers.

Disruption Is Inevitable

In a 2013 article in the Harvard Business Review, Clay Christensen, Dina Wang, and Derek van Bever suggested that the same market dynamics that disrupted many other businesses, from steel to publishing, are also affecting professional service firms, including law firms. They pointed to a similar pattern of industry disruption in which new competitors with new business models arrive, incumbents choose to ignore the new players, and eventually one of these “disrupters” achieves a level of quality acceptable to the middle of the market, thereby undermining the position of existing market leaders. Frequently the current market leaders are caught by surprise.

Disruption was also the prime subject at the March 2013 Reinvent Law conference, at which attendees discussed new models for delivery of legal services. These included direct application of digital technology such as e-discovery, outsourcing by law firms, and insourcing by clients. As Wesley Chan, CEO of Law Pivot, observed, “There are inefficiencies in the delivery of legal services, and there is a huge opportunity for a technology-driven disruption in the legal industry. Our goal is creating an intelligent online solution that connects companies to the legal answers they need.”

One example is Axiom Law, a 12-year-old, 900-employee legal services provider. In Axiom’s early years, large law firms dismissed it as a serious competitor, viewing it as a temporary staffing service for law departments. Axiom has expanded beyond contract-lawyer staffing to advising general counsel on methods to lower costs while maintaining quality and now employs lawyers, management consultants, workflow specialists, and technologists. At current revenue growth rates, by 2018 Axiom will be larger than today’s largest global law firm.

Technology has also helped virtual law firms emerge as lawyers join together to provide superior client service without the additional overhead cost of staff and physical offices. LeClair Ryan is a full-service U.S. firm that currently employs more than 300 contract lawyers in its Discovery Solutions practice area. Clients can unbundle litigation work and “right source” to the firm such projects as large-scale document and data review at a dramatically lower cost.

Law professor Daniel Katz, one of the founders of the “Reinvent Law” movement, has observed that lawyers should embrace technology by focusing primarily on improving service to clients. For evidence, he points to the explosion in the legal-services-startup market over the last five years.

“In 2009, there were 15 legal services startups,” he said. “Today there are over 400.” Examples include Legal Zoom and Rocket Lawyer. Legal Zoom provides legal documents for business formation, trusts, wills, name changes, and even prenuptial agreements. Rocket Lawyer provides online legal services, which include a network of attorneys with whom consumers and small businesses can consult through its on-call service.

Client Service in the Information Age

People are now using technology to access and spread knowledge beyond traditional boundaries. Smartphones, laptops, and tablets are always present. People are accustomed to going online to find and share information, communicate, make travel plans, and do nearly everything else. No matter what type of clients you serve, it’s likely they want to be able to use the same technologies for similar tasks when they’re working with you. Appropriate tools are available, even within the limits of a solo or small-firm budget.

Communication. The start of a new engagement is always a good time to discuss communication preferences with clients, including methods for exchanging confidential information and for receiving other, general communications. Maintaining the confidentiality of client information presents special issues. While ABA Formal Opinion 99-413 states that “a lawyer may transmit information relating to the representation of a client by unencrypted e-mail sent over the Internet without violating the Model Rules of Professional Conduct,” it follows that up with the caveat that “a lawyer should consult with the client and follow her instructions, however, as to the mode of transmitting highly sensitive information relating to the client’s representation.”

Document Access. For adding extra security to electronic communications, you may want to consider encrypted e-mail and document transfer through a service such as Dialawg, Rpost, or ZixCorp. Another solution is to give your clients access to their documents in a secure online repository. You upload the documents you want to share with the client, and the client accesses them via a secure log-in. The benefits to the client include having all the documents for a matter in a single repository, accessible at his or her convenience, with you taking responsibility for document management. You can update or replace the documents as needed, thus eliminating concerns about versions.

Frequently, documents require not only client signatures but also that certain fields be filled in and initialed. New e-signature solutions, such as DocuSign and RightSignature, make this process much easier for clients. These allow you to upload documents, flag required fields and signature blocks, send the documents to the needed signers and reviewers, and ultimately allow them to “sign” the document with a mouse or stylus.

Scheduling. Setting up meetings requires parties to check their calendars and prepare for changes, delays, and rescheduling requests. Frequently the result is a time-consuming loop of e-mail exchanges. Online appointment calendar tools such as GenBook, Appointment Plus, and BookFresh synchronize with an Outlook or Google calendar and display your free and busy times to clients and prospects. Most of these vendors provide a free trial, with a monthly fee thereafter.

Think about how you can use technology to make it easier for clients to work with you and how you can provide better client service. Talk with them about the kinds of tools they’d like to have and how you can make their experience better. Consider online services, while keeping in mind your ethical and legal duties. Make every effort to adapt your practice to clients’ needs, and work on further harnessing technology to increase clients’ satisfaction.

The Impact of Web 2.0

While technology has given lawyers new marketing opportunities, traditional principles of client development are still relevant. For example, allocating significant resources to an elaborate website might not, by itself, do much for you without a strategy defining how your site will attract prospective clients. You must be visible to your target market, build credibility, get results, and provide extraordinary service. Your website and your other promotional activities should support and enhance each other.

Frequently potential clients become aware of a lawyer when the lawyer uses traditional marketing methods such as networking, speaking, or writing. These potential clients then seek out a lawyer’s Web presence to ratify or enhance their first impression. They need to know where the lawyer is located and how to contact the lawyer. Thus, on their websites, law firms should illustrate who their key partners are and describe their concentrations and experience. A well-functioning law firm website is one that is user friendly, with a simple content index, a list of practice areas and groups, and summary resumé information on its lawyers, including links to practice groups and V-Cards for easy download to Outlook or other content-management tools. The site should identify the law firm’s mailing addresses and telephone numbers as well as electronic contact capability, either through email or through a website contact box.

The Decline of the Billable Hour

Until billing structures are changed, law firms might not be able to measure the immediate financial return of technology applications. For example, although the application of automated document assembly may reduce what normally is a several-hour-long drafting job to 10 minutes, this is not financially advantageous if billing continues to be done on a pure hourly basis. Law firms that offer fixed-fee arrangements and take advantage of technology applications will have a competitive advantage.

For most clients in today’s markets, a statement of the lawyer’s hourly rate is not a sufficient indicator of value. What the client really wants to know is, “How long will my legal matter take to be resolved and what will the total cost be?” Clients want their legal costs to be predictable and are very interested in how cost effective their lawyers are compared with the perceived value they are getting. When clientstalk aboutenhancing thevalue theyreceivefor thelegal servicesthey purchase, what they usually meanis the efficiency, predictability, andcost effectivenessofthedelivery of those legalservices. Most legal services have become similar to a commodity, and consumers assume the quality of each lawyer’s work product is the same.

Opening a discussion on alternative fee arrangements can be an opportunity to cultivate stronger relationships with existing clients, gain new clients from more rigid competitors, and increase profitability. However, implementing alternative fees usually requires lawyers to predict and analyze the effort that will be involved, lay out the plan to be followed, and factor in the likely outcomes. Success with alternative fees favors lawyers who have good management skills and a high level of expertise in the substantive area involved.

Some examples of alternative fee arrangements include fixed fees for a specific service, contingency fees based on results, risk collars that may cap legal expenses for a project, and flat-fee retainers covering specific time periods. Alternative fee arrangements are also frequently useful with routine types of client matters that are engaged in repeatedly. Examples include frequent filing of a certain type of patent or trademark application, monitoring compliance with environmental permits, and handling routine labor matters in arbitration (as opposed to court). A fixed fee might be used for a single project involving expertise and judgment, but not much risk, such as writing a handbook or developing a compliance training program.

Alternative fees might not be the best option when handling more complex matters that involve sophisticated expertise and higher risk, such as a line of product liability cases, a series of venture capital financings, or more complex multiparty contracts for capital equipment sales.

Driven by client demands and a changing marketplace, the decline of the billable hour appears inevitable. Many clients believe that billing legal services by the hour encourages inefficiency (the longer a task takes the more it costs). They would prefer alternative billing models that encourage efficiency and cost effectiveness. Lawyers who understand and offer alternative billing options can create growth opportunities. Even if a client has not specifically asked for alternative fee options, other lawyers and law firms may gain a competitive advantage for that client’s business if you do not raise the issue and you ignore these alternative options.

Profit Is Not a Four-Letter Word

With so many options for clients who need legal services, price-competitive pressure on legal fees has increased. Many lawyers respond to this situation by offering discounts, without understanding the implications. A common theme appears to be, “I don’t want to talk about any value-based billing arrangement. I’ll just give my clients a discount.” For example, lawyers may proposea10 percentdiscount to their total bill orablendedrateto cover multiple lawyers’ involvement butthen complete the work product the same way they’ve always done it.The lawyers are not thinking about the consequences that discounting rates may have on the profitability of that work product.

Lawyers and law firms can increase profits even in this challenging economic climate. Unfortunately, they frequently eliminate the very things required to get the kinds of clients and work that would improve profits. After the 2008 financial crisis, an Altman Weil survey of law firms found 46 percent had reduced support staff, 33 percent cut paralegals, 32 percent thinned their associate ranks, and 24 percent cut nonequity partners.

Outsourcing. Lawyers also frequently try to absorb administrative and management tasks they could inexpensively outsource. This takes them away from billable projects and marketing, two activities that increase profitability. Many firms also eliminate training programs and hold back on key technology investments. These actions create only a temporary windfall and fail to address the real issues contributing to inefficiencies and lower profits.

For solo practitioners there may be similar temptations. Avoiding the overhead cost of staff, whether a legal assistant, a paralegal, or both, could mean missing the opportunity to leverage billable time to handle additional legal matters and develop more client relationships. Another example is trying to manage office-administration tasks such as trust accounting or technology when outsourcing these activities to other professionals might allow the lawyer to focus on client development and maximize the value of his or her own practice.

Measuring Profitability

The standard formula for measuring law practice profitability was created by law-firm-management expert David Maister (see Figure 1):

These factors, expressed as ratios, are interdependent, meaning one of them cannot be changed without affecting the others. For example if you doubled your billing rate, profitability would also double. Of course, if you doubled your billing rate, realization would suffer as clients objected to the higher cost by not paying bills timely, and utilization would suffer as clients switched to cheaper competitors. Therefore, understanding each factor is key to executing the right steps to increase profitability.

Leverage is the ratio of nonequity fee earners to equity partners. In some small firms, all attorneys are partners, while others consist of a couple of partners with several associates. Larger firms may have a combination of equity and nonequity partners as well as associates. Solo practices might include one or more paralegals. In any situation, the fact is that there are only so many hours any individual lawyer can work or wants to work. Once this level has been reached, to increase profitability it is necessary to delegate billable work to another fee earner.

Utilization is the percentage of available capacity within a law practice that is being billed out to clients. To increase profitability, all fee earners should be fully utilized. Lawyers who are skilled at client development can build highly profitable practices by maximizing the utilization of other fee earners, nonlawyers as well as lawyers, within their practice.

Frequently lawyers offer a variety of rate structures to various clients and for various matters. The blended hourly rate is the ratio of total fees earned divided by the total hours charged.

For most lawyers and law firms, profitability at the end of a financial measuring period is a general goal but positive cash flow has the most immediate impact. Therefore the focus should be on how efficient each lawyer is at converting his or her work into cash. Realization is the percentage of the lawyer’s billable time actually billed to clients and not written off. Each percentage point lost represents money out of the lawyer’s pocket. All work in process can be considered similar to inventory, and it loses value every day it sits unattended on the lawyer’s desk. Effective time-entry practices help capture all work the lawyer has put into a specific matter. By improving the realization percentage of any size legal practice, both the cash flow and the profitability of that practice will increase.

Law practices, like any other for-profit business, can be measured by their profit margin. This amount is frequently identified as the practice’s net income, expressed as a percentage. Frequently the assumption is that better profit margins in law practices are attained by reducing costs, increasing hourly rates, and increasing billable hours. Unfortunately, these activities may not only fail to achieve the desired results but also may create client dissatisfaction and problems with both lawyer and staff morale.

Reducing Resistance to Change

Despite these trends, it appears that only a minority of lawyers and law firms have made any significant changes to their basic business models. When asked by Altman Weil to rank their confidence level in their firms’ ability  to keep pace with the changes in the new legal marketplace, the majority of law firm leaders rated their confidence as being moderate. However, when asked to rate their partners’ level of adaptability to change, the median rating dropped to low.

Creating a focus on change within a law firm of any size can be a challenge. Even when successful lawyers realize the power and sustainability of their collective force, most lawyers usually have a strong desire for workplace autonomy. In addition, every lawyer has his or her own style of behavior. For example, you might know “scorched earth” litigators who achieve excellent results for their clients but can be very difficult individuals to find common ground with, or patent lawyers who understand sophisticated methods to protect their clients’ assets but have difficulty agreeing to law firm operational decisions without exhausting every possible option.

Each lawyer will embrace change differently and will be motivated to success in a different way, depending on his or her style. Sometimes these individual styles are obstacles to change. Understanding and maximizing this mixture of styles is a key to creating law firm success. I have learned when working with lawyers and law firms that despite individual differences, some generalizations can be applied to develop a better understanding of the most effective method to create success.

Attorneys’ styles and personalities. For example, some lawyers can be considered primarily analytical. This means they focus almost solely on facts and details. They prefer to get things exactly right. They are often not responsive to suggestions of change because of the unknown variables but will usually not be assertive. Any leader or committee seeking to make changes will need to be specific and responsive to these style issues. One way to work more effectively with analytical lawyers might be to meet individually before presenting suggestions or conclusions at a group meeting.

Other lawyers may be considered primarily amiable. These lawyers value relationships with their peers and demonstrate great patience. They are also often not assertive but can be responsive to change. They want everyone to just get along. So you know if you can muster consensus among the group, these lawyers will usually follow along. However, they will want the concerns and questions of others fully addressed in the process to be sure there are as few negative consequences as possible.

Some lawyers may be considered primarily expressive. These lawyers usually value recognition and activity. They can be highly assertive and want change for change’s sake. They expect everyone to follow their lead but are often impulsive and disorganized. When your firm begins the process of identifying change initiatives, these lawyers often will be advocates and offer to lead the effort. However, caution must be exercised to ensure all staff members’ points of view are considered and maximum value is achieved. The most effective changes will require collective, rather than individual, effort.

Most law firms also usually have some lawyers who can be considered the drivers. These lawyers primarily value control and achievement. Their individual productivity is often among the highest in the firm. They frequently assume leadership positions, whether on committees or practice teams. This allows them to direct resources and sometimes enhance their own individual objectives. As a result, they can be highly assertive in leading change initiatives but not necessarily responsive to the suggestions of others. It may often appear they only want everyone to just do what they say. Frequently some of their own individual objectives may be desirable as firm objectives but nevertheless require definition to be applicable and adopted by all.

Within many of the law firms that I have worked with, all these individual styles exist. This is true whether the firm is large or small. Therefore, integrating individual styles into the process of adopting change initiatives is crucial. Law firms and their leaders need to identify and understand these autonomous styles. Only then can they begin to create sustained success.

Change Is the New Constant

When Charles Darwin used the new phrase “survival of the fittest” in his fifth edition of On the Origin of Species, he meant it as a metaphor for “better adapted for the immediate, local environment.” In today’s legal environment, lawyers learning to adapt to new paradigms are creating success. However, many suggestions about change among lawyers and within law firms are met with resistance. Debates about the value of change often end without agreement. My own experience facilitating these discussions has been that multiple models of law firm organization, compensation, and client development will evolve. There are, however, substantial differences of opinion as to whether these changes will be incremental or across the board, and which structure or style of leadership will most effectively foster such change.

Lawyers will always create professional success by doing what they do best, practicing law. Grappling with the economic and business factors of operating a law practice is an additional challenge to any lawyer. As lawyers we have an obligation to meet the needs of our clients. However, we also must operate our practices and our firms in such a way as to provide the necessary economic foundation to do good legal work and provide value to our clients. It may appear challenging in the new legal markets to do both, but we know, as did Benjamin Franklin, that a rising sun on a new day offers each of us multiple opportunities for success.