Improving Productivity and Profitability in a Insurance Defense Law Firm

By John W. Olmstead, MBA, Ph.D., CMC

Insurance defense work can be a blessing and a curse. Working for insurance companies often does result in a steady flow of work but at the following costs:

• Low billing rates – often in the range of $145 – $175 for partners and even lower for associates – auto mechanics and plumbers often fare better
• Unrealistic controls.
• Mandated billing guidelines regarding what can, what cannot, and how much time can be billed
• Strict litigation guidelines that dictate how the case is handled and managed.
• Case budget requirements
• Audits of your legal bills
• Limited loyalty and inability to develop close relationships with the client due to centralized claims offices and restrictions on social activities

So, in exchange for a flow of cases you may be selling your freedom, independence, and your soul. It is hard to be successful if you dabble in insurance defense. You either need to be in or out and if you are in you have to leverage the practice in order to be profitable at the lower billable rates. Be careful about relying on a large volume of work from one just one company. Consider diversifying your case portfolio to include a mix of higher stakes cases, if you are able, such as professional liability, products liability, medical malpractice, commercial litigation, and major construction defects.

Realize that going in that insurance defense work is commodity work and insurance companies are shopping for the best deal and the best price – so your competitive strategy often has to be a low cost provider?

The Profitability Levers

The profitability levers for law and other professional service firms:

R – Rate – billing rate (effective rate, realization rate, etc.).
U – Utilization – the number of billable hours.
L – Leverage – the number of associates/paralegal, etc. to owners or equity partners.
E – Expenses – office overhead
S – Speed – time it takes from the time work is done to when cash comes in the door.

With the low billing rates that are prevalent in insurance defense firms the primary profitability levers that can be managed in an insurance defense practice are utilization, leverage, and expenses. Insurance defense firms need 1800 – 2000 annual billable hours from their associates, a high leverage ratio of three or four associates for every equity partner, and low expenses – i.e. no-frills office space.

Often solo owners in small firms with a few associates may initially be doing fine with regard to owner compensation but this would not be the case if these solo owners had partners – the profits would not be there to pay higher salaries. Less than 1800 annual billable hours is not acceptable and there must be consequences for non-attainment. Firms that are not getting 1800+ billable hours from their attorneys must look into the reasons as to why they are not attaining 1800 hours. Possibilities could include:

• Not enough work
• Associates not working enough
• Poor time management habits
• Poor time keeping habits
• All of the above

If there is enough work, firms need to focus on the other factors and let everyone know what the consequences are for not attaining the billable hour expectation.

As firms think about partner tracks, they should keep in mind the issue of leverage and should not be tempted to make too many partners.

Most insurance defense firms expect a minimum of 1800+ annual billable hours from associates and partners. Often 1800 is a requirement to remain employed and the minimum threshold to be eligible for a performance bonus. Often, I see billable hours at 2000 to 2200 in insurance defense firms.

This goal is getting harder to achieve. Insurance companies are now managing hours as well as rates and outlining their expectations in their billing requirements and guidelines. Law firms can no longer “lean on the pencil” like they used to do in the old days. In addition, if business and file assignments are down you can’t expect associates to work on work that isn’t there.

Risks & Strategies

Insurance defense law firms that have been approved as panel counsel for multiple insurance companies can inadvertently find that their revenue base is increasingly dependent on a shrinking number of insurance companies over time.

RISKS

1. Small number of companies representing the lion’s share of the firm’s revenues
2. Changing Rules for Insurance Panels – General Industry Consolidation
3. Regionalization
4. Insurance Companies putting work “out for bid”
5. Trapped by a “Paradigm of Pass Success” and failure to institutionalize business development processes and practices
6. Promoting an “entitlement generation” of partners with no business development skill
7. Failure to stay abreast of changes within the client’s organization. (Needs, players, policy changes, etc.)
8. Aging/retirement of founding partners
9. In house assignments
10. Departing partners
11. Lack of time and focus to allocate to new business development

STRATEGIES

1. Use a structured client feedback process to obtain hard data from your clients on firm performance, client satisfaction, projected case assignments in the future, your firm’s share of the client wallet, changing management (people) and policies, unmet needs, and future opportunities.
2. If you don’t have one develop a strategic plan and a marketing plan (including a specific budget) for the firm.
3. Diversify the client base. Target new clients. Aggressively pursue new panel applications, track submissions, and monitor. Once approved – look for opportunities to build relationships. Consider educational forums and venues.
4. Determine if regionalization is an appropriate strategy for your firm. (Ask your clients)
5. Look for ways to obtain additional business from existing clients. (Ask your clients)
6. Write and publish more articles – externally and internally (website).
7. Beef up the blog on the website.
8. Get more attorneys in the firm involved in business development.
9. Develop a succession plan for the founders.

John W. Olmstead, MBA, Ph.D., CMC, is a Certified Management Consultant and the president of Olmstead & Associates, Legal Management Consultants, based in St. Louis, Missouri. The firm helps law and other professional service firms improve the operations and management of their practices and the lives of their practitioners. The firm, founded in 1984 serves clients across the Globe assisting them with implementing change and improving operational and financial performance, management, leadership, client development and marketing.

John’s assignments have covered the spectrum of management issues. However, in recent years most of his time has been focused on engagements helping firms in areas:

• Succession/Exit Planning
• Partner Compensation
• Governance
• Strategy & Competitive Business Models
• Profit Improvement programs
• Client Service Programs

John is the author of a recently published book, The Lawyers Guide of Succession Planning: A Project Management Approach for Successful Transitions and Exits, published by the American Bar Association, John served as the Editor-in-Chief of “The Lawyers Competitive Edge: The Journal of Law Office Economics and Management,” published by Thomson Reuters for 24 years. He is currently serving as Past Chair, Illinois State Bar Association Standing Committee on Law Office Management and Economics, Associate member of the American Bar Association, member of the Institute of Management Consultants, and past member on the Legal Marketing Association (LMA) Research Committee. John may be contacted via e-mail at jolmstead@olmsteadassoc.com.  Additional articles and information is available at the firm’s web site: www.olmsteadassoc.com and blog www.olmsteadassoc.com/blog

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