1. Law Firm Economics: Information Spend, Cost Recovery & the Bottom Line Blythe McCoy, West Librarian Relations Manager The West Librarian MBA Series Alabama May 13, 2005

2. Law Firm Economics – May, 2005 Welcome Law Firm Economics Managing Information Expenses through Cost Recovery Leveraging Technology to Optimize Cost Recovery Law Firm Economics Agenda

3. Law Firm Economics – May, 2005 Welcome Law Firm Economics Managing Information Expenses through Cost Recovery Leveraging Technology to Optimize Cost Recovery Law Firm Economics Agenda

4. Law Firm Economics – May, 2005 Law firms, like other businesses, seek to ensure their financial success through maximizing net income 1.Maximize fee income (earnings) Achieve earnings as close to fee capacity as possible Factors include the number of fee earners, hours worked, hourly rate, utilization 2.Minimize costs Direct expenses Overhead Law Firm Economics Overview

5. Law Firm Economics – May, 2005 Level of Organization Number of Fee Earners Target Hours Hourly Rate UtilizationFee Capacity Equity Partner251560425100% $16,575,000 Senior Associate52200350100% $ 3,850,000 Mid-Level Associate152200275100% $ 9,075,000 Junior Associate302200200100% $13,200,000 Paralegal101300125100% $ 1,625,000 Total $44,325,000 Librarians are “wild card” fee earners because they do not typically have target hours or a set utilization rate. Regardless, librarians do conduct and bill for work completed on behalf of clients, boosting a firm’s earnings. “Fee capacity” expresses the maximum earnings a firm can generate if operating at full capacity Law Firm Economics Maximizing Fee Income

6. Law Firm Economics – May, 2005 Firms can maximize fee capacity by manipulating its components but there are risks Increase target hours Associate satisfaction and retention May be perceived to promote inefficiency Increase hourly rates Dictated by geography, attorney seniority, type of work Hourly rates above norms impact a firm’s ability to be competitive Law Firm Economics Maximizing Fee Income

7. Law Firm Economics – May, 2005 Align lawyers’ capacities and capabilities with client demands Geography Industry Specialization Practice areas Marketing Manage headcount Reduce number of incoming new associates Typically reluctant to reduce headcount with the same vigor as the corporate business world Firms also work to minimize unconverted fee capacity Law Firm Economics Maximizing Fee Income

8. Law Firm Economics – May, 2005 Approximately 63% of all expenses Approximately 37% of gross receipts Consist primarily of legal staff expenses -Associates salaries dictated by geography, seniority, practice area Source: Citibank Survey and Blaqwell, Inc. Direct expenses are costs that can be directly traced to producing specific goods or services Law Firm Economics Minimizing Costs – Direct Expenses

9. Law Firm Economics – May, 2005 Overhead encompasses costs not including or related to direct labor, materials, or administration costs. The largest single expenses contributing to overhead are Occupancy – 35% Technology – 10% Promotion – 6% Reference – 4% Source: The 2003 Survey of Law firm Economics, Altman Weil, Inc. “Reference = library, including books, periodicals, subscriptions, newspapers and research services expense. Law Firm Economics Minimizing Costs - Overhead

10. Law Firm Economics – May, 2005 Overhead Expenses (22%) Fee Capacity (100%) Unconverted Fee Capacity Overhead Direct Expenses Revenue Operating Profit Net Income Investment Costs Contribution Margin Firms seek to maximize fee capacity and minimize costs to increase net income Law Firm Economics Converting Fee Capacity to Net Income Source: Blaqwell, Inc.

11. Law Firm Economics – May, 2005 Expenses: Employee Costs Legal staff salaries & bonuses Administrative staff salaries & bonuses Benefits Other employee expenses Occupancy Rent Maintenance & Repairs Utilities & other Office Operating Expense Office copier expenses Depreciation & amortization Stationery, printing & supplies Computer supplies & software Publications & services Equipment rental & maintenance Communication expenses Library expense Insurance Expense Interest Expense Business & Property Taxes Bad debt expense Payments to former partners Revenue: Fee income Contingent fee income Interest & other income Net Income: PPP Source: Anatomy of a Law Firm Merger, Hildebrandt International Law Firm Economics Typical Income Statement

12. Law Firm Economics – May, 2005 Average Profits Per Partner for AM LAW 100 Firms Source: American Lawyer The most widely publicized measure of expressing law firm success is Profits Per Partner (PPP) Law Firm Economics Converting Net Income to Profits Per Partner Thirty-two of the 2003 AM LAW 100 firms had average profits per partner of $1 million or more

13. Law Firm Economics – May, 2005 Leverage expresses the ratio between equity partners and other lawyers. Higher leverage typically results in higher PPP. -For example: A firm with 40 lawyers and 20 equity partners has a leverage of 1 to 1. Establishing a tier of non-equity partners is one way to improve PPP The principal factor affecting the conversion of net income to PPP is law firm structure Law Firm Economics Leverage and Profits Per Partner Just 23 2003 AM LAW 100 firms had only one partnership tier, compared to 55 in 1994.

14. Law Firm Economics – May, 2005 Law Firm Economics Leverage and Profits Per Partner Increased leverage typically means increased firm size and increased PPP 1:1 Leverage PPP = $297,290 2:1 Leverage PPP = $429,730

15. Law Firm Economics – May, 2005 Welcome Law Firm Economics Managing Information Expenses through Cost Recovery Leveraging Technology to Optimize Cost Recovery Law Firm Economics Agenda

16. Law Firm Economics – May, 2005 Overhead Expenses (22%) Fee Capacity (100%) Unconverted Fee Capacity Overhead Direct Expenses Revenue Operating Profit Net Income Investment Costs Contribution Margin Source: Blaqwell, Inc. Managing Information Expenses through Cost Recovery Overview Reference costs – including un-recovered online legal research costs – represent 4% of overhead

17. Law Firm Economics – May, 2005 Library expenses and profitability Law firm administrative executives are focused on managing all expenses Pre-recovery online legal research costs are typically one of the top five line item expenses for large law firms Un-recovered expenses show up in overhead, which reduces net income and profits per partner Managing Information Expenses through Cost Recovery Overview

18. Law Firm Economics – May, 2005 Cost Recovery Trends Firms under pressure to reduce overhead expenses Client “push back” for certain types of expenses ABA Ethics Opinion 93-379 – may charge clients as long as it “ reasonably reflects the lawyer’s actual cost”

19. Law Firm Economics – May, 2005 Online cost recovery and the role of the librarian Librarians understand the online research tool and the cost Online legal research is typically part of the library budget Successful online cost recovery can support increased library budgets / resources Managing Information Expenses through Cost Recovery Overview

20. Law Firm Economics – May, 2005 Survey Results 12-question survey as part of West Librarian MBA program 102 respondents’ answers from surveys administered to attendees of AALL Managing Information Expenses through Cost Recovery Survey Results

21. Law Firm Economics – May, 2005 Managing Information Expenses through Cost Recovery Survey Results Percent of firms that attempt to recover online legal research costs from Westlaw and Lexis N= 102 Librarians Average Rate of Cost Recovery for West/Lexis Online Research Costs 68% (Among those who attempt to recover)

22. Law Firm Economics – May, 2005 Satisfaction with ability to pass through online research costs to clients N= 92 Managing Information Expenses through Cost Recovery Survey Results Librarians

23. Law Firm Economics – May, 2005 Firm attempts to recover costs from services other than Westlaw or LexisNexis N= 92 Managing Information Expenses through Cost Recovery Survey Results All Librarians

24. Law Firm Economics – May, 2005 Managing Information Expenses through Cost Recovery Survey Results Satisfaction with ability to track online research costs from services other than Westlaw or Lexis N= 56 Librarians

25. Law Firm Economics – May, 2005 Satisfaction with ability to pass through online research costs to clients for services other than Westlaw or Lexis Managing Information Expenses through Cost Recovery Survey Results N= 56 Librarians

26. Law Firm Economics – May, 2005 Write-offs this year compared to last two years N= 92 Managing Information Expenses through Cost Recovery Survey Results Librarians

27. Law Firm Economics – May, 2005 Primary online cost recovery models Managing Information Expenses through Cost Recovery Survey Results

28. Law Firm Economics – May, 2005 Primary leadership for setting and managing online cost recovery policies Note: Percentages do not add to 100% because multiple answers were accepted. Managing Information Expenses through Cost Recovery Survey Results

29. Law Firm Economics – May, 2005 Cost recovery plans for the coming year N= 92 Managing Information Expenses through Cost Recovery Survey Results Librarians

30. Law Firm Economics – May, 2005 Cost Recovery best practices reported by respondents fell into five categories, in descending order of frequency (see following slides for examples of responses): Managing Information Expenses through Cost Recovery Best Practices Librarians Attorney Education & Communication ID Validation Client Education & Communication Team Effort/Company Buy-In Other

31. Law Firm Economics – May, 2005 Managing Information Expenses through Cost Recovery Best Practices

32. Law Firm Economics – May, 2005 Managing Information Expenses through Cost Recovery Best Practices

33. Law Firm Economics – May, 2005 Managing Information Expenses through Cost Recovery Best Practices

34. Law Firm Economics – May, 2005 Managing Information Expenses through Cost Recovery Best Practices

35. Law Firm Economics – May, 2005 Managing Information Expenses through Cost Recovery Best Practices – All Librarians (AALL)

36. Law Firm Economics – May, 2005 Managing Information Expenses through Cost Recovery Best Practices – All Librarians (AALL)

37. Law Firm Economics – May, 2005 Managing Information Expenses through Cost Recovery Best Practices – All Librarians (AALL)

38. Law Firm Economics – May, 2005 Managing Information Expenses through Cost Recovery Best Practices – All Librarians (AALL)

39. Law Firm Economics – May, 2005 Welcome Law Firm Economics Managing Information Expenses through Cost Recovery Leveraging Technology to Optimize Cost Recovery Law Firm Economics Agenda

40. Law Firm Economics – May, 2005 How do firms that are successful at cost recovery manage all of this? They communicate policy… they reaffirm commitment… and they leverage technology Leveraging Technology to Optimize Cost Recovery Cost Recovery Best Practices Cost Recovery best practices reported by library managers: Attorney Education & Communication ID Validation Client Education & Communication Team Effort / Buy-In Other

41. Law Firm Economics – May, 2005 Leveraging Technology to Optimize Cost Recovery Cost Recovery Best Practices Best practices align with the keys to a successful cost recovery plan: Organizational Commitment Business Readiness Strategy Management Organizational Commitment is Critical – involve stakeholders early: Determine policy… e.g. goals by location/ practice group, write-off discretion, action if goals are not met Establish a client communication plan (initial/ongoing) Identify core client billing requirements… e.g. bill centrally or by location, pricing methodology Commit to a user education program Agree on appropriate review process

42. Law Firm Economics – May, 2005 Best practices align with the keys to a successful cost recovery plan: Organizational Commitment Business Readiness –Client Matter Identification –Researcher Identification & Education Leveraging Technology to Optimize Cost Recovery Cost Recovery Best Practices

43. Law Firm Economics – May, 2005 Leveraging Technology to Optimize Cost Recovery Business Readiness - Client Matter Validation Take advantage of client matter options: –Forced Client Entry –Client Matter Format –Client Matter Validation Explore robust validation solutions: –Product Specific –Multiple Product –Custom Validation Firms utilizing robust validation report average recovery of 23% more Westlaw charges

44. Law Firm Economics – May, 2005 Leveraging Technology to Optimize Cost Recovery Business Readiness - Client Matter Validation Highlight: West-Hosted Validation –Allows firms the ability to store their client information on a server at West –Full remote user support, users can validate their client ID from any location (e.g. office, home) –No installation required –It’s Free!! Highlight: Elite Research Manager –Provides uniform client matter lookup and validation for online and local legal research sites –Captures research time/usage, providing an opportunity to extend cost recovery policies to additional online services

45. Law Firm Economics – May, 2005 Best practices align with the keys to a successful cost recovery plan: Organizational Commitment Business Readiness –Client Matter Identification –Researcher Identification & Education Leveraging Technology to Optimize Cost Recovery Cost Recovery Best Practices

46. Law Firm Economics – May, 2005 Be a pre-billing detective Leveraging Technology to Optimize Cost Recovery Cost Recovery Best Practices – Automate Management Reporting

47. Law Firm Economics – May, 2005 Leveraging Technology to Optimize Cost Recovery Business Readiness – Researcher Identification & Education Researcher Identification –Manage passwords online through My Account –Designate user attributes in QuickView+ to tailor reporting and client billing Unique TimeKeeper ID > Employee Number> TimeKeeper Number Custom TimeKeeper Grouping > Practice Group> Status (e.g. Summer, New) > Cost Center> Role (e.g. Associate, Paralegal) New

48. Law Firm Economics – May, 2005 Leveraging Technology to Optimize Cost Recovery Business Readiness - Client Matter Validation Schedule an Auto Report to prompt timely review of clients/matters:

49. Law Firm Economics – May, 2005 Flexible pricing/reporting options address your unique client strategy: Leveraging Technology to Optimize Cost Recovery Cost Recovery Best Practices – Streamline Billing Processes Exclude selected clients from special pricing calculations Remove clients excluded from special pricing from the report

50. Law Firm Economics – May, 2005 Add tax to QuickView+ usage, determined for each charge based on the rate in the jurisdiction where the user is assigned. If applying Special Pricing, tax is determined for the calculated price. Leveraging Technology to Optimize Cost Recovery Cost Recovery Best Practices – Streamline Billing Processes

51. Law Firm Economics – May, 2005 Utilize Auto Reports to prompt review of customized user group reports: > Practice Areas > Cost Centers> Summer Associates Leveraging Technology to Optimize Cost Recovery Cost Recovery Best Practices – Automate Management Reporting Westlaw User Name TimeKeeper ID TimeKeeper Group Westlaw User Number

52. Law Firm Economics – May, 2005 Seamlessly upload QuickView+ usage/charge information to Elite billing and accounting packages utilizing all of the customized QuickView+ functionality you currently employ: Leveraging Technology to Optimize Cost Recovery Cost Recovery Best Practices – Streamline Billing Processes  Timesolv  ProLaw (Version 9.2 or higher)  Elite

53. Law Firm Economics – May, 2005 Leveraging Technology to Optimize Cost Recovery Elite Research Manager - Summary Elite Research Manager increases law firm profitability by: capturing and enabling the management and recovery of all online research costs providing password management capabilities to law firm administration

54. Law Firm Economics – May, 2005 Leveraging Technology to Optimize Cost Recovery Recovery of Online Research Charges – Law Firm Needs Pre-recovery online research costs are a top-five expense for law firms –90% recover some or all Westlaw® and LexisNexis charges –82% attempt to recover other specialty service charges –5% - “very satisfied” with recovery success this past year –70% - attempt to improve results next year Unrecovered charges reduce library resources, net income and PPP Invalid client IDs or inability to assign an ID is top impediment to recovery Sources: 2004 West survey of library directors; 2004 Am Law Library Survey

55. Law Firm Economics – May, 2005 Best practices align with the keys to a successful cost recovery plan: Organizational Commitment Business Readiness –Client Matter Identification –Researcher Identification & Education Strategy Management –Streamline Billing Processes –Automate Management Reporting Leveraging Technology to Optimize Cost Recovery Cost Recovery Best Practices

56. Law Firm Economics – May, 2005 Leveraging Technology to Optimize Cost Recovery Cost Recovery Best Practices – Streamline Billing Processes Tailor cost disbursement reports to your recovery plan –Centralized or location-specific billing –Customized information needs –Special pricing Allocation of fixed amount –Based on usage value for all included/excluded content –Based on usage value for included content (excluded content charged separate per unit rate) Discount –All included/excluded content discounted –Use of included content discounted –Apply Tax Automate billing processes

57. Thank you!