1

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

2

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

3

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

4

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

5

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

• Geographical expansion

− Regional firms to national firms

− Local firms to regional firms

− National firms to international firms

6

Internal and External Pressures on Profitability

Internal and External Pressuresare on the Rise

FIRM

WorkSegmentation

Send WorkOverseas

Commoditization

Competitionfor Clients

Competitionfor Resources

StrategicMoves

RiskManagement

Flight Riskof Talent

CostManagement

PracticeSupportManagement

Of Talent

Consolidation

Clients

Competition

Internal Issues

Keep WorkIn-House

CompetitiveProfitability

Flight Risk

© Hildebrandt Baker Robbins (used with permission)

7

Internal Pressures

FIRM

RiskManagement

Flight Riskof Talent

CostManagement

PracticeSupportManagement

Of Talent

Internal Issues

CompetitiveProfitability

© Hildebrandt Baker Robbins (used with permission)

Management of Talent

• Balancing workload demands with client contact with variety of work, etc.

• Impact of client demands (e.g., decreased use of 1st

and 2nd year attorneys)

• Absorbing laterals and new hires

• Re-emphasizing training; new methods

• Generational issues

8

Flight Risk of Talent

• Partner and group defections

External Pressures

FIRM

WorkSegmentation

Send WorkOverseas

Consolidation

Clients

Keep WorkIn-House

Flight Risk

© Hildebrandt Baker Robbins (used with permission)

9

Client Pressures

• Flight risk

• Consolidation

• Keep work in-house

• Work segmentation

• Sending work overseas

External Pressures

FIRMCommoditization

Competitionfor Clients

Competitionfor Resources

StrategicMoves

Competition

© Hildebrandt Baker Robbins (used with permission)

10

Strategic Moves

• Mergers and acquisitions

• Laterals

• Geographic footprint

Commoditization

• Fixed fees

• Large clients

− Ongoing downward pressure on value pyramid

− Need to take some commodity work to have access to higher value work

• Affect of GP firms and micro-boutiques

11

Competition for Clients

• Never been tougher

• # RFPs; new professional roles (marketing and sales by non-lawyers)

• Competitive intelligence

Competition for Resources

• Top grads

• Laterals

• Headhunter calls

• Discerning the market rate for associate salaries and bonuses

12

Managing Profitability

Levers of Profitability

1. Realization (% collected vs. billed)

2. Utilization (billable hours)

3. Leverage (ratio of lawyers to partners)

4. Expenses (profit margin)

5. Speed of billing and collections

6. Billing rates

13

1. Realization

• Norm: 90% +/-

• Declining realization among top 30 firms, and flat for other firms, may be due to:

− Increased discounts/alternative fee arrangements

− 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

14

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

15

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

16

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

17

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

18

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

19

• 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.

20

Overhead Calculation

PARTNER BUDGETED INCOME LOGGED HRS VALUE PER LOGGED HOURS

A 300,000 1,906 157

B 1,050,000 2,277 461

C 715,000 2,047 349

D 1,300,000 2,907 447

E 260,000 1,523 171

F 7000,000 1,926 363

G 235,000 1,982 119

H 1,400,000 967 1,448

I 235,000 1,175 132

J 420,000 2,28 207

K 420,000 1,896 222

L 265,000 1,902 139

M 385,000 2,278 169

N 220,000 489 450

O 755,000 2,392 316

P 550,000 2,087 264

Q 275,000 2,384 115

R 275,000 2,342 117

S 500,000 2,479 202

T 285,000 1,759 162

U 575,000 1,754 328

$ 11,120,000 41,099

Overhead Allocation

21

Overhead Calculation

Calculate Average Headcount

DEC DEC 2014

DEC 2015

AVERAGE WEIGHTING POINTS

Equity Partner 20.00 20.00 21.67 20.56 1.50 30.84

Non-Equity Partner 9.00 10.00 10.00 9.67 1.25 12.09

Associated 23.00 23.00 26.00 24.00 1.00 24.00

Paralegals 22.00 20.00 25.00 22.33 .50 11.17

78.10

TOTAL EXPENSES 2011 16,429,774

Adjusted Total Expenses 16,429,774

Less Direct Cost N/E, Associates, Paralegals (7,603,521)

Soft Costs - Income (504,711)

Net Overhead 8,321,542

Divide by Numbers of Points Above 78.10

Overhead Per Point 106,55

22

Overhead Costs Per Logged Hours

N/E Associate Paralegal Partner

Weighted Points106,550

1.25106,550

1.0106,550

0.5106,550

1.5

Number of Positions Overhead

133,1879.67

1,287,921

106,55024

2,557,196

53,27522.33

1,189,629

159,82520.56

3,285,997

Number of Logged Hour 19,677 44,078 36,903 41,441

Per Log Hour Cost 65 58 32 79

Direct Costs Per Hours By Category

Non-Equity Partner 117

Associate 82

Paralegals 45

23

Question and Answer

Your opinion matters!Please take a moment now to

evaluate this session.

Thank You!