It is rare I have nothing to add, but this six minute (now there’s some rich irony) clip explains precisely how and why women are penalized by hourly billing. Congratulations to my partner Nicole Auerbach on a presentation that has earned such widespread praise.
The Wall Street Journal recently reported on the increasing number of BigLaw partners charging more than $1000 per hour. My thoughts on hourly billing are well know, but the criticism of these rates as excessive misses the point entirely. An hour of work from a lawyer billing at this level may well provide far greater than $1000 of value. The point isn’t simply the number of dollars per hour. It is about the use of time as a surrogate for value. A minute of time to avoid a lawsuit is worth millions whereas millions spent defending a lawsuit only to settle at a high number may contribute nothing of value. And a smart client should be willing to pay much more than a minute’s worth of time for the great advice, but at the same time find it unnecessary to pay for time that yields not value to the outcome.
Focus on what’s important.
Just ran across an article in Today’s General Counsel on choosing between litigation and arbitration. There are many factors that go into a decision to pursue one or the other, but this paragraph caught my eye:
Moreover, the inability to obtain full discovery can be considered a cost, not a benefit of arbitration. While it may be true that eliminating or severely restricting discovery can shorten the time it takes to final resolution of a dispute, doing so actually negates one of the primary purposes of alternate dispute resolution; facilitating expedient settlements. Robust discovery provides each party with the opportunity to learn the true strengths and weaknesses of the other side’s case, which in turn permits both sides to take better and more reasoned settlement positions. Because settlement is often the most efficient way to reduce costs, the lack of discovery can actually hamper the dispute resolution process by adding unnecessary time and expense.
Excuse me? Quite apart from the absence of any data to support the conclusions, the reason is dubious at best. Let’s parse the paragraph. The statements that appear in red are my commentary.
Moreover, the inability to obtain full discovery can be considered a cost, not a benefit of arbitration. [So one benefit of arbitration most parties desire --less discovery--is a cost. Hmm, other than privacy, why would anyone actually want to arbitrate anything?] While it may be true that eliminating or severely restricting discovery can shorten the time it takes to final resolution of a dispute, doing so actually negates one of the primary purposes of alternate dispute resolution; facilitating expedient settlements.[The premise of this statement is that the parties must have full and complete discovery to assess their risk. No trial lawyer believes this and I have not found a single client in 30 years who actually prefers to wait until discovery is complete before evaluating settlement. So if there is less discovery in arbitration, do parties just not settle? No data suggests that is the case.] Robust discovery provides each party with the opportunity to learn the true strengths and weaknesses of the other side’s case, which in turn permits both sides to take better and more reasoned settlement positions. [The assumption that a lawyer cannot assess the strengths and weaknesses of a case without "robust" (read, "really, really expensive") discovery" is simply untrue, as is the implication that business objectives do not greatly influence many if not most settlements.] Because settlement is often the most efficient way to reduce costs, the lack of discovery can actually hamper the dispute resolution process by adding unnecessary time and expense. [This statement is just absurd. Clients know from decades of experience that settlements after discovery almost always raise their overall costs. Legal fees are obviously higher and many times the settlement position worsens as both bad information becomes known and the other side's investment in the case escalates. This is precisely why virtually every sophisticated litigant places a premium on early case assessment--trying to identify opportunities to assess and settle the case before the expense escalates.]
I don’t know the authors of the article, but the positions they espouse in the article seem to benefit only the law firm’s pocketbook.
At the chime of the midnight bell on April 1st, Valorem now has on office in Silicon Valley. We are so pleased to announce that David Bohrer has merged his Confluence Law Partners practice into Valorem. Dave’s addition gives us a powerful patent litigation presence on the West Coast as well as a disciple of the gospel of value-based fee arrangements. Many readers of this blog will recognize Dave from his FlatFeeIPblog or his tweets (@DBohrer). Dave is an accomplished patent trial lawyer, and will be working with Marty Lefevour and Manotti Jenkins, patent litigators in our Chicago office, giving us a robust patent trial presence.
Here is our press release. Valorem-Confluence press release 3 -2013
Everyone claims to offer fee structures that are alternatives to the billable hour. Frequently, these “alternatives” are nothing more than estimated hours x hourly rates, plus “a little cushion.” So clients should ask:
1. How did you determine your alternative fee? What metrics did you examine? What factors did you consider? What experience did you draw on? Can I see your worksheet?
If the lawyer mentions hours, that have provided only a surrogate hourly rate number. But its locked in. Early settlement? Client loses. Case goes the distance? Law firm covered. That is not risk sharing under any definition.
Everyone knows that those who are serious about alternative fees have learned to handle things differently? Legal Project Management. Lean Six Sigma. Project Management. Process Mapping. Those words mean something to those truly committed to alternatives because these are among the things that drive the cost of production down (and hence increase profit margins).
2. How do you handle cases differently under the alternative fee you quoted than you would if you were billing by the hour?
If the answer is “we don’t,” they you need to ask “how are you doing things differently now than you were three years ago? Be specific.” The questions should elicit some specific response—changed staffing, great risk-taking, more partner involvement at the front end–something to show the manner of handling has changed significantly.
If the answer is that there is a difference in how the cases are handled, ask if the changes are designed to improve the firm’s efficiency and reduce the cost of handling the matter. The answer must be yes or the firm is too stupid to let them work for you . Once they answer yes, ask why they are doing those things when it benefits them (lower cost equal higher profit margin) but not when it would benefit you (cost plus billing)? There is no acceptable answer.
Everyone knows there is a huge amount of fat built into litigation, particularly in the process pieces of litigation. So clients should ask:
3. What is your disaggregation strategy, and why?
If there is no disaggregation strategy, the firm hasn’t eliminated the fat. It’s just that simple. The best answer, in my view, will be that document review (not just first level review, but all review right up until partners lay hands on the documents) should be outsourced. There are professional reviewers who do more, at a higher quality and provide more useful work product, than any law firm could consider, for a fraction of the cost. The cost difference is quantifiable. And the difference is money in your (the client’s) pocket.
Ask the questions. Don’t accept the standard lawyer pablum as an answer.
I am frequently asked how I go about pricing the handling of a lawsuit. I am always tempted to answer with the old line, “I could tell you but then I’d have to kill you.” My real answer goes something like this: “Before talking about how, you need to know why. Why is it that your client wants a fixed fee (or some other alternative to the billable hour) and why do want to offer it?” The latter question frequently draws the “I want the business” answer, which in my view is utterly unsatisfactory. It reflects a lack of recognition that AFA pricing is as much about how you do the work, how you approach problems and how you relate to your clients as it is about the dollars you receive.
Here is what I believe. The money the clients spend on piece of litigation belongs to the client, not me. I have never had a client with unlimited resources, so I assume there are other ways the client could spend the money it is considering spending on the lawsuit or dispute. It could buy a machine, it could acquire a business. You get the picture. Those other investments all have projected returns. Why shouldn’t the defense of the lawsuit? The corollary to this is that the client has a right to chose how and how not to spend its money. If I incur fees the client has not approved, I am taking this right away from the client. Who the hell am I (or any lawyer for that matter) to do so? Most AFAs (and budgets “with teeth”) are designed to address these two premises. Once you have the why, the how, while not easy, is not as hard as it otherwise is.
The prior post contains a link to a story discussing one of Disney’s key philosophies–”It’s not my fault, but it is my problem.” When a park patron shares a problem with a Disney employee, it doesn’t matter that the employee had nothing to do with the problem or that it’s “outside their jurisdiction.” The employee is trained to “own” the problem until it is solved. In stark contrast, I saw a story in today’s Chicago Tribune about American Airlines once again missing an opportunity to convert a problem into amazing customer service, similar to my own recent experience with the airline. “Service” programs that are designed to kick the can down the road (“you’ll have to deal with it at the airport”) are a waste–they do nothing but tick off the customer. How much easier would it be for an airline to fix the problem rather than suffer attack on Twitter or a major story about what jackasses they are in a major (well, the Tribune used to be) Sunday newspaper?
Customer service is not something you claim to do. It is something that is part of your (whether a person or a company) DNA. It is clearly not part of American Airlines’ DNA.
I have often observed that when presented with an idea from outside the law, lawyers are almost reflexively dismissive. After immediate dismissal of such ideas, lawyers then tend to exercise their legal skills to develop their arguments why the idea is bad. In contrast, most business persons I have had an opportunity to observe hear an idea and immediately consider how the idea could help their business. If the application of the idea is not clear, business persons tend to look for a germ, a molecule, a nano particle of “something” they can utilize. I hope that as lawyers are forced to think more like business persons, they embrace this attribute. I’m not holding my breath, but that is my hope.
It is in this vane that I am sharing a link to a story on client service (including a podcast version), something I heard this morning on an NPR program called Under the Influence, produced by CBC. The piece was entirely about customer service and the way it improves companies and profits. I hope you appreciate the ideas Terry O’Reilly shares.
Great post by Aric Press of American Lawyer discussing the “series of microclimates” that law firms and law firm-client relationships have become. The title of Aric’s article, Everybody’s talking at me, draws on the great 1969 song of the same title. And while Aric subtly notes the famous “I don’t hear a word they’re saying” line from the song, the fact is that change has been brewing to the point of bubbling over for years, clients have been expressing their noted desires for years and law firm partners have been largely silent in response. It is the “I don’t hear” line that should be the story, not the cacophony of voices. That is old news.
For lawyers who are late to the game, it is certainly not too late to at least think about change. But it is getting close. The comments by clients suggest the gradual move toward proscribing change rather than collaborating to achieve it, since the latter has proven to be a largely failed strategy.
As we reflect back on this past year, it’s worth looking back on what CEB has learned in analyzing legal departments’ budgets from over 300 different companies this past year (we’ve been doing this for a decade, so we’re homing in on some long term trends.)
The trends are all things many, including me, have been writing about for some time (that’s comforting). The nine trends are:
1. Moving more work in-house. Outside counsel almost always lose on make versus buy decisions.
2. Use non-lawyer professionals more often. A good paralegal is worth more than a poor lawyer. Take advantage of them.
3. Invest in legal operations capabilities. Legal ops control costs.
4. Invest selectively in legal technologies. Applause for matter management and ebilling technologies.
5. Unbundle legal services, particularly in litigation. This is an area of huge potential savings.
6. Focus on litigation management and oversight. How departments operate without doing this escapes me.
7. Use smaller firms. (So how much of their clients’ money do big firms invest in art? Check out Dewey and Howrey)
8. Reduce the number of law firms.
9. Use alternative fee arrangements judiciously.
From my vantage point, these are on the money. The CEB post is certainly worth checking out.