In Search of Perfect Client Service

In the opening paragraph of its 2010 Client Advisory, the joint Hildebrandt-Citi advisory ominously notes:

While the year ended with some hopeful signs, we enter 2010 with little prospect of a robust recovery and with mounting evidence that the profession is entering an era in which the fundamental economics of legal practice are likely to be significantly different.

The report later notes:

we expect that the economic recovery during 2010 will be quite
gradual. While we anticipate further improvement in demand for legal services – particularly in areas like M&A and other transactional practices – that demand growth will be tempered by pricing pressures that we expect to be even more severe than in 2009.

No client is going to willing return to "the good old days."  Those old days were good for for law firms.  Not so much for clients.  And it speaks to law firms' self-centeredness when they fail to recognize the strain their freewheeling spending and pricing placed on their clients.

The report is sobering, especially if you operate in cost-plus environment.

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Along the lines of my last post on lessons from a scoundrel, I urge you to visit Brains on Fire and read On the people right in front of you. Eric Dodd was visiting a coffee shop named the Ugly Mug in Ypsilanti, Michigan--I'll let him pick up the story here:

When I went up to the counter to get my fix, I noticed something that caught my attention and made me smile.

They had this little sign on the register that said: “Get off your phone! Thank you!”

On first glance it seemed like all of the other notes taped on registers by employees that are annoyed with phone-distracted customers not ordering and slowing traffic down in the morning caffeine rush.

Or maybe it was getting at something deeper. Either way, it made me think.

You see, the Ugly Mug takes a lot of pride in their coffee, but they take even more pride in their baristas. I had a chance to meet one of them - he knew incredible amounts about coffee, matching tastes, roasting, tasting, testing and crafting incredible beverages. They don’t just pour coffee and make lattes - they’re experts. And they want to do everything they can to match a drink to your palette that will blow you away.

Okay, makes sense so far.  To provide a great experience, the baristas want to be able to talk to you so they can provide a custom experience.  Great.  Works for me.  But Eric goes further:

I think sometimes we get so busy staying connected to other people we know through the electronic devices that have become necessary in our lives that oftentimes we miss the people right in front of us. In fact, we don’t only miss them - we miss out on them. Bad customer service aside, face-to-face interactions are one of the most powerful things we can experience - personally or when we’re interacting with a brand. If I had been calling, texting, emailing, tweeting, etc. while I was ordering coffee, I might have missed out on one of the coolest baristas I’ve met - and consequently his guidance to one of the best espressos that I’ve ever had.

Let us focus on the value of personal contact.  Put the phone down.  Invest in real contact.

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"Don't write anything you can phone.  Don't phone anything you can talk.  Don't talk anything you can whisper.  Don't whisper anything you can smile.  Don't smile anything you can nod. Don't nod anything you can wink."

Former Louisiana Governor and legendary scoundrel Earl Long.

Normally, one does not turn to scoundrels for lessons in client service, but an exception is due in the case of Earl Long's advice.  People communicate by email.  Somewhere between the formation of thought in your brain that you need to talk to your client and actually having the conversation, stupidity kicks in and you find your fingers do the talking via a keyboard.  Email, as it turns out, is one of the worst things that has ever happened to client development and service. 

So what should learn? 

Don't email anything you can call.  If your client is local, get off your butt and go to her office.  If not, give your fingers a rest and have a real conversation.  Have enough of them that you can appreciate the nuance of a nod or a pause or a wink.  Email is good tool to transmit information.  It is not a tool for conversation. It is not the way to get to know your clients. 

Patrick Lamb 2010

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"You have to decrease the size of your law department by 40%. I know it's at a time when the demand for in-house legal services will be going way up, but such is life."

"You have to reduce your spend on litigation by 50% with no drop-off in quality."

How would you like to be on the receiving end of such an edict?  Well, the edict part is made up, but the March issue of Corporate Counsel contains two stories that are must-read.  The first is on the story of David Leitch, General Counsel of Ford, and how he had to cope with reductions of 40% in his department.  40%!!!

The second article is about Kevin Blodgett of Dynegy, and his restructuring of that company's law department and the reduction of its external litigation spend.

There is HUGE lesson to be learned.  David Leitch summarizes it best:

Leitch acknowledges that the downsizing was painful.  By the end, he says, "I thought we were really cutting into the bone."  But his misgivings have dissipated: "As I sit here now, I realize it was necessary."  Plus, Leitch says, "people have adapted, and are more efficient and effective than they ever thought they could be."  His department continues to perform at the same level, he says.  And it hasn't increased its use of outside lawyers to make up for the loss of in-house attorneys.

Think about that for more than a bit.  A 40% reduction in in-house personnel.  No fall-off in performance.  What does that mean?  I am not suggesting there was fat in the Ford law department.  To the contrary, I am suggesting that when forced to do so by circumstances, lawyers like those at Ford find a way to get the stuff done that needs to get done, that necessity is a fantastic driver (pun sort of intended).

My guess is that if forced to do so, a lot of law departments could go through the same trial by fire and emerge much as Ford did. 

Is there a lesson here for law firms? 

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Courtesy of Dan Hull's post on this same topic, I was drawn to a post by Scott Edward Walker on Venture Hacks, Top 10 Reasons Why Entrepreneurs Hate Lawyers.  I actually read this post half a dozen times looking for my favorite reason in the list of 10 so I could quote something here.  But all of the reasons are spot on.  And they are in no way limited to entrepreneurs.  So I heartily encourage you to click over and read the entire post.

When I started practicing back in 1982, my firm's clients were entrepreneurs.  I remember feeling like I was missing something since our clients didn't have GCs.  They weren't big institutions.  I felt I was missing out.  Instead, I had to deal directly with CEOs and CFOs.  I learned if you didn't provide business advice, you had no voice.  I learned the two paragraph rule--whatever you want to say to a CEO better fit in two paragraphs because that was all the time you got.  As I look back, that training was priceless.

These days, in-house law departments are becoming more like small businesses than most can imagine.  They speak the same language.  They are starting to use the same tools as the businesses do.  Law, whether in-house or outside, is a business with a different name.  As a result, the lessons listed by Scott Edward Walker are perfectly applicable in every environment.

POSTSCRIPT:  While Dan Hull runs from start-ups and entrepreneurs, Valorem embraces them.  They bring an excitement and passion to what they do that is infectious.  So Dan, before you turn to run, given them our phone number!

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I've written before about the great value clients can receive when firms work together for the client's benefit.  But I have not written about this from a fee-sharing standpoint, and I have certainly not written about this as well as my friends Dave Bohrer and Michael Kallus at Confluence Law Partners.  Check out their post Fee Sharing With Foreign Lawyers in their terrific new blog, Flat Fee IP

. 

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From the January 2010 McKinsey Quarterly:

Even though cost containment remains a high priority, many respondents worry about the sustainability of the cost reductions and are only somewhat confident that their companies are adequately prepared for even bigger cost challenges, which they expect in the coming year. These are among the findings of a survey of 300 operations and other senior executives from around the world.

                                     *             *                *              *

While the results reflect a lingering environment of uncertainty and risk in the short term, they also show that some companies are making important strategic moves in cost reduction—among them, a focus on organizational effectiveness and capability building—to position themselves advantageously for the long haul.

So, if you're sitting around wonder when the good old days will return, wrap your head around the fact that more of the same is on the way.

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Courtesy of the inestimable Scott Greenfield, I was referred to a post by self-proclaimed leadership expert, Andrew Hughes.  It appears that Andrew's leadership expertise comes from being "part of the senior leadership team of a national [Australian] law firm."  As I have said, the odds of the words "leader" and "law firm" appearing in a positive way in the same sentence are remote at best.  Perhaps Andrew is that one-in-billion exception, but I just can't picture him coaching George Patton, for example, or even George of the jungle, so I share Scott's amazement with the self-proclaimed part.

Hughes writes of the problems law firms have with the X and Y generations.  Here's the part that draws Scott Greenfield's ire, as well as my own:

As illustrated by the ‘problems’ firms are experiencing with X and Y geners, there has been a global values evolution. These generations are less willing to accept the same incursions on their family and social lives in return for rewards in the future. They are also less tolerant of organisations that fail to give them the opportunity to be part of a larger cause, one that exists outside of a profit motive or the meaningless client service guff that is often dished up. (emphasis supplied)

Gee, it is a shame that client service gets in the way of family and social lives.  A damn shame.  My suggestion to the Andrew Hughes disciples?  Do what Andrew did and find another damn profession to work in.

Breathe in.  Deeply.  Breathe out.  Slowly.  Repeat.

Okay, everybody repeat after me:  The law is a service profession.  We practice to serve our clients.  That "client service guff" is the cornerstone of our profession.  Without clients to service, there is no need for our profession. 

Every time I write about someone who fundamentally doesn't get it, I am shocked and awed.  But after I relax a bit, I am really thankful.  The more people who buy into the lame views of Andrew Hughes and his ilk, the better it is for the Scott Greenfields and Dan Hulls of the world who understand that client service is the relevant scorecard.

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Every two weeks, I receive an email from a legal staffing vendor.  Each time I receive it, I deleted it.  Each time I went through that short process, I was annoyed.  Today, I finally unsubscribed.  It is highly unlikely I will ever choose to do business with this company, and the annoying blast emails, which send me information I don't want at a time I don't want it, will be one of the principal reasons why.  I have to believe that the company did not intend to trigger this reaction: to the contrary, they probably view these emails as an important part of their marketing.  But I also have to believe that my reaction is not unique.  But I am not writing to tell this story--instead I am wondering what lessons  I should learn about my own marketing efforts.

Here are my top lessons:

1.    As enamored as I am with our story, the prospective client doesn't care about our story. He or she cares about his or her issues.

2.    Talking about "us" is not useful--it is counterproductive.

3.    Selling solutions is much better than selling pieces with the idea that the client will assemble a solution.

4.   If my goal is to get on someone's radar screen, my outreach has to be either useful or funny.  Serious and sales-y, not so much.

Now, to put those lessons to work.

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My partner just returned from court.  All by his lonesome.  This was a multi-party extravaganza, but one of the parties was represented by 5 attorneys.  Count them--one for each finger.  One for each day of the work week.  How many spoke?  Just one.  To visualize this, raise your hand with all fingers extended.  Then close all your fingers except the middle one (it was the "big shot" who spoke, after all), and you'll have a good idea of what this firm is saying to its client.

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As a small firm, we are frequently told that people will buy "The Brand" (read, big firm) for harder matters because The Brand protects the buyer in case something goes wrong.  We generally respond to this by pointing to our own big firm pedigrees, talking about actual trial experience, which most big firm lawyers lack and our willingness to bet on our skills, which most big firms are unwilling to do.

But recent news events allow an even better response.  Toyota.  It's only turning into one of the biggest recalls in history, threatening the entire company.  So how's that quality branding working for those car owners now?

Sophisticated buyers need to be more discerning than simply relying on a bought and paid for brand, where good marketing and advertising disguises real shortcomings.

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My recent post Discounts: It's like putting off necessary surgery drew this thoughtful comment, which I believe merits a response. First, the comment:

Although you suggest that hourly billing law firms which discount will merely increase the number of billed hours to prop up their bottom lines, there is no evidence to suggest AFA firms will not act in other ways to promote their bottom lines as well. Is there some reason to believe that AFA firms/lawyers are less profit driven than hourly billing firms? No. Does anyone really believe that AFA law firms are more altruistic and benevolent with their revenues than hourly billing firms? Of course not. For AFA to work, the law firms must make money, and at the same time the corporate client must benefit.

An item from February 11, 2010 by Zach Lowe in AmLawDaily titled Emerging Trends in Law Firm Litigation? (found at http://bit.ly/dxRx6d) referred to instances of lawsuits being filed by AFA law firms against their clients because of disagreements on the scope of the AFA in which the law firms felt they were entitled to a greater monetary recovery than the corporate client felt was appropriate. The article quotes a New York attorney who said "we may see more of these sorts of fights between firms and clients because alternative fee arrangements are˜not as simple as contingency fee or time-based fee arrangements." Certainly, this suggests that AFA firms expect significant revenue production from their new agreements not based on hourly billing, and AFA does not guarantee outside counsel and in-house counsel will agree on how much is an appropriate recovery.

Additionally, the suspicion persists that AFA firms will actually do less work of value on AFA files so they can handle more matters, which is just another way of saying a discounted hourly billing firm will increase the number of hours billed on a file.

The way to prevent either of these two scenarios (AFA firms giving less attention to files and hourly billing firms "churning" file) from occurring is for in house counsel to carefully scrutinize the work being done by their law firms and to foster a strong relationship with the firms based on value. An hourly billing law firm which attempts to increase the number of hours billed can be promptly brought back into line if the client closely reviews the bill and indicates that the billing suggests work was performed without value. In all instances, corporate clients should have billing guidelines which restrict the opportunity for overbilling to occur, at a discounted or full rate, such as not permitting some types of work done (or a number of hours performed on those types of work) without client authorization. If a corporate client is willing to properly monitor its lawyers, AND also receives a discount from the law firm, there is no reason why the client cannot reduce its overall outside counsel expenses and receive value.

Similarly, corporate clients must be willing to work closely with an AFA law firm to ensure the lawyers are giving a matter the attention it deserves. It does a client no good to get a lower legal bill if it is later discovered that a much better result could have been obtained. Further, the addition of success or efficiency incentives might not sufficiently affect the law firms actions, but without proper monitoring by the client, that would also be discovered too late.

E. Leigh Dance posted a very interesting item on February 10, 2010 titled Four More Ways to Work Together to Improve the Value of Legal Services (found at http://bit.ly/aKYyUE) based on information conveyed at the December, 2009 General Counsel Roundtable discussion. She noted as follows:

    "I was interested that corporate law departments' primary issues all revolve around better collaboration with outside counsel. This is certainly not research, but the consistency of responses is notable. The General Counsels' top issue (of 9 we suggested), by a narrow margin, was:"working with outside counsel for improved value and results." This was followed closely by 3 other issues, all tieing for 2nd most important: obtaining skilled legal coverage in growing/emerging markets; demonstrating value to the business, defending budgets; controls, monitoring and reporting for compliance."

These results indicate to me that although GCs believe overall expenses are very important, they want good value from outside counsel. There is absolutely no reason why close relationships with hourly billing lawyers cannot be at least as "valuable" to corporate clients as value obtained from AFA firms so long as the clients stay actively involved with their lawyers. If an hourly billing based firm is willing to give a discount, and the correct amount of legal work is accomplished (i.e., no churning), the result will be reduced costs and increased value to the client. The key to all of this, however, is effective involvement of the client for both AFA and hourly billing.

Steve Pietrick

 My response:

Let's begin with a fundamental truth: in any fee structure, a client gets what it pays for.  If you buy hours, you will get hours.  If you buy efficiency, that is what you will get.

Steve posits that the way to avoid the "too many hours" problem is for in-house counsel to do a more effective job in policing the work done by outside counsel to ensure the problem is caught and fixed.  I am sure that there are many in-house counsel who capably do this.  That they spend their time avoiding being taken advantage of by their own counsel, however, is something I see as an indictment of the hourly billing model.  Protecting your client from being ripped off by your outside lawyer is a waste of resources, certainly not the highest and best use of the inside lawyer's time and talent.  This "policing" approach also assumes that in-house counsel has the time needed to carefully review and monitor all bills.

Steve also posits that there is no evidence that AFA firms are less profit driven or won't do things to improve their profits.  To the contrary, I think there is compelling evidence to believe that AFA firms are as profit driven as their hourly rate colleagues.  The whole point of AFAs is to use that profit incentive to drive a different kind of behavior, one where firms actually think about the cost to produce a result and how to lower that cost.

Steve then points out the most common criticism of straight fixed fee arrangements, that is that firms will not devote adequate resources to the matter as the pendulum swings from one extreme (too many hours) to the other (too few).  This problem is, of course, well documented and frequently described, if only by anecdote.  But Steve then goes on to say "the addition of success or efficiency incentives might not sufficiently affect the law firms actions, but without proper monitoring by the client, that would also be discovered too late."

Of course, the government might declare a three-day work week, but mere possibility does not mean much in this discussion.  Experience, both our own and that of several other firms and clients, had demonstrated that firms devote resources needed to achieve success bonuses.  I know of no examples where a firm devoted inadequate resources in the presence of a success incentive.

But the real point is this:  clients need to figure out what matters to them and how they want to be involved in a matter. I submit that the most productive involvement is in strategy and tactics of a given matter, not in policing those who are supposed to serve you.  Granted, there are no doubt people who prefer to have an adversarial relationship between client and attorney, euphemistically referred to a "healthy tension."  But I believe those desiring to act as policeman to their outside counsel are the minority.

So, while I agree with Steve's point that inside counsel desire value, I could not disagree more with his conclusion that "there is no reason" those who bill by the hour can't have as good a relationship with their corporate clients as those using AFAs.  While there are, as I have said many times, examples of firms who bill by the hour who are not caught up in maximizing hours, there are too many stories and too much data to dispute the conclusion that a shift from hourly billing to well-thought out AFAs produces materially greater value in the eyes of the client.

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Regular readers know that I am an NPR guy.  I was listening to Scott Simon this morning on the way home from the gym.  Scott had been off the air for a bit while undergoing surgery, and he made some comments at the end of today's show:

It wasn't until after Dr. Edward Benzel, Chairman of the Department of Neurosurgery, got his hands out of my neck that he handed me a paper he wrote last year for the Congress of Neurological Surgeons on wisdom.

Intelligence and experience are commodities that are measured on various scales. But Dr. Benzel sees wisdom as a deepening blend of intelligence, experience, and something that's more precious, and impossible to quantify.

Intelligence is critical. You wouldn't want a neurosurgeon without it. But smart people make mistakes, not despite their intelligence, but often because they're so smart, they're sure they must be right.

Dr. Benzel quotes Satchel Paige: "It's not what you don't know that hurts you; it's what you know that just ain't so."

Dr. Benzel also quotes Einstein, Moliere and Voltaire. But when you're rolled into an operating room, it's encouraging to know your surgeon is inspired by a man who pitched baseball games for 40 years.

At first I thought Scott was going to shift into some light-hearted comments about Satchel Paige, but then he said this:

Experience can knock around intelligence, to create the kind of doubt that can lead to reflection and maturity. But if you let experience alone guide decisions, you might not try anything new, which will turn wisdom into mush.

Dr. Benzel winds up concluding that an essential ingredient of wisdom is morality, to use an old-fashioned, even unexpected word: knowing when it's right—and he thinks it almost always is—to make a decision that we won't judge by whether it's bold, clever, or without risk, but whether it's truly wise.

I love moments like this, when I am forced to pause and think. Lots of people are smart.  Lots of people have experience.  But wise is an adjective not used often.  Is it just morality applied to experience and intellect?  In our business, I think it is that, but more too.  It is the ability to see the future and also to see the future and the present three dimensionally, so you see how things play out, and whether the future, in that circumstance, would be good or not.  It is about putting off immediate gratification for future well-being.  It's about seeing the broader impact of a decision, and who, the long run benefits and who is hurt. 

Dr. Benzel's point is a good one, and I don't know if his paper goes further.  But it is a wonderful idea to think about.

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Amid the cacophony of our daily lives, from politics to fee structures, I was given pause yesterday when told that Valentine's Day is the 20th Anniversary of this iconic photograph, taken by a camera on the Voyager 1 spacecraft.  Earth from 4 billion miles away. 

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“I’ve talked to many in-house counsels who say, ‘I just make a phone call, and I get a discount.’ Law firms are doing something that car companies did about a year ago, with the employee discount pricing. It becomes a frenzy of discounting.”

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When dealing with in-house counsel, there are some questions you always need to ask.  This is one of them.

Your in-house clients have clients too.  Frequently, they run the business.  They can influence your contact's career path, compensation and life.  You need to do what you can to make sure your contact's interactions with the business people are positive.  You will be thought of fondly (and frequently) if you do.

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Alternative Fees cannot simply be a different route to the same end.  If AFAs merely become a surrogate for what would have been charged under the hourly model, nothing has changed and we have learned nothing.  The wolf in sheep's clothing is still a wolf. 

In the absence of hard before and after data, the only way to know whether an alternative fee is a surrogate for that which one is seeking to avoid or something truly different is to find out what changes the firm proposing the alternative fee has made to change the firm's historic reliance on the hourly rate model.  A few simple questions will reveal whether subtantive chance has occurred at the DNA level or whether the firm is merely grasping at any revenue to come along.  The latter ought be avoided.

For example, every lawyer proposing an alternative fee should be able to describe how he or she will handle the matter differently than it would be handled on an hourly basis.  It is a really uncomfortable question, though, because the answer almost necessarily carries within it an admission that too much needless lawyering has been conducted previously.  The lawyer should be able to point to different business tools being utilized, such as project management, early case assessment, more aggressive mediation efforts, decision trees and so on.

Beyond use of tools and practices directly related to the specific matter, the lawyer must be able to point to cultural changes as well.  Are there minimum hour requirements?  Does the firm track the billing lawyer's realization rates by comparing the amount received to the the amount that would have been received had the matter been billed hourly?  How is the firm incentivizing cost reduction?  Does the firm analyze profit margins on particular engagements?  If so, how?  Changing cultural DNA does not happen with the flip of a swith.  It is a long and painful process, and there should be plenty of stories one experiencing it can share.

Changes must happen in-house as well.  Pam Woldow of Altman Weil has just published a fantastic article, GPS for General Counsel: Navigating Fee Transition.  This must read article addresses the change in mindset that inside counsel must make to derive real value from AFAs.  Pam offers the best response to the "how do I know I'm getting a good price" concern that I have yet heard:

Some general counsel worry about whether it can be shown that AFAs
were in fact set at the “right” level. What they fail to grasp is that there
is no right or wrong price. There never has been, and there never will
be. Existing billable hour rates don’t necessarily represent the “right”
price; they are variable and only reflect what a firm hopes the market
will bear or how much pricing leverage it believes it enjoys.

In other words, there is nothing inherently right about the price paid when paying by the hour.  The hourly fee is simply a point of reference.  Pam drives home the point when she quotes John Chisholm of JC Consulting, who notes “This is how the CEO and the CFO of a company operate. Indeed it is how the company operates.”  For General Counsel, who for so long have longed to have a place at the business table, failing to seize this opportunity to place the law department in league with their business colleagues will be a huge lost opportunity.

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One of the things I hated when I worked in an Amlaw 100 firm was the relentless pressure to "sell" the virtues of other practice areas, as if every partner and every practice area was of elite quality.  When the partner or practice area was of elite quality and the client had a need in that area, the conversation about meeting the need was worth having.  But as I have written before, it became hard when you were being urged to "sell" somebody you've never met.  Hypocrisy run amuck.  One of the many wonderful attributes of being in a firm that does just one thing is that when a client has need for a skill set you do not have, you really can look for the very best fit and make that introduction as a service to your client.

It was with that mindset that i read yesterday's Wall Street Journal article, How to Succeed in the Age of Going Solo.  According to the Journal, approximately 23% of US workers are consultants or some other form of independent worker.  23%!  That is a staggering number.  As BigLaw continues to shed partners and associates alike, the number of solos and small focused firms continues to grow.  To the extent there ever was a "talent gap" between big firms and others, that gap is closing rapidly.  A lawyer who is great for your matter when employed at a large firm is probably even better when she no longer is with that firm.  You'll get more of her attention and focus, without the survival pressures of BigLaw influencing her. 

The opportunities to build really incredible teams for specific matters is are just starting to unfold.  One effort to go beyond the boundaries of firms and geography is FMC Technologies One Degree Law program (full disclosure--I am part of the program).  But imagine being able to pull just the right talent and just the right cost for a matter.  If you can imagine it, it will happen.

The real question is not if it will happen, but how.  At what resource or location will the willing gather?  Certainly places like Legal On Ramp have the infrastructure and the imagination to make it easy.  What others?

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The Chicago Daily Law Bulletin just published a short article by my colleague, Reeghan Raffals, on Illinois courts' narrow definition of the "control group" entitled to privilege and Illinois' rather restrictive choice of law rules used to analyze privilege issues.  Those considering litigating in Illinois are well-advised to understand the significance of the rule before pulling the trigger.

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I have a new matter on which I inherited local counsel.  I send emails asking simple questions, like "did you do a choice of law analysis before saying State A's law applies."  Days later, I'm still waiting for a response.  I am waiting for, literally, a one word response.  The fact that I haven't gotten an answer is interfering with my ability to plan what I want to do on this case.

Will I survive.  Absolutely.  Will I hire this law firm again? Never.

Think about the last question.  I sent my email query to 3 lawyers, all partners.  And because of the poor service of those 3 lawyers, I have now ruled out the entire law firm.

Do you think clients think about their lawyers the way I do?  Ask yourself this question: are you prepared to wager everything that all clients don't? 

Client service may not be the reason you get a new client, but it certainly is a critical factor in whether you get new matters from a client.

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I can change things I have control over.  I cannot force others to change things that others control.  I cannot force clients to forsake their rule that lawyers must submit timesheets.  I cannot force every court I practice before to abandon their practice of relying on heavily on timesheets when reviewing fee issues.  I can discuss those issues with clients and courts and urge them to change, but I cannot force them to do so.  One I have made the effort to persuade them and they choose not to change, I am left with the decision to either play by their rules or move on to find others who allow me to exist solely in the space I want to be in.

Change is a process.  People do it at different paces.  Some take giant steps, some none at all.  It's messy.  And it takes time.  Unless you are one of those people who can define your space and survive by requiring those who play in your space to play by your rules, you have to expect this messiness and deal with it.

Voltaire is reported to have said "the best is the enemy of the good."  In the context of change, let's not let perfect become the enemy of better. 

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Yesterday on Twitter, a query was made as to whether there were any truly new law firm business models.  A highly regarded legal consultant identified Valorem, Bartlit Beck, Traverse Legal and Shepherd Law Group as examples.  There ensued a debate whether any of these firms other than Shepherd Law Group were different.  According to the protagonist in this dialog, if a firm used time sheets, it was not "different."

At one point, I was laughing so hard that I started to cry.  The idea that your business model is different and acceptable if you eschew timesheets but not different or acceptable if you use timesheets is  lawyer-centric (or consultant-centric or accountant-centric) in the extreme.  The debate on Twitter (perhaps owing to the 140 character limit) seemed to devolve into a "my way is better than your way" argument where there was precious little recognition of the business realities driving the choice of whether timesheets are used or not. 

Let me begin by acknowledging that my preference is for a world without time sheets.  If I am ever a buyer of legal services, I won't have my lawyers use them.  But right now, I live in a world where I serve clients.  Our clients are sophisticated buyers of legal services.  If they tell me they want to see time records with a bill, even if the bill is not hourly based, I provide them.  For many clients making the transition to non-hourly billing, the hourly records are important as they gauge value.  It would be nice if they all believed as Ron Baker does, but that's not my world.  I suppose I could refuse to take on such clients, but I have mouths at home that clamor for food.  I can just hear the voices out there telling me I am a coward for not abandoning time sheets completely in the hope that clients will come as they have to others.  With due respect to these voices, I do not see enough clients willing to go that road that I am willing to write-off the chance to represent 99% of corporate America. If I had a practice dealing with smaller matters or individuals or a more local clientele, maybe things might be different.

Beyond this point, both the expectation that courts have that any fee requiring court approval have time records to support it and the need to internally know who is available make time records important or useful.  One person on Twitter wrote "since time records are an inherently inaccurate tool, how can they be used in court?"  I have not debated the wisdom of this eons-old practice with any judges.  But since I expect to be asking several to approve fees, I don't want to run the risk that I come across a judge who chooses to follow lines of authority basing approval of fees on time records.  The visual of spitting into the wind comes to mind.

I've never told another lawyer that he or she should or should not use time records.  I couldn't care less.  I have spoken and written at length about aligning economic interests with clients.  I know that this has to be done in a competitive marketplace and even those who don't use time sheets compete on price, at least to a degree.  If they are more expensive than a comparable lawyer, the odds are many clients will chose the lower priced alternative.  So if the lawyer factors into his or her pricing what a competitor is likely to charge, they have created a fee based, to some degree, on time. 

If the debate is whether use of time sheets is relevant evidence of employing a different business model, I will pass on that debate as useless and a waste of, dare I say it, time.  If the discussion is about how lawyers are aligning their economic interests with their clients, how workflow is different, how people are engaging in practices that deliver better results by eschewing use of baby lawyers, how lawyers are creating "wow" customer experiences and whether a model that is based on those things is different, I'll spend some time on that discussion because its about what the customer gets out of the relationship.  But even these kinds of discussions are like talking about which team is going to win the Superbowl before the game is played.  The conversation might be fun, but it really doesn't matter all that much, does it?  The game still has to be played.

Instead of criticizing those who dare to change for not changing enough, it seems more prudent to be applauding anyone who tries something that's even a little bit different.  A bunch of little changes will eventually beget big change.  A larger scale change will benefit our clients, and that, to me, should be the focus of discussions.

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Not every alternative fee creates the same incentives.  Check this one out, as reported in the AmLaw Daily:

Drinker took on a patent case for a company called AgriZap and signed an agreement under which the firm would be paid its full fees over an 18-month period if AgriZap lost at trial. But if Drinker were to win the case for AgriZap, the agreement called for the company to pay the firm triple its hourly fees (plus costs)--and to pay it immediately.

This creates a strong incentive to win the trial.  But is there any incentive to control the cost of doing so?  It appears not.

Check out the outcome:

When AgriZap did win, Drinker submitted a bill for about $5 million---about double the $2.7 million the jury awarded AgriZap in the patent case.

Drinker won the ensuing lawsuit, so it was good for the firm, but I think it is safe to say that this is not an alternative fee arrangement that should be emulated.

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Let's start with a huge caveat.  The guy doing the talking in this interview, Stephen French, is the Managing Director of Legalbill.  According to the firm's website:

Legalbill is committed to providing corporations worldwide with unsurpassed solutions for legal cost analysis and management.

So, in real world terms, Legalbill manages hourly billing data, slices and dices in ways that are then used to help companies save money when dealing with hourly rate lawyers and firms.  If there is no hourly billing, there would be scant need for Legalbill, at least unless it came up with new, more relevant offerings.  So Mr. French's company has dog in this hunt.  But even with that caveat, he has some interesting things to say.

Watch AmLaw's video interview of Mr. French here.

Alison Frankel of AmLaw reports that:

There are two big problems with fixed rate or flat fees, as French sees it. First, clients don't get the same level of work from their lawyers. "When you get [fees] down to the lowest common denominator, it also has an impact on the responsiveness of counsel," he says. "It has an impact on the qualitative nature of the representation, and it also has, certainly, an impact on the cost effectiveness."

And second, alternative fees erode the very economic foundation of law firms. Especially with so much lateral movement and merger activity, French argues, it's very difficult to measure and compensate performance without hourly billing.

The second claim, that alternative fees erode the economic foundation of law firms is true.  That is why the firms need to change their business models, something at least some have started to recognize.  But to say that a business selling services should not change to meet the needs of the buyers of those services is an argument that, if accepted by law firms, will lead to their eventual demise.

The first argument is premised on the mistaken notion that "fixed rate or flat fees" are the essence of non-hourly fee arrangements.  There is scant data to support that assumption.  In-house lawyers who move toward use of non-hourly arrangements understand that every fee structure has strengths and weaknesses, but modifications to those structures can avoid the problems.  The problems identified by Mr. French are eliminated by including performance-based payments in the fee formula. 

I found it interesting, though, that Mr. French was straightforward in admitting that, for most law firms, the use of alternative fees is a marketing gimmick to appease clients.  There is evidence to support his impression, found in the fact that many law firms have not made the kind of systemic changes needed to maximize the profits from alternative fees.

Nothing in this interview is going to change the course of human events, but it is interesting to hear a robust defense of hourly billing.

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I received a couple of interesting comments in response to my earlier post, A Call For Benchmarks, and it seemed prudent to share them in the most public way.

Comment 1 was from Steven Levy, renowned expert on Legal Project Management, with whom I will be presenting in March:

Many of these are substitute metrics, which are bad juju. For example, win/loss record: Think of the DA who tries only slam-dunk cases and pleads out anything difficult; is that better than someone who takes on the toughest cases and wins 75% of them? (Are the 9-4 USC Trojans better than the 5-11 Seattle Seahawks? Different leagues.)

Partner/associate time may be distorted based on the type of work partners take on. I've seen situations where partners are doing associate-level stuff; is that good or bad? What if they're 3x efficient at 2x cost? Or 2x efficient at 3x cost?

And so on.... I'm not suggesting that metrics are bad, just that it's a bad idea to take them in a vacuum and make a decision solely by comparing these numbers.

That said, I'd add one: What percentage of the time do you refund (or not charge) part of an anticipated or agreed fee because you solved it well ahead of schedule? If firms don't do this at least once in a while, are they really acting in your best interests? On the other hand, if they do it too often, they're probably padding their estimates.

Not everything that counts can be counted, said Einstein, and not everything that can be counted counts.

Response and Comment:

No metric I know of provides "universal knowledge and enlightenment" to prospective clients.  But clients frequently ask about wins and losses because they would rather hire lawyers who win trials than those who lose them.  If you don't have a record, most clients will reasonably infer that is so because you are reluctant to try cases. You may be able to explain the problem away, but the information is useful. The Trojan-Seahawks comparison is always an issue, and some judgments cannot be made on win-loss record alone.  But that doesn't eliminate its value.

Partner/associate ratios can mean many things. It may mean that the firm is using an experience-based model.  Or that it is highly leveraged.  Again, the statistic is a starting point for discussion, but not knowing the answer suggests a lack of sensitivity to the leverage issue, which is important to clients.

On the benchmark you raise, we give every client the right to adjust our fee.  That said, the reason you offer--"because you finish ahead of schedule"--is not a reason to adjust a fee in my view.  With us, the client is not buying time, but a result.  It should be indifferent to how long it takes to produce the result.

Comment 2 is from Bradley Clark:

I believe the benchmarks differ across the client spectrum. Where an institutional client employing BigLaw on a matter may look at some of the benchmarks you have identified I know twice as many - if not more - that buy professional services based on relationship, trust, knowledge, and integration.

Response:

The factors you identify, Bradley, are factors that playing varying roles in every retention decision.  That doesn't mean clients, including small clients, don't benefit from seeing your performance data on whatever benchmark is important.

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We live in a world that is increasingly data driven. And that includes the world of law. Some may want to debate whether that is good or bad, but that it is so is beyond debate, at least in my view. With that in mind, I ask this question: when making a decision to buy services, that is engage a new lawyer, what data or benchmarks do customers want to examine?

As litigators, we focus on:

Win-Loss record
Cycle Time
Ratio of partner time to associate time
Ratio of costs to total fee
Cost per type of matter
Stage of resolution (in other words, do our matters settle early, just before trial, etc.)
Percentage of cases mediated
Percentage of cases successfully mediated
Performance to budget

What others should be added to this list?

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As 2010 begins, I am making one more prediction (earlier predictions here).  I wanted to make one more.  The watchwords for 2010 are project management.  Project Management skills are sorely lacking in the legal profession, but they may do more to help lawyers more efficiently and effectively represent their clients than any other tool.  I will be speaking on this topic with Steven Levy of lexician.com/ on March 10 at Ark Group's program, Alternative Fees: From Theory To Practice, in New York City.

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From Dilbert:

Avoid the heartache.  Make it a fixed fee with a performance incentive. 

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Courtesy of the Lean Six Sigma Academy, I am reading the Guide To Lean, by Ron Pereira.  He notes three ways to express how a company turns a profit:

1.   Price - Cost = Profit

2.   Profit = Price - Cost

3.   Price = Cost + Profit

All the same?  Perspective counts here.  The following is a summary of what's in the Guide.

Formula 3 is the way government might approach setting a price on something.  You figure out the profit you want, add it to your cost, and you end up with the price.

Formula 2 is a the way a producer who cannot reduce costs views things.

Formula 1  "Lastly we come to the lean formula (Price – Cost = Profit). This formula is arranged in such a way as to say that costs exist to be reduced, not to be calculated. The thinking here is that the market sets the price and the only sure way we can increase profits is by reducing costs."

I found this interesting because while law firms have worked hard to reduce their costs (mostly by firing people), I have seen very little which suggests that firms are reducing their cost to produce that which the sell to their client.  So, for example, you may have less lawyers in the firm because there is less work, but are you staffing cases differently?  Managing them to produce results for the client that costs less?  Firms that bill by measuring time still exist in a cost plus environment.

This is not a new debate, but I did think the discussion in the Guide to Lean provided an interesting perspective.

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Above The Law recently revealed some internal documents from Simpson Thatcher.   If Simpson Thatcher reflects what is going on in large law firms, it is clear that the recession is hurting BigLaw big time:

In 2007, our realization was 110%; in 2008, our realization was 97%; for 2009, we originally budgeted 93%, and we are now running at a realization of around 89%.

The firm's reaction is equally interesting:

We want incremental business and we are realistic about what is needed to obtain attractive incremental business. We think we are value-added and should be paid as a top-tier firm with top-tier talent, but we need to be competitive with rates. We are giving discounts on some litigation; we are giving discounts on bank and investment bank house account matters; we give busted deal discounts; we are willing to fix fees. If a particular partner rate or particular class rate is a sticking point, we can discount those rates to be competitive. We can quote a blended rate. In brief, we are flexible on rates and want to do what we need to do in order to expand our share of the high-end business out there.

Apparently, desperate times call for desperate measures.  Well, not that desperate:

We considered lowering our rates, but rejected that idea since we are collecting 100% or close to 100% on a high percentage of our business and are able to provide a discount on most of the rest of our business. We think lowering our rates would have a substantial negative impact on our revenues.

Which translates to this: If a client wants to pay us at higher rates, we'll take it!  But if the client says it will pay us less, we'll take that too."

It doesn't sound like Simpson is committed to changing its business model to deliver greater value over the long run, does it?  I wonder how many other firms are engaged in this "treading water" approach to value?

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This if for clients only.  If you are from a law firm, don't bother reading this.

Many firms have announced that they are moving away from lockstep compensation and advancement for their associates.  DLA Piper announced yesterday that it was joining other firms in this approach.  Above The Law described the DLA structure like this:

Instead of traditional lockstep advancement, the associate career path will be characterized by three broader and more flexible levels of development: Level I, Level II, and Level III. Each Level will in turn consist of two to three Steps through which an advancing associate will progress. Promotions between and within Levels will be performance-based, not tenure-based.

The focus has been on what this means for associates.  But for clients, the question is what does it mean for them.  Consider the case of two associates, Jane and Bob, both from the same year.  Until now, both had been billed at the same rate.  But now, Jane is evaluated as superior to Bob, and will be paid more.  Will there be a rate differentiation?   Does Jane's billing rate go up to reflect the differentiation from Bob, or does his rate go down? 

My bet is that firms will raise the rates of those in higher tears rather than lower rates of those who are not reviewed as favorably.  Thus, while the client with the lower-valued associate sees no change, the client on whose matters Jane is working will see a rate increase even though Jane continues to work just as she did before. 

Watch for it.  And let us know how firms handle this shift.

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Richard Susskind reports that law departments are facing cuts on the order of 20-40%.  Assume that his data is off by 100%, meaning the cuts are between 10-20%.  More cuts are looming.

Law firm rates went up an average of 2.5% in 2009, according to a National Law Journal survey.

Law firms are predicting increases in 2010 of 3.2%, according to this Altman Weil survey.

Note to law firms: do the math.

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I just returned from a breakfast at which Stephen Dubner, one of the authors of Freakonomics and the sequel, Superfreakonomics, made some remarks.  He told the story about the work he and his co-author did studying the hand hygiene habits of doctors at a hospital.  Doctors self-reported washing their hands 71% of the time.  By studied observation, the true frequency was 9%.  Committees were formed, edicts were issue, all to no avail.  Keep in mind, this was an effort to convince the highest educated cohort in a hospital to do that which all of them acknowledged they needed to do.  The a carrot was used.  Doctors would be observed and each time they washed their hands, this observation group would give them a Starbucks gift card.  Still no real improvement.  Anyway, Dubner went on at length about the various steps the hospital took to try to get the doctors to do that which they know they should do.

I won't reveal what ultimately caused the doctors to change their behavior, but Dubner's conclusion is that changing human behavior is incredibly difficult.

What does this have to do with alternative fees?  Everything.

I have written numerous times that the behaviors required of a successful alternative fee lawyer are significantly different than those required to be successful under the hourly rate model, and that a firm cannot simply flip a switch and provide its clients with the value associated with effective alternative fee models.  If it took as much effort as it did to cause doctors to start doing something they acknowledged was important, what lengths will it take to cause lawyers to change behavior that has been ingrained into their psyche for decades? 

My colleagues and I exist in the petri dish of change from one model to another, and we are "true-believers."  We have experienced how hard the change is in an environment where there is no cultural ambiguity or mixed signals.  It is certain that the change will be exponentially higher in larger environments where the commitment to change is not as universal, or where the opposition occurs sub rosa? 

This discussion is not meant to discourage those who are seeing the need to change from taking steps to achieve it.  To the contrary, the more aware of the likely difficult, the more effort can go into "getting the doctors to wash their hands," or achieving the small behavioral changes that can be the building blocks of larger changes.  But this cautionary tale also should serve as a reminder to clients that merely being quoted an alternative fee is not evidence that behaviors have changed, and the need to look further is as acute as ever.

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"If you don't like change, you're going to like irrelevance even less."

                             --General Eric Shinseki, then Army Chief of Staff

Courtesy of a tweet by my friend Gerry Riskin (who also blogs about this video here), comes this eye-opening (and if it doesn't open your eyes, you're dead) slide show prepared Beaton Research and Consulting.

Gerry's advice is to use this slideshow at the beginning of a partnership or practice group meeting.  But every lawyer, and certainly every leader, should be thinking about what this slideshow means for the practice of law in the United States.

Yesterday, I spoke to a group of mostly insurance defense lawyers.  Earlier, I wrote about Rio Tinto bringing in an Indian Legal Services Provider to lower costs.  Is it foreseeable that even the staid insurance world will be swept up in this frenetic pace of change?  How can it not be?

But certainly corporate America is caught up in this change, and it is dragging the legal world along with it.  Wake up.  Pay attention.  Or become irrelevant.

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Law 360 is reporting that Patton Boggs will award bonuses of $5,000 to $45,000 to associates who exceed their billable hour goals, but will reduce salaries for associates who have not met their targets.

Efficiency?  Who cares.  Results? Not on the radar.  Profitability of work?  Only for the faint of heart.  But hours, dammit, we will pay in the extreme.  Work more and retire your law school debt.

What kind of a message is this?  What behavior does Patton Boggs expect to see as a result?  It is as certain as the sun rising in the east that regardless of improvement in the economy, the associates of Patton Boggs will hear this message loud and clear and work more hours next year.

If I were a client of Patton Boggs, I would watch my wallet very closely.

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An absolutely brilliant piece by Paul Lippe in today's AmLaw Daily makes the case that lawyers' belief that they will reduce risk by making choices that are conventional or appear safe is misplaced, especially in today's rapidly changing world.  Lippe's piece, Welcome to the Future: What Bill Belichick's Taste for Risk Can Teach Law Firms, uses Bill Belichick's recent decision to go for it on a fourth down and 2 in the waning minutes of the Patriot's game against the Colts as the starting point for his analysis. He does so after noting John Maynard Keynes classic observation (that seems perfectly directly at most lawyers, and certainly most managing partners), "Most people would rather fail conventionally than succeed unconventionally."  There is comfort in the herd, but you go through life no better than the herd.

Here's Paul's punchline:

Over time, the Belichicks who think through risk and make choices that can be second-guessed are better risk managers than the folks who always make conventional choices. And whether he was right or wrong, you can be pretty sure that Belichick (and other coaches watching) thought very carefully about when to punt and when not to after the loss. Conventional choices may minimize the possible harsh glare of criticism, but they also minimize learning.

The same reality is emerging in how lawyers manage their business and careers. I was on a panel recently with leaders from two large firms. When asked how they would respond to a hypothetical client seeking an alternate fee arrangement that involved some risk sharing, one replied, in essence, "If we completely understand what it is, and there's no risk for us, and we're assured our normal level of profitability, and everyone agrees, then we could consider it." The other leader replied "yes." Which one do you suppose thought through the alternate fee approach harder? Which one is more likely to learn and be in a position to manage risk more effectively?

As an aside, you have to love a lawyer who, when a client seeks "an alternative fee arrangement that involves some risk sharing" sharing responds by telling the client that so long as "there's no risk for us".  Wonder where he learned that definition of risk sharing. 

But to Paul's point, to be blind to the risk posed by staying with the herd, ignoring the perils that stand to decimate the herd, is hard to fathom.  Yet the insight of the definitionally-challenged leader only confirms that people can be blind to their world.

And Bill Belichick?  He's far too comfortable with risk to ever be a managing partner.  And even if he got there, his shelf life as managing partner would be considerably shorter than Eric Mangini's tenure with the Cleveland Browns.

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In the past few weeks, I've posted on the decision many firms have made to raise hourly rates for 2010 (here, here and here).  The inside counsel world has heard the same thing.  And they are not happy.

Check out this Law.com post featuring how two GCs are handling the issue.  For those with no time to click, picture the GC in his or her office window waving goodbye and the outside lawyer walking dejectedly down the road, briefcase dragging behind.

The key comment in the post is from Brad Hildebrandt:  "It's a buyer's market."   Brad Hildebrandt's reputation aside, the truth is that it always has been a buyer's market.  GCs are now choosing to exercise their inherent power more than before.

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Altman Weil is out with a flash survey of law firms on 2010 billing rates.  The survey finds:

The survey found that US law firms project an average overall increase in rates of 3.2% for 2010. Most law firms will make rate change decisions based on specific variables including timekeeper class, practice, client or individual timekeeper. Only 13.1% will institute an across-the-board change in rates.

Larger firms anticipate a slightly higher average increase than smaller firms, with 1,000+ lawyer firms reporting an average 4% increase, while firms with 50-99 lawyers will raise rates just 3%. In those firms that plan an across-the-board increase, the average rate change will be 4.1%.

Law firms were asked to indicate the primary method they would use to adjust billing rates for 2010. Thirty percent of law firms indicated they would adjust their rates by timekeeper class. Other decision-making variables reported were practice or specialty (18.3%), client (12.8%) and individual timekeeper (11.1%).
 

Apart from the obvious "they just don't get it", two things jumped out at me.  One is that some nearly 13% of the firms are thinking of gouging specific clients where they can get away with it.  Wouldn't you love to read those letters?  "Dear Client, we've determined that you are susceptible to being gouged, so we've decided to raise our rates for you.  Similarly situated clients which are not as crazy as you will not see a price increase."

The other is that for all the talk about eliminating lockstep compensation amongst associates, 30% of firms are still using that lockstep method to get more from their clients regardless of whether the associate is providing any additional value to the client.

So, tell me again: how is that law firms are able to raise their prices more than inflation in an economy like this one?  Clients?  Anyone?  I'm dying to learn the secret.

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Ten days ago, I linked to a post, by Susan Hackett of ACC, Are Firms Tone Deaf? Why Push For Rate Increases In 2010?  I referred to a post I made a year ago using the same "tone deaf" language that firms should not seek rate increases in 2009.  This mornings American Lawyer contained this:

Although 81 percent of respondents said they expect their firms to raise rates next year, 77 percent said the increase would be 5 percent or less.

Yesterday, in my my post To Be Blind To Changes In The Legal Profession, I quoted this from the same AmLaw survey:

More than half the law firm heads report seeing a "fundamental shift" in the legal marketplace; only a quarter said they didn't.

For a lawyer, my math skills are above average.  These two numbers don't add up.  I would expect the 25% who don't see the "fundamental shift" to pursue business as usual and raise rates.  But "more than half" seeing a "fundamental shift" and 81% expecting to raise their rates next year cannot be reconciled. 

I am reminded of an immortal line uttered by Paul Newman, "what we have here is a failure to communicate."  Or perhaps more apropos, we see compelling evidence of people "talking the talk, but not walking the walk."

The receipt of these letters by General Counsel will test the GCs willingness to exercise the power they inherently have as buyers.  It will be interesting to see how the GC community responds.

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Richard Susskind uses a graph in his book, The End Of Lawyers?, and in his speeches that shows the pace of change as a "knee curve."  The graph shows that we have experience comparatively little change until now, but we stand on the cusp of a period of great change.  What does this mean?  Try this explanation, courtesy of the J curve:

In his forthcoming book, Kurzweil summarizes the exponentiation of our technological capabilities, and our evolution, with the near-term shorthand: the next 20 years of technological progress will be equivalent to the entire 20th century.

To put this in some perspective, the blogger notes that at the beginning of the 20th century, there were only 144 miles of paved road in the entire country, 94% of Americans were born at home, had no electricity and most never graduated from high school.

Coincidentally, my mother just sent me an email that contained these comments from 1955:

'I'll tell you one thing, if things keep going the way they are, it's going
to be impossible to buy a week's groceries for $10.00.

'Have you seen the new cars coming out next year? It won't be long before
$1, 000.00 will only buy a used one.

'If cigarettes keep going up in price, I'm going to quit. 20 cents a pack
is ridiculous.

'Did you hear the post office is thinking about charging 7 cents just to
mail a letter

'If they raise the minimum wage to $1.00, nobody will be able to hire
outside help at the store.

'When I first started driving, who would have thought gas would someday
cost 25 cents a gallon.. Guess we'd be better off leaving the car in the
garage.

'I'm afraid to send my kids to the movies any more Ever since they let
Clark Gable get by with saying DAMN in GONE WITH THE WIND, it seems every
new movie has either HELL or DAMN in it.

'Did you see where some baseball player just signed a contract for $50,000
a year just to play ball? It wouldn't surprise me if someday they'll be
making more than the President.

'I never thought I'd see the day all our kitchen appliances would be
electric. They are even making electric typewriters now.

'It's too bad things are so tough nowadays. I see where a few married women
are having to work to make ends meet.

'It won't be long before young couples are going to have to hire someone to
watch their kids so they can both work.

'I'm afraid the Volkswagen car is going to open the door to a whole lot of
foreign business.

'The drive-in restaurant is convenient in nice weather, but I seriously
doubt they will ever catch on.

'There is no sense going on short trips anymore for a weekend, it costs
nearly $2.00 a night to stay in a hotel.

'No one can afford to be sick anymore, at $15.00 a day in the hospital, it's
too rich for my blood.'

'If they think I'll pay 30 cents for a hair cut, forget it.'

Why is this important?  Read my last post about the leaders of 25% of the AmLaw 200 not seeing fundamental shifts in the profession.  But also think that if there is only a 25% chance that changes will be only profound instead of anywhere near what Kurzweil and Susskind are predicting, and think about what that means for you and your firm.  But then think about your clients.  How will their businesses change in a change environment?  Will you be as nimble as they will?  What are you doing now to prepare to be the lawyer they need in an environment that will be profoundly different.

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Following up on my last post on how clients can determine whether the alternative fee quoted is a good one or not, I invite you to read this article from Corporate Counsel, United Technologies Takes a Stand, Puts Billable Hour 'On Life Support.'  Here's the punchline from the story:

These days it's easy to find law firms willing to work for United Technologies under some kind of alternative fee arrangement. They're a big customer; the Hartford-based global conglomerate raked in nearly $59 billion in revenue last year selling products like elevators and helicopters. But to truly impress United Technologies, firms now have to do more than propose working off the clock. They have to explain exactly how they came up with their flat fee, and how they'll make money, something many can't do. "Sometimes they tell me they have no idea," says associate general counsel Chester Paul Beach.

I know from experience that no lawyer can wake up one day and decide to quote alternative fees and be any good at it.  Being good is like any other estimator's job--it takes experience and a detailed, nuanced understanding of your cost structure and your financial objectives for the engagement.  Kudos to United Technologies for asking precisely the right question.

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When giving a speech a few months ago, I was asked by an in-house lawyer how a client was supposed to distinguish a good alternative fee from a bad one. Great question.

My answer? Ask the firm to explain in detail how it came up with its number.

I recall the first time I quoted a fixed fee more than a decade ago. It was a very unpopular thing in my firm, and the “bosses” were heavily involved. I came up with number in a very granular way. How many motions? How many depositions? How much time reviewing documents? How long for summary judgment? It was an exercise designed to identify the number of hours we would spend on the matter. We then multiplied the hourly rates of the people who would be doing the tasks and came up with a total.

That was only the beginning of the process. Rates were likely to increase during the period the case was expected to be active, so we had to build in a “bump” for the fee increase. We had to build in another “bump” to protect us in case we were wrong about the hours. And finally, we had the self-congratulatory “aren’t we great for doing this for our client” bump. That was the number we gave to our client. As you can see, it had a huge amount of profit, indeed, a premium, built in.

These days, I’ve heard from a number of in-house lawyers that the alternative fee quotes they are getting appear to have gone through a similar design process. As I tell everyone who asks, any explanation that includes something to the effect that we calculated the hours we would spend and multiplied by hourly rates needs to be rejected immediately. The firm’s hourly rates are where their profit is located. Rates x hours = revenue. Revenue – expenses = profit. If the firm is not putting some of its profit at risk and altering the way it works, it is not using the alternative fee to client’s benefit.

So what’s a good answer? I’ll answer that question later.

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Law firms frequently strive to identify and adapt "best practices" in whatever area is under examination.  I used to think that this approach was laudable.  Not anymore.  The Harvard Business Review just posted Why Do We Ignore Best Practices?, which suggests some reasons why companies (firms) ignore best practices.

I take issue with the fundamental assumption of the HBS piece, which is that "best practices" are something to which businesses should universally aspire.  In some areas, like IT, best practices may be precisely the right objective.  But in most areas, seeking to emulate best practices created by someone else simply fosters a herd mentality.  In areas like branding, this is obviously problematic, and it can be that way in substantive areas as well.  Simply seeking to do the wrong thing the best way is not a virtue.

In my recent panel discussion with noted legal futurist and technologist Richard Susskind, Richard introduced the idea of blank sheet problem solving.  It was brilliant,  When being asked to solve a problem, a group starts with a blank sheet of paper, with the charge being essentially, start from scratch with no limitations and design a solution. If something elegant or innovative is designed by that process, the issue then becomes an engineering one, how to get from here to there.  But notably absent in the process is an reference to what others are doing.

Of course, in this same lecture, Richard discussed his view that lawyers are more concerned about not suffering competitive disadvantage rather than interested in seeking competitive advantage.  In other words, lawyers enjoy the herd.  Which makes them perfect candidates for seeking best practices.

The punchline?  Think about whether you are a herd animal or something more.  If you want to live in the herd, best practices will be your friend.  But if you want to excel, to rise above the herd, then ask whether best practices will hold you back.  Create a system, whether Richard's suggested approach or something else, that fosters creativity and encourages people to be more than a pack animal.  Challenge conventional wisdom, or as I see it, herd wisdom.

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During today's panel discussion with Richard Susskind, he mentioned that he had recorded an interview with Leah Cooper, the Managing Attorney of Rio Tinto.  Fantastic discussion of Rio Tinto's outsourcing of a significant amount of work.  Well worth a listen.

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Did you ever notice how decisions seem to gain a momentum of their own?  A managing partner becomes enamored of an idea, and no one else spends time thinking about it.  Or, as is more frequently the case, a tough question, such as "Are we at the top of our game, or are we in decline?" never gets asked because the answer is assumed. 

This is not an academic exercise.  Jim Collins reveals in his book How The Mighty Fall that the inspiration for the book came from a question he was asked about a question he posed to a group of generals, CEOs and social sector leaders.  Here's the story:

I pondered and puzzled, and finally settled upon, Is America renewing its greatness, or is America dangerously on the cusp of falling from great to good?

                                             ************

At the break, the chief executive of one of American's most successful companies pulled me aside.  "I find our discussion fascinating, but I've been thinking about your question in the context of my company all morning," he mused.  "We've had tremendous success in recent years, and I worry about that.  And so, what I want to know is, How would you know?"

"What do you mean?" I asked.

"When you are at the top of the world, the most powerful nation on earth, the most successful company in your industry, the best player in your game, your very power and success might cover up the fact that you're already on the path to decline.  So, how would you know?"

Collins wrote a book to respond to that question.  My question is this: who in your organization is asking that question?  And since most law firms have highly skilled paid professional advocates, if I were running a firm, I would give my best professional advocate the task of making the case that our firm was in decline.  Why?  Because if I couldn't win that argument against a good advocate, why should I believe he or she isn't right?  Then I need to ask what I can do about it.

Good questions.  Hard answers.  But as important, getting somebody to make the debate robust is worth its weight in gold.

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One of the explanations often offered by managing partners to explain why lawyers (really, their organizations) are so slow to change is lawyers' well-establish aversion to risk.  Change involves risk, to be sure, though the assumption implicit in the statement--that the status quo does not involve risk--is demonstrably untrue.  That debate, however, can be had another day.  Rather, I wanted to share something I read in Jim Collins' How The Mighty Fall about how to look at risk and whether it is "too much:"

Bill Gore, founder of W.L. Gore & Associates, articulated a helpful concept for decision making and risk taking, what he called the "waterline" principle.  Think of being on a ship, and imagine that any decision gone bad will blow a hole in the side of the ship.  If you blow a hole above the waterline (where the ship won't take on water and possibly sink), you can patch the hole, learn from the experience, and sail on.  But if you blow a hold below the waterline, you can find yourself facing gushers of water pouring in, pulling you to the ocean floor.  And if it's a big enough hole, you might go down really fast, just like some of the financial-company catastrophes in 2008.

Just as an example, it would be an imprudent firm not doing something in the fixed fee arena these days.  Do you have the whole firm start doing all of its work on a fixed fee?  That would be a "below the waterline" risk.  But doesn't it make sense to start somewhere and develop data and experience?  On a measure scale, that effort would be an above the waterline risk.

This is a simple but effective device for analyzing risk to your organization.

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"When you are at the top of the world, the most powerful nation on earth, the most successful company in your industry, the best player in your game, your very power and success might cover up the fact that you're already on the path to decline.  So, how would you know?"

This question is the foundation of Jim Collins' new book, How The Mighty Fall.  The back cover contains this statement:

Whether you prevail or fail, endure or die, depends more what you do to yourself than on what the world does to you.

Between those two quotes is a heck of a book, one that every law firm leader should be reading. But Collins tells a story that illustrates the point of the book better than merely stating the point ever could:

On a cloudless August day in 2002, my wife, Joanne, and I set out to run the long uphill haul to Electric Pass, outside Aspen, Colorado, which starts at an altitude of about 9,800 feet and ends above 13,000 feet.  At about 11,000 feet, I capitulated to the thin air and slowed to a walk, while Joanne continued her uphill assault. As I emerged from the tree line, where thin air limits vegetation to scruffy shrubs and hardy mountain flowers, I spotted her far ahead in a bright-red sweatshirt, running from switchback to switchback toward the summit ridge.  Two months later, she received a diagnosis that would lead to two mastectomies.  I realized, in retrospect, that at the very moment she like the picture of health pounding her way up Electric Pass, she must have already been carrying the carcinoma.  That image of Joanne, looking healthy yet already sick, stuck in my mind and gave me a metaphor.

It takes something extraordinary to escape the tendencies that cause people to turn a blind eye to the warning signs, to excuse the signs of decline, to refuse to apply the critical analytical skills that most lawyers possess in such abundance.  Those that escape these tendencies have a chance to avoid the fall. 

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I strongly endorsed a new book by Jeff Jarvis, What Would Google Do?  If you want to see Googley thinking in action, check out Michelle Golden's post, Think Your Clients Use Your Firm's Website?  Here's the advice:

Firms also talk about putting valuable content and tools behind this client-only wall. This is exactly opposite of what your content strategy should be. Put your content and tools "out front" where people can see how brilliant and generous you are.

The Gospel according to Google.  Share content and figure out how to make money by doing so.  In Michelle's example, sharing content is the avenue to new clients.

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I am hired by my client to represent them.  Doing so to the best of my ability requires me to give them my best judgment on the issues related to the matter I am handling.  There is nothing in the lawyer-client relationship that requires them to follow my advice.  They are the client, I am their lawyer.  Translation: THE CLIENT IS THE BOSS, THE HEAD HONCHO, THE GENERAL.  I am none of those things.  When they make a decision, I do my utmost to execute it.  It frankly doesn't matter whether I agree or not.  My job, ultimately, is to follow their direction and execute the decision as capably I can.

If you read the last paragraph carefully, there is nothing in there that says I have to agree with my client, tell them they are brilliant or in any way suck up to them.  In my experience, few clients want that.  They really do want to know what I think and why, what my reasoning trail is, what views are based on solid experience and what views are educated intuition, which are data-driven and which are not.

The notion of telling my clients what I think they want to hear is alien to me.  It is not what clients want from their lawyer.  But the stories of lawyers being afraid to take a position and reveal their thinking are so pervasive that they tell jokes about us.  "On the one hand....."

Law is a chain of command.  Outside lawyers are never at the top of the chain.  But do not use the chain of command as an excuse to be less than forthright in expressing your complete and candid views.

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In my recent post, Want To Think About The Future Of Law?. I referenced Jeff Jarvis' fantastic new book, What Would Google Do?  Listening to my tape of the book this morning, Jarvis made two great points.  One is what the calls the "cash cow in the coal mine," a play on the idea of the canary in the goal mine, an early warning indicator.  His point is that when your business is generating cash, the cash can blind you to the problems ahead and the need to change to survive.  By the time you realize you need to change, it's already too late.  The cash cow effectively killed the business.  He offers several terrific examples.  Might some law firms be on his list in the next edition of the book?

The corollary point Jarvis made during my morning listen is the one that gives rise to the title of this post.  Preservation of the pat is not a strategy.  No matter how much an owner may wish otherwise, a business must be inherently forward looking.  The past is past.  Dead.  Gone.  Yesterday's customer is no assurance of tomorrow's.  Business owners who fail to see the future and the need to look forward, not back, are destined to fail.

These two points, it seems to me, define the challenge of the moment for most law firm leaders.

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The ACC Value Index, a new tool for in-house lawyers to rate law firms, has caused endless consternation among law firms.  First, it was the marketers, thinking it unfair that the system was closed to the firms.  "What if someone says something bad about us?," they worried.  "How will we market around that negative ranking?"  The firms next moved to more elaborate challenges.  "The questions are unfair!"  "How dare you condemn an entire firm if one partner screws up!"

Of course, no firm wants to be at the forefront of criticizing the organization that speaks on behalf of clients.  So it was hardly surprising that some consulting firm that sells its services to these firms would emerge as a spokesman for the large firms.  The Zeughauser Group's November 2009 "Call To Action" contains every criticism firms might have with the Value Index.  The criticisms really fall flat.

Criticism No. 1:  The law firms can't see the ratings.  This is called a "serious flaw."  This is a big yawn.  If firms were actually working with their clients, trying to better serve their clients' needs, they would not be surprised by any ratings.  That that don't know these things is an indictment of the firms, not the Value Index. 

Criticism No. 2: The Value Index asks clients to rate matters based on individual offices and practices areas.  That is unfair, according to Zeughauser, because firms "'strive to put the best team on the field' for each client matter, staffing matters with lawyers from several practice areas and offices if that is what will deliver the best and most cost-effective service, expertise and result for the client."  The language sounds like it was written by a second-rate PR firm.  Since when have firms been concerned about "cost-effective service?"  But to the point, Zeughauser surely knows that however many offices or practice groups are assigned, there is a primary locale and a primary practice group on virtually every matter.  Consider it an evaluation of team leaders.

Criticism No. 3: The Value Index does not "collect specific actionable data that would be helpful to law firms striving to better align the cost and value of legal services."  The Value Index is a tool for buyers of services, not sellers.  Get over it and go figure out for yourself how to provide more value.

Criticism No. 4: You damn firms instead of lawyers.  As one friend said of this criticism, "I think all of this is akin to suggesting that as consumers we should not hold Campbell's soup responsible because we discover rodent parts, when we open one of their soup tins. 'It was really only a small snag within the Ox Tail Soup bottling line, and should not be a reflection on the quality standards of the whole company.'"  Firms have spent millions (or more) trying to brand themselves.  They do not have standing to say their brand cannot be judged.

Zeughauser's actions are shameful pandering to their customer base.  Law firms, in turn, need to stop acting like spoiled babies and grow the hell up.  I'm not suggesting the Value Index is perfect, but the reaction of BigLaw to it reminds me of a spoiled child throwing a temper tantrum in a public place.  But instead of acting like a responsible parent and telling the child to stop and deal constructively with the circumstance, the Zeughauser Group is enabling the problematic behavior.

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If you want to stimulate your  mind to think about the future of the practice of law, read (or listen, as I am) What Would Google Do? by Jeff Jarvis who also writes the blog, Buzz Machine.  And if you really want to expand your mind, read Small Is The New Big by Seth Godin right after.

Jarvis' thesis is that Google succeeds because it shares everything and builds platforms for people to do stuff more easily, making the Google base more essential.  It is interesting to noodle about how one (or even groups of firms) could benefit by enabling their clients.  More to come on the ideas spawned by these two books, to be sure.
 

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I was recently having a discussion with a friend of mine who is the Managing Partner of a firm I love and greatly respect. We were talking about Valorem’s Advisory Board and what a great experience its been for us. She lamented that she would love to create a similar board for her firm, but had run into resistance from some of her partners. Her comment got me thinking about the difference between having an ownership stake in an enterprise and controlling its operation, traditionally the function of enterprise management.

Perhaps dating back to those “olden days” (a phrase my kids use with me all the time) when men were men and partnerships were collegial and law was a profession instead of a business, our profession has been burdened with the notion of decision by consensus. That is, partners will hash an idea out and eventually a decision on the issue at hand will be made by general agreement. Sure, the legal documents provide for votes, but consensus is the favored approach.

As firms grew in size, the folly of this approach became apparent. Key decisions were delayed because “Bob” was traveling. Not all partners had the same appreciation for financial dynamics or client relations or other practice nuances, and only a few seemed to appreciate the “ways of the future.” Because no one was accountable, lots of things never got done. Some firms did, in fact, embrace concepts of enterprise management that would be recognizable in at least some business schools. Still others concentrated power in the hands of a few partners, although this approach typically has led to turf wars. The common denominator among most of these newer approaches is that they lack accountability. The absence of change amongst the managing partners in BigLaw during the last two years illustrates that essential failing in the management models of most firms.

Let’s look outside the law for a minute. Can anyone imagine Mabel Jacobs, an 82 year old retired homemaker who owns a few thousand shares of stock in Microsoft walking into Steve Ballmer’s office to talk about her views on what Microsoft should be doing over the next few years? About executive personnel decisions? About how it should use its working capital? Can you imagine a line of shareholders waiting to have similar discussions? Of course not. In the real world, we distinguish between ownership and management. Ballmer may be elected by the Board which is elected in turn by the shareholders, but once in, he makes decisions until the Board decides to remove him from his position.

Why should law firms view management differently? Yet partners routinely mistake ownership interest--a right to profits--with management.  In my own experience, I’ve seen the interest of former partners in management issues vary greatly according to their workload. Get close to a trial and suddenly the business of the law firm is irrelevant. Some people are not interested in the economic circumstances of the business world. Why on earth would we want them influencing marketing and pricing decisions? I've seen firms elevate their primary rainmaker with a thirst for power even though that person could neither management their way out of a paper bag or lead a firm to ice in the Arctic.  And why, as the pace of change accelerates to a speed that will shake foundations of virtually every enterprise, would any group of rational actors embrace of form of business management that is the antithesis of nimble and effective?

I am not, by the way, suggesting that every decision be concentrated in one person’s hands. Decisions like admission of new partners, merger, and other core issues ought to be discussed and voted upon. But a decision on whether to create an Advisory Board and who would be on it would never qualify as a core issue. Certainly an effective manager and leader will prize communication with his or her constituents, perhaps embracing what Tom Peters calls MBWA—management by walking around. But firms that tie the hands of their senior managers risk paralysis and unfortunately, obsolescence.  

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Someone sent me an email yesterday passing along a blast email she had received from a listserv:

Our firm’s clients are regularly pressuring us to enter into alternative fee arrangements. It is quite an undertaking to consider a model for this approach, and I am wondering whether anyone has already begun the process. We already have some matters (transactional work) in which we bill a flat fee. Can anyone tell me if they have experience with an alternative fee arrangement for litigation work? Thanks.

What can we learn by dissecting this email.  In no particular order:

1)  The pressure is from the firm's clients.

2)  The pressure is regular.

3)  The firm has accurately determined that it needs a different model for this fee structure (though I am not sure they are using model in the business model sense)

4)  The firm has underestimated what it takes to change to the new model ("quite an undertaking" does not begin to suggest how radical and institutionally transforming the changes will be)

5)  The firm has not heard of Valorem, Bartlit Beck, Shepard Law Group or the others that do litigation on a fixed fee or alternative fee basis (or else they would have called those firms directly).

6)  The firm is now behind the curve.

The most important of these six points?  Numbers 1 and 2. 

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Ed Reeser is a fantastic lawyer and a great guy.  We were teammates during Professor Bill Henderson's FutureFirm 1.0 contest last April.  Largely because of Ed's insights and wisdom, our team prevailed.  Ed, Jeff Carr, Patrick McKenna and I recently co-authored 4 articles together, largely because Ed played the role of the rancher, sitting on his trust steed, cracking the whip to keep the rest of us moving toward the finish line. I thought my admiration of Ed knew no bounds, but then I received this email from him, which I quote here with his permission.  The lessons for lawyers and non-lawyers alike should be obvious:

Lessons from a Corsican Mouse on the Practice of Law

I have had one lesson, taught twice, that was very important to my career and life, and rather than have any of you subject to the abject humiliation of the experience, share it with you openly.

The first installment came during my training as a martial artist, which I pursued ardently for more than 20 years.  It had to do with developing the skill of the "eye of the crab" both for recognizing danger early and scuttling out of its way, but also intrinsically radiating the message, without being confrontational, that their taking a piece out of you was not a worthwhile exchange for the piece you would take out of them....and thus they pass you by. That all sounds great coming from a wise and ancient kung fu master, but it was not within the real world of experience that is so much better a teacher...if only we survive it!

The second installment came a few years later when, as a black belt and thoroughly self impressed 20 year old, I was crewing on a sailing yacht in the Mediterranean for a summer.  My berth was at the base of the stair ladder to the cockpit, next to the radio and navigational units.  We were tied up in "stern to" fashion at a quay in Calvi, a port in northern Sardinia.  It was hot and I was sleeping on top of the sheets wearing bathing trunks.  

I felt the little cold feet of a mouse, which had come up the hawser, along the deck, down the stairs, and across my forehead, cheek, chest and belly, as he worked his way towards the galley that was two compartments forward.  The shock of realizing I was a rodent highway on the road to dinner caused me to sit bolt upright......except the berth was tucked beneath the deck so I did not have enough headroom to sit upright, or anything remotely close to that......and proceeded to smash my head into the underside of the deck.  Hard.

Spluttering in pain and with a heart filled with vengeance, I rolled out of the berth with the intent of causing mayhem and death to the trespasser, and pursued him down the passage forward.  Seeing my clumsy pursuit, the mouse bypassed the galley and its goodies, and kept moving forward towards the focsle.  Of course, I thought this was great.  The most forward location was the sail locker, which had no windows, a roof top hatch through which the sails were passed, and mahogany bulkheads four and a half feet high, completely impossible for the little guy to ascend or leap on top.  "Gotcha" seemed to be the operative description of the tactical dynamic.  

The mouse got to the end of his course, ran in a circle three or four times quickly, and sizing up that he was trapped and had no way out.........turned to face me, rose up on his little hind feet, stuck out his front arms and showed his tiny claws like a grizzly bear, opened up his mouth to fully bare his little rodent incisor fangs, and gave a mousy, but audible, grunt.  The message was clear....."maybe you will kill me, but I am going to take as much of you with me first as I can".  

Harvard man in his bare feet confronts 2oz mouse, with god knows how many exotic transmittable diseases.  A split second of hesitation to reflect on consequences of trade off to stomping on the food bandit, in exchange for being bitten.  In that split second the initiative of decision making, choice and action shifted to our little Italian "Mickey".  He zoomed forward between my legs, down the passage, up the ladder, out the hatch, across the deck, down the hawser, onto the dock.......and into the night.

Totally outplayed by a Corsican Mouse.  And the invaluable lesson of course?  That irrespective of one's position of power and ability to wreak great havoc and harm upon the other's position, the operative issue is not necessarily what you can do, but what can they and will they do to you, and are you prepared to accept that for the exercise of what you can do to them.  Forget the relative weighting of the pain!  Forget what you thought was a “win”.  Rarely is another prepared to give up their life, or anything close to it, for the privilege of taking yours!   And when the roles are reversed, neither will you be so prepared. Think about it before you commit too much money and foolishness in the pursuit of something you are not going to ultimately be prepared to do.

It has led to some very good advice to clients from time to time. And saved me from some nasty bites too.

Two days later I am still laughing like hell at the picture in my mind of the Harvard black belt and the 2 oz. mouse.  It is an interesting variation on my favorite Bruce Lee scene from Enter the Dragon, where Bruce talks about "the art of fighting without fighting."  Especially for litigators, it is hard to resist the the fight.  That is why Ed's lesson, so wonderfully told, like the Bruce Lee scene, provide such valuable insights.

 

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In a private email, Jordan Furlong observed that most lawyers begin law school with little to no business experience or business education. Law School adds no relevant business knowledge. Yet when most lawyers begin to practice in whatever area they choose, they find themselves encountering businesses, whether as clients or the adversaries of clients, and business issues. And because they lack both business experience and training, they are poorly equipped to advise clients in the context of the problem the client faces or even to understand that which is motivating a client’s decision-making.

Take the simplest proposition: should I settle this lawsuit? Well, what is the cost? A certain number of dollars? Really? What’s the accounting treatment of the settlement? Do I have a borrowing cost? Do I want the settlement pushed into next year so that I can report higher earnings per share this year? There are even more questions, but with these basic questions, one begins to see that even the simplest decision is informed by a myriad of business and accounting issues. Even something as divorced from business as First Amendment/Free Speech law is dramatically impacted by global issues triggered by the Internet and the ubiquity of speech that really has no geographic origin. Lawyers and law students receive no training in budgeting or project management, or even a taste of things like Six Sigma and Lean—things that are close to the hearts of many businesses or from which many businesses could benefit.

I received an email yesterday from the Executive Education division of Harvard Business School that started this way:

In today’s business landscape, corporations look to their law firms to be more than the providers of standard legal services—they expect them to be trusted advisers and knowledgeable business partners. Those who cannot fulfill this role are being quickly relegated to commodity service providers forced to compete on price often with company’s own internal legal team. To meet these increase expectations and to ensure that they are providing the highest level of value, law firms need to be able to provide thoughtful guidance that accommodates not only the law, but also the strategic direction of client companies. This new HBS Executive Education program provides the business knowledge required to understand how clients formulate and execute strategy and how law firms can add value in this process.

It’s good to see a recognition that this type of education is needed. But much more fundamental knowledge is needed. For example, while excellent accounting skills are always helpful, even basic knowledge is helpful. Understanding the factors that go into Earnings Per Share and other critical numbers that influence the market’s view of a company or how a bank lending money to a company would view it are immensely  helpful in advising clients. Another critical thing is understanding the difference between cash basis and accrual accounting, as well as the process of setting reserves and what variations in philosophy are appropriate or permissible in that regard. It is essential to understand company budgets—how they are set, what they are used for and how management makes decisions in ways influenced by budgets.I am sure my own education is lacking and in-house counsel and business persons could add considerably to this list.

On a slightly more esoteric level, law school teaches people to be lone wolves and tear everything down, to identify risk rather that evaluate it. It requires a high level of certainty in order to offer an opinion. Businesses operate in a world of considerably less certainty, and that "certainty gap" is one of the fundamental causes of out of control legal expenses. 

Business school (indeed business in general), on the other hand, is more about team work and problem solving. While risk identification is part of that process, it is not the end result the way it is with lawyers. Business school can really foster creativity—I read where one Stanford professor gave her class an assignment where each team was given $5. The team had the weekend to invest the $5 into an activity and then would be expected to give the class a three minute presentation on Monday. While most teams organized car washes or sold lemonade or something similar, the winning team realized that $5 wasn’t important—it was the three minutes. It sold that three minutes as advertising time to some off-campus stores and generated $600. Law school ties people to prior decisions and doesn’t reward the creative thinking found in this business school example.

The deficiency in law school is not just on a subject matter basis, it is the entire way of thinking. Think back on the old movie “The Paper Chase” with John Houseman in the role of Professor Charles Kingsfield uttering that famous line, “ You teach yourselves the law. I train your minds. You come in here with a skull full of mush, and if you survive, you’ll leave thinking like a lawyer.” Great theater, but in today’s world, thinking like a lawyer leaves you so far behind the pace of movement in the modern world that you render yourselves a dinosaur before you even begin to work.

What’s the answer? Taking the long view, law schools need to change the way the teach, and partnerships with business schools should become the norm. Smart students are well advised to pursue joint JD-MBA degrees. But on a more immediate basis, I think the answer lies along the lines Harvard Business School is considering, though programs will need to be at a variety of levels and priced far more conservatively than the nearly $8,000 price tag Harvard has set for its 3 day program.

There is probably a real business venture here waiting for the right entrepreneurial person to step in a craft a curriculum to could be web-based.  The market? Well, there are over a million lawyers in the United States and 45,000 or so law school graduates each year.  You do the math (I'm a lawyer so I probably would get the answer wrong!).

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AmLaw Daily contains an interesting post today noting that several UK firms were cutting their profit sharing.  From the post:

Several big-name U.K. firms have cut or delayed quarterly profit distributions to partners to cushion the blow of the continued recession.

Interesting choice of words--"cushion the blow."  The translation is that we don't have enough profits to give them to the shareholders.  The post goes on to point out:

The same phenomenon has been occurring in the U.S. In March, we broke the story about Dewey & LeBoeuf severely cutting monthly draws to under-performing partners and holding back some larger distributions. Later that month, DLA Piper slashed partner pay by 11.5 percent.

Many other firms have been identified in various reports as having taken similar steps.  One reason may be the firm's covenants in their bank line agreements, many of which contain performance criteria.  But whatever the reason, the bottom line is that firms don't have enough money to make distributions to partners. 

Okay, so the firms have slashed expenses and personnel and there still isn't profit there for the partners.  So what kind of pressure to extract money from clients do you think partners feel from their peers?  If I were a client, I'd be watching my wallet more now than ever. 

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In this space, I've discussed the "4-bucket" theory of law (process, content, advocacy and counseling), and I was visiting with a law school colleague of mine about the missing elements of legal education.  I indicated that the single biggest missing element is knowledge of business, since that missing knowledge bears not only on understanding the business of your firm, be it your own or someone else's, but the business of the profession, and finally, and most acutely, the issues your client is confronting.  For those just starting law school, the answer probably is a joint MBA/JD program.  But for those  already practicing, here are some resources that might be of assistance:

Manager Tools, a website devoted to business types with podcasts on various management issues

University of the People, and open source web education system with a focus on business

One client advisor suggested The Ten Day MBA.

You can listen to a story on 848, a Chicago Public Radio program, about open courseware.  If you're interested about open courseware, read The World Is Open: How Web Technology Is Revolutionizing Education.

Any other suggestions?

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A new Hildebrandt International survey reveals that in-house law departments are cutting their budgets. That revelation is sure to fire up water cooler conversations this morning,  The survey is actually reporting 2008 data, ignoring the grim reaper most law departments were forced to confront this year.  The survey was sent out in March and is only now being reported.  It is so out-of-date as to be irrelevant.

The Fulbright 6th Annual Litigation Trends Survey Report (available here) is far more interesting. Nearly a third of the respondents anticipate growth in litigation during 2010.  Budget forecasts and costs control remain the two biggest areas of concern with outside counsel. About half the companies report using alternative fees (not defined), and e-discovery remains an important topic.

I guess this is not a year for revelations.

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Jim Hassett of LegalBizDev was kind enough to send me a  preview edition of his AmLaw 100 survey of alternative fees.  Very interesting reading, and Jim is to be commended for his work in this area.  This most recent report includes the results of surveys and meetings with C-suite executives from 37 of the the AmLaw 100.  I was intrigued by a comment Jim made about defining alternative fees:

Unfortunately, different experts use the term “alternative fees” in different ways. Many agree with the narrow definition used in this survey: alternative fees are fixed or contingent billing arrangements that are partly or totally non-hourly.

However, many lawyers prefer a broader definition that also includes discounted arrangements that are strictly hourly, such as blended rates.

The fact that two conflicting definitions are in wide use can add considerable confusion to an area that is already confusing enough. These days, it is becoming commonplace to hear both in-house lawyers and outside counsel say that 10% or 20% or 30% or more of their work is performed on an alternative basis. But it is often unclear whether they mean that they are getting away from the billable hour, or simply lowering the hourly cost.

Lawyers manipulating numbers?  Imagine that. Students of diversity numbers or PEP numbers will be shocked, I tell you.

But let's cut to the chase.  Fees based on the calculation of time rather than the result obtained are not alternatives.  Such fee structures--discounts and blended rates being two prime examples--are simply more of the same with a word other than "straight" serving the adjective to describe hourly rates.

It's easy to see why firms want to use this definition.  Under this view, most firms have been using "alternative fees" forever and it is a great marketing ploy to tell clients and prospects that "50% of our revenue comes from alternative fees."  That sure sounds a lot better than "clients accounting for 50% of our work get steep discounts because otherwise they will move their work to another firm." 

Lost in the ruckus of what constitutes an alternative fee is the real point of alternatives--to shift risk from the client to the firm, creating a structure that pays for results not time, and places squarely on the firm the profit motive to do work cheaper.  Hourly work with whatever adjective is used is still cost-plus work, and it is marketing "happy talk" firms are starting to use with more frequency to avoid any critical analysis of the firm's business model and to justify to themselves and their clients why nothing has really changed.

For firm leaders that want to argue in favor of including blended hourly rates, discounted hourly rates or some other version that leaves in place the structural incentives for your people to charge your clients more rather than not, I encourage you go to www.amazon.com and purchase the book, Who moved my cheese?  You need to read it more than you know.

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Above The Law is reporting that Paul Weiss has terminated as many as 45 staff attorneys.  ATL previously reported that Skadden and Covington had terminated large numbers of staff attorneys.  I suspect many other staff attorneys have been let go, albeit without the press coverage.

Here's my question: who is doing the work formerly done by these staff attorneys?  One real value of staff attorneys was the ability to put lower paid qualified attorneys on matters that required a lower billing rate.  It seems unlikely these firms have decided to forego work.  My guess is that they are pushing the work upstream to full-time, fully paid and more expensive attorneys in an effort to keep them busy.  Fantasitic solution for everyone except the clients who pay more for the same work.  If there is some other explanation, I'd love to hear it.

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Ron Baker posted a long critique of the discussion on Lean.  I wanted to comment on some of his arguments, so I have copied the post its entirety.  My comments appear in caps within the body of Ron's post below.  Forgive this unorthodox approach, but it is the only way to create the proper context without a lot of unnecessary movement from one post to the next.  Here's Ron:

 

Pat Lamb posted on Lean Client Service, which inspired me to post a comment.

Then Pat replied in another post.

This led to another post, incorporating several comments from Legal On Ramp’s discussion board.

The debate is critical, and regular readers of VeraSage already know how much ink and mind power we’ve devoted to this topic.

Attacking efficiency is the equivalent of criticizing motherhood and apple pie, so my position is highly contentious. I believe this is good, since we only learn from people we disagree with. And, it illustrates how we have not yet come to grips with the consequences of no longer being an industrial/service economy, but rather a knowledge economy.

In that spirit, I thought it necessary to comment on Pat’s latest post, while expanding the discussion.

Here is my letter to Pat.

Hi Pat,

Fantastic discussion, thanks so much for provoking this much thought on what I consider a critical issue for professional knowledge firms.

We have two problems with this debate. The first is a linguistic issue. We all seem to be using a somewhat different definition of efficiency and effectiveness.

We believe all change is linguistic, so we should agree on terms. For example, you say in your post that I am one of the “leading thinkers on the issue of value billing,” but we at VeraSage don’t use the term “value billing,” since billing is done in arrears, whereas pricing is done up-front, before the work is started. There’s an enormous difference in these two approaches. [I APPRECIATE THE DISTINCTION AND APOLOGIZE FOR THE ERROR.  BUT TO ME, THE CRITICAL ELEMENT IS THE PRICING AND SUBSEQUENT BILLING MUST SHIFT TO THE LAWYER OR OTHER KNOWLEDGE WORKER THE NEED TO PRODUCE THE OUTPUT AT THE LOWEST COST IN ORDER TO MAXIMIZE PROFIT MARGINS.]

We also don’t believe law firms are “professional service firms” but rather “professional knowledge firms (PKFs),” terminology more in line with Peter Drucker’s famous definition of knowledge worker and knowledge economy. [TO ME, A DISTINCTION WITHOUT A DIFFERENCE]

So let me begin by defining how I am using the terms efficiency and effectiveness, which I take from Peter Drucker:

* Efficiency focuses on doing things right.
* Effectiveness concentrates on doing the right things.

Now many people argue that both of these are important, and up to a point I agree. However, past some point—which we argue occurs sooner on the graph in a knowledge firm than, say, in a factory—the two become mutually exclusive. I can cite hundreds of examples where a decrease in measured efficiency still leads to an increase in effectiveness.  [IS YOUR POINT THAT WE WANT TO DO THE RIGHT THINGS INEFFICIENTLY?  IF SO, I BEG TO DISAGREE.]

However, I can’t find many examples of where an increase in efficiency has increased effectiveness (as defined here). I know Fred Bartlit says that “increased efficiency almost always results in increased quality,” but quality is not necessarily effectiveness as I’m using the term here. One could make an incredibly high quality cement life jacket, but it wouldn’t be very effective (this crack was made by Tom Peters with respect to ISO 9000 standards).  [I THINK THIS IS WHERE THE PARSING OF WORDS GETS EXTREME, RON.  FRED AND I LIVE I A WORLD WHERE PEOPLE KEEP SCORE AND NEITHER OF US IS MAKING CEMENT LIFE JACKETS.  WE ADVOCATE, AND LIKE IT OR NOT, IT IS AN EVERYDAY PART OF THE BUSINESS WORLD.]

Peter Drucker believed that a business wasn’t paid to be efficient; it’s paid to create wealth for customers. A business could be highly efficient at doing the wrong things. Examples abound: buggy whip, dot-matrix printer, slide rule, and typewriter manufacturers, etc, all models of efficiency before they were decimated in a gale of creative destruction by more effective technology. [FRED AND I, AMONG OTHERS, HAVE USED THE BUGGY WHIP MAKER ANALOGY TO DISCUSS THE  BIGLAW MODEL.  BUT THE PRODUCT BEING SOLD BY LAWYERS IS RESULTS--SOLVING CLIENTS' PROBLEMS.  I DON'T KNOW OF A CLIENT WITH A PROBLEM WHO WOULD ARGUE THAT HER LAWYER'S ABILITY TO ACHIEVE A RESULT AND MAKE THE PROBLEM GO AWAY IS AN ANTIQUATED BUSINESS.]

In fact, a company at the apogee of their measured efficiency is probably in a perilous position, which is why Google allows its professionals to spend one day per week working on projects that excite them. This is not very efficient per your timesheet or billable hours; however it has led to many of Google’s innovations—Gmail, Google Earth, Google Books, etc. Other companies such as 3M and Gore have similar strategies.

This is why Peter Drucker wrote The Effective Executive, and not The Efficient Executive.

But let’s get back to efficiency.

What, Exactly, Is Efficiency?

Efficiency is always a ratio, expressed as the amount of output per unit of input. Mathematically, it seems straightforward, as if there was one widely agreed upon definition of the components of the numerator and denominator. In an intellectual capital economy, however, it is a conundrum. [EFFICIENCY DOES NOT ALWAYS NEED TO BE MEASURED, BUT ARE YOU REALLY ARGUING THAT DOING HIGHQUALITY WORK FASTER AND CHEAPER IS NOT A GOOD THING?]

Take the denominator in the ratio. Which inputs should be included? If we are dealing with wine, we could count the costs of the grapes, the bottles, corks, etc., none of which would help us define—let alone value—the final product. As they say, it is much easier to count the bottles than describe the wine.

If we were dealing with Rembrandt’s efficiency, we could sum up the cost of paint, canvas, brushes, and even the amount of labor hours spent plying his craft. Would there be any relationship to the final value of the output?

We can calculate how many surgeries the cardiologist performs in a given number of hours, but it doesn’t tell us anything about the quality of life for the patient.  [BUT A DOCTOR DOESN'T WASTE TIME NEEDLESSLY.  SHE HAS OTHER LESS EXPERIENCED SURGEONS CLOSE, NURSES DO THEIR WORK, TECHNOLOGY ADVANCES PLAY KEY ROLE, ETC.]

Was Einstein efficient? How would you know? Who cares?

Firms have learned costs are easier to compute than value, so they cut the costs in the denominator to improve the efficiency. This is the equivalent of Walt Disney cutting out three of the dwarfs in Snow White and the Seven Dwarfs in order to reduce the inputs, thereby making the resulting ratio look better. Since Snow White contained over 2 million painstakingly crafted drawings, this reduction would have been quite efficient—but hardly effective. The Two Little Pigs probably would have been more efficient, but nowhere near as effective.  [THIS IS A GREAT EXAMPLE THOUGH.  TOY STORY AND OTHER COMPUTER GENERATED CARTOONS ARE JUST AS GOOD BUT PRODUCED AT A FRACTION OF THE COST, ALLOWING THE PRODUCERS TO INVEST MORE AT THE IDEA DEVELOPMENT STAGE AND STILL MAKE MORE MONEY.]

The fact of the matter is, we do not know how to measure the efficiency of a knowledge worker. And this is true for a very fundamental reason, which leads to the second problem with this debate: The Grand Fallacy—that is, the idea that there is such a thing as “generic” law firm efficiency.  [LEAN IS ABOUT LOOKING AT PROCESSES TO SEE WHAT VALUE THEY PRODUCE FOR CLIENTS.  ARE YOU SAYING THAT WE SHOULD BE INDIFFERENT TO THE USE OF TECHNOLOGY IN DOCUMENT REVIEW FOR EXAMPLE, EVEN THOUGH STUDY AFTER STUDY HAS SHOWN IT PRODUCES EQUIVALENT RESULTS AS HUMAN REVIEW FOR A FRACTION OF THE COST?]

There’s No Such Thing As Generic “Efficiency”

Efficiency cannot be meaningfully defined without regards to your purpose, desires, and preferences. It cannot simply be reduced to output per man-hour. It is inextricably linked to what people want—and at what cost people are willing to pay.  [EFFICIENCY, AT LEAST IN THE LAW, IS GREATER OUTPUT--RESULTS.  TO THE EXTENT RESULTS CAN BE PRODUCED FASTER AND AT A LOWER COST, THE LAWYER HAS ADDITIONAL TIME TO INVEST IN OTHER PURSUITS OR OTHER CLIENTS.]

Consider the example of a hammer in a poor country. It’s likely to drive more nails per year, since it’s most likely shared among more people and sits idle less of the time. But that does not make the poor country more efficient; it just proves that capital tends to be scarcer and more expensive in those countries.  [SO WE'D RATHER HAVE LARGE NUMBERS OF EXTRA COMPUTERS FOR EXAMPLE, RATHER THAN TRYING TO PURCHASE ONLY THAT WHICH IS NEEDED?  WE LIKE TO HAVE EXTRA BODIES AROUND FOR THE RARE TIME THEY ARE NEEDED RATHER THAN LOOKING FOR ALTERNATIVE APPROACHES?]

During the Cold War, the old Soviet Union used to boast that the average Soviet box car moved more freight per year than the average American box car. Yet this didn’t prove they were more efficient. On the contrary, it proved that Soviet railroads lacked the abundant capital of the American industry and that Soviet labor had less valuable alternatives to engage in than their American counterparts.

Your automobile is not very efficient, since it’s idle a majority of the time. So what? When you want to go somewhere, it is incredibly effective, since it meets your purposes at a price you’re willing to pay. (I am indebted to Thomas Sowell, and his masterful book, Basic Economics, for these examples).

Princeton economist William J. Baumol asks this thought-provoking question: How would you go about increasing the efficiency of a string quartet playing Beethoven? Would you drop the second violin or ask the musicians to play the piece twice as fast?  [NO, BUT YOU WOULD LOOK AT THE COST OF TRANSPORTING THE MUSICIANS FROM ONE ENGAGEMENT TO THE NEXT, OR THE COST OF PROCURING THE NECESSARY INSTRUMENTS FOR THESE PEOPLE TO PLAY THEIR EXCEPTIONAL LEVEL.  YOU ARE LOOKING AT THINGS FAR TOO NARROWLY.  I DON'T ADVOCATE USE OF LEAN TO CHANGE THE MANNER IN WHICH A LAWYER TRIES A CASE IN COURT, BUT THERE ARE SO MANY OTHER ASPECTS OF PRACTICE THAT DO LEND THEMSELVES TO THIS ANALYSIS.]]

Adam Smith explained how the specialization and division of labor were the major causes of productivity increases and the creation of wealth. However, even some of Smith’s insights are not effective in a knowledge environment. Shakespeare could not specialize in writing the verbs while a colleague wrote the nouns of his many works, even though this would, no doubt, increase “efficiency,” at least given the way firms currently measure that statistic.

Judgment vs. Measurement

Efficiency is always a measurement. Effectiveness, on the other hand, is always a judgment, which is far more important in a knowledge environment. Some of the comments on your blog post support this position, especially Fred Bartlit’s.

There is no generic way to “measure” the quality of legal output; it requires a judgment, based on the results it creates. This is one of Drucker’s major insights about the difference between a factory worker and a knowledge worker. If I’m placing tires on an assembly line it is much easier to measure my quality (and defects) than if I’m a lawyer writing a crappy brief, which will only be discovered by a judgment, usually from another lawyer.

I was hospitalized last year. My surgeon ordered a CAT Scan. The procedure was done very efficiently, as measured by outputs and inputs. I was in and out very quickly, comfortable, etc.

However, when my surgeon saw the scan results he “judged” the radiologist screwed up, didn’t scan far enough down my thigh. The measured efficiency could not inform him of this defect—it had to be judged. This defect led to a much longer hospital stay and other serious complications.

The scan was highly efficient, but it was nowhere near being effective.

I’m all for process, and you mention audits. However, judgment is still superior. Take Enron. The auditors followed the “processes” and the “checklists.” What they didn’t do is apply professional judgment by asking “Do these financial statements reflect the underlying economics of this entity?” The result was an efficient audit that was entirely ineffective. [RON, YOU WRITE AS IF PROCESS AND JUDGMENT ARE MUTUALLY EXCLUSIVE.  THAT MAY BE TRUE IN THEORY.  I CAN ASSURE YOU, HOWEVER, THAT IN THE WORLD MY CLIENTS OPERATE IN, THEY ARE INTEGRATED. YOU HAVE TO PROVIDE GREAT JUDGMENT AT A LOW PRICE.]

Anthony Kearns makes an excellent point when he says: “In law...it will be difficult if not impossible to determine in advance where efficiency in process can be achieved without unsatisfactory compromises in quality.” [AND WITH ALL RESPECT TO MY FRIEND ANTHONY, I ONLY NEED TO POINT TO THE WAY DOCUMENTS ARE PRODUCED AND REVIEWED TO ILLUSTRATE THE FALLACY OF THE CLAIM.]

This is another way of stating what economists have known for centuries: there is no generic efficiency without respect to purpose, and what you are willing to pay.

Anthony also makes another excellent point about expertise driving efficiency (I would say it drives effectiveness), and this supports my argument even more.

When we are undergoing education, we aren’t very efficient as measured by a ratio of outputs divided by inputs. New skills take time to learn, and beginners make tons of mistakes. If all we cared about was efficiency we’d never educate our team members. But the only way a knowledge worker can become more effective is through education, so the cost of less efficiency is a price worth paying.

Scott Irwin’s formula is interesting: Effectiveness + Cost Control = Efficiency.

But I reject this, for the many reasons cited above. Too many companies focus on cost control and efficiency at the expense of effectiveness, which I believe is dangerous. [RON, I JUST THINK THE MAJORITY OF PEOPLE ARE GOING TO REJECT YOUR ARGUMENT THAT WE SHOULD BE INDIFFERENT TO COST.  NO ONE CAN AFFORD THAT THESE DAYS.  BEING FOCUSED ON COST TO THE EXCLUSION OF RESULTS IS NOT GOOD, BUT AS MENTIONED, THEY ARE NOT MUTUALLY EXCLUSIVE.]

Gordon Bethune, former CEO of Continental Airlines, made this very point in his book, From Worst to First. He said Continental’s management culture was totally focused on driving down cost per passenger mile, by piling more people into the planes like sardines, cutting down beverage sizes, taking out pillows, blankets, and magazines, etc. ["TOTALLY FOCUSED"  MY POINT EXACTLY,  IF YOU FOCUS ON ONE OR THE OTHER TO THE EXCLUSION OF THE OTHER, YOU LOSE.  BOTH NEED TO BE PURSUED.]

He wrote “you can make a pizza so cheap no one wants to eat it, and you can make an airline so crappy nobody wants to fly it.” This cost mentality was precisely why Continental filed bankruptcy twice in one decade before Bethune took over and began to focus on effectiveness.  [BUT EVEN THE BEST AIRLINES PAY ATTENTION TO COST, BUYING OIL WHEN IT IS CHEAPER, FOR EXAMPLE, OR HEDGING INCREASED OIL PRICES.]

Efficiency in a law firm, in and of itself, is not a competitive advantage. It’s the equivalent of having restrooms. If your firm isn’t using the latest technological tools that is incredibly inefficient; but if it is using those things, so what? All of your competitors are too.  ["IN AND OF ITSELF."  AGAIN, YOUR OWN WORLDS SHOW YOU ARE CASTING THIS AS EITHER/OR WHEN I CERTAINLY DID NOT AND NO BUSINESS PERSON I KNOW OR HAVE HEARD OF DOES EITHER.]

The differences in firm revenue and profit cannot be explained by efficiency, only effectiveness in customer service, as well as the ability to create, communicate and capture value. Efficiency is a table stake—the minimum you need to be in the game.

Competitive advantage is built on effectiveness, not efficiency.

It’s not very efficient for Nordstrom to have pianos in its stores, as it lowers sales and profit margin per square foot (the efficiency metric for retailers). It is, however, incredibly effective to serenade your employees and customers everyday, creating an ambiance they want to come back for.  [BUT THEY DO HAVE PIANISTS ONLY DURING PEAK HOURS, NOT EVERY HOUR THE STORE IS OPENED.]

The ultimate manifestation of the efficiency mentality was Robert McNamara, president Kennedy’s secretary of defense from 1961 to 1968, thereafter becoming president of The World Bank. McNamara was an accounting instructor at Harvard Business School before World War II, then he served as a specialist in operations research projects with the U.S. government during the war. After the War, he was hired by Henry Ford II—along with the so-called Whiz Kids—to revitalize the sagging profits of the Ford Motor Company.

He brought a mechanistic mind-set to the War in Vietnam, trying to micromanage it by the numbers. He apologized for this ill-conceived strategy in his 1995 autobiography In Retrospect: The Tragedy and Lessons of Vietnam.

Blindly relying on measurements can obscure important realities. The ultimate problem with numbers and measurements is what they don’t tell us, and how they provide a false sense of security—and control—that we know everything that is going on. I think the mentality among many leaders in professional firms is “If we can’t manage it, let’s measure it.”

What is the Purpose of a Law Firm?

What are firms trying to accomplish? What is the goal? Is it simply to crank out more work per labor hour?

If that’s the case, then under the hourly billing model their revenue actually decreases. That seems ludicrous.

Is it to crank out more work per labor hour to increase firm capacity? For what purpose? To add more “F” customers? That, too, doesn’t make much sense.

As Kurt Siemers, CEO of Kennedy and Coe, LLC (a Top 100 accounting firm) says:

And since becoming more efficient is a zero sum game over time, we have been left with working more hours to earn more. The historical business paradigm of our profession found itself on a collision course with our commitment to the well being of our people.

Simply stating that a firm wants to be more efficient is meaningless. They need to define what they are trying to accomplish long before they can begin to consider the best way to achieve their objectives. This is, I believe, precisely what Fred Bartlit is saying, which I agree with wholeheartedly.

The ruthless quest for increased efficiency contains within it a grave moral hazard. It’s encouraging behavior from firm leaders that is driving out creativity, innovation, dynamism, customer service, as well as talent from the professions.

I know you are a big fan of Total Quality Service, Pat. So are we. In fact, I came to Value Pricing through TQS, as the hourly billing method is a lousy customer experience.

The giants in TQS, thinkers such as Karl Albrecht, Stanley Marcus, Walt Disney, J.W. Marriott, among many others, didn’t have much use for efficiency, knowing that dealing with people requires effectiveness. Karl Albrecht criticized TQM, Six Sigma, etc., for this very reason, and thought the mechanistic mentality it fostered killed customer service.

Doing the Right Thing, not Doing Things Right [IT SEEMS WISER TO ME TO DO THE RIGHT THINGS THE BEST WAY, OR AT LEAST A BETTER WAY.]

Forget about efficiency. Worry about effectiveness. [IN MY WORLD, RON, I HAVE TO WORRY ABOUT BOTH.  IF I DIDN'T, I WOULDN'T HAVE CLIENTS.]

Better still, focus on efficaciousness; meaning having the power to produce a desired effect. This term is used to describe the miraculous power of many drugs since it suggests possession of a special quality or virtue that makes it possible to achieve a result—exactly what we are trying to accomplish in law firms for customers.

In an intellectual capital economy, and within firms, where wealth is created using the power of the mind—as opposed to the brawn of the body—these characteristics better explain the value created by knowledge workers.

Yet all of the so-called “efficiency” metrics and protocols such as Lean and Six Sigma have their origins in the late 19th century time-and-motion studies for manual laborers in factories, not knowledge workers who don’t work to the rhythms and cadences of an assembly line.

Firm leaders need to stop looking at input-output tables based on labor hours. Rather, they should define what their purpose and strategy is so to be different than the competition in order to command premium prices.

I believe lawyers are more artists than technicians. By all means, put processes in place for the low value work that can be streamlined and is repetitive. But when it comes to the thinking, strategy, synthesizing information, and creating results, use your minds, creativity, expertise, wisdom, and judgment. [PART OF WHAT WE DO IS ART. BUT PART IS PROCESS AND CREATING CONTENT.  THOSE ASPECTS ARE VERY AMENABLE TO PROCESS ANALYSES LIKE LEAN.]

I can increase an artist’s “efficiency” by providing them with paint-by-the- numbers kits, but it will produce crappy art.

Do I have a higher opinion of lawyers than do those who have commented on this board?

What is Superior to Lean/Six-Sigma?

It’s one thing to light a candle in the darkness and point out flaws in the status quo, a function incredibly valuable if we are to improve our theories.

However, it’s also important to offer an alternative to the present darkness.

A Professional Knowledge Firm is not a factory, which is why I believe Lean and Six Sigma are the wrong talisman. Companies such as Google and Apple don’t use these tools; Southwest Airlines doesn’t even use them.  [BUT SOUTHWEST MORE THAN MOST ANY OTHER BUSINESS I KNOW LOOKS TO STRIP OUT "STUFF" THAT DOES NOT IMPROVE THE CUSTOMER EXPERIENCE, WHICH IS THE VERY DEFINITION OF LEAN.]

As a knowledge worker, I have seen far too many firms implement this type of thinking, turning their artists into a caricature of Charlie Chaplain in Modern Times, getting sucked into efficiency metrics, quotas, etc. I believe the price we pay for this is a lack of focus on effectiveness and customer service.

I, for one, don’t want to work in an organization that has a ruthless focus on efficiency. It’s not very inspiring or meaningful.

We offer the following cognitive tools as superior to Lean/Six-Sigma in a Professional Knowledge Firm:

* Key Predictive Indicators—measuring the success of the law firm the same way the customer does;
* Before and After Action Reviews—a concept developed by the U.S. Army and one of the most innovative tools that can be used in a PKF.
* Knowledge Management—knowing what a firm knows so it can be leveraged is one of the most effective ways to create wealth for customers.
* Project Management—we believe this is a critical skill for all firms, no matter how they price, even if by the hour. PM looks forward, planning capacity, resources, risk, etc. Timesheets look backwards. Timesheets have allowed firms to do a lousy job on PM (not to mention capturing value through more strategic pricing). By the time you see a problem on the timesheet, the milk has been spilled, the damage already done. [I AGREE WITH ALL THESE CONCEPTS, NONE OF WHICH ARE FUNDAMENTALLY AT ODDS WITH THE CORE CONCEPTS OF LEAN.  AGAIN, THEY ARE NOT MUTUALLY EXCLUSIVE.]

I have one final question: Is this debate efficient? What are people putting on their timesheets when they participate in these types of Social Media discussions, which are quite time consuming?

I don’t think this is efficient at all.

I do, however, find it very effective.

[ARGUMENTS IN COURT ARE RARELY EFFICIENT, TOO.  NOT EVERY MOLECULE OR BREATH OR ARGUMENT NEEDS TO BE EFFICIENT OR EFFECTIVE.  TRYING TO FORCE EVERYTHING INTO ONE CATEGORY OR ANOTHER IGNORES THE REAL WORLD.

RON, WHEN WE FIRST MET, I ASKED YOU HOW YOU WOULD APPLY YOUR VALUE PRICING MODEL IN THE CONTEXT OF A CLIENT WHO HAD JUST RECEIVED A COMPLAINT AND WAS LOOKING AT 3 LAW FIRMS WHO WOULD HANDLE IT, TWO OF WHICH WERE PROPOSING SPECIFIC BUDGETS.  IN MY WORLD, THAT PROPOSED PRICE WOULD BE WHAT THE CLIENT LOOKED TO AS THE BOGEY YOU WOULD HAVE TO MEET OR BEAT.  INSTEAD OF RECOGNIZING THAT REALITY, YOU SHIFTED THE DISCUSSION TO THE THEORETICAL BENEFITS OF VALUE PRICING, MUCH AS YOU HAVE DONE IN THIS DISCUSSION BY FOCUSING ON ONLY CERTAIN ASPECTS OF WHAT LAWYERS DO.  REALITY IS TOUGH THING TO DEAL WITH, BUT IN POSTING ABOUT THE POSSIBLE VALUE OF LEAN TO CLIENT SERVICE, I WAS SUGGESTING THAT LAWYERS WOULD BENEFIT FROM A CRITICAL ANALYSIS OF THE MANNER AND PROCESS BY WHICH THEY HANDLE ALL ASPECTS OF MATTERS FOR CLIENTS.  THIS DISCUSSION HAS ONLY REINFORCED MY VIEW OF THE VALUE TO THAT CRITICAL ANALYSIS,  QUITE FRANKLY, I CANNOT BELIEVE THAT ANYONE REALLY BELIEVES THAT ACHIEVING GREAT RESULTS WITH INEFFICIENT PROCESSES AND WITHOUT CONCERN FOR COST IS PREFERABLE TO ACHIEVING THE SAME GREAT RESULTS EFFICIENTLY AND AT A LOWER COST. ]

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Certain posts from In Search Of Perfect Client Service are posted on the Legal On Ramp discussion board.  The comments by fellow "rampers" on my two recent posts on Lean, Lean Client Service and Update on Lean: Ron Baker Takes Issue have been so interesting that I am taking the liberty of posting them here;

From Anthony Kearns, National Risk Manager for the Legal Practitioners Liability Committee (LPLC),  a non-profit statutory insurer that provides first layer professional indemnity insurance to Australian law firms:

Patrick,

Kudos on bringing up Ron.

A couple of points:

From what I understand Toyota doesn't employ lean production in their engineering department although they are fantastic at project management so this fits with your apply the right tool to the right "bucket" theory.

Lean production was developed for an industry with sophisticated error management systems already in place. Even more importantly, there were well defined production standards against which output could be measured. In law we have neither of these so it will be difficult if not impossible to determine in advance where efficiency in process can be achieved without unsatisfactory compromise in quality.

So, again we come back to quality.

Efficiency in professional services comes from expertise. Expertise can be developed more efficiently than we do at the moment through effective education and (somewhat ironically) better error management. Lean production may have to wait until all this has been achieved.

From Fred Bartlit of Bartlit Beck:

Experience has shown that increased efficiency almost always results in increased quality

So, 6 Sigma does, to me, have lot of application in litigation firms

From John Brown of Brown Law Firm:

I join Pat in disagreeing with the contention that applying ‘lean’ to a knowledge firm, where efficiency in professional services comes from expertise, runs the risk of creating bad results efficiently.
I’ve seen data that ‘discovery’ can constitute 80% of the cost of litigation, and well over half of that cost can be tied up in document review if there is a significant amount of electronically stored information.
To produce a good result for the client requires the application of trial experience and judgment to ‘process’ discovery information in a way that strategically positions the matter for trial, with evidence that will bear on the ultimate issues developed with the right weight and emphasis to create leverage for a successful resolution by way of verdict or settlement.
The ‘value billing proponents’ have properly noted that in traditional hourly billing engagements there is an economic incentive to employ a linear, checklist-issue spotting, turn over all the ‘discovery rocks’ process that might arguably perfect outside counsel recommendations but in reality gain the client very little advantage in the litigation.
It is worth noting that the value billers want to be judged on results, believing that a ‘leaner process’ that focuses on development of evidence around the key issues that will impact a trial result and create settlement leverage is superior to a much broader, more diffuse undertaking of sorting through all possibly relevant information in a way not cost-effective for clients.
In that sense a ‘lean’ focused process is more likely to lead to successful results.

From Scott Irwin of International Paper Company:

I've always viewed "efficiency" according to the following formula:

Effectiveness + Cost Control = Efficiency

The error pundits usually commit when arguing that productivity tools such as Lean, JIT and Six Sigma don't translate well to knowledge-based service firms is they tend to focus on only part (typically, Effectiveness) of the foregoing equation. While its true Effectiveness is a far more objective, statistically-measurable criteria in the manufacturing context, this does mean Effectiveness cannot (and, therefore, need not) be measured in the knowledge context. There tends to be less disagreement on the susceptibility of the Cost Control criteria to quantitative evaluation and improvement. Nevertheless, the (incorrect) assumption that the Effectiveness criteria does not lend itself to quantitative evaluation and improvement seems to be what prevents (or, more properly, excuses) otherwise intelligent, well-intentioned professionals from achieving their highest capacity for Efficiency.

More from Fred Bartlit:

1. Turns out that same changes that increase efficiency also have even greater impact on "Effectiveness/results"

That is because inefficiency is caused by relying on inexperienced associates. Efficiency results from using highly experienced trial lawyers with few, if any, rookie associates on the team

Experienced lawyers get better results than inexperienced lawyers, of course

2. And, effectiveness/results are quite easy to measure.

Several approaches: First, decide early on what is a good result. Size of verdict, beating injunction, size of settlement, etc

Second: have bonus hang on results achieved at end of matter when results are fully known and there is no issue of uncertainty

I hope you find this discussion as interesting as I do.

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Ron Baker is one of the leading thinkers on the issue of value billing.  I take what he says very seriously.  In response to my previous post on Lean Client Service, Ron posted a comment.  Because comments tend to get buried or lost, I wanted to share his comment and offer a further thought.  Ron commented:

Hi Pat,

This is an enormously contentious issue. I don't think Lean (or Six-Sigma) is relevant in a knowledge firm, where the talisman should be effectiveness, not efficiency. There's an enormous difference between these two.

I have seen many professional firms attempt to implement Lean. Yet it was invented for manufacturers, not knowledge firms. Google and Apple don't use it, for a good reason. It's too focused on efficiency and not effectiveness. Lean would never argue for 20% Google Time.

If you want to read the debate on this issue, see:

http://www.verasage.com/index.php/community/
comments/book_review_is_mayo_clinic_efficient_
or_effective/

http://www.verasage.com/index.php/community/
comments/was_drucker_wrong_about_knowledge
_workers_a_book_review/

Regards,
Ron Baker, Founder
VeraSage Institute
www.verasage.com
Twitter @ronaldbaker

While I admire Ron greatly, I disagree with him on this point.  Some part, indeed for many, a significant part, of what knowledge workers do is process.  Accountants, for example, who do an audit, follow a series of protocols and procedures to ensure the process is consistent and complete.  So too for a review of a tax issue.  The same also holds true in a lawyer's world.  Transaction documents, while not templates or boilerplate, do address common issues.  Most lawsuits involve collecting documents and reviewing them.  All matters can benefit from sound project management skills.  And so forth.

As my friend Jeff Carr, the GC of FMC Technologies, has described, in the practice of law, there are four buckets: process, content, advocacy and counseling.  It seems clear to me that there is a qualitative difference between process and content, on the one hand, and advocacy and counseling on the other.  Process and content seem perfectly situated for application of lean principles.  Consistent with the desire to reduce cost whenever possible in order to maximize profit margin, I think it valuable to look for opportunities to apply these principles.

The "knowledge workers are different" argument is a good one on many levels.  We want our surgeons to be good, not necessarily fast.  We want lawyers who get good results, not bad results efficiently.  But a lawyer who gets good results efficiently is more valuable than a lawyer who gets the same results inefficiently.  So the argument breaks down, or at least is inapplicable, at some level.

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I was listening to NPR today.  There was a story about how Congress could not work on climate change legislation because it was focused on the health care debate.  It reminded me of a time when I asked a colleague if we could schedule a meeting to discuss a new case, only to be told that the lawyer was not available for the next month because he was writing a brief.  He was serious.  And it wasn't a big deal brief.

So my question is this:  aren't we supposed to be able to walk and chew gum at the same time?  Or are those who can keep several balls in there just "special."

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Wikipedia defines "lean" this way:

Lean manufacturing or lean production, which is often known simply as "Lean", is a production practice that considers the expenditure of resources for any goal other than the creation of value for the end customer to be wasteful, and thus a target for elimination. Working from the perspective of the customer who consumes a product or service, "value" is defined as any action or process that a customer would be willing to pay for. Basically, lean is centered around creating more value with less work.

That, my friends, is an incredibly powerful idea. 

During the summer, I had occasion to visit with someone who is a lean expert.  He explained that there are seven points of waste that must be analyzed in every production or service scheme.  They are highlighted in the graphic. Lean is routinely applied to service offerings and can easily be applied to the practice of law, ranging from a particular lawsuit to litigation generally (or other practice areas too) to the entire operation of the firm. One might view a brief written by a rookie associate that is completely redone by a senior associate before being edited by a partner as wasteful.  If the error happens too frequently, perhaps the first draft should be done by a more senior person.

I am not suggesting answers--we're still trying to come up with lean processes at Valorem.  But I am suggesting that the process, the questions and critical analysis, should be implemented in law firms. 

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Earlier today, I wrote about the "efforts" of Reed Smith, Mayer Brown and O'Melveny to "transform" themselves by offering their clients alternative fees.  The reality is that the firms weren't really doing anything.  They simply had formed committees to look at alternative fees.  Of course, anyone who has ever been in a big firm knows that committees are formed when somebody needs a place to send an idea so it will die.  My cynical view was these moves were simply PR.

Now a striking example of how the PR machine works.  Ashby Jones of the Wall Street Journal Law Blog wrote a post today, Is The Billable Hour Dying? Here's More Evidence That It Might Be. This, of course, begs the question of whether forming committees to look at an idea is evidence that the status quo is changing.  How happy do you think the marketing pros at Mayer Brown and Reed Smith are at the moment?  They haven't actually quoted a single alternative fee and the Wall Street Journal is now treating them committed players in the area.

Ashby Jones is a terrific reporter, but he got this one wrong.  The story about Merck actually doing something with its firms is a story.  Forming committees to "study" the issue is not a story.  The only real story would be to identify those firms that are not, at this moment, studying the use of alternative fees.  The story there would be whether those firms have what is needed to survive.

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A lot of people have been wondering whether we had reached a "tipping point" on alternative fees and there is some evidence that we have.  You see, when BigLaw starts talking the talk, it means they are playing catch-up.  In the past few days, if you believe the headlines, Reed Smith, Mayer Brown ("Mayer Brown and Reed Smith set to champion fixed fees")and O'Melveny ("new business model") have all made the jump.

In our "only headlines matter" world, these headlines suggest tectonic change.  But what's the reality behind the headlines?  It's an important question, since firms won't deliver headlines to their clients, they will be delivering invoices.  And if the invoices don't change, all the talk in the world won't amount to anything.

The Mayer Brown story is easy to dismiss.  According to the story:

Mayer Brown's senior management is in the process of reviewing how the firm bills clients and is considering proposals to overhaul fee structures for core transactional practices including corporate, banking and real estate.

So as I read this, the fact that Mayer Brown is thinking about changing its fee structure is newsworthy.  Frankly, any firm that isn't at least  thinking about changing its fee structure these days is too stupid to continue to exist.  And it also bears pointing out that Mayer Brown's review is limited to transactional areas.  Most clients, however, acknowledge that litigation is the area of greatest need of fee change.

Reed Smith is in much the same boat. Again, the story is pretty clear:

Separately, Reed Smith has also been looking at changing fee structures within its transactional practices. The firm has a committee made up of partners from across the firm reviewing proposals and is looking at an increasing use of fixed or capped fees for clients within its financial industry group (FIG), corporate and real estate practices, for transactional work.

A committee is studying the issue.  Wow.  Aren't we impressed. 

The O'Melveny story is more interesting, because the firm at least understands that if anyone is going to really believe its changed its stripes, it is going to have to use the language of "business model change."  So it does.  But do the announced changes really change the business model?  Here's the telling lie:

What changes have to be made to address these new realities? For one thing, the firm wants lower associate-to-partner leverage. O’Melveny plans to reduce its leverage to “as low as 2 to 1 in some practices,” although this “will be partially offset by increases in charge hours and by fortifying associate and counsel quality.”

The essential element of alternative fees that actually work is that they shift risk to law firms, meaning the value changes from leverage and body count to experience and fewer bodies.  More brain power, less body count.  So a goal of reducing leverage "in some practices" to "as low as" 2 to 1 will make anyone experienced with alternative fees laugh out loud.  O'Melveny might as well take out a full page advertisement saying it really won't be changing a damn thing.

I have written before that it is not possible to be both an alternative fee firm and a billable hour firm.  I've also written that I didn't think BigLaw could make the necessary change to become alternative fee firms.  I offer these two stories as Exhibits A and B in support of my hypothesis.

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Valorem created an Advisory Board in May. The first meeting of the Advisory Board was Tuesday.  It was well-attended (7 of 10) and was incredibly valuable.  There really should be a better adjective--it was that good.  We are so very thankful to our Board for their time and input.  But my message here is simple.  If your firm doesn't have an Advisory Board, create one.  Every firm and every firm leader can benefit from advice and ideas from people with a different viewpoint and different background.

Let me offer just one insight.  Everyone can mouth the platitude that you need to think like your client and give your client what he or she needs.  But what does that really mean?  Perhaps you could use your advisory board to put some meat on those bones.

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A couple of days ago, I wrote a post about lawyers refusing to take a position on something.  I've gotten a lot of nice comments on ...and on the other hand ... and wanted to follow up with a short but important point.  When you figure out what your real point is, the one hand you want the client to know about, express yourself succinctly.  I was reminded of the importance of something I take for granted by Dan Michaluk's post, The case for short legal communications.

One of the great things about my early legal career was starting at Katten Muchin when its primary clients were young entrepreneurs, like the firm's founders.  I remember frequently being disappointed that we didn't have institutional clients who had in-house counsel.  In retrospect, I count myself fortunate to have dealt on a daily basis with the men and women who owned and operated the businesses that came to Katten for representation.  In that circumstance, we learned quickly that multi-page memos analyzing arcane legal issues and tangents would be met with derision.  The clients wanted an answer and a reason, and if your thinking did not make sense in the context of their business, your time with the firm would be short. 

You had one paragraph to state the issue, and the answer.  You had a second paragraph to state your reasons.  Everything else was waste in the eyes of many of the clients.  As I've aged, these lessons of my youth have served me well.

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When  speak before groups that include in-house lawyers or business people, I always ask at what level of certainty business decisions are made.  The answers tend to range from 40% to 60%.  There have been lower numbers, but I can't recall any that were higher.  A high degree of certainty is a luxury most business people don't enjoy.  I always follow-up by asking what degree of certainty outside counsel operate at.  Interestingly, the most frequent numbers from both outside lawyers and inside lawyers is 90% or 95%.

I won't go into an analysis of the personality traits that drive lawyers to this level of certainty.  They have been discussed elsewhere and often.  The question that nags me, however, is why clients tolerate the lawyers spending time and treasury to achieve that level of certainty.  Certainly it is appropriate on some matters.  But on most ordinary, day-to-day matters, why not operate at the same level of certainty as the business does normally?  And the corollary is how much extra has to be invested to get from 60% certainty to 90%? 

I wish there was data on this later point, because my suspicion is that the data would show the a disproportionate share of the cost comes in the effort to move from 60% northward.  In other words, it sure seems that the cost per unit of certainty increases as the level of certainty increases.

If my surmise on cost is correct even most of the time (exceptions to every rule), and businesses are happy with decisions made on a 60% level of certainty, the excess cost being paid is substantial, albeit unquantified.  So if an inside lawyer wants to have her outside counsel operate at a lower level of certainty, how is that accomplished?  There is, of course, a trust issue.  Inside counsel will have to acknowledge that some key facts might not be learned if depositions or document review are limited.  Likewise, if the chance of summary judgment is 25%, some summary judgments that would be won won't be.  The key, it seems to me, will not be persuading inside counsel to run these risks.  Instead, the key will be getting everyone on board as to what will be done and what will not be done.  After a few cases, these meetings should hopefully become routine. 

The specter of having to invest time to save it may prove an impediment to change.  But given the magnitude of savings that could be realized with this kind of change, perhaps it is worth it.

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I love this article.  Not because it mentions my friend and client, Jeff Carr (it quotes him liberally). Not because it mentions Valorem (it does).  Not even because it ends by quoting my tweet (it does).   I love it because of this sentence:

"Alternative fee arrangements are like teenage sex. There's a lot more people talking about it than doing it—and those that are doing it don't really know what they're doing," says one industry observer.

You need to analyze this teenage sex comment is the context of this point:

Law firms are certainly partly to blame for the slow pace of change. Michael Dillon, general counsel of Sun in Santa Clara, California, says that as recently as a year ago, virtually whenever he suggested an alternative fee structure to a law firm, he "would get blank stares, or a list of reasons they didn't think it was possible." Lawyers being lawyers, even those that do agree to a flat fee in theory will sometimes build in so many caveats and exceptions that it's no longer a flat fee, says Legalbill's Mukerji.

Another major hurdle is the way law firms are structured. Since the 1960s, law firms have billed by the hour and lawyers—especially associates—are evaluated largely based on how many hours they bill. Billing a matter on a flat fee basis can create a disconnect between a firm's earnings on that matter and how it values the associates that work on it. Most lawyers also are not schooled in putting together a budget except for the most routine of matters, and law firms have been slow to collect and analyze the needed data.

Firms have not been doing alternative fees, at least until recently, and are not properly structured or culturally aligned in order to generate the real savings alternative fees are capable of providing.  Yet these alternative fee novices now claim to be offering alternative fees.  Let's put aside the teenage sex braggadocio and assume that firms really are offering alternative fees free from the caveats and exceptions that make them worthless. How can a firm that for decades has been culturally committed to maximizing hours suddenly be proficient at a model designed to minimize hours?  Better yet, how can a firm where some people are supposed to bill the most hours possible culturally support a fee arrangement intended to minimize the number of hours spent?

It can't be done.  It's that simple--it cannot be done.  So how are these pretenders trying to get by?  One of three ways only.  One, the firm is so desperate for revenue that it is following the "any port in the storm" theory--take whatever work you can get now and sort it out later.  Two, it is following the "figure-out-the-number-of-hours-and-multiply-by-our-rates-and-add-a-cushion" approach, which builds in all the expected profit and more, leaving inside lawyers wondering where the value is.  Third, the client has data, has mined it and is telling its lawyers what the client will pay, a slight variation on the "take-it-or-leave-it" approach.  But absent structural change, firms following theories one or two are wannabes at best and will bail on alternative fees at the earliest possible moment.

Jeff Carr says the industry can't go back:

"We're at a tipping point," Carr says, "As alternative fee arrangements become more mainstream, it will set the industry on a path that is, thankfully, irreversible."

There are a lot of large firms hoping he's wrong.  And I hope they keep thinking this change is a temporary blip.

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My friend Ed Reeser has written extensively, in blogs, Legal On Ramp posts and articles, on leadership issues in law school.  If you know Ed, you know that he is the kind of person who leads from the front and he is the kind of leader you love to follow wherever he goes.  So when he writes about leadership, I read very closely.   His latest piece, The Lost Art Of Leadership, published in today's Los Angeles Daily Journal, is worth a careful read.

Ed begins with one of my favorite Peter Drucker quotes, "Management is doing things right; leadership is doing the right things."  The gist of Ed's argument is that law firm leaders have failed this essential test of leadership; they have lost touch with the people that make up the firm, and in so doing have brought the firm to its knees.  People are the real key, and they are being sacrificed in the name of expediency.  According to Ed:

Partners in leadership positions are increasingly not leaders, but those with enough power to demand positions and allocate to themselves, and their friends, increasing shares of money and other rewards.  The confusion of the position of leader, with the fulfillment of the role of  a leader, has never been more apparent.  The short-term approach of present day law firm management appears to have more in common with a smash and grab visit to a Tiffany's counter than exercise of fiduciary concern for one's partners or a long-term responsibility for colleagues' careers.

Harsh, to be sure, but true?  This is an area where there is no "right" answer and no data to suggest an answer.  But let me share this anecdote.  I just returned from lunch with two of the leading and most respected law firm consultants in the world.  I assumed their business was booming because certainly in these trying times, leaders would be looking for insights and a sounding board to discuss new ideas and approaches to bring their firms back to economic rightness.  Nope, not happening.  I suppose its possible that firms really are seeking insights and fresh ideas, but have simply gone to other consultants.  Not likely though. Instead of saving careers and being a true leader, isn't it much easier to eliminate a few jobs and cut back on coffee?

At the end of the day, it is, perhaps, too much to expect that most people running law firms would act as true leaders.  Real leadership, after all, is really one of the rarest traits.  That is why we so marvel at it when we see it.

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Accountability and law firm leadership (actually, management more accurately describes what goes on at most firms) are words rarely used in the same sentence, paragraph or conversation.  I decried the lack of accountability last March in my post, Who Is Accountable For The Lack of Vision?.  This morning's AmLaw Daily contains a wonderful article by my friend Ed Reeser, On Law Firm Leadership and Accountability.  It is a must read for every partner in a large law firm.  Those who lead the firm (or at least make management decisions) should read it for the challenge it poses to them.  The rest of the partners should read it for the novel idea that those who lead actually should be accountable instead of anointed.

Ed comes at this issue with a great deal of credibility, having lead the Los Angeles office of an AmLaw 50 firm.  Ed does not suggest that so-called leaders who fail their partners should be booted from their positions.  His suggestion is far more reasonable:

The partners, including leaders, should respectfully require ALL persons in positions of leadership at the firm, as a group, to proportionally reduce their compensation in 2009, and again in 2010, by enough to bring all other capital partners to projected partner compensation levels announced at the end of 2008/beginning of 2009, should operating performance not be sufficient to reach those income levels, up to a maximum reduction of 20 percent of compensation for Leadership Partners. A lesser percentage doesn't have enough incentive, and more seems too great a disincentive to good leaders to step up. Build in incentives for superior performance if necessary....but survival of your firm should be enough for true leaders.

What happens if leaders (self-styled, no doubt) fail or refuse to rally behind an idea like this?

If Leadership Partners cannot, or will not, it tells all of partners something they are better off knowing now, and not later: Whether the leadership of the firm exists to promote the betterment of the firm and the partners, or whether the firm and partners exist to promote the betterment of the Leadership Partners. The process will deliver a budget that will finally confront reality, the first step in developing a business plan that works, and a budget everyone can believe in!

The partners of firms are not getting performance which as shareholders they deserve, and have been promised. Leadership Partners, it is time to lead your people, by walking behind them. This may be the last chance for leaders in many firms to make a right decision.

Real leaders lead from the front.  If a firm's leadership can't commit to this simple concept, they reveal themselves to be anything but leaders.

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Mike Roster, the head of the ACC Value Challenge and a former GC and outside lawyer, just relayed a story in a post on Legal On Ramp.  Here's the story:

I once was at a board meeting with a director who had been a CEO of several major public companies. We had just heard a presentation by lawyers from one of the nation’s most prominent law firms. At the end of the lawyers’ presentation, this director said, “Now that you’ve done all your hand-wringing – which I know makes you feel good – and have shown us how smart you are, why don’t you tell us what you actually recommend?”

I have heard similar stories many, many times.  And I have to confess, I have never been able to understand the penchant of so many to count angels on the head of the pin and then refuse of offer meaningful advice.  A client has an inherent, unqualified right to know what his or her lawyer thinks, what the lawyer would decide if he or she was the "decider."  Sure, it can be a close call with no sure right or wrong answer.  I'm sure client's react by saying "easy decisions never make it this far north in the organization and we live with incomplete information and uncertainty every minute of every day. Welcome to my world, now get over yourself and TELL ME WHAT YOU THINK."

It is amazing that lawyers don't have their hands cut off just so they can't say "on the one hand ..."

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"If I hire a plumber to renovate my bathroom, I want to know what his time and materials are!" [GC, major corporation] "Don't you really just want a nice bathroom?" "But I don't want to be taken for a ride."

THIS IS WHY YOU GET COMPETITIVE BIDS.  BUT TELL ME, WHY DO YOU CARE HOW FEW HOURS IT TOOK IF THE RESULT IS A GOOD ONE?

"How do I know I'm saving money with a fixed fee? Isn't the law firm just going to take the opportunity to pad their bill even more?" [GC, major corporation #3]

FIRST, MINE YOUR INTERNAL DATA SO YOU KNOW WHAT YOU EXPECT IT TO COST.  SECOND, ASK TO SEE A DETAILED BREAKDOWN OF HOW THE NUMBER WAS ARRIVED AT.  IF BASED ON HOURS AT ALL, IT SHOULD START AT EXPECTED HOURS AND WORK DOWN--CONSIDERABLY.  THIRD, LOOK AT THE MODEL OF THE FIRM.  SEEK FIRMS THAT ARE BASED ON EXPERIENCE AND HAVE A TRACK RECORD. FOURTH, MAKE SURE YOUR LAWYERS HAVE SIGNIFICANT SKIN IN THE GAME.

"Lawyers are risk-averse; we know that. So if they have to quote a flat fee, they'll estimate how many hours it will take and add a safety margin. I'll end up paying even more!" [GC #4]

THIS IS THE APPROACH MOST BIG FIRMS TAKE TO FIXED FEES.  GIVES THEM A BAD NAME BECAUSE FIRMS DON'T TAKE RISK.  GET COMPETITIVE BIDS FROM FIRMS WHOLLY COMMITTED TO ALTERNATIVE FEES.

The most critical point, here, is that most companies have significant data, or can access significant data through other companies based on personal and professional relationships.  On most matters, you should have a good idea on what a matter has cost in the past.  That should be the starting point for a downward negotiation.

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But let's not get to the point where we're mocking folks who are trying to move in the "right" direction. At one point you say you can't move from fish to fowl overnight, so don't mock the baby steps. Maybe right now they don't "get" that they need to squeeze out those 200 hours on every engagement, but aren't these steps in the right direction? All the writing I've read on shift to fixed fee billing suggests it's hard, and there will be missteps along the way. At some point, aren't these stories showing a glimmer of recognition?

From a comment to my post on the  Wall Street Journal article on the billable hour.

If the steps discussed in the WSJ article are, in fact, in the right direction, the commenter is correct that these steps should be applauded, not mocked.  After all, the journey of a thousand miles begins with a single step.  Point well made and taken.  So the question becomes, are these fledgling steps in the right direction?

It is, of course, impossible to tell at this nascent moment.  After all, how does one look into a man's soul and know what he really believes.  So I don't know, but I suspect, and would wager some real money on this (the lottery tonight is $250 million and I know I have the winning ticket), that what we are seeing from most of the firms identified in the Wall Street Journal article is window dressing. 

Why do I believe this?  First, there is incredible pressure on large law firms to get revenue in the door any way possible these days.  Overhead has to be covered.  So when you have people sitting around twiddling their thumbs, it no longer matters if they work at a comparatively low effective hourly rate so long as they are generating revenue.  So it is economically easy to  perform fixed fee work when the alternative is sitting around doing nothing.

Second, I don't see any structural changes in these law firms.  Working under a fixed fee arrangement places a premium on experience, not body count.  More time is worse than less time.  You've got to put people through a re-education process: everything they have been taught to value suddenly isn't very important.  People have to learn to evaluate risk--their own risk--on operate with a level of uncertainty they have never dealt with.  Not only not easily done, but it cannot be done if a person is given one fixed fee assignment while they have other hourly rate assignments. Picture the spinning heads of the fembots in Austin Powers.

Third, people like Fred Bartlit and other experienced observers of the profession, for whom I have enormous respect, don't see real change here.

Last, I don't think one takes baby steps into a paradigm shift.  You either are fish or you are fowl.  You cannot be both.  Having spent 25 years in firms laboring under the billable hour model, including 18 years at an AmLaw 100 firm, and now having spent almost 2 years at a non-hourly firm, that is what I believe.

Bottom line, when I see evidence of earnest change, I'll stop my mocking.  Until then, I can't control myself.

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John Kotter, author of A Sense Of Urgency and a professor at Harvard Business School. He is considered by many to be an authority on leadership and change.  Those words are not spoken often in the context of the business of law, so it is not surprising that Kotter's recent interview on the topic of leadership and change is in Inc. rather than a legal publication. But as a believer that what is good for business is good for legal business too, I wanted to draw attention to Kotter's discussion of urgency.

From the introduction to the interview:

Kotter believes there are two kinds of urgency -- and, like cholesterol, one is good and one is bad. The good kind is characterized by constant scrutiny of external promise and peril. It involves relentless focus on doing only those things that move the business forward in the marketplace and on doing them right now, if not sooner. The bad kind -- to which many companies have recently succumbed -- is panic driven and characterized by breathless activity that winds up producing nothing demonstrably new.

Kotter advises leaders to stamp out the bad urgency, which demoralizes and drains people, and use the -- dare we say it? -- opportunity of the economic crisis to remake their organizations with a lean and hungry look. And he encourages them to sustain that newfound urgency even when flush times return.

Kotter does not believe that actions of most business since the recession hit are positive:

Many companies probably think they're responding with urgency, and there are certainly a lot of people running around trying to come up with solutions. But most of that activity is going to be ineffectual, because it is driven by a fear of losing. It's not that gut-level determination to win and to make absolutely sure that they do something every single day to keep pushing that goal forward. That's true urgency.

The "frenetic activity" that seems to abound in large law firms these days (at the management level alas) is a sign of "false urgency."  With "true urgency," one expects to see change.

It is a most interesting interview, including Kotter's explanation for why, if the Klingons were attacking, he'd want Kirk in command, not Spock.  My take from it is that Kotter would not applaud the "leadership" coming from most law firms these days.

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Last week, I wrote about corporate America instructing its counsel to make litigation go away rather than spending money defending lawsuits.  Perhaps one way it is doing this is by increasing the use of mediation. Mediation is a good investment of time and money, especially if you get a good mediator.

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I am really annoyed.  I just read a post at Above The Law, Under Attack, Should Billable Hour Be Concerned For Its Safety?  The post concludes with this observation:

It is easy to say that the billable hour doesn't reward efficiency. And clients can demand fixed rate solutions if they want to. But right now the most objective way to measure an associate's contribution to the firm is by looking at hours. Until somebody comes up with a better system that provides some measure of objectivity, the billable hour isn't going anywhere.

The stupidity of this statement is beyond my ability to quantify, but qualitatively, it's pretty damn stupid.  There are, after all, many objective standards employers could employ to judge an associate's performance.  Resting heart rate or breaths per minute.  Distance covered in a 1 minute run.  Shoe size.  Number of suits in his or her wardrobe.  Apartment size.  Critics will say that these things have nothing to do with performance.  I agree, but I say the same is true for number of hours worked.

I am a big advocate of looking at what real businesses do as a way of determining what law firms should consider.  I know of no business that looks at time spent working as a basis of evaluating the performance of a professional employee.  So why should lawyers be treated differently? The answer is because law firm partners have gotten lazy.  Instead of sitting down to meaningfully review the performance of each associate on a substantive basis, which could take hours, why not simply look at a data run?  Hey, that only took minutes.  Lawyers who abdicate their review responsibility do a gross disservice to their associates.  That's sad, but in view of how firms treat associates, predictable. 

Easy vs. effective.  Let's try to keep our eye on the ball.

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The front page of today Wall Street Journal contains an article, 'Billable Hour' Under Attack,that poses more questions than it answers.  Amongst the useful insights:

• corporate spending on flat fees is up 50% over the same period last year
• corporations using flat fees are experiencing 15% average savings over those not using flat fees

But the article contains some stunning quotes that merit some commentary.  Barry Ostrager of Simpson Thatcher is quoted as saying "a client can't expect to have the absolute best team of lawyers from a a firm and have the lawyers give up all the other work they could be doing on a regular fee basis to work 18 hours a day on flat fee engagement."  I'm certain many clients are asking "why not?"  After all, firms like Bartlit Beck and Valorem, as well as others, do this routinely because the focus is on payment for results, not payment for time.  After all, you can spend lots of 18 hour days and if the client doesn't get the results it needs, are the 18 hour days all that meaningful?

There's more.  The article states:

Orrick … has tripled the revenue it generates from alternative billing arrangements …but maintained profitability through efficiencies. … Financial analysts file biweekly reports describing how lawyers’ time is being spent. “You find that someone may have spent 200 hours on something” that isn’t crucial…”

That's great--the firm has added to its overhead to catch the wasted 200 hours, something it apparently did not do before when the client paid for that waste.  But more importantly, if the fixed fee is really working as it should, the firm should have a handle on the work that is going to be done before it is performed so that only necessary work is undertaken.  I've written before how BigLaw doesn't get it when it comes to fixed fees, and that one cannot suddenly stop being a fish and become fowl.  It doesn't work, and this kind of example illustrates the point perfectly.

Then there's this. Saul Ewing, which offers fixed fees only for certain due diligence and Pennsylvania Insurance Department administrative hearings, is featured thusly:

Saul Ewing recently investigated a client’s potential acquisition under a six week flat fee engagement. The matter was handled about 10% more cheaply than it would have been under a billable hour deal. … “It was still fair to the firm because we were incentivized to get done in 10 hours what another lawyer at another firm may have spent 12 hours doing.”

One must immediately wonder about that 17% wasted time under the hourly system and why Saul Ewing could only do it 10% more cheaply.  But Saul Ewing aside, the point is that the firm has just admitted that it can do ABC work on a fixed fee as effectively but more efficiently that it did when it was doing it on an hourly basis.  Why would that same conclusion not hold true for all its work, including the substantial majority of work it is not doing on a fixed fee basis?  Why would any of its clients pay full freight again?

The Wall Street Journal article should provide major impetus for change.  Anyone refusing to at least  discuss AFAs and experiment with them may be having an interesting discussion with the CFO in the near future.

ADDENDUM:  In a post on Legal On Ramp, Fred Bartlit writes:

Another truly hilarious example of paradigm shift science: " Financial analysts file biweekly reports describing how lawyers’ time is being spent. “You find that someone may have spent 200 hours on something” that isn’t crucial…”

This firm is saying "only when we have a financial incentive to be efficient, check for wasted time, do we do this. The rest of the time we make big bucks on inefficiency"

They are openly admitting this b/c they just do not get it.

Fascinating, truly fascinating

That's from someone who used to be at the pinnacle of BigLaw.
 

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In two separate articles, long-time law firm consultant Joel Henning and former GE GC Ben Heineman, Jr. and William Lee, co-managing partner of WilmerHale, have highlighted the plight of the profession borne of the billable hour and the model that creates a ponzie-scheme-like need for ever increasing revenue in law firms.

Henning's article, A Broken Business Model,begins with this observation:

Law firm economics are pretty simple. There are only a handful of drivers of law firm profitability: productivity (billable hours), leverage, realization, expenses and rates. It's self-evident that — for the past decade — law firm profitability increased by upwards of 10 percent annually and even more in some firms. But only one profitability driver was operating: unrelenting annual increases in hourly rates.

Henning then takes the bold step of advocating for opening the legal profession to outside investment, as has been done in the UK:

Moreover, the case against our retrograde regulatory environment is relevant to our hand-wringing about legal costs and the lame law firm business model. University of Southern California Gould School of Law Professor Gillian Hadfield, a lawyer and an economist, argues that regulatory barriers keep us from reducing the high cost of corporate legal services. She suggests that — but for proscriptions against the unauthorized practice of law and our monopoly over certain legal matters — other professionals trained in a variety of disciplines could offer innovative and efficient methods of managing business relationships that now can be handled only by lawyers.

But that's not all. Regulation also keeps us from bringing in outside investors who would cast a cold eye on the inefficient and costly ways in which we deliver legal services. Although such a transformation in the American legal profession seems revolutionary, it is already taking place in Commonwealth countries including Australia and England.

If we moved to such a system, the current model would simply fade away.  As Henning concludes:

If this were to happen, the billable hour and the lawyer compensation systems grounded upon it would largely become anachronisms. Savvy outside investors would find that too many smart lawyers and too few smart systems currently inhabit our law firms.

Heineman and Lee are not as visionary in their piece, Two Veteran Lawyers Say Now Is The Time For Fixed Fees. Their point is simple if not especially novel:

Seen in its best light, fixed fees thus have significant benefits for both in-house and outside counsel: reduced billing hassles, more predictable cost to the client, more predictable and timely payments to the firm, and, ultimately, better alignment between the cost and the value of the legal service. The credit meltdown and the deep global recession may provide the impetus for real change in this corner of the economy, as in so many others.

Recognizing that results matter, Heineman and Lee suggest a Valorem-type holdback bucket:

Even with good processes, law firms under fixed-fee regimes will, of course, also be judged by the quality of their results. The fixed fee can make incentives or demerits easier to design and implement. For example, the monthly payment in a litigation could be 80 percent of the fixed fee. If a satisfactory settlement (defined at the outset) is reached, then the firm receives the withheld 20 percent. If the matter goes to trial with a positive result, the firm receives 125 percent of the fixed fee. If neither a good settlement nor a good trial outcome occurs, then the firm receives the original 80 percent of the fixed fee.

Similarly, some part of the fixed fee can be held back until after a deal is completed and acquisition integration occurs. Then the client can see if the due diligence done by the outside firm properly identified problems. A bonus could be possible if corporate performance is better than the pro forma projections. Moreover, if a law firm is managing a book of business, like labor arbitrations, as well as preventative measures inside the company, a bonus payment can be designed if the number of labor disputes declines year over year.

As I have said many times in many places, the best fee agreement for a client is one that rewards those things most important to the client and does not reward those things the client wishes to avoid.  And since no client ever goes shopping for hours, hours is the one thing that should never be rewarded.  This message gone from cacophony to symphony.  Are clients listening?

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Anecdotes first:  A short while ago, I had lunch with a friend, a BigLaw partner.  This partner's firm had gone through two rounds of associate and staff layoffs, a round of partner reduction and some de-equitizations.  According to this partner, more of each are on the near horizon, as in 2009 sometime.  I heard similar predictions from another friend, a partner at a different large law firm.

These anecdotes are fresh in my mind when I happen upon Law Review: Big Firms Still Facing Big Problems in the Philadelphia Inquirer.  A critique of the business model of BigLaw, not terribly positive.

Larry Ribstein, a professor at the University of Illinois College of Law, says the response of many big firms - cutting costs and discounting rates - isn't a cure.

"My theory is that big law firms don't have a coherent business model," says Ribstein, who studies the economics of the legal profession. "From a client standpoint, why would you pay so much per hour for a lawyer who works for a big firm vs. [a lower rate] for a lawyer who works for a smaller firm? What value does the big firm add?"

That's my theory too, so I immediately think this guy is a genius.  But then I happen upon a post over at Legal On Ramp by my friend, Ed Reeser.  Ed used to be the managing partner of the Los Angeles office of an AmLaw 50-ish firm, and he knows the inside of BigLaw better than anyone I know.  Ed wrote:

Reports of profit declines at some of these firms are in the range of 20 percent or more but, for a majority of firms, the reported year-end results actually range from neutral to 3-5 percent decreases. Hmmmmm! Does an enterprise of any kind take a chainsaw to its staff and attorneys for a drop of that magnitude? Of course not!

So the magnitude of financial stress is presumably much greater than reported. These management responses in the form of terminations and cost cutting are either proportional to the impact on current or projected income streams, or hysterically out of proportion. Now, the managing partners of major law firms are not the kind of people to get hysterical. It should therefore be fair to conclude that the responses are calculated and requisite, not irrational or emotionally over-reactive.

But why now? Once the year end profits for 2008 were finally in, the distributions of income made to the partners, and the work flow for the first six weeks of the year completed and tallied.... business looked beyond bleak for 2009 with no clear picture of when it might improve. But the slash and burn of the first quarter has not abated, and each month brings a new wave of adjustments that are quickly adopted across the industry once implemented at a major firm.

The law firm management response is not unlike a medieval physician responding to a patient that is not recovering. Throw on a few more leeches, open a vein, and draw some more blood.

Why is this happening if the reported declines in net revenue are reported to be so marginal? In a few instances, it’s because the reported declines are not accurate. More importantly, though, the real driver is a fundamentally flawed business model, which has wreaked havoc for more than a decade, and which cannot be effectively changed in a short period of time. The current actions of management are not directed to a solution, only a deferral of the day of real reckoning.

This frames the precise question:  why is no one making the fundamental changes required to remedy an out-of-control situation?  Why doesn't someone shoot the diseased animal and put it out of its misery?  Ed provides a detailed answer, identifying 5 compelling reasons why BigLaw is in trouble, and then explains management's indifference:

Significantly, and sadly, many law firm leaders cannot afford a comprehensive and transparent analysis of what they’ve actually been doing for the past several years, which would be required for a “clean sheet of paper” transformation to a new business model. Alas, there is a gaping divide between what partners have agreed to live by in their written partnership agreements and how the inner circle actually administered the decision-making apparatus. The synapse would shock a number of their partners if they were fully aware.

I have stopped worrying about partners who cede their lives to management of the type described by Ed, who are too passive or afraid to make waves to protect their own stake.  At some point, those partners have to accept their personal responsibility for the hand they are about to be dealt.

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The online version of National Law Journal contains an interesting analysis of the impact the recession is having on how corporate America looks at litigation.  In For Litigators, A Different Kind Of Recession,author Karen Sloan analyzes various data and surveys and reaches some interesting conclusions.  Here is the critical part for me:

A survey of general counsel by Altman Weil, which is owned by The National Law Journal's parent company, in late 2008 found that 75% of general counsel had their budgets cut in 2009. The average decrease was 11.5%. "It's not down 2 or 3%. It's double digits," said Susan Hackett, senior vice president and general counsel for the Association of Corporate Counsel. "They can't afford litigation. There's a real sense of, 'Make this go away quickly and quietly.' "

Hackett has observed a greater reluctance by companies to initiate litigation or defend themselves in court. Instead, they are "looking to apply the least expensive Band-Aid" to their legal problems. "I'm seeing a greater focus on saying, 'We will try to make you whole somehow. What can we do? What do you want?' Sometimes money isn't the ultimate goal," Hackett said.

Hackett's point was echoed by Peter Sloane, a litigation partner at Cahill Gordon & Reindel in New York: "I see clients who are much more focused on the cost-benefit analysis before starting litigation. There's a much greater emphasis on thinking outside the box in approaching legal disputes."

About time.  I am left to wonder what the hell people were thinking about before.  Did they think litigation was like Madden NFL 2010, some computer game to play to satisfy some competitive urge? 

Litigation should always be the very last resort.  You are taking a business problem and asking someone else to solve it for you.  "Hey you, dud on the street, solve this problem for me."  We call that dude a judge.  And sometime we don't trust the one dude, so we go even further and look for 12 (or 6) perfectly average strangers with no special skill or expertise to decide how to solve a problem.  We call those strangers jurors.  This form of problem-solving is very costly, and places a tremendous load on the gladiators who stand in front of the dude or strangers. 

I am a lawyer whose favorite part of being a lawyer is trying cases.  But having stood in the well so many times and looked into the eyes of so many dudes and strangers (by the way, dude is not gender specific), I have come to know that trials represent, in many but not every case, a fundamental failure of imagination.  It's good to know that the economy appears to have stimulated imaginations so that businesses are finding ways to solve problems in different ways.

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Over the weekend, I was cleaning out some old files on my computer and I ran across a slide show I had put together for a presentation on client service.  I thought I would post them here.

There were two over-arching points to the presentation that are worth reminding yourself of everyday:

1.   You need to know what your client thinks about you.  In detail. Not asking, assuming you know, drawing inferences--those approaches are for losers.  Ask.  Ask aggressively, by which I mean you should frame your questions in ways that are design to elicit criticism.  You must never lose sight of the truth that no lawyer is perfect. Because that is so, every client should have criticisms are suggestions on how you can improve performance or the delivery of value. 

2.   The second truth is that if you hear the word "fine" (as in, "everything is fine"), understand that you've just been sentenced to death.  And if you doubt me, remember this post the next time you're out at a restaurant having a mediocre or worse meal, and your waiter asks how everything is, and you answer with "everything is fine."  You need clients who are more than satisfied, more than pleased.  You need clients who are advocates, who think you are so great that they want to have legal problems just so they can deal with you. 

Certain companies have effectively branded themselves by providing such extraordinary products and services that they become the standard by which competitors are judged.  If your service firm is not the benchmark by which others in your industry are judged, you have room to improve, and improving enough to become the industry benchmark should be a focal point of your efforts.  Anyone who is not the standard is at grave risk of losing clients.

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Let's say you're the managing partner of an AmLaw 200 firm.  You've terminated associates and staff (using, of course, the kinder and gentler term "lay offs"), you've eliminated free coffee, taken tissues away from associates and staff (presumably you had the good grace to do this after all the layoffs),  raised the amount people have to pay for vending machine soda, closed unprofitable offices, cut the salaries of summer associates,  forced non-rainmaker partners out, had a second round of staff and associate terminations, and basically done everything one can do to cut costs and preserve you firm's profits per equity partner. 

Then comes the annual rite, the reporting of those PEP to American Lawyer and its release of the AmLaw 100.  The AmLaw report does include a column for percentage change from the previous year, and you undoubtedly hope that your clients will focus on the fact that your PEP are down from the prior year.  But that's not the column clients look at.  They look at the "PPP" column, where the numbers are still eye-popping, with many firms earning more than $1 million per equity partner.

But here's the real kicker.  No one looks at the PEP and really imagines that each partner is making a million, or whatever the number is.  Those reviewing the numbers are far to sophisticated to make that mistake. They know that firm leaders and the inner group, what I call "The Club," take a disproportionate share, justifying their self-aggrandizement by the alleged value they add (they never seem to deduct for the screw-ups though) or the institutional clients they control.  Different firms, different rationalizations.  But the bottom-line is the same.

Now comes the real test.  Clients see those big numbers, even as the GCs and in-house counsel have had their bonuses evaporate and the company stock price has plummeted.  Clients negotiated a rate discount last year, only to see the total fees paid remain the same.  This year they need more.  So here are the two big questions as we enter into the season of planning for 2010:

      1.   Will clients finally start exercising the power inherent in their being the buyer and demand material changes in the amount of fees they pay for services?

      2.   How will BigLaw respond if faced with such demands?

My guess is that most BigLaw members of The Club are hoping the answer to question 1 is "no."

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Very interesting article in the Legal Technology section of law.com today, Does The Future Belong To Virtual Law Firms? The articles discusses how Virtual Law Partners secured a client that is incorporated in Delaware and based in St. Petersburg, Russia, and is represented by a VLP partner living in Cali, Columbia.  Pretty cool.  The article describes the virtual model this way:

The model is relatively straightforward. The virtual firms hire only partner-level lawyers with an established client base, cut their Big Law rates in half, and let them keep almost all of what they bill. At VLP, for example, partners with ten to 15 years of experience bill $275-$400 an hour. The lawyers operate remotely, but they tap into a larger infrastructure with centralized billing, IT support, marketing, and recruiting efforts. They also share work frequently, communicating through video chat or e-mail as needed.

For work that can be done by one person, this is a great, cost-effective way to obtain an experienced and capable lawyer.  Here is one client's take on the capabilities of the model:

Many companies, however, are waiting to see if virtual firms can handle bigger assignments. "I think a certain domain will remain exclusive to the big firms, such as complex litigation, or big corporate deals," says Tim Reis, the general counsel of EMS Technologies, Inc., and an early FSB Legal client. Still, he sees room for the virtual firms, "because the traditional model is just becoming too costly."

From my standpoint, the question is not whether virtual firms can handle bigger matters, but whether they can handle them as effectively as boutique competitors.  The difference?  The ability to aggressively collaborate. Even with the best communication hardware, there is something lost when you can't go next door and bounce ideas off someone who may have nothing to do with the case but who is vested in its outcome. I've experience firsthand the accelerated evolution of ideas from really good to extraordinary when several experienced minds combine their talent and judgment and work through a problem.  When one of us is out of the office, it is just not possible to achieve the "capture the moment" collaboration we routinely achieve when collaboration occurs spontaneously.

That said, the virtual model, as well as the Valorem model (fixed fee litigation for business by senior trial lawyers), have a place in the business world.  As BigLaw continues to charge more and more, we believe the need for cost savings and cost certainty will cause clients to explore options like Valorem and Virtual Law Partners.  We also believe that those who try these new models will find that the results are just as good, or in many cases better, than those achieved by large law firms.

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The sophisticated buyer has to understand that the historic leverage, billable hour model on which virtually all law firms is based is a system that is fundamentally at war with how firms committed to the fixed fee (especially with a results-based holdback) are modeled.  For example, perhaps the most successful fixed fee firm is Bartlit Beck.  It has 53 partners and 16 associates.  There is no billable hour firm built with that kind of ratio.  Bartlit Beck and others, like Valorem, are built with an emphasis on experience because profit comes from getting results faster and more efficiently than other firms. 

No matter what big firms say in their pitches to clients where they offer fixed fees, you cannot easily or quickly eliminate a culture that prizes long hours and pushes work to the lowest levels to then be redone by people at more senior levels. 

So my advice to clients is this: if you are the beneficiary of a fixed fee proposal from a large firm, make sure you have a results-based holdback to guard against all the work be done by inexperienced lawyers, and ask the firm how they have changed their culture to support fixed fee arrangements.  Then get a competitive quote from a firm that is modeled on generating profits from fixed fee engagements because of the results the firm achieves, not because they add in "a premium and a contingency."

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I received an email this morning that I found really shocking.  It was from Law Firm, Inc., attaching "an offer" from one of its advertising partners, LexisNexis.  The offer was contained in what was formatted as an article or blog post, with this title: "Stacking the bench with more associates wins partners more income."  Here's the gist of the ad:

Do you think about leverage—or associate-to-partner ratio—as an important metric when assessing your firm’s profitability? Probably not. But many see it as the secret to increasing profitability in a competitive market. By putting less expensive resources on tactical tasks, your partners can focus on more strategic issues. And ultimately that means more profits where it counts. Employing too few associates and underutilizing the ones you do have can seriously impact your bottom line. In fact, top performing firms understand the importance of leverage—and typically have three fee earners for every partner.
You may be saying to yourself, “With three times more associates to partners, our billings would go down.” That is true, however, even though billings shrink—profit per partner goes up. Firms that have equal amounts of associates to partners may have less profit for partners to share. In fact, partners in firms that have an associate-to-partner ratio of three to one can see 30% more profit than firms that are evenly stacked.
 

It's hard to imagine an ad that could be more out of touch these days.  The leverage model was a bad, albeit profitable, idea in the good old days, but even the most ardent supporter of that model has awakened to the fact that it is not sustainable and absolutely the wrong approach in today's client environment.  I really shocked that LexisNexis has not found a way to tailor its product offerings.  But assuming that it advertises the way it does because people buy their products to achieve the pot and the end of the LexisNexis rainbow, what does the ad say to clients about how law firms are responding to the current challenges clients and firms are confronting?  Is this the way you want your firm to respond?

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The ABA Weekly reported today that Jack Welch, former General Electric CEO, told an audience at Society for Human Resource Management’s annual conference that “there is no such thing as work-life balance” and women who take time off for family will have a tough time climbing the corporate ladder.

Statements like these make me bristle. I will not dispute that taking time off for family (or for any other endeavor, for that matter) has obvious consequences -- regardless of the career and regardless of gender. But just when it seems that progress is being made, with more women staying in the workforce, having fulfilling family lives and progressing up the precarious rungs of the damn ladder that was undoubtedly crafted by someone with the limited vision of only “up or down”, a general pronouncement from the likes of Jack Welch comes along and moves us back decades. Not because what he is saying is not true, but because he is reporting the obvious as if he is disseminating a new revelation – and the more that revelation is repeated, the more people stretch it, exaggerate it, rely on it and accept it as a foregone conclusion.

Does Mr. Welch seriously think that women are unaware of the fact that their careers fare better when they are at work rather than not? Or that it’s news that there are consequences for every choice made, or that it is difficult to make it to the top of a company? Women know this, have accepted this and are plowing forward in spite of this. But pronouncing it during an interview with ABC’s Claire Shipman in front of an HR conference does not provide any new information to the public. It entrenches the concept as gospel. It sends a message to women that no matter how hard they try or think changes are occurring, it isn’t worth it because nothing will change – least of all, the perceptions of white-haired-white-men still occupying the vast majority of corner offices. And what message does it send to men? Don’t bother trying to foster change by being progressive within your own companies, and go right ahead and discount, from the get go, any woman who takes maternity leave or any other extended time off for family purposes. After all, she’s been warned by Jack!

Would it be appropriate if I made what also might be construed as a remarkably obvious revelation? Jack doesn’t know jack about jack.
 

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I think the world of Dan Hull.  Smart, opinionated, tough-as-nails, erudite.  Great writer. Funny as hell. Plus we share an unwavering commitment to providing unsurpassed client service.  We don't see eye to eye on everything, though.  Dan still believes in the billable hour.  I have devote my life to proving it the bane of the legal universe.

Another issue on which we disagree is work life balance.  I read Dan's two recent posts, Work Life Balance Is Still A Dumb-ass Issue and Breaking news: I will name my next three children after Jack Welch and three thought immediately came to mind.  Dan believes there is an inherent conflict between being in a service profession and having a life outside that profession. 

Let me start with a point of agreement.  Ours is a service profession.  To excel and succeed, we must be devoted to our clients and their needs.  The relevant numbers for measuring devotion are 24/7/365, not 9 to 5. I am sure there is no light between my position on this and Dan's.

But Dan's writings on this suggest that work-life balance cannot be reconciled with 24/7/365.  Here are the thoughts that come to my mind: Hobson's choice v. Kobayashi Maru.  A Hobson's choice "is a free choice in which only one option is offered, and one may refuse to take that option. The choice is therefore between taking the option or not; take it or leave it."  I do not see the choice as a take it or leave it, one or the other.

I have been at a ballgame with my kids and had to respond to urgent emails from clients or step to a quiet area for a phone call.  I happily do so and my kids seem not to notice my momentary disengagement.  On occasion, I have had to work late to get something done to meet client's deadline.  I do so and neither my family nor I resent the need to do so.  But when client needs do not require my immediate attention, I have left work early to watch kid activities or see a school concert.  I am leaving on vacation shortly and while I will be reachable for important calls, the substantial bulk of my time will be spent with my family.  If those "balances" are good enough for me, they are good enough for all of my colleagues.  One can have both work life balance and be a true professional fully devoted to one's clients.

The Kobayashi Maru reference?  The Kobayashi Maru is a vessel at the heart of a simulation in the Star Trek series.  It presents the young officer with a no-win scenario. 

"James T. Kirk takes the test three times while at Starfleet Academy. Prior to his third attempt, Kirk surreptitiously reprograms the simulator so that it is possible to rescue the freighter. This fact finally comes out, later in the movie, as Kirk, Saavik and others appear marooned, near death. Saavik's response is, "Then you never faced that situation. Faced death." Kirk replies, "I don't believe in the no-win scenario." Despite having cheated, Kirk was awarded a commendation for "original thinking."

I may not ever receive a commendation for original thinking, and I most certainly am no James T. Kirk, but I'm not too keen on no-win scenarios either.  The client commitment v. work life balance conflict can most certainly be a win-win for all.

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Dave Bohrer of

recently published an article,

which discusses the impact of using alternative fees in patent defense litigation. [I should be able to post a link to the article in a few days.  Email me for a copy in the interim.]  Dave is a former BigLaw IP partner, and he knows the cost of defending a patent case as well as the benefits that his new model creates.  Thus, I was particularly interested in this portion of his article:

In the case of fighting trolls, hi-tech does not want to pay the $5 million-plus charged by hourly firms. The fixed-price discussion necessarily focuses on lowering the cost to levels where it is less expensive to fight than settle. One of the unanticipated advantages of this process, according to Neal Rubin [of Cisco], is that "counsel's willingness (or unwillingness) to share the risks and rewards of litigation can help  [Cisco] assess the strengths and weaknesses of its case. While firms are not equally risk positive or averse, a firm's willingness to accept risk provides a useful litmus test that can help instruct the client whether it has realistically assessed the strength of the case. The straight billable hour model provides no such feedback."

If lawyers won't put their skin in the game, perhaps it is because they think the bet isn't likely to pay off.  And if your lawyers think that, shouldn't you take a much harder look at whether you are accurately assessing your position in the case?

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While the good news out of all the reports on lawyer overbilling is that the majority of lawyers do not engage in overbilling practices, the bad news is the compelling evidence that a sizable minority of lawyers throughout the profession do engage in abusive billing practices and that the insurance industry has been a particular target of billing abuse. It is clear, then, that prudent insurers need to take definitive, defensive steps to further guard against becoming the victims of lawyer overbilling.

Insurers need to adopt a comprehensive, three-step defensive program that includes: clear billing guidelines based upon the ethics of the legal profession, a good e-billing program, and an effective legal bill review program. Employing all three defensive measures is critical. For just as a three-legged stool cannot stand on just one or two ends, a successful program to defend against overbilling lawyers cannot succeed without all three necessary parts of the program.

 

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The pain just keeps getting more intense.

Morgan Lewis just announced that it is:

1. 1.  canceling all on-campus interviewing this coming fall; 
2. 2.  canceling the summer program for 2010; and 
3. 3.  pushing back the start date for current summer associates to 2011.

Ouch.  

  I keep waiting for a firm to say it is dramatically changing its business model, but apparently more pain is required before something so drastic happens.

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My friend Pam Woldow of Altman Weil just posted "An Open Letter to the General Counsel."  It is must-read material if you are an inside lawyer.  See if you identify with any of these comments made to Pam in an interview with a GC of a major transportation company:

1. “My legal budget has been drastically reduced, and if my legal spend exceeds budget, my management has made it clear that I'm toast.”

2. “A logical cost-cutting step would be to move my matters to smaller non-New York white shoe firms whose rates are better and whose service seems competent (and which often offer superior responsiveness, too).

3. “But if any of these smaller firms messes up an engagement — or even if they actually do a good job but the outcome is disappointing — my management will roast me for not engaging the ‘best’ firm."

4. “The ‘best’ firm may not be able to produce a better outcome, but at least their reputation offers me the defense that ’no one could have produced a better result.’ And my selection judgment remains unimpugned, even if my budget takes a beating.”

5. “So all in all, it’s safer — at least in the short term — to keep all my matters with high-credibility, high-priced firms. Furthermore, by maintaining the status quo, at least I don’t have the logistical hassle of moving my business and setting up new counsel-relations protocols. At the end of the budget year, though, I’m gonna get killed.”

From my vantage point, I've seen this "damned-if-you-do-damned-if-you-don't-paralysis" too many times.  And as the innovators who left the big-name brands, we find ourselves on the losing side of this affliction.  Pam's letter offers realistic, precise advise on how to address the competing budget and safety concerns. 

While there is more involved than this, the crux is to distinguish between "bet-the-company" matters and more ordinary course matters.  Show show your fealty to brand on the true "bet-the-company" matters where senior management is more likely to have a stake or awareness.  But isn't ordinary course precisely where you should be demonstrating you interest in your budget?  Doesn't it look better to the powers-that-be if you can show you've taken some smart, innovative steps to save money?  Keep in mind that 97% of all matters settle, and I suspect for many companies, that number is closer to 100% for these kinds of cases. 

The risk of the status quo is that you're "gonna get killed" or will be "toast."  The risk of change is .....?  At some point, one needs to reflect on Albert Einstein's definition of insanity.

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Ph.D. from the University of Chicago. Then President of a think tank in Washington, D.C.  Then, motorcycle mechanic.  Not a normal career path, to be sure.  This is the path taken by Matthew Crawford, author of Shop Class As Soulcraft: An Inquiry Into The Value of Work.

The author and his book were featured on an NPR story, 'Soulcraft' honors an honest day's work.

And this has everything to do with the legal profession because . . .?  Let's start with part of the dialogue on the broadcast.  Economists have taught that "anything than can be put on a container ship will be manufactured where labor is the cheapest."  But then the critical jump: "A similar logic has emerged for the product of intellectual labor, anything that can be delivered over a wire....will be."   Crawford then focuses on a distinction between work that has to be done on site and work than can be delivered, whether via a container ship or the internet.

I was fascinated by this distinction because it captures the "off-shoring/contract lawyer" concept, and because it helps crystalize the Jeff Carr "Four Buckets" theory as well as the gospel of Richard Susskind.  Crawford's lesson:  "Find some work where you can make yourself useful to other people in a straightforward way that engages your own judgment and thinking so that your actions feel like they are genuinely your own."  This lesson is true whether you are fixing motorcycles or providing counsel to a client.  If you don't, your job may well be one of those sent elsewhere.

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Andrew Kassner, managing partner of the 680-lawyer Drinker Biddle & Reath L.L.P. of Center City, said the new focus on flat fees, incentive payments and other alternative forms of compensation means law firms need to be very careful about how they deploy their lawyers.

High-level partners, for example, shouldn't be doing legal research that can be left to a more junior, and less-expensive lawyer, while the partner should handle client contacts and the broader legal strategy.  (courtesy of philly.com)

Huh?  Was there ever a time when "high-level partners" should have been doing legal research? 

We keep this poster in our office to remind us of one the important differences between Valorem and BigLaw.  What BigLaw, or at least some of it, does not seem to get is that the proper and effective  deployment of lawyers when using fixed fees is so fundamentally different than under the billable hour model that the two cannot peacefully co-exist.  That "endless supply of expendable labor" that made you so profitable in the billable hour model?  They hurt you on the fixed fee model.  Or do you really think that a bunch of inexperienced rookies are going to get you to the promised land of fast, efficient and effective results?

Times have changed.

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You have marvel at the ability lawyers have with sleight of hand.  Here on the left, we will tell you the economy is improving.  Ignore the additional layoffs, deferred start dates, cancellation of on-campus interviewing, closing of offices and other actions taken with my right hand. 

In June, nearly 60% of the respondents in a Citi Private Bank survey of 133 Managing Partners said the economy would improve in the second half of the year.  Sounds encouraging, eh?

Just this week, there have been further layoffs (DLA Piper, among others), deferred start dates for the current crop of summer associates (Orrick--2012), and dramatic reductions in on-campus interviewing (e,g, Cravath not interviewing at U of Va.).  A day does not go by without multiple stories of large law firms scaling back even more than they have already, sometimes dramatically.

Gee, that sounds an awful lot like things are getting better, doesn't it?  As Momma taught me, actions speak louder than words.

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Altman Weil has released the results of its 2009 Chief Legal Officer Survey.  To my mind, the most telling result is this:

The survey asked Chief Legal Officers (CLOs) to rate how much pressure corporations are putting on law firms to change the value proposition in legal service delivery, as opposed to simply cutting costs. CLOs responded across the board, with 25% rating the pressure as high – or between 8 and 10 on a zero to 10 scale; 37% rating the pressure in the mid-range at 5, 6 or 7; and 38% rating it low, between zero and 4.

However, when asked how serious law firms are about changing their delivery model, the answers were in sharp contrast. Only 5% of CLOs assessed law firms as highly serious, scoring them between 8 and 10. Twenty percent gave firms credit for some level of effort, rating them 5, 6 or 7. A full 75% rated law firms between zero and 4 on the scale, indicating little or no interest in change.

Wait, did I read that right?  "A full 75% of the CLOs rated law firms between zero and 4 on the scale, indicating little or no interest in change."  How is that possible?  CLO's put maximum pressure on their law firms and law firms don't respond.  NEWS FLASH to law firms not responding: IT'S TIME TO WAKE UP!

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Two things captured my attention today.  They fit so nicely together because I can't understand either of them.  First, I read an Above The Law post about DLA Piper abandoning lockstep compensation for its associates.  But it was this quote from co-CEO Lee Miller that struck me so hard:

"I don't think the model is broken, but people want to rethink what they're doing and why they're doing it."

So let me try to understand. DLA is abandoning lockstep, laying off lawyers, cutting associate salaries, deferring associate start dates, expanding its contract lawyer (non-partnership track) program, and so forth.  Sounds like things are just hunky-dory. If things get any more "not broken," DLA will be the legal profession's version of the Chicago Cubs.

But that was this morning.  This afternoon, Above The Law posted that Buchanan Ingersoll had cut the compensation of its associates by 10%.  ATL includes this statement.

Buchanan Ingersoll CEO Jack Barbour furnished Above the Law with this statement. Barbour suggests that the cuts are in part to due to Buchanan's attempts to keep its billing rates competitive in this recession economy.

So let me try to understand this one.  There is no indication that Buchanan is cutting its rates, only the compensation.  That money not paid to associates goes to ....[drum roll]... that's right, the partners.  And while I do not know for sure, I would be terribly surprised if Buchanan did not raise its rates at the end of last year, as it and virtually all firms do every year.

In fairness to Buchanan, they are not the only firm that has cut associate salaries, and perhaps others have tried to justify it in the same way.  But it seems to me if your goal was to keep rates competitive or do something for your clients, actually lowering the billing rates would be a starting point.

It's been 18 months since we launched Valorem. We clearly don't speak BigLaw-ese anymore.  Can someone translate these statements so they make sense to regular stiffs?

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Mavericks At Work: Why The Most Original Minds in Business Win is a terrific book, written by Fast Company co-founder William Taylor.  The book has many attributes that make it a "must-read," but the one I want to focus on here is a company discussed in the book named NineSigma.  Here's the backdrop to put this discussion in context.

The discussion of NineSigma takes place within a discussion of the open source movement.  In that context, consider this discussion of P&G:

"We have 7,500 R&D people who operate in 150 different areas of science," [Larry] Hutson explains. "But when you look around the world at these 150 areas, you see that there are one and a half million people outside of P&G with training that is equal to or better than our people.  In other words, for every one person we have in a particular area, there are 200 people on the outside of equal minds or better.  Now it's pretty obvious that 200 can invent better than one--you don't have to be a genius to figure that out."

It's Hutson's mission to figure out how Procter & Gamble can tap into that outside genius.  His initiative, called Connect + Develop (that's C+D, as distinct from R&D), has a mandate to help the consumer giant import half of all new technologies and product ideas from beyond the walls of the company.  It's hard for an outsider, Hutson says, to appreciate the stakes of this shift: "Here you have a nearly one-hundred-seventy-year-old company with an unbelievable sense of pride in its science and marketing.  And we're viewing the outside world as the other half of our R&D lab.  It's an absolute sea change."

This alone, without more, should inspire people to imagine change.  But there's more:

Hutson is also a tireless champion of NineSigma, a fast-growing outfit in Cleveland that has built what it calls a "Managed Exchange"--an Internet-based global network through which companies can issue a call for help to researchers around the world, any of whom may be hired to deliver a solution.  Forget sending a run-of-the-mill RFP to the same old suppliers, NineSigma uses the Web to identify the best minds in a wide variety of fields and sends targeted RFPs to every corner of the world.

There is substantially more discussion of this in Mavericks,but this little hors d'ouvres should inspire lots of thought on how this same model could be modified for the practice of law.  For example, a few ago, I posted on Jeff Carr's 4 buckets--advocacy, counseling, process and content.  The NineSigma approach to content is obvious--no highly paid associate that the firm is really training should be doing basic, blackletter law research.  That can be done by a pre-qualified researcher at a much lower price.  The firm's value-add becomes what it does with that basic information.

I am just at the front-end of thinking about this.  But if a company like P&G can go through the sea change described in Mavericks (and you will marvel at the examples provided in the book), perhaps there is some cause for optimism that the legal profession can move forward as well.

One further thought: I have written about Legal On Ramp before, and, indeed, many who read this will be reading it on LOR's website.  Legal On Ramp is precisely the kind of company that could be the NineSigma of the legal profession.  Be sure to think about the possibilities in that context.

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Marketing, to be effective, needs to (1) have a point and (2) not insult the listener or viewer.  These things seem to be Marketing 101.  So here I am this morning, driving along listening to NPR.  The announcer reads the piece that programming is brought to you by "[insert name of large national accounting firm] where we are dedicated to providing our clients with thoughtful answers." 

Now I am not a marketing expert, but doesn't it seem like a client should be able to assume that it's highly paid national accounting firm will provide thoughtful answers?  Or is there some large cadre of accounting firms that provides thoughtless answers? 

I was going to say that my conclusion is that marketing statements that are obvious insights into the obvious are a colossal waste of money, but that would make me guilty of that which I criticize (although at least this is free!).  So let me leave with this:   there needs to be a quality control element to everything a firm does to present itself to the public, if only to avoid certain ridicule for things like "thoughtful answers." 

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One of the points that Mike Dillon, GC of Sun Microsystems, made in his recent post, Change, is that the new generation of lawyers has a different perspective on the practice, which is helping drive change. 

The career perspective of the newest generation of attorneys is an additional factor in driving these changes. They desire a different lifestyle than what was offered in the past. I know this from first hand experience. As I'm writing this, I'm sitting in a conference room with a number of our law school summer interns. They work differently than I did when I was in law school - collaboratively, in communal spaces, streaming music, while interacting with peers via Twitter, Facebook and other social networking sites. To many of them, flexibility, mobility, a collaborative environment and interesting work are paramount - and not always what law firms can currently offer.

Against that backdrop, I listened on my ride home tonight to a terrific NPR story on How Technology Divides Workers.  Here is one of the points I found most interesting:

"You can have Gen Y-ers who are busy looking at their BlackBerrys. They've got their laptops flipped open, they're engaging in social networking right during the course of a meeting, and you have a boomer rolling their eyes, not understanding it," says Michael Walsh, the CEO for LexisNexis U.S. Legal Markets. "Two-thirds of boomers that were surveyed indicated that they felt that use of devices, technology — such as e-mail, social networking, the Internet, etc. — contributed to a decline in office etiquette."

I am all for social networking--after all, I blog, I twitter, I'm on LinkedIn, Facebook and others.  One of my kids even said I was cool.  (Of course, you need to understand that right after he said that, he asked me to buy him a new PSP game.)  And I multi-task too--the three screens in my office enable that practice.  But in a meeting, when other people are investing their time, well, that's where I draw the line.  Put the blackberrys and phones away.  Be in the moment and give yourself to the moment.  When everyone does that, the moment is likely to have value, which is, after all, the point of having the moment to begin with.

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Two years ago, Mike Dillon, GC of Sun Microsystems, observed in his post, The Way Of The Mastodon:

 My point is that the epoch of the current law firm model - which derives its profitability from growing scale and raising hourly rates - will soon be over. The firms that will survive and thrive are those that recognize this change and focus on how to maintain margins by focusing on efficiency.

Just last week, Dillon said he was shaking his head while reading a post reporting that law firms do not expect to make radical changes as a result of the economic downturn and related changes in the legal marketplace. In light of his earlier prophetic comments, his reaction that this feels "like whistling past the graveyard" should cause all but the most stubborn to at least pause.  According to Dillon:

The reality is that we are in the early stages of a seismic shift in the traditional cost and delivery model for legal services. I see it every day in my interactions with the law firms that support us and in my discussions with peers at other companies. This change is the result of three major factors: the current economic downturn, the rise of alternative legal service providers and the lifestyle choices of the newest members of our profession.

Dillon concludes his analysis with this thought for those who persist in propping up the status quo:

Change is always difficult. But, all of us in the legal profession - whether in-house or firm - need to embrace it. For as Benjamin Franklin once said: "When you're finished changing, you're finished."

While the tendency is to focus on BigLaw's resistance to change, the truth is that BigLaw merely reflects what is true about the profession as a whole.  Lawyers tend to fear change and are uncomfortable (to say the least) operating with unknowns and uncertainty.  Courage is not the absence of fear, it is overcoming your fear to act the may you should rather than instinctively.  Change can--and should--be your choice.  If you don't relish it, you need to figure out how to at least be comfortable with it.

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The President's proposed solution to the economic problems created by the easy loans made during the housing bubble requires banks and other lenders to keep 5% of the loans they package and sell.  The belief is that if lenders have "skin in the game," they will refrain from making bad loans since doing so will cost them money.  All this is according to an NPR story:

Banking industry consultant Bert Ely, 67, remembers when sitting down to apply for a home loan was like going before a judge. "You sat down with a sober banker," he says. Today, "these mortgages are made with the intent of selling, not keeping."

Ely explains that over the years, banks and mortgage lenders started making loans and then selling them off to investors, and when that happened, lenders became more like salespeople. Mortgage brokers and loan officers got their commission regardless of whether a loan was good, and it was somebody else's problem if the loans went bad.

"The lender doesn't care as much about the riskiness of the loan or the eventual likelihood of default if he's going to sell it and not retain any risk," Ely says.

So basically, lenders often don't have skin in the game the way they used to because they're not lending out their own money any more.

Listen to the full story here.

All this is interesting if you're into following the economy, of course.  But it's also interesting to those who follow issues relating to the billable hour.  Isn't the problem identified in the story essentially the same issue raised in indictments of the billable hour model?  When you are economically divorced from the outcome, when your profit is guaranteed regardless of what happens, you behave differently than when you have skin in the game.

There are those who take exception to this claim, who believe they are just as efficient using the billable hour method.  There may be the exception that proves the rule, but in this case, I find the claim that "I am just as efficient as I would be if I had skin in the game" to be like Woodstock, which everyone above a certain age claims to have attended even though most didn't. 

Skin in the game on legal fees drives efficiency.  And results.

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I don’t normally write with a law student audience in mind. The recent spate of terminations (I hate the word “layoff”), my encounters with great law students here at Valorem and at FutureFirm 1.0 and a recent post on Legal On Ramp by Ed Reeser asking whether being a BigLaw associate was worth it anymore all got me thinking about how hard it must be to be a law student these days. While I am more than 25 years past that very fun time in my life, I do have a piece of advice I want to pass on.

Here it is: plastics. No, not really, but Boomers will get it. Seriously, this is it: don’t believe a thing “they” tell you. In this case, the “they” is law firms. Any law firm, any size, my own included. The reason is a variation on the old “follow the money” theme. Understand that there are exceptions to every rule, so this criticism is not meant to apply to all, just most. But even if its “just a lot,” it’s enough that you need to protect yourself and not believe anyone.

Firms get paid for things, and they, in turn, pay people for things. Most firms get paid for hours, and so they provide lots and lots of hours. The firms, in turn, pay people for hours. More hours equals more pay. This is Econ 101 stuff. But you’re coming in at the entry level and you need lots of things that are not what the firm is selling or rewarding. You need training. You need mentoring. Why will anyone invest in you to provide those services? They won’t. No one gets paid to do so (this is true no matter how much the firm talks about its mentoring initiatives). No one gets paid to train you (not the go sit in a conference room and listen to some partner babble about something, but the I’ll sit through your deposition with you and critique your questioning kind of training). So, if these things happen, they are purely random acts of kindness. 

Lawyer behavior has become the product (and maybe it always was) of the law firm’s business model. If a firm is based on a highly leveraged, billable hour model, most new associates will be gone inside of four years. Why would any sane person invest time in the associates who are likely to be gone? The don’t. So look for a different model. 

Models drive behavior. Figure out what behaviors are important to you. And then work like hell to understand what models exist that promote those behaviors. You then have the list of firms you should consider asking for a job. The real problem you face is that so far as I can tell, most law schools don’t teach their students about the business of law and about business models. There are exceptions that I know of—Professors Bill Henderson of Indiana and Gillian Hadfield of US come to mind—and those I don’t know. But insist and getting this kind of information. And if you find yourself sitting across the table from some Stepford partner from BigLaw, ask him or her to explain (and defend) his/her law firm’s model and identify the behaviors that the model promotes. It should be an entertaining discussion.

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Here's a sentence that should scare the bejesus out of every inside lawyer:

"Other firms, however, are taking work they would typically farm out to contract lawyers and instead are giving it to associates who might not have much on their plates."

So says Raunn Ross of Agency Legal Staffing in Los Angeles.  Apparently, some firms are resorting to the argument that its better to have work done by experienced employees "who have a proven track record."  This is the gist of a Law360 article, Temp Attorneys Boon For Some, Liability For Others.

If you're an inside lawyer, you've got to wonder.  When assignments are being made in a law firm, say for document review, exactly how much consideration is given to the permanent associate's track record?  But more importantly, is the law firm so out of touch with the market for contract lawyers that it doesn't realize the number of high quality, high caliber lawyers who suddenly are on the market.

Once again, clients have to be saying to themselves, "with friends like this..."

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In February, I posted about The Problem With Most Fixed Fee Proposals.  Here was my point:

Let's start with the "what it would cost on an hourly basis" part of the calculus.  Hours times hourly rate.  See any problem?  To start with, hourly rates include a very hefty profit margin.  The lawyers also have no incentive in calculating the fee to be skinny on the hours.  The problem is then compounded by "adding a safety margin" (the proper translation of this is "more profit").  So law firms typically come up with a fixed fee that guarantees them more profit under the fixed fee approach than they would get under the traditional hourly system.

Today, Altman Weil's Tim Corcoran posted Navigating The Acorn Minefield and illustrated the point wonderfully:

I recently met with a BigLaw partner who proudly described his role as the primary arbiter of fixed fee engagements at his 500+ lawyer firm.  Apparently any engagement that required, or that the firm believed would benefit from, a fixed fee rate structure had to pass through this partner.  His approach was to study the client’s prior year billings for the same type of work, or find similar billings from another client, add a cushion equivalent to 15-25% of these billables, and quote the result as the fixed fee rate.  There was no evident involvement by the Finance team, no cost accounting data available to benchmark relative costs of legal service delivery or whether the prior work was profitable.  And there was no guidance to the timekeepers on how to operate more efficiently lest the new fixed fee engagement become non-economic.  The partner seemed proud of his role, until I made the mistake of questioning whether this sort of formula couldn’t be automated, since it didn’t appear to be a data-driven exercise.  Not knowing my place, I then questioned whether the clients wouldn’t eventually notice that fixed fee engagements were merely prior year billings plus 20%.  I was shown the door.  

Tim goes on to discuss "acorn pricing" in a most thoughtful manner.  Acorn pricing is described by one BigLaw partner this way:

“We’ll practically give away some early work, but we hope to make it up with more profitable work later on.”

This post is not about acorn pricing--Tim's post addresses that issue better than I could hope to.  For me, and hopefully for clients, the point is the manner in which BigLaw divorces fixed fees from risk sharing and looks to exchange budget certainty for the client for the firm's profits.  That is a poor bargain for the clients and any who accept BigLaw fixed fee arrangements (indeed, any fixed fee arrangements) without understanding whether the firm is taking on any risk are at risk of being taken to the cleaners.

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There is something known as "contract year phenomenon."  Wikipedia describes it:

Contract year phenomenon is a term used in North American sports to describe the occurrence when athletes perform at a very high level in the season prior to their free agency eligibility. Most often, these athletes have seasons that are statistically better than previous years, but then once they sign their new contract, they return to their previous level of performance.

The contract year phenomenon is most associated with the NBA due to the league's high salaries and lengthy guaranteed contracts. This occurrence is sometimes seen in MLB but it is almost never found in the NFL due to the league's relatively low salaries and most importantly, the lack of guaranteed contracts. NFL players who sign contracts with new teams and then don't perform can simply be released from their team, as the team is then only held responsible for the bonuses in the contract.

Put another way, when incumbency is assumed by the player, performance declines.

I've always wondered whether this phenomenon plays out in lawyer-client relationships.  For some thought-provoking insights into this question, check out Rees Morrison's post, 10 Steps To Hiring New Outside Counsel.  Maybe if lawyers felt more like NFL players and less like NBA players, we would act like we were always "one play away from being cut."

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The title is Fred Bartlit's take on the recent decision by Pillsbury Winthrop to cut associate salaries between 10-20% based on utilization rates.  Fred's take is 'this guarantees that more associates will "make their quotas" and that clients will pay much more for no reason." (Fred's comments appear in a post on Legal On Ramp)

When I and others have suggested before that pressure to meet hours requirements breeds inflationary billing practices, some have resisted the idea.  In this environment, where meeting hours quotas can make the difference between having a good paying job and long term unemployment, I think the temptation to inflate hours will be irresistible for almost all but the most saintly or those so disenchanted with their job they are prepared to leave anyway.  Bear in mind that this kind of hours inflation does not have to be outright fraud, though I suspect we will encounter cases of this kind of behavior.  But most people will be more subtle:  who's to say whether it really should take 10 hours instead of 7 to research an issue or write a motion?  Or what about taking an extra deposition "just to be sure a fact is really a fact?"  There are almost countless ways motivated lawyers can "create hours" and, if your job depends on doing so, it is a fare bet that many (most?) will.

But Fred's point is more focused--why should the firm's clients have to pay for this, whether it be risk or reality?  This kind of policy is an extreme example of ignoring client service.  I'm not sure why a client would tolerate it.

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The AmLaw Daily contains a fascinating post, GCs, Law Firms And Flat Fee Arrangements: A Matter Of Trust.  One outside lawyer is quoted as saying that "the single biggest obstacle to flat fee arrangements is fear."  The reporter goes on to say that clients worry about the quality of work they will get and outside counsel worry that they will lose money if something unexpected happens. 

Most outside lawyers still don't get it.  Start with this:

At the conference, some outside counsel said companies have an obligation to ensure their firms don't lose money if a turn of events isn't due to the firm's negligence.

This is, at core, a view that clients must insure the firm's profitability.  The article does not suggest that outside lawyers worry that they will make a windfall if something unexpected happens that reduces the work they need to do  and increases their profit margin. So, for the outside lawyers, flat fees must be a win or break-even proposition for them to be acceptable.  How quaint.

This quaint view that their profits must be guaranteed infects many fee proposals.  Silvio DeCarli, DuPont's Chief Litigation Counsel, notes that DuPont frequently gets fixed fee proposals where the firm makes money if DuPont loses the case and makes even more money if the Company wins. 

As more firms try to offer alternative fees, clients should be wary of this "heads I win, tails I win more" approach to fee calculation.  Real partners win together, but they also lose together.

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Last week the American Lawyer reported the results of its first "Women in Law" survey.  Despite the occasional standout firm, women still account for approximately 1 in 5 big firm partners. The Am Law 200 does much better than the Am Law 100, with 60% of the former reporting an average of 19% women partners while only 41% of the Am Law 100 reported the same.

The article’s companion piece "Back Door to the Top" was one of the first I have seen that highlights one of the most ignored diversity loopholes -- the fact that many surveys, reports or articles ignore the drastic difference between attaining income and equity partnership.  Ironically, American Lawyer’s “Women In Law” survey did just this. Most lawyers who have spent any time in large law firms can attest that the status of income partnership is, by and large, akin to a glorified associate status since income partners do not share in the profits of the firm.  As a result, when firms are able to report that they have 23% women partners, the number appears to be well above the national average and suggests a progressive firm where perhaps the path to the top is slightly smoother than elsewhere.

 Drilling down to the percentage of women income partners versus the number of women equity partners would likely paint a more accuratepicture of the proverbial path. Even more telling would be the average length of time women income partners stay in that position versus their male counterparts, or better yet, how many of the woman who attained the equity partner title were lateraled into the firm, and at what level (i.e., associate, income partner, equity at another firm??).

It is baffling to me that nearly every organization collecting data from firms and then reporting it is missing the most salient information. The National Association for Law Placement (NALP) is perhaps the most egregious example. This institution provides the relevant data upon which so many other surveys and articles are written. It is also the data provided to all law students for recruiting purposes. Despite the good work that NALP in many other regards, the omission of this difference in status is shocking, considering that it holds itself out on its website as “the premier resource for information on legal employment and recruiting.” http://www.nalp.org/research

   While I can understand that some difficulty lies in the inability to easily compare firms with two-tier partnerships to those with only one tier, the failure to report the numbers that really matter is tantamount to aiding and abetting  law firms' ability to hide within the loophole of general partnership numbers and appear to be one thing when the reality may show another. Just an observation....

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I read with interest a law.com story, New Approaches, New Firms on Corporate Clients'  Shopping Lists.  The story reports on recent findings from a BTI Consulting survey.  Here's the key finding:

Clients need new approaches to fees, staffing and billing -- including a shift from hourly to flat rates, he said, but when they've reached out to the largest Am Law firms for solutions, they are told "We're not sure we know how to do that. What kind of volume guarantees can you give us?" The Am Law 100 and 200 are a ranking of the highest-grossing U.S. law firms by The American Lawyer, an affiliate of the Daily Report.

This finding is consistent with discussions I have had with friends in management at AmLaw 200 firms.  And it consistent with my experience--one does not start pricing "flat fee" (more on that in a moment) work all that easily.  The tendency is to guess the number of hours a piece of litigation or other work will take, multiply by the hourly rates of people who will be doing the work, build in some cushion (10-15% seems to be the norm) and, voila, a fixed fee!  Sorry, but it doesn't work that way.  One of the key benefits of a flat fee (more on those later) is that they generate efficiency on the part of the lawyers.  But if the firm uses the calculation methodology some have confessed to using, none of the efficiency benefits are shared with the client. 

Put aside the lack of experience in calculating a fair fixed fee.  Put aside the cultural obstacles to doing fixed fee pricing effectively.  A flat fee, by itself, does not incentivize success.  It leaves in place the fear clients have that firms will push down work to the lowest levels while the partners keep working for clients who pay their high hourly rates.  Flat fees leave in place clients' fears that firms will simply stop doing work once the fee is concerned.  Flat fees provide no incentive for the firm to tell the client not to do something.  The essential element to making flat fees work is for firms to have skin in the game.  Whether by way of significant holdback or results-based premium, skin in the game is the answer to the kinds of concerns expressed above.  It also will force the firm to do a candid evaluation of the matter at the outset and share the outcome of the evaluation with the client.  Clients benefit early from a candid evaluation of the matter even if the evaluation is that the matter is not worth the firm's risk.

Back to the law.com article, clients need to educated consumers so they don't accomplish budget certainty by paying a higher total fee than they should.

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I just finished reading What I Wish I Knew When I Was 20, by Tina Seelig.  Dr. Seelig is a neuroscientist and the executive director of the Stanford Technology Ventures Program, the entrepreneurship center at Stanford's School of Engineering.  I wish I knew this now, at 52.  I have spent a lot of time talking about change in the legal profession, developing new business models and other the rapid development of new technology and the effect it will have on us.  Here's Dr. Seelig's lesson:

It's incredibly easy to get locked into traditional ways of thinking and to block out possible alternatives.  For most of us, there are crowds of people standing on the sidelines, encouraging each of us to stay on the prescribed path, to color inside the lines, and to follow the directions they followed.  This is comforting to them and to you.  It reinforces the choices they made and provides you with a recipe that's easy to follow.  But it can also be severely limiting.

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Uncertainty is the essence of life and it fuels opportunity.  To be honest, there are still days when I'm not sure which road to take and am overwhelmed by the choices unfolding in front of me.  But I know that uncertainty if the fire that sparks innovation and engine that drives us forward.

The book is a quick read.  It should be mandatory for every child in high school, and every 52 year old who wonders what life is putting on his or her plate.

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The need to improve is never satiated.  Just as true is the fact that "fresh eyes" frequently see things that those closest to something cannot see themselves.  These two facts were the impetus for Valorem Law Group forming an Advisory Board.  It features current in-house lawyers,current and former GCs, advisers to the legal profession, consultants, bloggers and thought leaders.  Many are not clients of the firm.  All are terrific people and we are profoundly thankful for their participation.  Details on the group members are available here. 

I have said in the past that I hope to avoid using this blog as a platform to promote Valorem, and I remain true to that sentiment with this post.  The point isn't to promote Valorem, the point is to underscore the value to involving others in your efforts to improve.  It can make a difference.

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This headline caught my attention: "Billable Hour Hullabaloo is 'Overblown, Drinker Partner Says."  Courtesy of the ABA Journal, The headline is true to the article. 

“The billable hour is an overblown issue,” said Drinker Biddle & Reath managing partner Ed Getz, in an interview with the ABA Journal.

Getz goes on to say that clients are focusing their attention on capping total fees and budgets, but are not so interested in abandoning the tried and true billable hour. 

This defense seems to be "because it is, it will be."  Comfort with the status quo is a given.  Were it not true, there would not be a status quo. 

In various posts on Legal On Ramp, Fred Bartlit has made the point that the last people to change are the people who do best under the old system.  Everyday, BigLaw proves the truth of this conclusion.  It is hard to see that a client concerned with budget certainty and fee caps is interested in something other than buying six minute segments of time.  By refusing to see the client's real concern, law firms are missing an incredible opportunity to rebuild themselves and seize market share.

On a personal level, I loved this quote from a partner at my former firm:

Arthur Hahn, the national chair of Katten Muchin Rosenman’s financial services practice, said his firm will continue to increase associate training and invest in technology to increase value to clients. But, the democratic partnership structure at the core of the legal profession will survive.

Said Hahn, “The practice of law is a profession, not simply a bottom-line business."

When I left Katten in 2000, things were different.  It actually took pride in being a bottom-line business.

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Several weeks ago, I posted about Jeff Carr's 4 buckets of law practice--process,content, advocacy and counseling.  In the same vein, Jordan Furlong advises lawyers to Get ready for the process era.  It is an outstanding piece of work and presents a similar view much more capably.  Jordan's conclusion:

I was listening to Richard [Susskind] deliver the keynote address at the ABA TECHSHOW last month when it occurred to me how fundamental a change this will be within our profession. We’ve never needed to worry about process or efficiency before — we dictated the terms of the marketplace, so we could take as long as we liked to do our work and in whatever fashion pleased us. That’s coming to an end, and most law firms will face a huge challenge converting their business models to adapt. I twittered as much during Richard’s presentation: “Future legal business: process consultant for law firms. Lawyers will need help mapping out and re-engineering their practices.”

In the near future, it won’t be good enough for lawyers to ignore the journey and focus on the destination — we won’t be able to focus solely on the ends and let the means take care of themselves. The nature and quality of how we do our work will become at least as important as the work itself. That’s going to be very tough for us to wrap our heads around, but I don’t see any way we can avoid it.

My only addition to Jordan's piece is the this future is here.

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It may be, according to this post in the Harvard Business Review Editor's Blog.  This article discusses the relationship between buyers and Chinese manufacturers, but also notes this:

Is the buyer likely to trust any vendor again? Not surprisingly, when HBR surveyed readers in January 2009, we found that more than one-fifth of 1,024 respondents admitted that their trust in suppliers had been shaken over the past 12 months. That relationship isn't the only casualty; the June issue of HBR, online next week, will spotlight trust. As the articles will show, trust has drained away in almost every facet of business. (emphasis added)

Has the recession hurt the trust between law firms and their customers?  Hard to imagine it hasn't.  While I doubt the HBR articles will address this specifically, I'll be looking forward to seeing whether any of the articles shed some light on this relationship.

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Rahm Emmanuel is famous for saying "a crisis is a terrible thing to waste."  But another crisis truism comes to mind as well: "by the time you recognize a real crisis, it may be too late to do anything about it."  The question for the day is whether law firms yet today recognize the real magnitude of the crisis they are facing.  There is scant evidence to suggest they do.

As I was driving in today, I heard a report on the unprecedented decline in business travel, business bookings at hotels and related markers showing that businesses are not close to rebounding from the extreme difficulties created by the economy.  Last night, the report was that the current recovery in the stock market is following a historic pattern that suggests a further decline is still on the horizon.  Then there was the report about the continuing decline in home values, meaning Americans continue to lose wealth and the resulting buying power.  People are forgoing retirement because they no longer can afford to retire.  And so on.  The point is that American business is facing uncertain times for longer than they care to imagine.

So what are law firms doing in the face of this?  They have played at the periphery.  A few lay-offs (but more on the horizon according to Peter Zeughauser), some salary cuts counterbalancing paid vacations for new associates, eliminating free coffee and other moves to trim expenses.  The essential model is unchanged, which leads only to one of two conclusions: a) law firms still do not understand that their business model no longer works; or b) they get it but don't know what alternatives exist--a failure of imagination.

In the meantime, the value of the current crisis is being wasted. Law 360 contained an article today, Firms Rethinking Business Model in Recession, that initially gave me hope that more was happening than was public.  But this sums up the article:

While legal consultants said few firms had made changes to their governance so far, all agreed that law firms were reassessing every aspect of their businesses.  Some consultants, however, cautioned that the middle of a recession might not be the best time for wholesale changes because no one knows yet where the chips are going to fall.

Governance!  That's like the owners of the Titanic asking is they should change the color the ship as it was sinking into the Atlantic.  Maybe that second truism has some merit to it after all.  A crisis may be a terrible thing to waste, but law firms that do not re-examine their fundamental business model are doing exactly that.

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Seth Godin, a leading marketing adviser, has a fantastic discussion of the difference between luxury and premium goods in his blog today.  The entry is suitably titled Luxury vs. premium.  Here's what he says:

Luxury goods are needlessly expensive. By needlessly, I mean that the price is not related to performance. The price is related to scarcity, brand and storytelling. Luxury goods are organized waste. They say, "I can afford to spend money without regard for intrinsic value."

That doesn't mean they are senseless expenditures. Sending a signal is valuable if that signal is important to you.

Premium goods, on the other hand, are expensive variants of commodity goods. Pay more, get more. Figure skates made from kangaroo hide, for example, are premium. The spectators don't know what they're made out of, but some skaters get better performance. They're happy to pay more because they believe they get more.

This same rationale can apply to law firms.  I know that every big firm detests the idea of doing "commodity" work ("they" do commodity work, but of course "we" don't).  I always wonder that everyone says that everyone else is doing commodity work how it is that no one is doing commodity work.  But that's another story. 

If a client chooses to pay enormous rates for a New York firm for work that can just as capably be handled by a firm from  Columbus or Chicago or Oklahoma City, it seems to me that they are using a luxury firm.  In these days, how many GCs can afford a Rolex when an Omega will do the trick?

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Interesting article in Time.com, Why Rookie Lawyers Get $60,000 Paid Vacations.  The article never answers the question, it just talks about how individual 3Ls are reacting to the "opportunity."   No one has really spoken about this from the customer's perspective.  If a firm has an incoming class of 50 new lawyers, somebody is paying for that $3,000,000.

Is it too early to start a betting line on whether firms raise rates in 2010?

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"... it’s more based on the data I’m seeing on the firms’ financial performance. The data is dismal, and it leads you to certain conclusions. Often consultants draw those conclusions sooner than the firms do, but they’re going to draw the conclusions too."

So spoke law firm consultant Peter Zeughauser, in the WSJ Law Blog, in a scary post titledWill BigLaw Slash Hiring By 90%?. A few more observations:

"Well, we’re still way ahead of 2006 in terms of compensation. We’re going to have a down year this year, and according to some calculations I’ve read, profits-per-partner across the board could be down as much as 30 percent unless there’s at least a 10 percent reduction in headcount."

"I think you’re going to see underpeforming or poorly performing partners managed out, and I’m talking about both equity and non-equity partners. When I talk about poor performers, I mean I’m referring not just to hours and billable rates, but also their ability to attract clients. I hear from a lot of managing partners the lament that “my partners don’t act like owners.” I think these partners — the partners who “don’t behave like owners” — are going to struggle."

These observations beg the question--what drugs do BigLaw managing partners take?  Seriously, can you imagine the carnage if PEP are down anywhere near 30%?  Because you know that 30% will not be borne equally by all partners--the gorilla rainmakers are not going to be hurt like others.  And then there is the question about bank debt, lease guarantees and other financial commitments that are certain to take center stage as the profit numbers plummet.

The real question for law firm customers--are your lawyers going to paying attention to you and your matters while fighting for survival? 

SPECIAL NOTE:  A few days ago, I posted about Twitter.  Well, I took the plunge, and this post is courtesy of a tweet by Ron Friedmann, who also blogs at Strategic Legal Technology.  Thanks Ron.

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The US Bankruptcy Trustee is moving to disqualify Kirkland & Ellis from representing General Growth in the company's bankruptcy, which is pending in New York.  The reason?  General Growth also is represented by Weil Gotchal and the trustee believes “the danger of overbilling and duplication of billings is great.” Ya think?  Overbilling squared.

By the way, Weil Gotschal was paid $14 million by General Growth for bankruptcy work before the Chapter 11 filing.  Poor Kirkland was paid only $5 million. 

ADDENDUM:  The BK judge allowed both firms to represent General Growth.  Oddsmakers in Las Vegas immediately set up a betting line as to whether there would be any $$ for creditors once firms finish their representation.
 

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Usually, I start a post by typing the title and I go from there.  I know what I want to say.  This time, I'm not sure where to go or what to title the post.

Two tidbits of information came to my attention today, both published.  Above the Law reported last week that Jenner & Block has recently de-equitized more partners.  Today's chicagotribune.com reported that Seyfarth Shaw announced that it expected 2009 profits to decline by five to seven percent.  This public announcement is perilous because of the effect it can have on partners joining the firm or leaving it.  A missed target could easily trigger the law firm equivalent of a run on the bank.  The peril of such an announcement is obvious, making me wonder why the announcement was made at all.  What benefit would outweigh the risk?  One risk that would outweigh it is the death by a thousand rumors, internal or external, the firm might be experiencing or anticipating in the interim. 

Do these two things provide broader insights other than into just these two firms?  Perhaps not.  But these are good firms, formerly rock solid.  But neither piece of information is consistent with rock solid status.  Which leads me to wonder (and boy do I hate to sound like Donald Rumsfeld), if we know this about these two firms, what do we not know about all the other like firms (say, AmLaw 25-200)?  It does suggest to me that firms continue to tinker at the margins but still have not come to the realization that survival depends on embracing a new business model. I was going to suggest that this isn't really surprising, but at some level, that's like suggesting that it is appropriate to wait for the whole house to be ablaze before trying to put out the fire.

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Altman Weil has released the results of its Law Firms in Transition flash survey.  The results are fascinating.  Here are some highlights :

• The top four areas of permanent change identified by all survey respondents were:  more price competition (chosen first by firms in all size categories), a longer partner track, more contract lawyers and more non-hourly billing.
• The top four changes identified as temporary were: reduced first-year classes, reduced associate salaries, lower profits per partner and reduced leverage.
• Seventy-one percent of respondents indicated that the size of their law firm made it more competitive in the current economy; 26% felt their size was not a factor, and 3% were not sure.  Not one law firm saw its size as a disadvantage.
• Despite their belief that competitive pricing is key to winning new clients, a very small number of law firms, and none with 250 or more lawyers, reduced any of their billing rates in 2009. (Wow!)

Here is Altman Weil principal Tom Clay's take on the questions regarding alternative fees:  "Law firms are slowly increasing the amount of alternative fee work they do, but most still haven’t figured out how to structure and staff projects so they are more profitable."

I've written before that clients should be wary of firms that are based on an hourly rate model trying to compete in the alternative fee world.  One cannot be fish or fowl.  Best evidence of potential problems?  The findings of temporary changes--that reduced leverage and reduced profits per partner are only temporary.  The conclusion?  Many of these firms are resisting change and believe that we are experiencing short term deviations from an on-going norm.  Clients beware.

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I have not been able to figure out Twitter.  Here's the description from Wikipedia:

Twitter is a free social networking and micro-blogging service that enables its users to send and read other users' updates known as tweets. Tweets are text-based posts of up to 140 characters in length which are displayed on the user's profile page and delivered to other users who have subscribed to them (known as followers). Senders can restrict delivery to those in their circle of friends or, by default, allow anybody to access them. Users can send and receive tweets via the Twitter website, Short Message Service (SMS) or external applications. The service is free to use over the Internet, but using SMS may incur phone service provider fees.

As you can see, individual messages are known as "tweets."  Cute.  But I still can't see how this helps me be a better lawyer or develop new business.

My own lack of imagination, however, should not be read as an indictment of Twitter-ing or Twitter-world.  It is, instead, a confession that I need to spend some time pondering the value of this social-networking phenomenon.  In the meantime, I bring you Matt Homann's 100 Tweets: Thinking About  Law Practice In 140 Characters Or Less.   My friend Anne Reed from Milwaukee now has 606 people following her tweets.  Anne writes the highly regarded Deliberations blog.  And I often see people linking to this blog from Twitter.  So there clearly are discussions of interest going on in Twitter-world.  Time to start thinking.

Perhaps the biggest challenge here is figuring out whether I could ever say anything worthwhile in 140 characters or less.

ADDENDUM:  After posting this, I ran across a Fast Company FC Expert Blog post titled Why Guy Kawasaki Is Wrong About Twitter, which links to Guy's post, How to Use Twitter as a Twool.  Both are good reading if you share my ambivalent feelings about Twitter.

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I've mentioned my friend Dan Hull any number of times in my posts.  He is thoughtful, an extraordinary writer and someone who shares my passion for providing great service to our clients.  He sees things through the same client service prism I do.  I don't always agree with him, but when I don't, I devote a lot of time to thinking about why.  I don't want to miss an insight he has that I might have missed, leading to bad judgment in staking out a position.

Dan's What About Clients? blog contains a new post, The Scramble for Value, that asks whether the focus on new business models, work-life balance and other issues has caused us to lose sight of the importance of client service.  Dan frames the question much better than I ever could:

Lawyers are not special. We are servants, if often well-paid ones. Billing models, partnership structures, staffing alternatives, the care and feeding of associates, firm culture, collegiality--they mean nothing unless designed and maintained for clients' day-to-day needs. We are not royalty. We serve. We anticipate, prevent and solve client problems. Nothing more. Can we focus more on the real deal: the Art of the Client. What else is there?

In this circumstance, I agree and disagree.  We are, as a profession, spending a lot of time talking about what "this" means for lawyers and how firms must alter their business models to survive, and so forth.  Not client centric at all, and regrettably so.  But at the same time, there is no discounting the fact that, in the main, service flows from the business model, or the business model acts as a levy and interferes with client service.  Not 100% of the time.  Not every lawyer.  Not every firm.  There are exceptions.  Notably, Dan's firm seems very much the exception, focusing on long term relationships and ensuring that bills reflect value.  But if we focus on the exceptions and lose sight of the norm, we miss too much.  Having seen both the hourly rate business model and the alternative fee model up close and personal, I am 100% convinced that the latter model provides more for our customers.   Not 100%, every firm every time, but much more so than the hourly rate model.  I've written about the reasons at length and won't run on here.  Time will tell, but in the meantime, as Dan suggests, let's keep our eye where it belongs: on our customers.

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As I posted a while ago, I had been asked to participate in a panel on The Future Of Fees at the Superconference put on each year by Inside Counsel, a publication on the regular reading list of informed inside counsel.  This year's conference concluded on May 6th.  It was an extraordinary event.  The discussion with my fellow panelists, Fred Bartlit (Bartlit Beck), Karen Klein (GC of Kayak.com) and David Grumbine (Senior Counsel, Whirlpool) was fascinating on many levels, at least for me.  My great thanks to them for sharing so many insights.

A couple of the presentations I attended were noteworthy.  My friend Dan Hull led a panel on Dealing With Gen Y at work.  Great discussion, great debate, great insights.  Dan did an outstanding job assembling a panel with diverse views, from both inside and outside counsel including boomers and actual Gen Y-ers.  Although Dan and I view this subject differently, I learned a huge amount from the discussion.

Jeff Carr, GC of FMC Technologies, and Paul Lippe, CEO of Legal On Ramp  participated in a panel on Web 2.0 and its impact on the practice of law.  I was able to attend only a portion of the discussion, but I left more firmly convinced than ever that web technology and the development of opportunities such as Legal On Ramp are going to accelerate the pace of change and, ultimately, the way we practice law and price for our services.  The glimpse into the future was exciting.  Even more exciting was the realization that in many respects, the future is here for those willing to take advantage of it.

Great conference.  Kudos to Tom Duggan, publisher of Inside Counsel and the host of the event, and Sheila Brennan, the architect of the event and designer of the content.  Outstanding work by Tom, Sheila and their team.

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I had a chance the other day to spend time talking with Pam Woldow of Altman Weil.  Wow, was I impressed.  Pam helps Inside Counsel achieve better performance from their law departments.  In today's world, that means she spends lots of time helping inside counsel deal with budget cuts, some as high as 50 per cent.  Pam is uniquely qualified, having been an outside lawyer in big law firms, the head of litigation of a multi-billion financial services company (and litigation seems to be where budget excesses seem to thrive), Chief Counsel of the Pennsylvania Department of Insurance, Deputy General Counsel of Pennsylvania, and General Counsel at a subsidiary of Advanta Corporation.  The prism she has seen the world through gives her unique insights into the challenges faced by inside counsel in today's world.

Pam and I had spoken before, and we certainly have posted on a number of discussions over at Legal On Ramp.  But until our recent conversation, I had not had a chance to get beyond the resume.  What I found in my discussion with Pam is that her resume merely scratches the surface of what she brings to the table.  Creative, insightful and able to cut to the chase while still recognizing the frequently-less-than-obvious internal hurdles many GSs have to confront as they struggle to achieve the improvements demanded of them.

I make this promise to inside counsel:  if you are confronting budget issues, speaking with Pam would be a great place to start.  I would be shocked if you didn't leave that conversation believing there are ways to achieve the impossible.

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I was reading the May issue of American Lawyer this morning.  From Citations on page 24: "I don't think partner retreats are what hold a firm together.  Frankly, what holds a firm together is money.  That's what holds us together."  This quote is attributed to John Quinn of Quinn Emmanuel, are originally reported in The Wall Street Journal Law Blog on March 26.

How sad. 

The same issue reports that Quinn Emmanuel's profits per partner were $3.335 million in 2008.  You'd think that, at some point, enough is enough and there would be something more that would bind a firm together.

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When we created the Valorem website, we boldly declared that "The Billable Hour Is Dead."  It was a bold statement, clearly relying on the "dead man walking" concept.  Today, a former partner and still friend of mine brought this blog post to our attention (Thanks Debra!):  Billable Hour Admitted To Hospital.  It is riotous.  Here's a sample:

Look, it’s no secret that the billable hour suffered an intense loss when his good friend mortgage-backed securities essentially passed away in early 2008,” explained legal commentator David Lat during an interview with Fox & Friends. “Now, people are turning on old billable hour while the economy’s in the toilet and he’s got nowhere to turn. I wouldn’t be surprised to learn that the billable hour tried to take his own life.”

A small candlelight vigil for the billable hour has already started to take shape outside of the Lenox Hill hospital. “I came here out of respect for a dear, dear friend,” explained White & Case LLP partner Leslie Davenworth. “People may say things like ‘the billable hour is dead’, but as someone whose ascent to partnership was based solely on my logging of 2,500 or more hours per year, I refuse to believe it. I’ve just become too attached to my good friend to say goodbye right now.”

The post is from Litination.  (By the way, the Associate Photo captions are worth a visit.)

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Another great post by Dan Hull at What About Clients?, this one on Ease Of Use Services.  Dan begins with a pet peeve I share, the way the gap between the lip service to client service and the actual service provided has rendered the notion of client service nearly meaningless.  For some organizations--Dan's firm, elite hotel organizations such as Four Seasons, and others--client service is part of the organizational DNA. 

Dan raises the question of what if firms had to compete on our clients' ease of use experience.  He frames the question in the context of Folgers coffee can, which won an ease of use commendation from the Arthritis Foundation.  Dan then issues this challenge:

Develop and apply ease-of-use concepts to pure services? Our clients' services? Our services? Sure, why not? It's probably coming anyway, even while it will be infinitely harder to do for services than for products. WAC? has noted before that even corporate clients that sell goods see themselves as selling solutions and not products.

                                                                    *****

Law firms, of course, have always sold services. And we are a small but powerful engine in the growth of the services sector. We strategize with and guide big clients every day. While that's all going on--day in and day out--what is it like for the client to work with you and yours? Are clients experiencing a team--or hearing and seeing isolated acts by talented but soul-less techies? Do you make reports and communications short, easy and to the point? Who gets copied openly so clients don't have to guess about who knows what? Is it fun (yeah, we just said "fun") to work with your firm? How are your logistics for client meetings, travel and lodging? Do you make life easier? Or harder? Are you accessible 24/7? In short, aside from the technical aspects of your service (i.e., the client "is safe"), do your clients "feel safe"?

What if law firms--or any other service provider for that matter--"thought through," applied and constantly improved the delivery of our services and how clients really experience them?

And then competed on it...?

That imagining thing is hard.  Turning into reality?  Way hard.  But if client service was easy, everyone would be doing it.  Instead of just talking about doing it.  Dan's post goes right to the core of real client service--it is not what you do,it is who you are.

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Jeff Carr, the General Counsel of FMC Technologies and ACC Board Member, has spoken often about his idea that legal services fit into four buckets, two of which he is happy to pay for and two of which he thinks will someday be free.  Jeff says he happily will pay for advocacy and counseling, which require skill, expertise, knowledge of the company and which are, at their core, customized services.  The other two buckets are process and content.  Jeff sees these kinds of products as ultimately being provided for free or at very minimal cost on the web.

I know that some people have questioned this vision.  But a new post in The Adventures of Strategy by Rob Millard or the renowned Edge International consulting group suggests Jeff's vision is here, or at least on the not-too-distant horizon.  Rob's post, The inexorability of commoditization, describes Wilson Sonsini's launch of a web-based Term Sheet Generator for venture financing for free.  The story also is described by Ross Hollman, in Strategize, who discusses the "why" question:

Why would Wilson Sonsini do this? It's not really costing them anything -- by their own admission, it is a web-based, generic version of a tool that they already use in-house. Maybe the end result will work for some venture money, but my guess is that there's enough that's generic that you may need to call Wilson Sonsini for advice and/or customization: give away the artifact (i.e., the term sheet) and make your money on the resultant service. Will some other attorneys use this and charge their clients for it? Probably. But my guess is that Wilson Sonsini is not after the clients that would go to those types of attorneys.

Rob Millard then makes the point Jeff Carr has been preaching:

Ross and others preaching a similar message including Mark Chandler (general counsel of CISCO,) and Richard Susskind (author of 'The End of Lawyers') are dead right: the days of selling knowledge or standardized templates by the hour are almost gone forever. In the (near) future, information and "artifacts" (I love that term ... ) will be freely available in the market. Professionals will only make money where they need to apply deep expertise and judgment to their clients' specific businesses in ways that yield high value. For this, they will be able to charge superior rates not only because of the high value to the client, but because such deep expertise and judgment will remain rare in the market given the effort required to acquire it and remain up to date. For those relying on less sophisticated services, the price race is on .... all the way down to zero.

Given the paradigm shift now underway courtesy of a troubled economy, I wonder how many law firm leaders will think about this issue.  I wonder how many will actually frame their plans around this idea.

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I was intrigued by a a post penned by my friend, Dan Hull, on What About Clients?.  In We, The Undisciplined, The Miserable, Dan raises this issue: "Do we lawyers know how to get things done, done right and done on time? Do we even value that? I wonder."  Dan then compares the results obtained in business schools and in big company training programs with the results achieved through training at law firms.  Dan ends his sobering post with this observation:

For a long time I've thought that American business schools and the training programs of global and often publicly-traded companies do a much, much better job than do law firms of training recruits to value and adhere to the structure of a plan on an item for action. It's almost as if law school and firms deem us all such "professionals" and "artists" that we are beyond learning skills of project planning and execution. What a crock. Not learning the value of pushing non-urgent but important things along at a steady pace has cost us dearly. As motivated as lawyers often are, our discipline for sticking to anything and seeing it through is often poor; again, unless it's urgent, we just don't see its value. Do our best clients run their businesses that way?

This attitude is the norm, and we lawyers--who rarely innovate or take a leadership position on anything in commerce--are just fine, thank you, with it. After all, "all the other law firms" are mediocre on the discipline of getting things done, and have "crisis-only" mentalities--why shouldn't we be that way? So we waste time blowing off important but longer term projects. Worst of all, we send to others in our firms, and especially to younger lawyers, the message: "No worries--just work on a barely adequate level; don't do things until you have to; and if it's not urgent, let it slide." As with client care and service, our standard is not only embarrassingly low, we are exporting that low standard internally whenever and wherever we can.

Great point.  Great post.

PS:  Of all the blogs I read, WAC? is a favorite.  Always well-written, sure to make the synapses of my brain fire, and dedicated to providing the best service to clients.

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The AmLaw Daily reports today that an insurance company has sought to compel arbitration against a prominent Los Angeles based firm over the reasonableness of its fees handling a toxic tort matter.  Among the allegations are an associate who has not yet passed the bar charging $450 per hour.  Over a 4.5 year period,the firm charged the insured nearly $22 million.  The petition also refers to the size of the legal team:

 For the most part, the team of 15 attorneys and 11 staff spent their time reviewing the same things and then billing to confer among themselves about what they had reviewed.

The firm declined to comment, and it appears from the article that the firm was charging a blended rate, which led to the $450 per hour issue. 

A couple of things bear comment.  First, as I have said before, lawyers who bill by the hour and firms built on that model have a cultural ethos that seeks to maximize hours.  There is no simple way around it--if your model begins with an intent to charge for time, people will look for ways to maximize the time spent.  It doesn't matter what the firm says to contrary in its marketing materials or even if it occasionally negotiates non-hourly fee arrangements.  Institutional culture trumps one-offs every time.

Second?  I'm thinking how much lower the total paid could have been if a results driven fixed fee had been agreed to.  But then, don't get me going on insurance companies and the money that industry wastes.

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I had the great privilege of participating in FutureFirms 1.0, organized by Professor William Henderson of the Indiana University School of Law.  The event, sponsored by Hildebrandt, feature four teams comprised of law firm partners, associates, current law students and actual clients.  There was a fact pattern that all teams operated from, essentially a typical AmLaw 200 firm that was looking to restructure itself.  The contest is wonderfully described by Aric Press, the Managing Editor of American Lawyer, who covered the event.

Those familiar with Valorem Law Group know that I have spent considerable time thinking about the right business model for law firms wishing to place a stake in the future.  What made FutureFirms 1.0 was the the chance to discuss many of my ideas with people far smarter than me and constituencies such as law students and actual clients.  I learned so much, and I am so very grateful to  my teammates, including the phenomenal Ed Reeser, Mike Short (our Hildebrandt consultant), Tonio Desorrento, Sonia Miller Van-Oort, Darrick Hooker, and two outstanding law students and three clients who shared so many insights. 

I was encouraged by the fact that all four teams had many common ideas that demonstrated true focus on meeting clients needs, and a willingness to invest in the steps needed to change firms in ways that will make meeting client needs more realistic.  One of the most interesting parts was a mini-keynote delivered by Anthony Kearns, CEO of the Legal Practitioners Liability Committee (of Australia), a co-organizer of the event.  Rarely has there been so much substance delivered with such humor.  Aric Press summarized the presentation this way:

To add urgency to this climate, the weekend began with Kearns, the Australian lawyer, offering an amusing but sharply focused description of the American big-firm landscape. Here's what he sees:

1. The big-firm bubble is about to burst. Choose your pin: angry clients; the exodus of talented people from the practice of law; the competition for associates that firms can't afford; the increased competition for business between and among the firms.
2. The prevalence of bigger and stronger in-house departments.
3. The presence of three generations in the law firm workplace.
4. The global financial crisis, which has broken the old relationships.
5. The utter failure of firms to differentiate themselves to clients or recruits. (And, I might add, to themselves.)

And then he compared this situation to the lot of turkeys. On average, he said, they live 1,000 days. Each day when they wake up, everything seems exactly the same, except that some friends are not around anymore. Everything else seems to be okay. Get to day 1,000, however, and things change, suddenly and with extreme prejudice. He didn't think a lot of firms would die like a slaughtered fowl. Nor did he think that large law firms were going away. But some were in jeopardy, even though they didn't know it. Deaths take a while, and intensive care can prolong all sorts of partnerships.

The question: Is it too late to get healthy?

Or, as the great man wrote, are you busy being born or busy dying?

Special kudos to Professor Bill Henderson and his IU colleagues for hosting such a thought-provoking event, and to Hildebrandt for sponsoring the event.  I hope there are more to follow.

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Yesterday, I saw something I had never seen before.  A Lincoln pick-up truck.  I've never seen a BMW pick-up, or a Lexus pick-up truck.  Nor, if memory serves, an Audi, Bentley, Rolls, Porsche or Infinity pick-up.  I was surprised.  Lincoln used to represent the ultimate in American luxury cars.

Why did this resonate with me?  I had been having a conversation with a friend of mine, a partner at a very large law firm.  He kept talking about the firm's multi-stage platform and how good the firm was at, well, everything.

When I saw the Lincoln pick-up truck, I knew two things.  One is that it is not possible to be all things to everyone, or even many.  These days, that opportunity doesn't exist anymore.  And if you try to be all things to some, you are destined to be nothing to all.

The second thing?  I'll never buy a Lincoln, precisely because of the first thing.

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The March 30 issue of National Law Journal contains an article, reprinted on Law.com, discussing how some inhouse lawyers are responding to the economic crisis by asking their firms to slash hourly rates.  The discounts discussed in General Counsel Pressuring Firms Amid Recession  are not quantified, but include references to "we'll match any qualified offer" and similar gimmicks.  Those inhouse lawyers seeking discounts to offset budget decreases of up to 35% of ignoring the fact that the hourly rate is only one component of the cost equation.  This point is effectively made in the article by Joel Henning of Hildrebrandt and Susan Hackett of ACC.  It's a point I've made before as well.

The articles does note that some customers are moving their work from large firms to smaller firms where the value offering is much higher.  This is a smart step, but it should not be the only step.  Lawyers at any firm want to make money, and if the hours are available, the numbers on that side of the equation will pile up.  The keys are efficiency and quality, two attributes never associated with the hourly rate model.

General Counsel faced with unprecedented budget cuts need to be more creative than simply seeking discounts or moving work to lower priced providers.  There are systemic solutions there to be had.

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I recently wrote about whether BigLaw would take the opportunity provided by the economic downturn to change their fundamental business model. Yesterday, I ran across an article in law.com suggesting change may be occurring.  Tough Times For Law Firms, Lawyers May Be Catalyst For Positive Change posits the theory law firms are changing because they are changing the way they hire and the starting salaries for new associates.  Written from the perspective of a legal recruiter, the article misses the mark.   The change addressed in this article is peripheral at best. BigLaw firms are about the partners, not the associates.  Clients are really secondary, necessary evils needed to bring in money.  Associates are overhead. 

Here is the benchmark by which one will be able to judge whether real change is occurring in the legal profession.  When firms abandon leverage in favor of efficiency and quality, change will have occurred.  When the focus is on providing materially greater value at materially lower costs, real change will have occurred.  When the focus is on winning (however a client defines that objective) instead of body count, real change will have occurred. 

We aren't there.  We may never be.

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Accountancy Age encourages financial advisers to "charge by the hour if you want to survive."  Essentially, the argument is this:  hourly fees are more predictable than commission-based income.  Meaning, you can more more if you charge for your time than if you charge for your results.

Pathetic.  Especially when you realize that the minute the market starts north, people will abandon the hourly rates to return to lucrative commissions.  I propose this slogan for the financial advisers who adopt this approach: "We'll soak you silly when you win, and then soak you more when you lose."

Thanks to Trey Meyer and his LexKansas blog for the tip on this article.

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The recent story of General Motors provides an interesting point of comparison for law firms.  Before approaching the government last December for bailout money (and a tone-deaf request at that), General Motors had decades to change itself into a company that could compete in the future.  It failed.  Between December and last week, GM had a chance to change itself, or at least create a plan for change, that would allow it to survive.  It failed.  It was then forced to sacrifice its CEO and try yet again, this time with substantial direction from the Federal Government.  You know things are in bad shape when the Federal Government has to provide what is, to most informed observers at least, direction and guidance on some fairly fundamental points.  Three chances.  GM is down 0-2 in the count and time will tell--and not much time at that--whether it swings and misses yet again.

No law firm is going to get a government bailout.  Firms had a chance before the economic crisis to structure themselves in a way that would make them effective competitors in the post-downturn period.  If any of the AmLaw 200 took advantage of this opportunity, it would be news, and i certainly haven't heard about it.   That means that most of these firms are going to have one chance--and the clock is ticking--to make material changes to their business models and get it right.  Once again, there is scant evidence that firms are taking advantage of this opportunity.  Strike 2--and its a two strike league--is on the way for many.

What will the end look like?  There will be some abrupt explosions.  We've seen some examples already, with Heller coming to mind.  There will be come mergers, akin to the marriage being forced on Chrysler and Fiat.  Two economic lightweights combining will only yield a larger economic lightweight, so these forced marriages will at most buy some time, but the death watch will be on.  There will be a growth in partner departures, as those who can do so will look for smaller, more nimble ships to use as a platform.  At the same time, the strongest of the large firms will use the period as an opportunity to cherry-pick  talent, and they will make themselves stronger.  Banks, landlords and retirement debt will be play a critical but hidden role behind the scenes.  Lastly, the continued pressure by clients to cut costs will effect firms differently. 

Darwin is at work here in so many different ways.  But unlike GM, there will be no government to hold firms' hands and guide them to survival.

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I love the Westin Hotel in Seattle.  I have several great memories of that hotel. But on Thursday, I was in a hurry and I needed to grab a quick bite.  For some inexplicable reason, this hotel does not have a restaurant for breakfast.  Instead, there is a little cafe where you can get breakfast, but there is no wait staff to speak of.  And on this day, when I was in a hurry, the line to order was close to a mile long.  Well, maybe not a mile, but it took a long, long, long time to order and by the time I did, I was simply taking coffee to go.  In the grand scheme of things, is this a huge problem?  Not really.  Those who know me know that I can afford to miss a meal or a hundred.  But it irked me enough that I am going to look at hotel options the next time I am in Seattle.  And that is the last thing any hotel chain should want.

Lessons for lawyers?  I would hope the big one would be obvious.  Giving your customers any reason to look at another firm is a sure way to lose customers.  Because some will find something where the little thing that irks them about you isn't any issue.  Moral of the story:  don't do a great job on most things and flub up on the little stuff.  Be great at everything when it comes to client service.

(And if anyone from Westin happens to read this, I also don't like the fact that you are not putting bathrobes in your rooms anymore.)

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Question for clients.  How would you feel if your law firms hiked their hourly rates by 3% today? That's right, you get the same work output and pay 3% more.  Okay, show of hands.  Ummm, any body want that 3% increase?  Is there a single hand to be raised?  Of course not.  You would think the law firm insane.

Don't assume this isn't happening to you.  Do assume you'll never know about it.  How is this happening?

Vendors pushing time capture software are showing firms studies that show that 62% of lawyers do not enter their time the same day.  For those that don't, 10% of time is lost, never entered.  Forgotten meetings.  Forgotten phone calls.  Forgotten briefs.  This software helps people remember that which they forgot, and they are promising a 3% addition to the firm's bottom line.  Without any additional work being done and, save for the software expense, no expenses.  Firms appear to be lining up. 

From my vantage point, this begs the question--where do they think this money is going to come from?  The TARP fund? The Fed printing some more money?  It will, of course, come from the firm clients, which will be paying 3% more for the same work.  I have yet to discern any way in which this differs from a 3% rate hike, except for the secrecy with which its being done.

PS.  Ask the firms how long they will be keeping this data that will help capture this "lost" time.  The answer will astound you, but I can assure you of this.  Most clients will never be able to see this data.  It will be long destroyed before you ever ask for it.

To be clear, I think this is a bad strategy for law firms--I advocated lower rates going into 2009--but even more than that, I think the stealth nature of this rate increase just plain stinks.

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You're a young associate.  Several of your friends have been "laid off" (most non-law firm types call it being fired).  They are struggling with their loans, losing their apartments, having to move home.  Then you look down at the assignment given to you by the one partner not hoarding the work to himself.  You think to yourself, "I could probably get this done in a couple of hours."  But then you remember you are short of meeting your hours targets.  Is it surprising in this circumstance that associates "take a bit longer than they otherwise might" to complete the assignment?  Hardly.  What are firms doing to combat this pressure?  Nothing.  To the contrary, most firms encourage it.

It is one of the ironies of the short-sighted, leadership-less response to the economic crisis that firms responding by cutting staff and professional personnel are only exacerbating the behavior that helped feed the problem in the first place.  But that is precisely what they are doing.  In Bad Times May Bring Out Bad Behavior For Lawyers (sub. req.), Law 360 discusses this problem, with William G. Ross, a Professor at Stanford School of Law who specializes in billing ethics, concluding, "I think job pressure will inevitably increase billing pressure, which will encourage unethical billing."

The real problem goes far beyond unethical billing.  It begins with work hoarding at more senior levels, extends to people doing their own typing when they don't normally, continues to "checking cases in a few extra states just to make sure that the citation to black letter law is correct, carries on to the extra edit or two just to triple check there are no typos in the motion for extra time to file a brief, and so on.  My point is that these incredibly smart lawyers can figure out ways to legitimately make more work for themselves without necessarily fictionalizing their efforts.

Who pays for this?  The very clients challenged by the economy, whose reductions in work led the law firms to cut back on staff in the first place.  Ironic that the end result may end up being higher bills (or at least higher write-offs for the firm).  Efficiency is the first casualty of the billable hour system.  The problem is the model, not the people.  So, punchline for clients: if your firm is not changing its business model--dramatically--then watch your wallet.

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There are many law firms that apply the Hippocratic oath to their public expressions--first do no harm.  An in the course of "doing no harm," they become milquetoast and merge into background, just like elevator music.  No one hears it.  No one cares about it.  But no one is harmed.  Mission accomplished.

Those who have read this blog or visited Valorem's website know that I don't subscribe to this approach. I believe in expressing and debating ideas in a marketplace.  And in a good marketplace, the best ideas will rise to the top and survive, until toppled by a better idea.  The hard part is keeping on open mind to fairly judge the ideas that are better than your own.  This approach runs the risk of offending or alienating some, but it also will attract those who value your ideas and expressions.

I have written before about my participation in various Legal On Ramp forums.  Yesterday I noted that "[t]hese {LOR forums]  include some of the most interesting, informed and insightful exchanges I regularly observe."  I'd like to report a success story.  Legal On Ramp really focuses on inhouse counsel: they are the intended beneficiaries.  Well, one inhouse lawyer read some of the things I had written and, based on that, decided to take a look at Valorem's website.  There, he noticed some things he like and he started to read the partner bios.  Taken with my partner Hugh's reference to "two pizzas and a porno" in his bio, the client picked up the phone and called him.  The end of this too long story is we were retained to handle a matter for this client.

So, even if one were inclined to dismiss the value of the learning that can occur in the marketplace of ideas (like LOR), there's always the potential for pecuniary benefit.  So, milquetoast or smart money?

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There is a fascinating discussion going on in a Legal On Ramp forum under the same title as this post.  I am taking the liberty of quoting in its entirety a post by Fred Bartlit of Bartlit Beck, because it is so incredibly indicative of BigLaw's attitude about the current state of things:

I've been writing a lot lately that large law firms are changing at the periphery with genius moves like eliminating coffee and terminating associates, but that so far none have demonstrated any real commitment to change their business model.  This post,  in a nutshell, explains why.  And Fred has hit the nail on the head with his characterization of the state of mind involved.

Addendum:  I neglected to include in my original post a brief comment on the Legal On Ramp Forums.  These include some of the most interesting, informed and insightful exchanges I regularly observe.  Kudos to LOR and the many forum participants.

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Yesterday's online version of the Washington Post contains an interest article, Recession Sends Lawyers Home, that discusses the growing number of virtual law firms.  The article discusses Virtual Law Partners and others.  One of my partners wondered whether our true competition would come from virtual firms rather than BigLaw.

It's interesting to note that Virtual Law Partners does not list litigation as one of their practice areas, and I don't think that's an accident.  When done best, litigation is a very collaborative process.  It is much easier to collaborate effectively when you see people and can talk together in war rooms, collaboration rooms, or wherever, without trying to multitask because an email came in while on a conference call.  The ability to run into someone's office to say, "hey, I just had this really cool idea.  What do you think about this?" and be told on the spot that you're a genius or an idiot, or more likely that with some tweaking, there might be something there is worth its weight in gold.

Let me offer this insight.  My partner Mark travels back and forth between our office and Los Angeles a great deal.  Our collaboration is much more effective and in-depth when he's here than when he's not.  So, for what it's worth, my answer to my partner's thought is that I'm not yet persuaded that virtual lawyering is our greatest threat.  But I'm open to being persuaded.

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Desperate times apparently cause companies desperate for cash to do really stupid things.  And the results are never good for the stupid company.  One of my partners is a million-mile flyer on an unnamed airline, but I wouldn't deny it if you suggested their skies were not as friendly as their ads claim.  This partner wants to take his daughter to spring training, a trip they make together every year.  Time to cash in some frequent flyer miles.  Bodda-bing, bodda-boom, access the website and it's over.  He even paid the extra $116 to get Economy-plus seats.

Except he made a mistake.  So he calls up, confesses his error and asks to have the date of the flight changed--same flight, different day.  That will cost you $200.  Annoyance rate increases.  Then the confirmation arrives.  It's not the same flight.  They have booked him on a morning flight.  Followup call, where they say the evening flight he wanted was booked full.  Except that he had seen what seats were available, and he knew it was two-thirds empty.  Finally, the friendly skies person confesses it was their mistake.  What about the Economy plus seats?  "Oh, that was only on the flight you canceled."  So, because the friendly (and apparently stupid) skies people are so desperate for cash that they won't apply the $116 to the rebooked flight, they have now permanently lost a million mile flyer.  Because despite what people say about O'Hare, the great thing is that there is always another airline that can fly you anywhere you want to go.

Moral of the story:  No matter how hard times get, don't forget that your best customers are the foundation of your business, and if you treat them badly, you will lose them.  To the contrary, you need to show your appreciation more than ever.  Loyalty is a two-way street.

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Today's Chicago Tribune reports that in response to the economic crisis, one Chicago law firm has eliminated free coffee in one of its lobbies.  In fairness to the "leadership" of this firm, they could not have read my post from yesterday, Who Is Accountable For The Lack Of Vision?, but you can think of a better illustration of the problem of lack of leadership?  Business journals from around the globe are talking about once-in-a-century economic cataclysm, and legal commentators are talking about the need for change in the profession on an epic scale.  We are confronting the need for unprecedented change in order to survive.  So how does one law firm choose to confront this daunting challenge?  It eliminates free coffee in its 45th floor lobby.  The patient has a gunshot wound, and this firm calls in a manicurist to take care of the hangnail. 

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As I drove home from my morning Starbucks run, I was listening to an NPR story about the auto industry.  One President of Local Union in Pontiac, Michigan was saying that his local used to have 20,000 members, but now had only 1800.  "We went from counting our overtime hours to wondering whether we would even have a job, all in the space of two months," he said, trying to add emphasis to the precipitous decline in the industry.  Hmmmmm.  Really?  Apparently the entire auto industry, union included, needs to be indicted for being blind to the future.

I grew up in Detroit.  Unlike most of my friends and cousins, I was not a child of the auto industry.  Perhaps that gave me more of an outsider's view, but it was clear in the 1970s that the domestic auto industry was heading south.  And even if the guys who ran the industry were close enough to retirement that they didn't want to recognize the coming change, the next generation or the one after that surely should have.  The claim of surprise is an admission of lack of vision.

The parallels to the current situation in the legal profession are easy to see.  Commentators and others (see Fred Bartlit, for example) have been raising warning flags for years about the coming change in the industry.  Some commentators (Richard Susskind comes mind) see so far into the future that it's not surprising most don't follow.  But others who are on the leading edge of the curve (Gerry Riskin comes to mind) predicted precisely what is happening at a time when firms could have reacted responsibly.  Few, if any, did so.  And now, like the Local Union President, law firm leaders are claiming surprise.  Generally their comments include something about who could have predicted the demise of the capital markets?  Fellas (because there are few women who run major firms), the bursting of the housing bubble was being discussed for years as were the ramifications.  In your zeal to ride the profits per partner wave just a bit longer, you weren't listening.

Which brings me to the title of this post.  In the legal world, who is accountable?  In January 2008, I wrote about attending a leadership meeting with managing partners of some of the largest firms in the country.  No one was preparing for what happened.  Even this summer during the run-up to the ACC Value Challenge launch, leaders of major law firms were being dismissive of client concerns about value and cost.  The arrogance was stunning.  But not as stunning as the blindness to the economic fall-off. 

There have been many stories about lay-offs, the large law firm euphemism for terminations.  Strange, though, that there have been few stories about Managing Partners being laid off.  Indeed, only Cadwalader comes to mind.  Seems to me, though, that partners ought to hold someone to account.  The essential traits of leadership are vision and accountability.  Both seem to be in short supply in our industry.

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Brian Baxter of American Lawyer has a post on lawjobs.com called The Fine Art Of Overbilling.  It begins with this:

A tongue-in-cheek look at how to pad your bill, unless of course you don't mind getting arrested or disbarred

Except, as I read it, it wasn't tongue-in-cheek.  Let's look at the eight overbilling schemes and decide for ourselves whether they are tongue-in-cheek or hit a little close to home for some BigLaw lawyers:

1. Tell clients they're more exposed than they actually are. That way they'll be willing to spend more on their defense. Any potential settlement will also likely look like a win from a client's perspective and that means more in fees!

2. Embrace document review, the mother lode of law firm billables. Hire temp or staff attorneys and bill the client at normal associate rates.

3. Raise your hand and "volunteer." Philadelphia Lawyer writes that the lawyer who crafts the initial version of any document for all parties "gets the lion's share of billable time out of the project." If a client asks why you're always willing to spend all day on some mundane filing, just say you want to control the process so they're protected.

4. Don't be afraid to double dip. Travel time is billable time, often for two more clients at the same time.

5. Be a jackass. Angering opposing counsel is a proven, easy way to ensure a protracted legal battle. Always communicate in writing, which takes more time, instead of simply using the phone.

6. Cut-and-paste, but act original. Almost every brief has been written before. Except the one you're about to copy.

7. Let clients play lawyer if they want, even if they're spouting nonsensical arguments that would never hold up in court. Just close your eyes and listen to the clock tick.

8. Big words = big bills. Promissory estoppel? Statutory preclusion? Sounds important, right? Sometimes it is. Other times ... not so much. But most clients don't speak legalese. If they call and demand an explanation, talk them through it. It's all billable time, baby.

Here's my vote on whether this happens, and at what level.

1.  Routine, especially by younger partners.  No one wants to work on low-risk matters.

2.  Legendary. 

3.  Happens all the time.  Senior Associates, younger partners.

4.  In the past, but probably not as much anymore.

5.  Incredibly, yes.  I think the definition of what is relevant in discovery used by BigLaw is different than that used by the rest of the profession.  They always want more.  Whatever they get never seems to find its way to court.  But then, neither do most BigLaw lawyers.

6.  Let's just say that few firms place a real premium on knowledge management.  After all, the law that's existed between the time of Marbury v. Madison and last year could have changed, and then there's the need to have the most recent cases for the string cite that's a page and half long.  On an uncontested legal issue.

7.  I'll leave this one the clients to judge.

8.  Varies, but probably not a big deal.  Most clients are smarter than their outside lawyers anyway.

So there you have it.  My scorecard says the Fine Art of Billing (and bilking the client) is alive and well.

What to do about it?  Billing is about incentives.  If a client buys hours, that is what they'll get.  And these really smart lawyers can create ways to create hours like nobody else.  You want results?  Pay for them.  Put that creativity to work on ways to get better results faster.

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A man who owned a shoe repair store was being interviewed this morning.  He said his business was up big time.  People are being more thrifty, having shoes repaired, zippers replaced and so forth rather than simply disposing of these things and buying new.  "Maybe this [referring to the bad economy] will make us live the way we should have been living," he said.  Some, like my mother, a child of the depression, never stopped living that way.  But for many of us, maybe the new ways will stick.

That sentiment should be kept in mind as we review the latest economic and legal news.

• 4th Quarter GDP revised from -3.8% to -6.2% with no sign that the pace of decline is slowing
• Consumer spending continues to decline as a precipitous rate
• An additional 600,000 jobs were lost in January
• Business purchase of new equipment plunged at a 29% pace, the most since 1958
• Fed Chief Ben Bernanke said we are experiencing a "severe contraction" and warned that the recession could continue into 2010.

The losses in the legal industry and the resulting termination of staff and associates have been chronicled here and elsewhere.  I read with interest Bruce MacEwen's The "Index Fund" of Law Firms in his Adam Smith, Esq. where he discusses the Latham terminations.  Deep into the post, you'll find this important discussion:

I have a hunch, which [Latham Chairman] Dell obliquely confirms when he remarks that "current and future client demand would likely require less leverage."

My theory—which I'll devote more ink to in future—is that, among many other things, we as an industry are going through our own "de-levering" period, and that on the other side of this interregnum firms will, by and large, have lower associate: partner ratios.   Many are the implications of that, presuming I'm right, but Latham seems to be acting as if they think it's accurate.

And then there's this:

Finally, this morning's news out of Latham tells us something with all the emphatic insistence of a fire-truck air horn:  Firms are businesses.  I hope that by now that comes as news to no one.

Before firms can live to thrive again another day—which, trust me, they will—they first have to live. 

True, to be sure, but it seems to me the pressing question is how do firms change to live?  Because I included the recent bad news about the economy adjacent to the discussion about the legal market, I bet many of you read those two parts as if they were one.  But they are not.  The first part is more about our clients and the ever more challenging world in which they struggle to survive.  Latham partners (and other BigLaw partners) will make out just fine in 2009.  Maybe they'll take a domestic vacation or delay a big purchase for a year.  Hardly soup kitchen stuff.    But our clients operate in a world where most can't see when or how their downward spiral ends.  The pressure to reverse the downward spiral is enormous.

Maybe this will make us live the way we should have been living.  Maybe it will make we lawyers remember those in a service business do best when we truly walk with our clients arm in arm, not when we negotiate with them in a mere vendor-vendee relationship.  Maybe the troubles will cause use to figure out win-win ways to deliver legal services at a dramatically lower cost and still increase our profit margins.  It can be done.  Now, more than ever, it must be done.

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It comes from Australia.  Of course, because you wouldn't expect this from a US lawyer.

It begins this way: "I am writing to you quite frankly because I am being made to and for no other reason."  Okay, so maybe it's not totally serious.  But it is honest.  And very funny.

Here are some more highlights:

You will be pleased to know that I will personally look after your matter-unless something more profitable or interesting pops up-but you can be assured of service commensurate with the quantum of the fees you will be paying us. At various times I will have a team of lawyers, paralegals, graduates and whoever else maybe struggling to reach their budget assisting me.  Please be assured that regardless of whether I will be actually working on your file or not, I will make sure that some of my time is added to your file to reflect my level of importance in the firm.

In respect of our charges as you would appreciate (or you would if you were partner in our firm) it is very difficult for us to be precise on what your total legal fees in this matter might be. 

This is because we charge solely according to the time we spend on your matter (which is in the firm’s best interest and if it is in our best interest it must be in yours) and I have no way of knowing how much time we will need to spend on your matter in advance. It is not that I have not had experience in this type of matter before its just that, well every case is different. I may be a good lawyer but I have absolutely no skills nor training in pricing so any precise fee I would give to you wouldn’t be much use to either of us.  Indeed, it may be disadvantageous to me as it may mean I have to achieve an outcome for you regardless of my ability to make my monthly budget- not a pressure I would like to have. I hope you will understand.

And then there's this gem on budgets:

It is also not in my interest to give you a precise figure anyway primarily because you might hold me to it. Even if I were to give you a precise figure you might not like that figure and choose to shop around, or  ask me how I arrived at that figure. Worse still you might seek to negotiate a different fee with me.

I am prepared however to give you a range which may – or may not – be of some assistance.  Based on what you have told me to date, which I know was not much because I have not asked you many questions, I can with some confidence state that your fees are unlikely to be any less than $20,000 (in fact I can positively guarantee they will not be any less than $20,000 looking at my budget month to date) and are unlikely -but not impossible- to exceed $200,000.

Everyone at our firm is proudly assigned an hourly rate at the commencement of each financial year (although we do reserve the right to change the rates at anytime without telling you in advance).  You are lucky to be dealing with me who as a senior partner can command extraordinarily high charge out rates.  As the senior partner I can guarantee my rates will always be higher than anyone else in the firm as you will note from Appendix 1 attached which lists all members of the firm and their current hourly charge out rate. 

Whilst we all have an hourly rate for your convenience we break down our rates into 6 minute units of time and charge you for each 6 minutes or part thereof we spend on your file. Please be assured however that we will NEVER spend less than 2 hours doing anything on your file.

 

LMAO.   Thanks to Australia's John Chisholm for bringing this to our attention.

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In the wake of today's announcement by Latham that it is "laying off" 190 associates, and on the heels of Black Thursday when hundreds of associates also were "laid off,"  I feel compelled to highlight three recent posts, You Are Too Efficient. You're Fired,  Hours Based Bonus + Bad Economy = Warning To Clients (Watch Your Wallet), and Average Hourly Rate or Ratio Analysis To Thwart Work Hoarding.  The moral of these posts is that law firms facing economic difficulties have an incentive to drive work up, not down.  Picture a room full of senior associates reviewing documents that used to be reviewed by contract lawyers, or a senior partner taking a deposition formerly taken by a young partner.  Law Firms will answer with the old "efficiency" argument, but it the new way is so much better than the old way, why weren't they doing it that way before?  Bottom line:  The pressure on law firms to generate revenue is greater than ever before.  The source of the revenue?  Clients.  At the same time, clients are facing unprecedented pressure to reduce legal spend.  You do the math.

By the way, I put "lay off" in quotes for a reason.  Time was the notion of "laid off" meant you would be called back after a bit.  These are not layoffs by any stretch of the imagination.  These are terminations pure and simple.  Times like these call for candor.

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Jim Hassett, who writes he influential Legal Business Development blog, will be moderating a discussion of how boutique firms are delivering greater value using alternative fees.  The West Legalworks webinar will take place on March 17 at 12:30 Eastern.  Details are here.  I honored to be on the panel that Jim assembled, which also includes Fred Bartlit, founder of Bartlit Beck, the Litigation Boutique of the Year, Jay Shepard of the Shepard Law Group and Bruce Raymond of Raymond & Bennett. 

Here's the program description:

In this panel, the author of a recent review of alternative fees will discuss the real world issues of "how to do it" with founders of several leading firms that are committed to helping lawyers move away from the billable hour.  The discussion will focus on the real world lessons learned in hundreds of matters, including:

• Case studies of several different alternative billing strategies
• A discussion of how to set prices successfully
• "From the trenches" advice on how to get started, and when

This promises to be a most interesting discussion.  I'll be wearing green.  Hope you'll join us.

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Just a few days ago, I posted You Must Understand Their Expectations Before You Can Meet Them, the latest is a long line of posts in which I articulate my basic premise that Clients have the power of the Buyer and that law is, inherently, a Buyer's market.  In this same vein, Seth Godin has just posted The Rational Marketer (and the irrational customer).  Before I make my point, let me first be clear that I AM NOT suggesting that clients are irrational customers.  Far from it.

Back to Seth Godin's post.  Here's the punchline:

The problem is that your prospect doesn't care about any of those things. He cares about his boss or the story you're telling or the risk or the hassle of making a change. He cares about who you know and what other people will think when he tells them what he's done after he buys from you.

The opportunity, then, is not to insist that your customers get more rational, but instead to embrace just how irrational they are. Give them what they need. Help them satisfy their needs at the same time they get the measurable, rational results your product can give them in the long run.

When you begin with the premise that the buyer has (1) the money you want and (2) the power to decide whether to hire you or not, any discussion of rationality is wasted breath.  All that matters is whether you make the client believe that hiring you will make his or her life better.  You won't find that out from the Company website.  The more you interact with the customer, the more you will know.  The more questions you ask, the more you will know.  And in the end, your best chance of winning will be if you adapt to the Buyers needs and wants instead of trying to make the Buyer change.

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Jim Hassett's latest in his series of of posts on alternative fees is now available.  This is a very important post on how to set a fixed fee.  Jim notes that there are two ways of getting to a fixed number, cost plus pricing and value pricing.  In the former,

estimate what you think it would cost to perform the work on an hourly basis, and then add a safety margin to cover unexpected developments and profit.

This is how most firms calculate a fixed fee and why clients refuse to accept these proposals.  Let's start with the "what it would cost on an hourly basis" part of the calculus.  Hours times hourly rate.  See any problem?  To start with, hourly rates include a very hefty profit margin.  The lawyers also have no incentive in calculating the fee to be skinny on the hours.  The problem is then compounded by "adding a safety margin" (the proper translation of this is "more profit").  So law firms typically come up with a fixed fee that guarantees them more profit under the fixed fee approach than they would get under the traditional hourly system. 

What risk has the firm assumed in this approach?  None.  Well, some might say that "what if" the case turns into a runaway train?  Most who quote a fixed fee identify the assumptions on which the fee is based and if those assumptions change, will submit a modified proposal.  So, in the end, very few firms assume any real risk.

The thing that makes a winning fixed fee agreement is a quote that is lower than the fee that would be paid under an hourly basis, which then creates huge incentive for the firm to do the work at a lower cost (and I mean cost in the traditional sense of the word, not the lawyer sense) so that the firm increases its profit margin.  Client wins.  Firm wins. 

I leave with one final thought.  The second most frequent concern expressed after the "double profit" concern just discussed is that the firm will allocate inadequate resources in order to maximize the profit margin (translation--increase the risk of a bad result).  The holdback or bonus component based on the result is an absolute answer.  Fees are all about the client identifying that which is most important to them--for most the top two are cost and result--and structuring the fee to maximize the firm's incentive to accomplish those objectives while at the same time giving the firm the incentive and latitude to do the work as cheaply and efficiently as possible.

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In my inaugural glog post (glog is my definition of guest blog post, I alluded to the issue of diversity and suggested that, in addition to driving change related to alternative fees, in-house counsel had the power (or at least some power) to drive change in this regard as well.

In late January, I had the honor of sitting on a panel about affinity groups and diversity initiatives in California with two fellow panelists (Macey Russell and Tiffani Lee). I qualified not only because I am a woman, but because I co-founded and ran the women's initiative in my former BigLaw firm from 2004 - 2008, and in 2008, formed an organization in Chicago called the Coalition of Women's Initiatives in Law Firms (Coalition for short) which now boasts 35 member firms and more than 80 firm delegates. The Coalition provides a forum to share  best practices, training, programming and policy ideas with the women running their own firm's initiatives. It's an effort to address issues collaboratively rather than individually (the old "power in numbers" and "why reinvent the wheel" adages).

Although "diversity" has taken a distant back seat to survival within law firms these days -- not because it’s a puzzle that has been solved, but rather, because when profits per partner fall, everything else takes a distant back seat-- I was struck by a question that came from a participant in the session, as well as by others not in attendance, but who joined in a discussion afterwards -- how can you tell whether firms are really committed to or are actually making progress with diversity? How do we distinguish window dressing from real change?  For what it's worth, here are my 2 cents on what is going on behind the diversity curtain:

1. To borrow a phrase from Justice Potter in Jacobellis v. Ohio, it is difficult to define what a commitment to diversity means, but "I know it when I see it."  Among other things, it includes: (a)  affinity groups and diversity initiatives that are driven by the attorneys, not mandated by marketing or management; (b) creative programming designed to address issues that the affinity members themselves think are important; and (3) real measurement of things that matter like percentage of work done by minorities and women on matters for the firm's top 10 clients by revenue or the top 10 revenue-generating matters by department.  It is also (4) evidence of shifting associates or partners around in an effort to capture greater diversity on even the firm's most important matters.

2. It’s the hard evidence.  Numbers.  And specific numbers.  It's not just the percentage of minority/women partners -- it's the percentage of minority/women EQUITY partners that matters.  Allowing firms to hide behind laudable numbers showing 20-25%  women and/or minority partners ignores the fact that in reality, among the equity partnership, the numbers are usually in the dismal single digits. The NALP, American Lawyer and other organizations who gather or utilize data from law firms but do not insist on a breakdown of equity and non-equity status are simply perpetuating the fallacy that great strides are being made at every level.  Remember - non-equity partners are not factored into the venerable "profit per partners" equation and are, like associates, mere overhead. 

3. Rather than asking for the number of minority and women partners or associates on key firm committees -- ask about the number of DIFFERENT minorities and women serving on DIFFERENT key committees.  In other words, if there are 5 key committees and  the same 3 women and  2 minority partners serve on all of them -- saying there are 25 minorities/women on key committees may be technically accurate, but disingenuous at best. 

4.  In BigLaw, it's all about revenue generated and hours billed. Speaking from experience -- and yes, this will draw the ire of many, and admittedly, this is a generalization --  women and men with families or significant outside commitments or interests are disproportionately negatively impacted by the measurement of hours billed, since the typical efficiency that emerges when trying to juggle work and other responsibilities is not only not valued in the law firm context, but it is penalized, as  more efficiency = less hours billed = less revenue generated for the firm (even if those same efficient hours got a winning result for the client). 

There are a whole host of studies and explanations as to why women and minorities, regardless of drive, success in practice and intelligence, are not as successful at developing business as their white male counterparts, and I won't even attempt to get into those here (see one of my favorite articles relating to women). 

What Can You Do? Suffice it to say that if you are an in-house lawyer and you really want to make change and strides for women and minorities -- (a) demand accountability and breakdowns of the number of hours spent by diverse attorneys and women on all of  your matters (and demand to see it on every bill) and (b) seek out and directly give x percentage of your work to women and minority attorneys.  Note, please, that I am not saying to give it to someone who isn't qualified -- I am simply saying, broaden your horizon when it comes to evaluating qualified recipients so that women and minorities are included in the mix on a regular basis.

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My friend Dan Hull of Hull McGuire and author of What About Clients? is interviewed by "Charon QC" in a podcast covering a wide range of topics.  Dan offers insights on topics ranging from the economy to client service to lawyer layoffs to cross-border collaboration and more.  I was riveted and I suspect you will be too.  Among Dan's many insightful comments is his observation that the problems with the billable hour are not inherent to the billing form.  I know Hull McGuire delivers extraordinary value to its clients and does so billing by the hour.  My take from my off-line conversations with Dan is that the intimacy of the relationships he and his colleagues have with the firm's clients overcome any of the negatives associated with hourly billing, and I can certainly see the validity of that circumstance.  I value his insights that challenge my own views on hourly billing and I encourage you to carefully consider Dan's thinking and this and the other topics he addresses.

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The title comes from a line by Matt Homann is his post, Ten Rules of Rainmaking.  The line reminded me of a retreat I attended once that was led by Gerry Riskin.  Gerry began by asking the assembled group what would have to happen that day for everyone to leave thinking it had been a great day.  He spent a lot of time and engaged everybody in the discussion.  All expectations were on the table.  The bar was set.  And then he hurdled it.  He tailored what he discussed and how he organized the day to the questions he asked and how he steered discussions.

Matt's line reminds us that clients, not the lawyers they hire, are the ones who judge the effectiveness and value of our service.  Isn't Gerry's retreat question similar to one we ought be asking at the beginning of an engagement?  Shouldn't we be asking "what would have to happen in this dispute (or transaction, or whatever) for you to say that you believed you made a brilliant decision to engage us?"  "How does 'that end' look to you?"  The answers certainly can vary---"Go to trial and win," or "we know we have to settle quickly so get them to mediate before May 1st."  And so on.

Don't be shy about asking for financial expectations.  When you first heard about the case, you had a feel for your fee.  Understand that the client does too.  Why not get it on the table to find out if you are in the same ballpark.  If you're thinking hundreds of thousands and the client is thinking $50,000, its qualifies as really darn important to clear that up before undertaking the engagement, lest you start down a road destined for failure.  But more important than simply avoiding a potential fee dispute, it suggests that you and the client are looking at fundamentally different strategies. Why that is so would, to me at least, be of great interest.  Hopefully, the many variations on this theme, understanding expectations before you can meet (and beat) them, are clear.

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Time was, people produced things and stood behind them.  Slogans like "our name is your product" and similar sentiments were expressed as a means of assuring quality.  Those days are over.  But now it looks like the pendulum has swung in the opposite direction.  It's a sad day.

I stopped by a store at O'Hare airport moments ago to buy a pair of earbuds.  And the clerk informed that earbuds routinely failed so I should pay an extra $5 for a special guaranty that would allow me to return the apparently defective earbuds and exchange them for another pair of equally defective earbuds.  Companies have forgotten that warranties are useful for items that wear out, but EARBUDS?  I fear for the day when we'll be given the opportunity to pay a special fee to ensure against our restaurant food not being warm enough.  Or perhaps to guard against those notoriously defective toothpicks.

I hope professional service firms don't fall victim to this insanity, but I can see some large prestigious firm offering a fixed price in order to attract a piece of business, only to then suggest the client pay a fee for insurance against under-staffing.  Or some such nonsense.  Price should not be an excuse for shoddy work or defective products.  It's that simple. 

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From time to time, you've heard me mention my Valorem partners.  I have tried (unsuccessfully, I realize) to keep this blog from being too Valorem-centric.  But as my partners and our spouses gather tonight to celebrate our first anniversary, I want to use this space to share with them some things I've learned during our year together. 

My partners, Nicole Auerbach, Mark Sayre and Hugh Totten, are visionaries and true believers.  Each is the kind of person who makes others around them better people and better lawyers.  We began with a vision that if we organized a firm from the ground up as a client would, we would come up with something different.  More than different, unique.  And each has stayed true to that vision.

I believed when we started Valorem that collaboration was the key, that if a group of gifted lawyers worked together, we would achieve more than any of us would on our own.  We all felt that our clients deserved that level of commitment.  I now know that we were right: we do more and better for our clients by collaborating.  And to share an insight into how special my partners are, we have routinely spent lots of time discussing case strategies and tactics, frequently pushing each other, and never once have I believed that one of us was more interested in winning an argument than in finding the best answer for our client.  That kind of search for the best answer is something I hope everyone has a chance to experience: it is breathtaking.

When we were putting our web site together, one of my colleagues crystalized another idea that we all shared: we take our work seriously, ourselves not so much.  We've learned, I think, that laughter can make our work even better. 

One of our clients, the visionary Jeff Carr of FMC Technologies,  posted this comment in a Legal On Ramp discussion:

 Pat -- congratulations on the one year mark. You are one of my favorite lawyers, but more importantly, the firm that reflects your vision is one of the "new age" firms that's going to help change the legal services delivery world. Keep up the good work for us, for all your other customers, and for the profession as a whole. Change is tough, being at the forefront is tougher, and being on the point of the spear is both exhilarating and terrifying!

Your friend and happy customer, Jeff

Let me end with this note to Nicole, Mark and Hugh.  It is one of my great honors and pleasures to be your partner, to be sharing this adventure with you.  I am tempted to call on Shakespeare and say something maudlin like "We few.  We happy few.  We band of brothers."  But the gender specific reference is incomplete and the gender neutral translation misses something.  So instead, let me say this as I raise a glass to my friends and colleagues:  "To us and to the tip of the spear.  May year two be as fun and exciting as year one.  May our adventure continue.  And may we remember always that we, acting as we, are always more than but one of us.  Thanks my friends."

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More litigation results from bad drafting that one can possibly imagine.

Excellent writing is a critical component of excellent client service.

My friends at What About Clients have two terrific posts on good writing.  The first reminds us that writing well is hard work.    The second discusses client-centered writing and advances the argument that over-reliance on forms "tends to perpetuate bad legal writing."

WAC? is on the money.

There is a delicate balance to be struck between providing clients the value of not re-inventing the wheel and the benefit of thinking about each problem anew.  But in each case or contract or matter, it is important to discuss that balance with your client.  Sometimes, good enough is good enough.  Sometimes, only the best will do.  The key is that client must be the one to make that decision.

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My first memory of the importance of optics in law was the time I was standing with an in-house lawyer for a large waste company outside a waste transfer station in Brooklyn, New York.  We were going to be meeting with a senior partner from a large New York firm.  He arrived in a limousine, stepped out wearing a very expensive suit and tie (I'm sure the tie cost more than any suit I owned--I know for sure the shoes did!).  You could see him sniffing the air, he asked "What is THAT smell?"  The immediate reply from the in-house lawyer was "Money."  The odor was, of course, eau de waste.  Needless to say, the really rich senior partner was way out of place in a waste transfer station and clearly was not enjoying himself.  When the time for lunch arrived, he proposed taking his limousine to his club in Manhattan.  The in-house lawyer was thinking sandwiches in the office kitchen.  The partner made his excuses and left.  I had sandwiches and howled with laughter at the in-house lawyers impersonations of the rich partner.  Lesson learned--optics count.

Flash forward to November 2008 when the CEOs of the Big 3 Automakers flew their corporate jets to Washington to ask for a federal handout.  I authored a post on the auto chiefs being tone deaf, suggesting that firms asking to raise rates in the current economic environment were being equally tone deaf.

Let me plead guilty to mixing my metaphors.  But whether you are visual or auditory by nature, the point remains the same.  Now let me take it one step further.  If your invoices show limousine charges, hotel charges at The Peninsula instead of a Marriott, staying at an expensive hotel remote from your client's office rather than the more modestly priced hotel right across the street (a story told by a GC at a recent conference), hundred dollar per person dinners, flying first class and so on, you are, in your own way, acting like the Big 3 CEOs.  You are ignoring your audience. 

There was a sentenced used to describe the legendary George Halas of the Chicago Bears by those who negotiated player contracts with him: "he through nickels around like they were manhole covers."  Now that is a description we should all aspire to hear from our clients.

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I heard a story last week to the effect that many larger firms are offering fixed fee arrangements in response to RFPs issued by prospective clients.  Just a few days before, I had been talking to some lawyers at a large firm who were investigating the possibility of their firm quoting more alternative fees to their clients.  The image that comes to mind from these two encounters is that of a ramshackle house with a fresh coat of paint.  The paint doesn't change the dilapidated condition of the house, nor its need for new plumbing and electrical wiring. 

Now don't get me wrong.  I view the movement by any firm toward alternative fees as a positive step.  But it is the first step in a journey.  An for unwary consumers, simply having a fixed fee or some other alternative quoted to you doesn't mean you're not buying a ramshackle house with a fresh coat of paint.  Here's why:  if the fee quoted to you was arrived at simply by estimating the number of hours a matter will take and then multiplying that number times the billable hour rate for the person expected to do the work, the firm has just built all of its profit into the quote.  And that's what I heard from the firm that interviewed me: they wanted their fixed fee proposals to factor in their profit.

That's all well and good is the buyer--the client--is simply looking for budget certainty.  But those looking at fixed fee arrangements are also usually looking for some kind of risk sharing.  And the firm having its profit built in to a fee quote is not risk sharing.  A meaningful alternative fee is not based on cost, it's based instead on price.   From an article about legendary business consultant Peter Drucker :

Properly pricing a product is no easy exercise. It involves a complex bit of calculus that must take into account not only a business’ up-front investment but also the ongoing costs it expects to incur (as it moves down the learning curve and, presumably, becomes more efficient); the position of its competitors; and the crucial interplay between price and volume.

It also requires a degree of self-restraint. "The first and easily the most common sin" among businesses, Drucker wrote in a 1993 article, "is the worship of high profit margins and of ‘premium pricing.’"

Historically, many companies ignored these factors. They set the price of something simply by adding up all their expenses and then slathering on top as much profit as they thought the market would bear.

As Drucker pointed out, such "cost-driven pricing" was backward. In the end, he concluded, "the only thing that works is price-driven costing" -- that is, figuring out what customers believe a product or service is worth and then designing the item accordingly (with a sufficient profit built in to support sustainability and growth, which does not necessarily equate to the highest price that could be obtained).

The import of this to alternative fees?  Ask a lawyer quoting an alternative fee what his firm's cost structure is.  How much does it cost to support a given lawyer over a block of time, say a week or a month.  Once firms know their real cost structure, then its possible to have a discussion about how much profit the firm should receive if it fails or it succeeds in the engagement.

Beyond this fundamental, there is the question of staffing and leverage. The lawyers that interviewed were shocked when I said we frequently had more partners on a matter than associates.  Didn't that mess up our leverage?  My response was to ask this question--if the goal is to get the best result fastest (which minimizes the cost), isn't a capable partner more likely to achieve that than an associate?  And wouldn't two partners working as teammates and collaborators be more likely to meet that objective than would a silo of partner, senior associate and junior associate?  I could hear the light bulb turning on over the phone.

Next comes the question of how the firm's structure is designed to minimize costs.  If a firm pays associates (or advances them) based on work quality and hours, associates will be committing career suicide by working more efficiently.  (See here for an example.)  If the firm doesn't reward associates for performing "good enough work efficiently" when that kind of work is all that is required, how can a client have any comfort that the fee proposal reflects the cost savings that such an approach generates?

Having lived alternative fees for a year and having designed a business based on them, I assure you that one could write a book on alternative fees.  And maybe I will.  But the point is that just like a savvy home buyer has a house inspection to ensure that fresh coat of paint isn't simply a mask for serious problems, a savvy consumer of alternative fee services needs to ensure that the alternative fee is simply not a disguise for the firm's effort to guarantee its profit and not share savings and risk with its client.

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In today's world, there is little doubt that, with very limited exception, the business of law is now a buyer's market.   The number of layoffs at large firms, and the demise of several prominent firms seem to confirm this.  Certainly the anecdotes of revenue declines in 2009 do as well.  But not only are we a buyer's market, we are in a service business.  Combine those two things and insights into the thinking of buyers becomes priceless.  (It was before, but at least now no one should want to argue the point.)

On Friday, I had the opportunity to listen to a panel of distinguished General Counsels who, among them, were responsible for many tens of millions of legal spend.  Maybe even nine figures worth of legal spend.  Certainly enough that one ought want to hear their views.

Let me quote from my notes (the quotes indicate I wrote down verbatim what the GC said):

"the cost pressures are unprecedented."

"we can spend only if we can show it adds to our competitive advantage"

"A substantial amount of my time is spend on finance issues.  We did up a bottom up budget and were told to reduce it by 25%."

"Firms must recognize we are living in a different world"

And so it went on.  One after the other made this point and then came back to it to emphasize it.  Several commented on their frustration with firms that sent the annual rate increase letters (don't say I didn't warn you) and the missed opportunity of trying to lower rates (again, you heard it here).

So, for those law firm leaders who have raised rates and laid off associates and others, might I suggest a sabbatical to go to business school.  You will not sustain a business by ignoring the needs of your customers--ever!  And certainly not in a buyer's market.

Is anybody listening to the buyers?

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Well, to be precise, it’s not about time.  That’s why it’s time to take the plunge. 

There are some lawyers out there—you know who you are—sitting in your large comfortable offices wondering what will happen to your firms as this economic cataclysm continues.  You know your firms are pursuing the wrong business model.  You know your clients need the flexibility afforded by fee arrangements your firms will not countenance.  Yet you continue to sit.

Inertia is a powerful force.  You know the old maxim from high school physics: an object in motion tends to remain in motion while an object at rest tends to remain at rest.  You sit there at rest.  But there is a gnawing doubt in your mind making you wonder whether this is the best approach to your future and for your clients.   It isn’t.  The profession is going through a revolution.  Those who see the future and take appropriate action will thrive.  Those who sit by and wait will die.

The assumption buried in the belief that you can wait until it is obvious that you must jump or die is that there will be an opportunity to jump at the point you convince yourself to stand up and move out.  That assumption is ill-founded.  The opportunity exists now, but it will only exist for a while.   When the market does its next somersault, the opportunities simply may not be there for you.  They will be for your clients, however, and your inaction will force your clients to decide between you and economic rationality.  Are you sure they’ll choose you?  The data suggest they’ll choose savings over relationships.

So, my advice to you?  Take the plunge.  The water’s better than fine.  And there’s still room to swim.

[ My apologies to my partner Nicole for shamelessly trading on the theme of her inaugural “glog” post, but it worked so well in this context that I couldn’t resist.]
 

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Fred Bartlit tells a story in a Legal On Ramp post that bears publicizing:

Last night a young lawyer from a top school told me about one of his best friend's experience in a large Chicago firm

(Now - this IS hearsay because it is second hand, but I know the source well and believe the story)

His friend has always had top reviews. Top.

This year he is told "you are in trouble. YOU DID NOT MAKE YOUR HOURS"

He replies that he finished every assignment efficiently and was always told how good his work was.

The reply? "you are too fast. Slow down. Study the cases more carefully"

And, "you are in trouble b/c if your hours are up this year, we will think you have faked them to keep your job"

I AM NOT KIDDING

Firm has made decision to get rid of the fast, smart, efficient lawyer in favor of slow working drones.

And some people wonder how strong a message large firms deliver to their associates that hours count more than anything else. 

You can't make this stuff up, folks.  And no matter what BigLaw spokesmen or apologists say, this kind of institutional pressure is inherent.  It is part of BigLaw DNA.

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Mark Slatin has a most interesting post on Trusted Advisor.  In Transparency and Selling, he writes:

Yet, we’re trained to go in come back with information that will close the sale. Hunt it, kill it and bring it back to eat.

• What if, instead of dancing around an answer we don’t know, we just admit we don’t know?
• What if, instead of promising something we probably can’t deliver, we admit that and then tell them what we can do?
• What if, instead of offering “teaser” pricing and then covertly getting it on the back end, we share our cost structure?

These examples are counter-intuitive--downright treasonous in some circles.

Without the pretension, void of false promises and out on a limb – we are, admittedly exposed, naked and vulnerable.

But wouldn’t you rather buy from a seller who is willing to show you his cards, even if--perhaps because--you both know it might cost him the sale? That visceral reaction works in reverse when transparency dominates relationships (think Madoff, Blagojevich).

There are some great insights here.  One thought that immediately pops up is the pressure to cross-sell.  I wrote about that issue in Can I introduce you to my partner (pssst--what's your name?)?  But Mark's piece provides much more insight into the notion that selling is all about building trust and having the client's needs come first.

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Let me tell you a short story.

A senior in-house lawyer is meeting with the CEO to talk about a problem the in-house lawyer had been asked to solve.  The in-house lawyer describes how his efforts at negotiation had failed, so he had taken steps to find a random person off the street so that person could resolve the problem for the in-house lawyer.  The CEO looked at the in-house lawyer like he was out of his mind.  The in-house lawyer, now worried by the CEO's reaction, asked if the CEO would feel better if he instead chose 12 people randomly from off the street.  The CEO fired the in-house lawyer.

Does anybody think the CEO is crazy?  Me either.  But let's rerun the story with three extra sentences.

A senior in-house lawyer is meeting with the CEO to talk about a problem the in-house lawyer had been asked to solve.  The in-house lawyer describes how his efforts at negotiation had failed, so he had taken steps to find a random person off the street so that person could resolve the problem for the in-house lawyer.  The random person assigned to the lawsuit was Judge Smith.  The Company's outside counsel was trying to find  some background on Judge Smith. The CEO looked at the in-house lawyer like he was out of his mind.  The in-house lawyer, now worried by the CEO's reaction, asked if the CEO would feel better if he instead chose 12 people randomly from off the street.  The in-house lawyer assured the CEO it wasn't too late to submit a demand for a jury.

Do the three highlighted sentences change the way you feel about the story? 

Let me acknowledge up front that I am a litigator and there is nothing I love more about my job than trying cases.  With that caveat, however, there are way too many cases filed and litigated vigorously that should never be litigated.  And those cases always end up settling.  Why?  Because the issue involved is too important to let a random person or 12 random people decide the issue.  Neither a law degree and a black robe or swearing the oath of a juror are qualifications to decide disputes between businesses. 

Lawyers (both inside and outside, and frequently both sides of a  dispute) involved in litigation do not spend enough time figuring out which cases are wheat and which are chaff, which must be tried and which can be settled.  The result is a monumental amount of wasted money.  Of course, that money is wasted on outside lawyers, so they're happy.  But at some level, isn't the solution obvious?

Tomorrow, or someday soon, some thoughts on solutions.

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RainToday.com has published a new report, How Clients Buy: 2009 Benchmark Report on Professional Services Marketing & Selling from the Client Perspective.  The report, which runs 57 pages and provides data from more than 200 buyers of accounting, financial, legal consulting and other services, costs $345.  Among the many highlights and insights:

• 52% of the buyers of legal services, even those who rate their lawyers 4 out of 5 on a satisfaction scale, are willing to switch providers.
• 83% of buyers say the the service provider's website holds "some influence" or "a great deal of influence" over their decision to engage a provider.
• the most commonly experienced problems by buyers were that service providers did not listen to them (38%) and did not respond to requests in a timely manner (30%), did not understand their needs (30%).

The report includes RainToday.com's analysis of the survey data, which I found insightful.  Those who need to remind their principals of the need to continue to invest in marketing and client satisfaction efforts during economic downturn will want to have this report as part of their arsenal.

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Ed Poll of LawBizBlog and LawBiz Management has been advising lawyers for 25 years.  Ed is one of the people I look to regularly for ideas and inspiration.  His recent post, Corporate Counsel Want Value, frames an important question.   The post discusses comments by Susan Hackett of the Association of Corporate Counsel about ACC's Value Challenge.  Ed writes:

The "Value Index" being developed by ACC is intended to measure, among other things, client satisfaction with the services provided by their outside counsel. The concept is that of a scorecard, not a ranking. Defining "value" will be a difficult task. Ultimately, the definition may have to be left to the respondent. ("Beauty is in the eye of the beholder.")

Yesterday, I was discussing Valorem's approach to alternative fee arrangements with counsel from a large law firm.  One arrangement, indeed our preferred arrangement, is fixed fee with a holdback, where we leave the payment of the holdback to the client's discretion based on their satisfaction with our work.  In this conversation, as well as others, I hear a sense of something ranging from amazement to incredulity to a belief that we are out of our minds. 

Let me respond to the doubters.  Value, like beauty is in the eye of the beholder.  We are in a service profession.  If cannot adapt what we do to satisfy each consumer of our service, we are missing the whole point of being service providers.  The key to quality service is the ability to detect that which each client wants and the ability and flexibility to adapt what you do and how you do it to deliver the customized service needed to satisfy and please.

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What About Clients? periodically reviews its 12 Rules of Client Service.   Rule 10 is one of the most nuanced.  From today's WAC?:

Rule 10: Be Accurate, Thorough and Timely--But Not Perfect.

Ah, devil perfectionism: it's the curse of eldest children, professionals, many knowledge workers, most lawyers, all spouses, your Mom, and the geek classes, or Techwazee. The horror, the horror. Be excellent, not perfect. See Rule 10 in WAC?'s annoying-but-accurate 12 Rules.

"Be excellent, not perfect."  Sounds like a line from an inaugural address.  But for the sake of completeness, I went back to the original discussion of Rule 10:

"But Not Perfect." Not talking about mistakes here. I refer to the paralysis of high standards. I know something about the second part of Rule 10--because I tended to violate it when I was younger. And I still want to. Perfectionism is the Great Destroyer of Great Young Associates. Don't go there. Don't be so stiff and scared you can't even turn anything in because you want it "perfect" and you keep asking other lawyers and courts for extensions. It's not school, and it's no longer about you. Think instead about Rule 8: Think Like The Client--and Help Control Costs. Balance efficiency with "being perfect", and err on the side of holding down costs. If a client or senior lawyer in your firm wants your work to be "perfect", and for you to charge for it, believe me, they will let you know.

The failure to achieve anything close to this balance is certainly high up on clients' "drives me up a tree" list.  I know the conversations we routinely have with our associates on this issue.  But it made me wonder, when you have hundreds or thousands of associates, how to train them to strike this balance in a way that is satisfying to clients?  Particularly when you are paying salaries and bonuses and advancing people to partner based on excellence and hours and not balance?

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Nearly 75% of all law departments are facing budget cuts in 2009.  Over 30% are facing cuts of between 11% and 20%, while 35% are facing cuts between 6% and 10%.  These are among the bleak results from an Altman Weil flash survey of General Counsel.

So, how do the respondents plan to deal with these cuts?  Over 50% plan to use more alternative fee agreements and 53% plan to use lower priced counsel for some work.

The punchline of the survey is this:  the top three concerns of general counsel are (1) outside counsel costs; (2) lack of predictability of legal spending; and (3) litigation risk.

One last result of note.  Over 82% of the respondents currently spend less than 10% of outside counsel fees on alternative fee arrangements.  This excludes discounted hourly rates and blended rates (which are not, in any real sense, alternatives to hourly billing).

So let's do some analysis.  Fifty percent plan to use more alternative fees.  Eighty two percent are spending less than 10% on AFAs now.  GCs want lower costs and predictability.  Hmmmm.  There seems to be an answer here.  But will change win out over inertia?

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In a Friday post, Above The Law reveals that Arent Fox utilizes an hours-based bonus system.  If an associate does not exceed 1950 billable hours, no bonus.  And then in hundred hour increments, associates can receive ever increasing "productivity bonuses."  Arent Fox is not alone in using this system.

Consider, for a moment, the incentives and interests created by this system.  An associate is constantly thinking about how many hours they have ("gee, I need 12 more hours this month to stay on my bonus target").  Where, dear clients, do the associates go to "find" those hours.  But look at the firm's perspective.  What is the cost of that "extra" hour?  The associate's salary and benefits are already paid for.  Ditto the office and secretary.  All that has to be paid out of that hour is the portion of the bonus attributable to it.  And that is a hundred dollars max.  The point is that those "extra" hours are the most profitable hours for the firm.  Well isn't that a great incentive to effectively police abuse of billing abuses.

So this is my advice to clients, or at least clients concerned about how much they pay in legal fees: ask your firms if they pay bonuses based on hours.  If they do, find another firm.  Find a firm that doesn't reward the creative discovery of more hours.  Or better yet, find a firm that rewards the creative discovery of ways to reduce hours without sacrificing quality.  We're out there.

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Earlier, I wrote about Part I of Jim Hassett's 5-part series on alternative fees.  Jim has already written the entire series (if you want it in full format, it's available here).  But showing great agility, Jim has adapted Part II on his blog posts to incorporate some dialogue created by Part I.  Jim shares some email exchanges with Ron Baker of VeraSage Institute, which are most interesting.  The issue Jim captures is how soon alternative fees arrive as a meaningful replacement of the billable hour.

Having spent some time in discussions with Ron, I know him to be a proponent of value billing--that is, figuring out what the value of a particular matter is and having that value become the fee.  At our very first meeting, I asked Ron how that would work in the litigation context and I never quite heard an answer that made sense to me.  From my standpoint, it is a mistake to let the idea of "value billing" hijack the movement to alternative fees.  In a perfect world, a value fee and an alternative fee should be one and the same.  In the real world, an alternative fee is simply one that aligns the economic interests of lawyer and client.  After that, the bells and whistles added can (and should) result in cost savings and greater value to the client.

The discussion is worth a careful read.

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Charles Green has a wonderful post on his Trusted Advisors blog about LL Bean: Urban Myth Or Rural Superstition.  Pulled from The Consumerist, it tells a story of the Maine Outfitter's legendary customer service.  Guy's wife orders 3 monogrammed shirts for him for Christmas.  Oops.  Wrong size.  She calls to place the order again with the right size and admits her error.  The LL Bean clerk refuses to take the order and insists that she return the shirts so they can replace them with the right sized shirts.  "But their monogramed, so you won't be able to resell them.  And it was my fault," she said.  LL Bean's reply? "I understand that, but we want to make sure are customers are 100% satisfied with their orders."  Wow.

The Trusted Advisors post provides some other examples of exemplary service, including David Maister's promise of 100% satisfaction, promising any unsatisfied customer the option of paying what the customer thought his service was worth.  My friends at Summit Law Group include a similar promise on their invoices.  With Summit's blessing, we at Valorem Law Group have included "Value Adjustment Line" on every invoice.  Our hope is that our commitment to satisfaction will one day earn us the "legendary" adjective applied to LL Bean.

As an aside, many people have asked if we're crazy.  They can't believe we would provide clients the unquestioned right to make any adjustment to our invoices they think appropriate.  As we have thought through the process, we can't believe everyone doesn't offer the same option.  We provide a service.  We believe we provide outstanding quality and value.  Why would we not stand beyond what we do?  We hope clients and prospects ask all of their service providers if they are confident enough to offer the Valorem promise.  The commitment to client satisfaction should not end just before the invoice is mailed.

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From time to time, Dan Hull and his colleagues at WAC? repeat some of Hull McGuire's Rules of Service.  I love this post summarizing Rule No. 9:

Lawyers aren't special. We're in a service business. Get used to it. Rule 9: Be There for Clients 24/7. Snippet:

      Returning telephone calls promptly and keeping your client "informed" is not client service. Color all that barely adequate. Get a new standard.

Succinct and perfectly tuned.

Some days, as I read about another firm announcing salary freezes or layoffs of partners or firings of associates, I wonder whether anyone thinks about Rule No. 9.  It seems that some times we're so busy thinking about "our business" that we forget that "our business" depends on "their business."

So, to paraphrase Dan, these days, good service doesn't even get you in the game.  Reach higher.

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Last Saturday, my wife slipped and broke her wrist.  Yesterday, her wrist was surgically repaired.  She's doing fine. 

I learned a couple of things while at the hospital that are germane to this blog.  Here they are, in no particular order:

1)  Your waiting room says a lot about you.  A few weeks ago, I wrote "My now daily trip to the car dealer" in which I lavishly praised my Lexus dealer's customer waiting room.  As impressed as I was with my Lexus dealer's waiting room, I was appalled by the shabbiness of the Hospital's waiting room for people whose family member was in surgery.  Cheap, worn out furniture, lack of connectivity, lack of space, lack of refreshments and facilities combined to make the waiting room an unpleasant area. 

2)  Communication is important.  Surgery was supposed to start at 9:30 and last "an hour to an hour and a half at most."  At noon, when I hadn't heard anything, I asked the volunteer in the waiting room to check in to see how things were going.  "We're not supposed to call the OR."  I encouraged her to make an exception, which she did.  She reported that surgery had not started until "a bit after 22," which, coincidentally was about the time I started worrying whether everything was okay.  Just think how easy it would have been to share that information.  Frankly, I had more insight into the progress the car technician was making on my car's oil change.

The moral of this story is that I would rather do my waiting at the Lexus dealer.  But, for here, isn't the moral that if people visiting your office have to wait, it's better that the wait be a positive experience?  Won't that make it more likely (even if just a little bit) that people will come back?

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As Valorem was celebrating its first anniversary on January 1st, I spent a bit of time thinking back on the things that shaped our birth.  One of those things was a prescient post by Gerry Riskin way back in August 2007.  Gerry is, in my view, the world's foremost consultant/advisor to law firms.  He also is the author of the Amazing Firms, Amazing Practices blog.  Before anyone in the legal industry was predicting difficult times, Gerry posted Doom and Gloom For The Legal Profession--It's Coming.  Here was Gerry's prediction:

Our legal profession is in for very rough times. My message to Managing Partners is not to become pessimistic but simply to have a contingency plan in place.

Most firms will:

a) continue to be hourly billers (for the most part)
b) plan for extensions of the historic linear revenue and profit per partner growth
c) perhaps fine tune by de-equitizing or closing an unprofitable office or two

but few will create a contingency plan for:

a) dramatic drops in demand for many traditionally hot practice areas
b) over-staffing (at all levels and in most practice areas)
c) the cancer of internally competitive behavior as the pie shrinks

Those inclined to tell me I am crazy I ask to wait six months following the next US election – then I will eat this post if I was wrong.

(Clearly Gerry avoidis having to eat the post, without even having to wait six months past the election.)

I had to wonder whether starting a new firm in the face of the such a prediction was a sign of early madness.  But I am a big believer that even economic crises create opportunities, especially when you focus on the needs of the consumers.  The Valorem business model is designed to help clients reduce costs and better confront the huge obstacles created by the economic downturn.  But this post isn't about Valorem, it's just that my reminiscing triggered the post.

In September of this year, Gerry Riskin asked this question:

Managing Partners, you may have a disaster plan for fire, perhaps for terrorism - do you have one for the economic train coming off the tracks?

Yesterday, Fred Bartlit makes these observations in a discussion on Legal On Ramp:

"The message is clear...change or die"

I know all the big firm guys well. They are good guys. Smart, nice. etc.
but, NONE of them think this. NONE.

They regard our views exactly as US auto companies regarded Japanese cars in 1975 or so.

To be clear: the average (median?) partner at the big firms makes, what, 2.7million/year?

This means the top guys running the firms make, maybe, 8million/year

This is big big money in America. Particularly with corporate exec compensation down/controlled, Wall St dead.

The last thing someone making a guaranteed income of this size is thinking of is changing the system that has worked perfectly for him.

NO ONE in any of the large firms is thinking, as we read this, "we must change our model"

They are thinking: "need to get hours up, and work on hourly rate where we can. But, if we just get hours up on each matter, we will do fine"

Nothing wrong with this; just normal conduct of highly successful people.

One last piece of information to make my point.  In the January/February 2009 issue of Foreign Policy magazine, you'll find this:

Taken together, these amounted to the biggest asset and credit bubble in human history; as it goes bust, the overall credit losses could reach as high as $2 trillion. Unless governments move with more alacrity to recapitalize banks and other financial institutions, the credit crunch will become even more severe. Losses will mount faster than companies can replenish their balance sheets.

Thanks to the radical actions of the G-7 and others, the risk of a total systemic financial meltdown has been reduced. But unfortunately, the worst is not behind us. This will be a painful year. Only very aggressive, coordinated, and effective action by policymakers will ensure that 2010 will not be even worse than 2009 is likely to be.

The sobering prediction came from Nouriel Roubini, a professor of economics at NYU's Stern School of Business and someone who predicted--accurately--what has transpired thus far.  Four other economists who "got it right" join him in predicting what many expect to be still harder times and then an "L-shaped" recovery.  

If these predictions come to be, or even if they merely come close, what will it mean for our clients?  For the business model on which most firms are based?  Those who consider these questions, almost without exception, expect the next few years to be a time of unparalleled change and realignment in our industry.  Are you prepared for it?                        

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Before founding Bartlit Beck in 1992, Fred Bartlit was "the man" at Kirkland & Ellis.  As big and impressive as K&E is now, it was that and more when Fred was there.  His departure to set up Bartlit Beck was big news.  Few have seen big firms, big clients and small firms and big clients as up close and personally as has Fred Bartlit.  So when he shares his insights on the thinking of big firms, the concerns clients have and on pricing for trial work, he's worth listening to--closely.

I've written before (here, for example) about Legal On Ramp.  I wrote more about it when Fred Bartlit joined LOR.  Since joining, Fred has been a frequent contributor in several outstanding discussions about the practice of law.  You need to be a member of LOR or join to get the full discussions, but I wanted to share some of his input:

Two decades ago I had an epiphany.

It dawned on me that the litigation market was an anomaly. All other markets drive competing business models. Dell and HP, for example.

But the litigation market, rather than being the driver of many different business models, was driven by, was both the creation and captive of a single business model: the "billable hour"

It seemed at the time obvious that there were alternative models which would much better serve the interests of both clients and trial lawyer. So, 16 years ago my partners and I started a law firm devoted to a superior business model.
We thought at the time that the advantages for both lawyers and clients were so dramatic that new models, including ours, would soon overwhelm the billable hour model.

We were wrong. We forgot the basic rule of paradigm shifts: "those who have done best under the old, wrong, paradigms are the last to see the need to change"
So, 5-6 years ago I gave up preaching our new model.

Now, with economic crisis, there are powerful new forces for change. As Rahm Emmanuel said "a crisis is a bad thing to waste".  Drucker's great book on innovation points out that much innovation over the years has been driven by major outside forces impacting a market and making the need for innovation much more striking and evident.

For these reasons, I have determined to use Legal On Ramp to restate the premises as we first saw them 20 years ago and have continued to drive our law firm.

Right away, you know you're getting a chance to hear some things that are based on meaningful experience and that Fred hasn't addressed publicly for a while.  Elsewhere, he says:

3. Why do I say "no metrics" - because in almost any market of such huge size, competitors would have detailed metrics on the costs to them of every task under the son. Almost NO ONE knows what tasks should cost done right. I usually ask meetings of General Counsel and other inside lawyers "what should it cost to prepare for and take the deposition of an economic expert in a 100million antitrust case", I get answers ranging from "$30,000 to $500,000 in the same room"

So, to me, we have a dramatically atypical situation facing us: a huge market that is not competitive, that does not foster innovation in business processes, and has NO useful metrics for comparing efficiencies of different competitors or calculating roughly what various aspects of litigation SHOULD cost.

and then:

Dead bang right. 18 years ago it finally dawned on me that, for example, 3 highly experienced partners will always do a much higher quality job than 20 associates, 4 junior partners, chief trial lawyer, etc WHY? Because it makes no sense to have people preparing a case for trial who have never seen a trial. Such novices will always waste huge $$$ doing "projects" that will never see light of day at trial or change anything. Likewise, a 3 person team of great trial experience means that knowledge is concentrated, not fragmented. It does no good if someone in the back of the courtroom knows the answer; the person on her feet must know it.

So, my ideal law firm is 55 partners, maybe 2-3 associate novices in training/mentoring. And, many of our biggest cases (we do almost nothing under $100 million at risk) are handled by 3 lawyers, all of whom have lst chair jury experience, and NO associates.

These are just tastes, appetizers really, to a main course discussion that is extraordinarily provocative.  Agree with Fred or not, if you read the discussion, your brain will be engaged.  And that is always a good thing.

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When legendary CBS Evening News Anchor Walter Cronkite announced his opposition to the Vietnam War in February 1968, President Lyndon Johnson is reported to have said, "That's it.  If I've lost Cronkite, I've lost middle America."  It was a turning point in the war.

Evan Chesler is a senior partner at Cravath, Swaine & Moore   Forbes Magazine just published a piece authored by Mr. Chesler titled "Kill The Billable Hour."   Here's a sample:

The billable hour makes no sense, not even for lawyers. If you are successful and win a case early on, you put yourself out of work. If you get bogged down in a land war in Asia, you make more money. That is frankly nuts.

There is nothing novel presented in Chesler's article.  But the fact that a Cravath partner is making the argument is, on some levels, newsworthy.  I'm not saying that the Chesler article will have the same impact as Cronkite's editorial.  I hope it does.   The AmLaw Daily thought the Chesler acknowledgment of the obvious was newsworthy enough to interview Mr. Chesler about it.  The article contained this insight:

Chesler says that he’s been raising this issue with clients and in private talks for the last few years. Thus far, he says that he has "just a few situations, in the single digits" with clients who have abandoned the billable hour. "There's a lot of inertia, a lot of the devil you know in this area," he says.

Inertia.  The devil you know.  More on "the devil" in a subsequent piece,  For now, let's celebrate the acknowledgment by a partner at one of the country's leading firms that the method they use to bill their clients is "nuts."  Welcome to the club, Mr. Chesler.

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Bear with me on this one.  I came upon three different articles that, in my mind at least, fit perfectly with each other.  Sort of like getting the Rubik's cube right. 

First is this list of the 13 Worst Things About Hourly Billing, brought to you by The Greatest American Lawyer.  Thanks to my friend Gerry Riskin for alerting me to this post.  Here's my favorite:

4. The moment a client opens up an hourly bill and realizes that the last month effort just cost three times more than she expected for the entire project.

Second, there was a discussion over at Legal On Ramp that included Ron Friedman's post of comments from Sheryl Katz (BigLaw associate and partner at WilmerHale, Bryan Cave, Perkins Coie, and Graham & James, general counsel, and business person):  Here are her comments, which are significant enough that I have reposted them in full:

I read your blog post about the possibility of large companies getting sick of big firms and going to small firms. Having been a General Counsel I think this is highly unlikely as more than a minor trend.

If small firms that would do the same quality work for less were truly available, I would have farmed out more work to them. In some cases former law school classmates, or former attorneys at Wilmer or other firms that I knew, were available in smaller firms to help on matters. Sometimes this resulted in good quality work and lower bills. However, small firms often don’t have the depth of staff, so some matters that are not even necessarily that big can really only be handled by a bigger firm. Also, on a lot of transactions you really need your tax lawyer, corporate lawyer and banking lawyer to be at the same firm.

Then there is the issue of outside parties on transactions. If you are working with a large bank or Venture Capitalists or Private Equity, you may find that they want to work with a “name brand.” Often they are indifferent to the legal fees because they are not the ones paying the bills.

There are very good lawyers everywhere; there are great solo practitioners. Unfortunately, there is also a lot of mediocrity. If, as General Counsel, I had to put too much work into the project training outside counsel or fixing their work, then I didn’t want to use them again. The firm I used the most was expensive but always did an excellent job, and its associates were efficient enough that the bill was often cheaper than less competent counsel from smaller firms.

On the other hand I regularly used a small IP firm that had split off from a large mega firm. The work was consistently great and it was a bargain. But I knew the lawyers really well and before I used them I tried several small IP firms and was very frustrated.

Going to a large firm in a lot of cases is sort of like going to a chain restaurant. You pretty much know that the minimum you are going to get is going to be acceptable. And if the firm messes up, as General Counsel, you are covered. After all, you can always say “It may be a mess but Blank, Blank and Blank is reputed to be a great firm so don’t fault me for hiring them.

The third article was an AmLaw Daily article, The Innovation Agenda: Are Lawyers Stuck In GM's Tire Tracks?  One key quote from the article:

“The analogy to the auto industry is perfect,” stated Fred Bartlit, with his usual conviction. The founder of Bartlit Beck Herman Palenchar & Scott added one qualification: “Lawyers are harder to change than car executives. They’re trained to find things wrong with a new system.” (Bartlit, it should be noted, has represented General Motors Corporation in the past.) Bartlit, who left Kirkland & Ellis 16 years ago to found a nontraditional firm, stressed that lawyers' behavior can only be understood by examining the science of paradigm shifts. "The last to change are the ones who were best at the old system."

These there articles highlight the challenge now confronting the legal profession.  At this point, there can be no serious argument that the hourly billing system is in a client's best interest.  Firms have mastered the model and used it to squeeze out profits beyond anyone's immagination only a decade ago.  At the same time, however, apologists for the present system have fashioned arguments to sustain the system.  Those arguments, along with the virtually insurmountable obstacles to cultural change in large and mid-size law firms, combine to create persuasive proof that law firms cannot and will not change to meet their clients' needs.  The change needed is akin to turning around an aircraft carrier in a bathtub. 

President-elect Obama's new Chief Of Staff, Rahm Emmanuel, was recently quoted as saying "a crisis is a terrible thing to waste."  My prediction as that as companies continue to sink under the weight of  the declining economy, more and more will look to smaller firms and alternatives to the billable hour in an effort to squeeze greater value from their service providers.  People looking back at Sherly Katz's prediction that this will be only a minor trend may well view it as an enormous understatement.

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I began my legal career before I went to law school.  In 1978, after graduating from college, I joined Kirkland & Ellis.  I was a "project assistant" and was paid by the hour.  One of my first assignments was to the "Plywood Antitrust Litigation" team headed up by Fred Bartlit.  The case went to trial, Fred was instrumental in my getting a key recommendation from our expert witness, and the rest is history.  After a storied career at Kirkland, Fred and some colleagues founded Bartlit Beck, perhaps the top litigation boutique in the country.  Maybe it's a case of unrequited hero worship, but I have always admired Fred Bartlit and I found the Bartlit Beck model intriguing.  When I was organizing a conference for American Lawyer some years ago, I arranged for Fred to be the keynote speaker.  He spoke about  Bartlit Beck's diamond structure, contrasting it to the pyramid model most firms favored.

Flash forward to a year or so ago, when my Valorem colleagues and I were getting ourselves organized.  We drew inspiration from two firms (along with many other sources).  One firm was--you guessed it--Bartlit Beck.

With that as prologue, this might be of interest only to me, but Fred Bartlit just joined Legal On Ramp, an organization I've written about before that has as members some of the leading thinkers on the law profession.  As with most things he does, Fred is already making an impact.  There is a fascinating discussion thread, started by Paul Lippe, entitled "The Change Agenda--Whom Are You Callin' Irrelevant?"    Amongst the contributors to the discussion are Professor William Henderson, and Fred, both of whom refer to a just concluded conference, Leading Legal Innovation.  Fred shares his notes from the entire conference.  Here's a couple (and remember, these are notes of the conference and not necessarily Fred's views);

The litigation “market’ is likely the most inefficient large, non-oligopolistic (fragmented) market that exists
Have heard this concept expressed again and again in many different ways at this conference. For example, GC’s, consultants, law firm participants made the following points:
Law firms are: “Expensive, complex, slow, risk averse, fragmented, static“
“Company management is at end of their ropes. They have become arbitrary and WILL tell law depts.” “you MUST budget. We can budge on 300mm drilling project and you CAN do this on litigation.” “there is no choice and there will be change”
“we do better job for customers than our law firms do for us”

This discussion thread is so good, so insightful, that it makes Legal On Ramp a bargain at any price (and it's free!).

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  I took my dear old Lexus in for an oil change this morning.  Five minutes of check-in and out the door with a freshly washed car in less than an hour.  The McGrath Lexus dealership has remodeled itself, and the customer waiting area is one part luxury hotel, one part Starbucks.  Wireless Internet.  A cafe were coffee, pastries, fruit and newspapers were available for free, with ever-so-comfortable tables and chairs to sit and enjoy a bite.  The area immediately adjacent to it was a quiet sitting area with chairs I could live in.  Next to that, work desks and computers for those who need to work and next to that, an area to watch television, again with fantastic chairs.  I almost want to bring my car in for service every day, even though my car doesn't need service.

Lexus gets customer service.

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I saw a link to a blog post on the most overrated and underrated people of 2008, and I had to check it out.  It's pretty predictible, but one "winner" got me thinking.  Let's start with the paragraph that triggered my brain cells:

Most underrated phenomenon: Newspapers. Here's a weird paradox. If you include the Internet, more people are reading quality newspapers than ever before. Yet newspapers are - as the bankruptcy of the Los Angeles Times and the Chicago Tribune shows - dying. We don't just want it all, we want it free. Does it matter? As good as some bloggers are, they don't have the army of foreign correspondents or in-depth investigative teams that are necessary to make sense of the world. If print newspapers - for all their manifest flaws and corporate biases - die, there will be an aching hole where newsgathering used to be. Newspapers: buy them or lose them.

With the Tribune Company filing for Chapter 11, redesigns we faithful readers have endured since Sam Zell bought the company, I've had a front row seat to the demise of a really good newspaper.  "We want it free."  Then I started hearing words that my friend and client Jeff Carr of FMC Technologies planted in my head about his view of the future of law:  Clients will pay willingly for advocacy and counseling.  They don't want to pay anything for content and process.

If Jeff's prediction is accurate, there will be parallels between the legal business and the newspaper business. This begs the question, of course, as to what both businesses will look like in five years. I'd love to hear your thoughts.

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My eyes were drawn to the bolded Law21 on my list of blogs.  A new post from Jordan Furlong.  Mind vitamins, to be sure.  I got my money's worth in the first couple of paragraphs:

First is this National Law Journal article about how law firms are responding to the recession (short answer: myopically). Among other things, firms are laying off staff and paralegals in droves, perhaps in part because underutilized associates are keeping for themselves the work they normally delegate to these para-professionals:

“It’s a desperate move to keep their billables up,” said [Chere Estrin of paralegal training company Estrin LegalEd], noting that paralegals have told her that some associates are doing their own document reviews, deposition summaries and other research. “It’s gotten worse lately, and it’s not good for anyone.”

Not good for the paralegals, vulnerable employees placed at greater risk of layoffs in an economic storm. Not good for the associates, whose legal skills atrophy as they rediscover how many words they can type per minute. And not, by the way, so good for clients who wind up paying associate-level prices for staff-level work. Pretty good for the firm’s bottom line, though.

I wrote about similar phenomenon, the one where partners start writing briefs for associates, and the other associates were typing their own briefs instead of delegating that task to paid professional assistants.  As firms become less busy, the incentives to hoard hours and do work that should rightly be delegated are profound, and cost clients plenty.

What should clients do?  I mentioned before the importance of watching the ratio of partner to associate hours.  Jordan Furlong's story convinces me that paralegal hours need to be included in that ratio.  So if you see changes in the ratio of partner to associate to paralegal hours, investigate further.  The same result can be obtained by examining the average effective hourly rate, since more hours by people charging higher rates will raise the effective hourly rate.

It's easy enough to find out if you're being victimized.  The real question is what you'll do about it.  One thought is to insist that the firm provide an analysis of the past two years and update it each month for you.  If its clear you're tracking the number, they should get the point.  If they don't, perhaps they deserve to be replaced.

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$600 (bleeping) per hour?   (Sorry, I'm from Illinois.  It's our water.) 

Blago humor aside, let me draw your attention to this Wall Street Journal Law Blog post.   From the Journal:

Yesterday, Judge Chin, in a polite and judicious order, asked Dewey to provide a bit more information on its fees:

It is difficult to evaluate the reasonableness of the hourly rates for most of the lawyers listed. For example, [five attorneys] — all simply described as “Associate” — have substantial hours billed at hourly rates of, respectively, $605, $605, $550, $605, and $605. Without knowing anything about their backgrounds, it is difficult for the Court to determine whether the requested hourly rates are reasonable.

Perhaps if one of the associates also has a Ph.D. in astro-physics and the case requires that scientific expertise, one of the associates might be worth it.  But the question for all of you-in-house lawyers--do you think associates are worth these rates?  Does this question posed by the Court influence your answer?

Is it reasonable to bill at hourly rates of $700 to $950 to $950 for partners and $425 to $550 to $605 for associates in the context of a securities receivership? Is it reasonable to bill at hourly rates of $285 for summer associates & $175 to $275 for paralegals?

Ever wonder how these rates can add up?  The Journal reports that Dewey is seeking $2.2 million for 20 days worth of work, $100,000 per day.  I'm in awe.

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I ran across an article by Paul Lippe in The AmLaw Daily titled "Welcome To The Future: Brains That Can Change."  Paul, CEO of Legal On Ramp, provided a taste of changes that had occurred in the past few days:

• Goldman Sachs reported a $2 billion loss
• Google cut spending
• The American Bar Association announced a Web 2.0 collaboration system targeted to students, smaller firm lawyers, and nonlawyers. 
• Sam Palmisano, the CEO of IBM, declared about the financial crisis, "you can retrench, pull in your horns, protect the balance sheet, and preserve cash. Or you can realize that this is about humanity screaming for change."
• While The New York Times headline read "At GM, Innovation Sacrificed to Profits," the CEOs of Ford, GM, and Chrysler agreed to take $1 salaries, re-tool their fleets to be green, and drive those green cars (instead of boarding private jets) from Detroit to Washington, D.C., to present Bailout Plan II. The Big 3 are making a huge effort both substantively and symbolically to be ...Toyota, a company that has mastered change because it started out with far fewer advantages.

Paul then discusses the comparisons that have emerged between the current environment and 1933, including relaying some compelling personal anecdotes.  He concludes with some observations on the magnitude of changes his grandfather experienced .  Paul ends with this observation:

Let me suggest that 2008-20 will witness the greatest change the world has seen since 1933-45. If the Big Three CEOs can loosen up their brains to comprehend and lead that change, I know smart lawyers can, too.

I venture into disagreement with Paul with great trepidation.  But I would make this observation.  Being a son of Detroit and having spent a lifetime marveling at the ability of these behemoths to turn lemonade into sand, and then try to drink it, I do not for a minute believe that the Big 3 will turn things around.  They are simply playing politics now, and even with their survival at stake, the level of insight into the changes needed is less than what one would expect to hear from any--yes, any--person who works on the factory floors.  I fear the same for great swaths of the legal profession.

Paul has an addendum with this:

One can't help but note that all of the passion, empiricism, and conversation is on the pro-change side. So if there is a vigorous, fact-based, enthusiastic defense of the status quo out there, it's pretty darn quiet. To stimulate it, I'll repeat the offer I've made elsewhere: if anyone wants to take the "pro status quo" side in a debate, I'm happy to engage with you at your partners' meeting, bar association, local pub, or favorite Web 2.0 site. But if all you can offer is a skeptical harumph, perhaps that tells you something.

I certainly won't debate the change issue.  Regrettably, I have to take the "con" on the change argument vis-a-vis lawyers.  I am too much the skeptic to believe in it until I see something real.

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Caption from a cartoon in this week's New Yorker:  "There's a lot I want to experience, but not a lot I want to actually do."   (thanks to Seth Godin)

From Tom Peters' list of 27 things that will transform every organization: "Walk the talk. ("You must be the change you wish to see in the world."—Gandhi)"

Title of Larry Bossidy's great book:  Execution: The Discipline Of Getting Things Done.

I get the message.  Do you?

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Outstanding post by my friend Jordan Furlong, who posts at Law21.ca (Dispatches from a legal profession on the brink).  The post that really captured my attention was "the market doesn't care."  Jordan draws from posts by "two of the smartest people writing on the web these days," Seth Godin and Scott Karp.  While I haven't read Scott Karp's blog, I am a regular reader of Seth's, and I concur in Jordan's assessment.    Here's an insight into Jordan's analysis of the posts he references:

You can probably guess where I’m going with this: the legal services marketplace doesn’t care if lawyers make money. The irreversible changes that our industry is going through, the steady advancement of globalization and technology, the growing legions of competing products and producers — the earning expectations of lawyers and the atrophied business models of law firms mean nothing to them. What lawyers want is about as relevant to these forces as the farmer’s crop is to the tornado bearing down on him.

I believe in the immutable certainty of change. Discussions, like Jordan's, of the confluence of events and circumstances that accelerate the pace of change, are endlessly fascinating.  And Jordan's post, more than most on the subject, is worthy of your attention.

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It's that time of year for the associate set.   The payoff for surviving a year of crazy partners and even crazier hours.  We're past Thanksgiving, when every associate who still has a job gave thanks for still having a job.  Now we are into payoff season.  Bonus time.  And this annual seasonal frenzy has yielded some stellar posts on bonuses and whether clients should care about them.    The story started with Above The Law, a post that has generated nearly 1500 comments.  Carolyn Elefant followed up in Legal Blog Watch, asking "Should Firms Cut Bonuses In Response To Clients?"  My friend Dan Hull then offered an inspired post in  What About Clients, aptly titled "In any year, just firms--not sophisticated clients--should care about associate bonuses."  The discussion was brought to a head in an f/k/a post entitled "smart clients care about bonuses and marketplace "value"."  All are worth a careful read.  The discussion veers toward a discussion of value billing, which is interesting but really off target.

For what its worth, I find myself falling into the Dan Hull camp.  For this reason:  clients need to care about their own cost structure.  That means, how much they pay for firms to perform legal work that needs to be performed.  Let the firms worry about their own cost structure.  If a firm pays huge bonuses and, as a result, charges too much (under whatever billing structure), wish them well and find a replacement.  It is asking too much for clients to manage their own law departments, advise the business they represent, understand the industry in which their company competes and micromanage each of the law firms that does work for their company.  Set the bottom line and let the firms worry about how best to get there.

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I recently posted on the 10% game that clients and their law firms play.  The client representative wants to feel like he or she has achieved a real discount with the law firm.  So the representative insists on a "10% discount."  Lawyers, being the smart people they are, can do the 10% math, so they raise their base rates so that after giving the 10% discount, the firm gets its regular rate.  The game is truly perverse.  No one cares about actual cost.

Here is a story I recently heard.  Well-regarded midwest firm is meeting with a large client.  Large client tells firm that its rates are dramatically lower than the New York firms with which the midwest firm shares the workload.  Hundreds of dollars per hour less.  Client is utterly uninterested in moving work to the midwest firm so it can save hundreds of dollars per hour.  Client simply asks midwest firm to give it a 10% discount.

Here's the latest on the 10% game.  From the American Lawyer survey of the AmLaw 200:

Aric Press, the Managing Editor of The American Lawyer and one of the most informed and astute observers of the profession, commented on these results in The AmLaw Daily.  In his typical pithy manner, Press says:

And yet, they tarry. One reason seems to be that clients still see these plans not as a way to agree on a price, but another way to wrest a discount off the billable rate card.

He is equally critical of law firms when it comes to the move to alternative fees.  Be sure to catch the entire post.

Suffice it to say here, clients need to realize they cannot wait for law firms to lead them to the promised land.  Aric Press' post quotes one managing partner as warning him to "stop writing that story [on alternative fees].  It's not going to happen."  Clients need to realize also that the move to alternative fees is not all or nothing.  Clients that need a change for nothing other than reasons of economic survival should think about an experiment.  Move some portion of your workload to alternative fees so you can develop a basis for making an informed judgment.  Valorem, as an example, has bet its future on the fact that you will save money and enjoy budget certainty by making this move.  There are many firms like ours--you simply need to plug in to the underground.

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The American Lawyer's annual survey of Managing Partners to AmLaw 200 firms (112 respondents) is out.  In light of my recent posts on the economy and hourly rate increase, two survey questions jumped out at me.

So, notwithstanding the enormous difficulty our clients are experiencing, 97% of the AmLaw 200 expect to raise hourly rates.  And 2/3 of the firms expect an increase in profits per partner in 2009.

One can only marvel.

But the same issue contains some incredible information about how clients are responding.  For more on that, be sure to read my next post.

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I am humbled to be have been included as a contributor to a roundtable discussion on the economy and law practice in a time of turmoil.  The roundtable was moderated and edited by Dennis Kennedy and was published online by Law Practice Today. The contributors included Tom Collins, Bruce MacEwen, Patrick McKenna, Jordan Furlong, Ed Poll, Allison Shields, Merrilyn Astin Tarlton and Dennis Kennedy.  You can understand why I am so honored to have been included among this Who's Who of legal thought leadership. 

The discussion includes some insights into the depth and possible duration of the economic downturn, as well some insights into how firms should be responding to position themselves for survival.  Given the depth of expertise from the panel, the free advise offered is well worth reviewing.

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   On its November 21, 2008 broadcast, NPR's Day To Day program ran a story on the looming demise of the billable hour.  You can hear the story here.  Valorem's own Nicole Auerbach is quoted at length, along with Susan Hackett, the General Counsel of Association of Corporation Counsel and Steven Williams of Corporate Executive Board.

Each time a person stands up for an ideal,
or acts to improve the lot of others...
he [or she] sends forth a tiny ripple of hope,
and crossing each other from a million different centers of energy and daring,
those ripples build a current that can sweep down the mightiest walls of oppression and resistance.

Robert F. Kennedy (1925 - 1968)

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DuPage County Bar Association Speech Slides

Many thanks to the kind people at the DuPage County Bar Association and the many attorneys who attended my presentation on "The Economy, Legal Fees and Your Future--or--Alternative Fees Will Help You Survive The Economic Downturn."  Here are the slides used during my presentation.

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For the past several nights as I have been driving home, I've heard the local NPR announcer say that this programming was brought to you by "Blah, Blah & Blah, a national law firm with offices in 12 cities."  Every time I hear this, I wonder whether anyone ever hears the announcement and says "wow, that is a really unique firm and I am going to hire them."  There is utterly nothing about the tag line that communicates anything of interest about the firm and it obviously does not communicate a value proposition. 

With that personal observation as prologue, I recommend you read Seth Godin's post, "The edifice complex."  Here's the punchline:

I'd replace the expensive sponsorships and buildings with something more valuable, quicker to market and far more efficient: people. Real people, trustworthy people, honest people... people who take their time, look you in the eye, answer the phone and keep their promises. Not as easy to implement as writing a big check for the Super Bowl, but a lot more effective.

I'm not sure Seth's answer is the best answer to the problems inherent in boasting to the world that you have offices in 12 cities.  Butut if you're going to spend money on marketing, perhaps having real people speak to real people at real potential clients about real value you offer might provide a better return on your investment.

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  The message of my recent posts on law firms raising hourly rates this year (here, here and here) is that the firms that raise their rates are tone deaf.  The explanations for raising rates when client law department budgets are being slashed is self-absorbed.  They have ranged from "we can" to "we have to so our profits per partner numbers don't suffer so badly" to the more nuanced,  "well, some areas are busy so we can get away with it in those areas."  The analysis is always inward looking.

  I thought I about this today when I saw this story on CNN.com: "Auto CEOs Flew Private Jets To Seek Bailout."  It wasn't one private jet--each had his own private jet.  The auto executives had their rationales for their choice in air travel--personal security, company requirements and so forth.  They looked at things from their own perspective.  But they are beyond tone deaf.  When you go to ask someone for something, you need to look at things from that person's perspective, not yours.  That someone opposing bailouts would seize on this kind of perceived excess was as predictable as the sun rising in the east.  Couldn't they have flown coach one time?  This has the capacity to become the symbol of a "they don't deserve our help" response to the plea for bailout money.

The issue on fee increases is exactly the same.  It's not about what firms can do for themselves.  That's tone deaf.  It is the equivalent of flying a private jet to a hearing where you ask for billions of taxpayer dollars.  It ignores appearances.  For smart firms, it will be about they can do for their clients.  Imagine what would happen if a firm said, "we know our clients are suffering and we are their partners, so we are reducing our fees by 10%."  Think they might get any new business?  Perhaps some good PR?  I can think of a lot of good things that might happen, including keeping everyone busy and making more money that the increased rates would have generated.

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My friend Paul Lippe at Legal On Ramp asked me to share this important information that may be of great interest to associates (and partners) who have become the victims of the economic downturn:

At Legal OnRamp, we're concerned about the recent layoffs of associates in large firms, but also optimistic that this will give those lawyers an opportunity to adapt to the world that's emerging. As such, even though Legal OnRamp is primarily for inhouse lawyers, we are inviting associates who are being laid off to join. We are putting together a career center with a variety of resources, we have a number of job listings, and will support various networking and skills development activities. We have extended that offer directly to the firms and welcome individuals to contact us as well. Just indicate which firm you are being laid off from when you request an invitation at www.legalonramp.com.

It's a smart play if you need to network.

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"I don't care what you raise your rates to, just make sure you quote me a 10% discount."

In a number of meetings I have attended recently with leaders of large firms, similar stories are being told.  The firm proposes an alternative fee and the client declines to pursue the alternative fee, instead asking for "10% off" the firm's hourly rates.  According to these law firm leaders, at least some personnel at their clients are not really interested in cutting legal spend but instead are concerned that they be able to demonstrate this 10% savings.  I've heard enough similar stories that either there is a grain of truth to the stories, or, alternatively, there is a single client out there obsessed with this 10% discount and I was simply lucky enough to be in meetings with the client's law firms. I'm going with the former.

I've spent enough time investigating, proposing and writing about alternative fees to know that reactions to non-hourly fees for a continuum that is quite long.  I also have heard enough to know that when many firms propose non-hourly fees, the proposal amounts to  "pay me a lot up front and then a lot more if we get a result'."  There is no true risk sharing on the firm's part. 

Suffice it to say that when firms hear the "10% solution," they are smart enough to know how to set their "base rates" so they get exactly what they want when the 10% solution is applied.  Presto!  Through the magic of a spreadsheet, the client saves nothing and believes it is saving 10%!  Everybody's happy, right?  Everyone except for the CFO, shareholders, and the General Counsel whose bonus is predicated on reducing actual costs instead of achieving such pyrrhic victories.

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"I have been skeptical that the global megafirms, in fact, provide the claimed superior service, quality or price.  Indeed, the relationship between the big law departments and big firms is often bedeviled by prickly issues relating to power, money, culture, and, ultimately, the foundational question of who controls the corporation's legal matters.  These questions have become more salient as the global economy turns down, but big firms' expenses and rates continue to rise."

This sounds like it was written by a recently laid-off partner from a large firm, looking to exact a measure of retribution against his former firm.  You wouldn't be surprised if it was.  But these are the words of Ben W. Heineman, Jr., the renowned former General Counsel of General Electric.  In that context, these words read as an indictment instead of mere grousing.  American Lawyer, November 2008, "Bigger Isn't Better," by Ben W. Heineman, Jr.

"...and, ultimately, the foundational question of who controls the corporation's legal matters."  Think about that for a minute!  It is an incredible claim by a man well-known for extraordinary care in his wordsmithing. 

But this is just the beginning.  Heineman dissects arguments made by proponents of BigLaw and lays waste to the notion that BigLaw is the smart money, particularly in these tough economic times:

My GE meetings with big-firm leaders usually began with a stark comparison of differing economic imperatives and worldviews.  I had to operate the legal department within a budget; they had to bill and collect like crazy for almost two-thirds of the year to feed all the mouths before they made any profit.

Yet year after year, firms raise their rates.  As noted in a recent post, industry leaders are predicting increases, albeit smaller ones, this year.  Heineman then address (much more articulately) the productivity issue I have addressed in the past:

Why do law firms take such a narrow view of "productivity"?  In simplest terms, a total productivity increase in business is defined as more output with less input.  To maintain margins in fierce global competition, the corporation has to lower costs along with price.  But for law firms, "productivity increases" mean leverage--more lawyers per partner or matter--or more hours billed per lawyer.  Both of these measurements speak to increases in firm hours and revenues.  But, with rising compensation and operating expenses, they do not, in and of themselves, remotely speak to more product for clients with less cost and less price.  For the largest firms, with their cost problems and billing pressures, this "productivity disconnect" with clients can be acute.

Indeed.  Heineman goes to conclude that "at GE, I came to believe generally that small was beautiful and big was wasteful."  The fact of the matter is that as more BigLaw refugees follow the Valorem approach, the options offered to clients secure the same or better service, the same or better results at a much better price are even greater today that when Heineman reached his conclusion.  The lingering issue is whether economic hard times will prompt more inside lawyers to reach the conclusion reached by the old master.

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Two online articles caught my eye this morning: they seem so interrelated.  In Forbes.com, the article titled "The Worst Is Not Behind Us" includes this prediction:

"The prospect of a short and shallow six- to eight-month V-shaped recession is out of the window; a U-shaped 18- to 24-month recession is now a certainty, and the probability of a worse, multi-year L-shaped recession (as in Japan in the 1990s) is still small but rising. Even if the economy were to exit a recession by the end of 2009, the recovery could be so weak because of the impairment of the financial system and the credit mechanism that it may feel like a recession even if the economy is technically out of the recession."

And Law.com includes "GCs Prepare For Rate Battles."  The gem from this article:

Law firms are playing coy. They say publicly that they haven't made up their minds, but several consultants and at least one management source say they expect rates to go up in 2009, although not as much as in years past. . . . .

Law firm consultants are predicting a 3 percent to 5 percent rate hike for 2009. That's less than the 5 percent to 10 percent increases firms made in recent years when the economy was strong.

There is a horrible disconnect between the forecast from Forbes and the forecast about rate increases.  Is it possible or that law firm leaders are hard of hearing?  Do they live such insulated lives that the don't see the hardship their business clients must cope with every day?  Do they not realize the goodwill they could develop and the marketshare they could capture if they resorted to innovative pricing strategies rather than doing "the same old thing?"

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Legendary Sioux warrior Chief Crazy Horse is renowned for his exhortation "today is a good day to die."  That sentiment must have been rampant among large law firm partners when they received their November edition of The American Lawyer.  Trepidation should begin right at the outset, reading Aric Press' column.  You need to read it for yourself, but the gist is that if you're a partner at a big law firm, your fellow partners have the ability to create billion dollar liabilities for your firm.  More troubling is just how easy it can happen when the firm compensation system and culture rewards partners who generate business.  The real life story of Mayer Brown partner Joe Collins and his former client Refco is told in depth by Susan Collins later in the issue.

The issue then transitions into "20 Days That Shook The World: Chronicle of a Future Foretold."    One troubling quote comes from Peter Kalis, chairman of K&L Gates: "The metaphysical question is whether you can have bulge-bracket Wall Street firms without Wall Street."  

After that sobering reflection comes "Why Heller Died," the story of the demise of a century-old landmark firm.  If it can happen to Heller, there must be some question in the back of your mind about whether it can happen to your firm.

But the real eye-opener has to be the article "Bigger Isn't Better" by Ben Heineman, the legendary former General Counsel of General Electric.  Heineman carefully dissects the purported advantages of large firms and lays waste to them.  I am going to write more on this article since it is profoundly important to inhouse purchasers of legal services, but BigLaw partners have to ask themselves what benefit their current business structures actually create.  The vision in my mind, having both worked at an AmLaw 100 firm and having read Heineman's article the scene from Wizard of Oz where the curtain is pulled back and the "great and powerful" Oz is exposed for what he really is.

Let me avoid over-hyping the issue.  Today is not a good day to die.  But it is a good day to be critically reflective about your firm does business.

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I have always tried to keep politics out of this blog.  But sometimes history overtakes events and exceptions must be made.

When I was a child, I wrote a paper on Martin Luther King's "I Have A Dream" speech and through many different avenues, it keeps coming back into my life.  I was always touched by this line: 

I have a dream that my four little children will one day live in a nation where they will not be judged by the color of their skin but by the content of their character.

I have always wanted to be judged by the content of my character.  I can only imagine the thirst those who are not part of the majority feel for the same thing.

I spent yesterday sitting outside the polling place at the Good Samaritan Lutheran Church in South Bend IN doing voter protection for President-elect Obama.  The weather could not have been nicer—70 degrees, cloudless bright blue sky, beautiful fall colors.  Our precinct had 1,114 registered voters, up 20% over the last two election cycles.  Over 750 people voted, roughly half black and half white.  The Obama ground organization was unbelieveable—volunteers of all ages and colors.  There was a sense of excitement, of anticipation, that was palpable.  I could feel that the African American voters were walking a little taller.  It was a sight.   And it made me remember a conversation I had with my Dad.   I remember asking him once why he thought the Kennedy election was so important.  He told me it was because he felt that  a world of opportunities had opened for his three year old son that had not existed before.  My response to him was that I never once thought being Irish or Catholic was a roadblock.  As I was thinking back about that conversation yesterday, the obvious finally dawned on me after all these years.  My reaction was exactly the sign of progress my Dad had hoped for when I was three.   And then I thought about how many minority kids might now grow up like I did, not  feeling encumbered by the traits over which we have no control.  If that happens, yesterday's historic event will truly be a great step forward for our country.  Obama's reference to the founding fathers brought to mind their very deliberate word choice—"In order to form a more perfect union…"  They knew we would not be perfect.  Ever.  But the desire to be "more perfect"—sort of an olden days version of continual improvement—is at the very soul of America.  It may take time, but that which is wrong will be made right. 

So whoever you voted for, whatever your politics, perhaps we can all agree that something historic happened yesterday.  And maybe we, as the great country we are, have taken another step toward the Dream. 

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My partner, Nicole Auerbach, the soul of Valorem, ensures that we live by the rule that while we take our clients and their problems very seriously, we can't take ourselves seriously at all.  This is the sign that welcomes us to our Conference Room.  Even after several months, I smile every time I walk in the room.  I hope it brings a smile to your face as we end a tough week.  Cheers, Nicole.

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The November 2008 issue of Inside Counsel reports that 62% or the responding law department leaders expect their law department budgets to be reduced as a result of the economic crisis.

The pie is shrinking.  Your piece can shrink with it, or you can figure out how to get a bigger piece.   What are you doing to make sure you get the calories you need?

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Last March, I wrote that unlike with every recession since World War II, we would not be able to rely on the consumer to drive the economy of this recession.  Since that post, we've seen home prices continue to tumble and the precipitous decline of net mortgage equity withdrawals (essentially, the amount of home equity borrowing by Americans), down from a range of $140 billion to $225 billion per quarter to a mere $9 billion in the second quarter.  Third quarter results may well approach zero.  The effect of this reduced spending on a key segment of the retail market is discussed in The Economist (thanks to my friends at What About Clients for the heads-up).

Just add some gravy to the mix, this from Bert Dohmen's Wellington Letter:

The consumer doesn't have the money to buy goods, the retailers can't get loans to finance inventories and they can't get sellers to accept the LOC's from banks to ship the goods.  It's a triple whammy!

What does all of this mean?  No one has a crystal ball, but more and more experts are predicting a very difficult 2009.  Some are predicting that the economic problems could persist for years.  But the bottom line really is this:  unless your firm is prepared to roll the dice on things "returning to normal" in a very short period of time, you must engage in serious "worst case" scenario planning.  Chaos creates opportunities to be sure, but those most likely to gain advantage in chaos are those most prepared for it.

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Check out Larry Bodine's discussion of the ACC/Serengeti study that predicts a downturn in spending on outside law firms in 2009.  Also take a look at Hildebrandt's Fall 2008 Special Client Advisory.  Those looking for good news or positive signs will be disheartened.  From Hildebrandt:

Unfortunately, it seems certain that a quick turnaround for the economic crisis will not be possible.  Despite the aggressive efforts of governments and central banks around the world to bolster the capital markets and to free up credit, it is apparent that it will take several months to work our way out of the current quagmire.  We believe that we are unlikely to see any significant turnaround until late 2009, at the earliest.

As I wrote yesterday, the smart money is betting on a later date. 

The Special Client Advisory also contains this insight:

If, as seems likely, across-the-board rate increases will not be possible in 2009, the hit on law firm profitability will thus be particularly severe.  Moreover, the current crisis is occurring at a time when client resistance to the level of legal fees has already been mounting.  All of this may ultimately require a re-thinking of the basic law firm economic model.

The use of the word "may" in the highlighted sentence could rank as one of the great understatements of this episode.  Having said that, my encounters with leaders of large law firms over the last several months lead me to believe that most (indeed, almost all) do not understand or appreciate the profound changes that will be required by law firms just to survive this toxic environment.

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    I just wrote about how much worse the economy may get, and what it means for law firms.  I would be remiss if I didn't offer some thoughts on what the declining economy means for clients.

   Let me begin my observations by recalling Einstein's definition of insanity: doing the same thing over and over, and expecting different results.

  So, the first thing each client needs to do is to decide whether you are insane.  If you decide you are, good luck.  If you realize that change might be necessary, start by making two lists: (1) what do I want to accomplish; and (2) what ways exist that allow me to accomplish my objectives.

  Let's begin by discussing List 1.  I suspect that in this environment each sane person's list includes some variation on the idea of reducing costs.  There are probably a lot of adjectives included with that concept--materially, significantly and others along these lines.  Many would also have predictability on their lists, along with effective budgeting. 

With respect to List 2, begin with this principle:  for brainstorming to work, the only bad idea is the one not expressed.  Ideas tend to feed on one another.  Idea A might not be good, but it sparks something in someone else who comes up with Idea B, a fabulous idea that would never have seen the light of day were it not for Idea A.

On List 2, I hope people consider two things I have banked my future on: fees based on something other than time, and the use of small firms.  But not just any small firm.  There are many firms that are comprised of people who received the benefit of big firm training and have substantial experience handling the most complex matters for large clients.  Some, but certainly not all, of the lawyers that leave big firms leave on their own accord because they realize they can do more for clients when freed of the limitations inherent in big firms.  It is one of the great misconceptions that  big firms are better than small firms.  There are a lot of ex-big firm lawyers out there who equal or exceed the experience and talent of big firm lawyers, but who have so much more ability, flexibility and interest in helping clients solve their most important problems without regard to the impact any deal will have on the firm's AmLaw 100 rank.  My friend Dan Hull refers to these boutiques as muscle boutiques.  Inasmuch as I joined several other big firm refugees to start Valorem, I believe with every cent left in my kids' Section 529 plans that these smaller specialty firms have a special place in helping clients solve their problems.  And that clients will recognize this. 

On Wednesday, I will be part of the faculty of a program offered by Inside Counsel, Managing Litigation As A Business.  I am a big believer that litigation can and should be managed as a business, not only by inside counsel but by outside lawyers as well.  If inside counsel ever want to discuss the concepts, I'll be happy to discuss the issues with you--no charge of course.  You can reach me here.

The end of this exercise is to take your lists and force rank each so you know what your priorities are and what steps are most likely to help you achieve the priorities.  Take the top three items on list 2 and, for each develop a detailed list of precisely what you will need to do to accomplish the item.  This third list is where the rubber hits the road.  Don't write "identify 3 new law firms that use value pricing."  Find the three firms and then write down, "Give work to Firms A, B and C.  If you can be even more specific, do it.  "Call Jane Smith to see if she can take over the ABC matter and complete discovery for less than $40,000."

The last thing is to take your detailed to-do list and do it.

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   Wake up and smell the coffee.

    If you run a law firm, heck, if you work at a law firm, wake up and smell the coffee.  What, exactly, do you think you're going to do if the economy continues to head south (which I just wrote about).   If life for your clients continues to worsen, what exactly do you think you're going to do?  Think for a minute about how clients will feel when they receive that letter telling them that you're raising your rates.  Think how they will feel when they read about BigLaw complaining that their profits per equity partner are down 10% (but that partners are still making millions, all the while the company's stock price is down by two-thirds).   Think about the struggle everyone at our client's is experiencing everyday to do more with less. 

Now think about what will run through each client's mind when he or she considers how you and your firm have reacted during these troubled times.  Did you help their situation or did you hurt it?  Did you feather your own nest at the client's expense or did you tighten your belt so your client didn't have to tighten its belt as much?

My friend Gerry Riskin has repeatedly advised law firm leaders to discuss the strategic and managerial implications of the economic meltdown.  I hope people are lining up with Gerry and others like him to discuss the issues raised, because these issues go to the heart of most firms' business model.  I don't think I am wandering too far from reality to suggest that firms that are slow to reinvent themselves during these times will be in peril.  Already the early indicators are there:  the recent ACC study showing client's taking more work inside; the warm, enthusiastic reception to ACC's value challenge (subtitled, "kill the billable hour"); some major counter-cyclical practices not cycling up; decreasing executive compensation and other factors that blow chill winds into most law firms. 

Now, more than ever, is the time for zero-based thinking.  Everything must be on the table for critical examination.

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I ran across an article in the business section of this morning's  Chicago Sun-Times that made my blood run cold.  Columnist Terry Savage was recounting how Bert Dohmen, publisher of The Wellington Letter, predicted the current credit crisis in March 2008, saying that "[t]he enormity of this problem is beyond anything we have ever seen in financial history."    In Dohmen's September 28, 2008 edition of The Wellington Letter, he recounts how Jeffrey Immelt of GE recently said we have a " once in a hundred year" crisis in the credit markets.  Former oracle Alan Greenspan just said that we have a "once in a century" credit crisis.  And to top it off, Warren Buffett recently said on CNBC: "Last week we were at the brink of something that would have made anything that's happened in financial history look pale." He later added, "If Congress doesn't help us on this, heaven help us."  Nothing like all of this to start off a Monday.

The kicker?  Dohmen is quoted in the Sun Times article, saying "Most bear markets, after a major bubble has burst, decline 80-90 percent, going back to where the bubble started....So until a major index is down over 80 percent, I will not even start looking for a bottom."  There is a discussion about a "fake rally" and then the real bad news.  So when is the fake rally  going to occur?  Dohmen says he'll make that prediction for his subscribers, but leaves the rest of us with this prediction: "But I can say the worst is still ahead over the next several years for stock market investors." 

Of course, our clients are the ones that make up the market.

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As I flew from Chicago to Boston this morning, I had an opportunity to read the October issue of The American Lawyer, which fortuitously arrived yesterday.  I smiled as I read a piece labled “The Going Rate: With the economy down, will fees go up?”  Readers of this blog will know I wrote about that issue a few weeks ago. I relayed a personal story about someone from a large firm telling me the firm was planning to raise rates.

AmLaw quotes Peter Haugh, managing executive of the legal group at Wachovia Corporation, as saying “Contrary to what one might think, it has become very evident that law firms are raising their rates and feeling more convinced about it.”  Feeling more convinced about it?  To quote a line my mother wore out uttering to me as a child, “good god, man, are you nuts?”

This stunning revelation comes on the heels of yesterday’s release of Association of Corporate Counsel/Serengeti Law’s study showing that in real dollar terms, corporate America is spending less on outside counsel.  I’ve regularly questioned whether lawyers have business sense, and I guess time will tell whether the strategy of throwing kerosene on the fire is the right approach to this development.  One might have thought  growing market share by actually lowering rates or looking at value fees as an option would be a better long-term strategy.  Oh well, what do I know?

So as I sit here on my flight, two pieces of advice come to mind.  For outside counsel at firms that raise rates this year, my advice is to immediately go to your phone, pick up the receiver and dial 1-8-0-0-P-S-Y-C-H-I-A-T-R-I-C-H-E-L-P and follow the instructions you receive.

For outside counsel who are shaking their heads wondering what else law firms can do to make your life difficult, my advice (at least for those who have litigation needs), is to go to your computer and type in www.valoremlaw.com.  While that last sentence is written with (hopeful) tongue in cheek, I do seriously note that firms like Valorem (my firm) and Summit Law Group and others comprised of ex-BigLaw partners who have seen the future and realize it should not include the billable hour or at least not BigLaw rates, provide a real option to help you meet your litigation needs.

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Market forces work in law firms, at least to an extent.  When hours become scarce, they become more valuable--more valuable, that is, to the person who records them.  Hours are not more valuable to the client who has to pay for them.

Consider this from a post on law.com:

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As I write this, the Dow has just gone under 8,000, and today's Wall Street Journal notes that in the last seven days, investors have lost $8.4 trillion of wealth.   And that is only wealth lost in the market.  Home prices continue to decline in many areas as well.

If you want to understand the details of the crisis and the bailout, I encourage you to listen to two pieces aired by Ira Glass on This American Life, an awarding winning NPR show.  The first piece is The Giant Pool of Money. It describes the subprime crisis.  The second, which aired just last week, is Another Frightening Show About The Economy. 

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  I'm guessing that a lot of law firm leaders are starting to think about hourly rates for 2009.  I know they've probably heard some rumblings about the economy.  Maybe they've noticed that their portfolios are worth about 40% less today than just a week ago.  Home values?  Same thing.  Hmmmmm.

So as these law firm leaders sit down with their favorite beverage in the evening, I'm sure they are wondering what to do about rates?  Tough decisions.. ..hmmmmm .....shall we raise rates by 7 or 8 per cent? 

Apocryphal?  I kid you not, I had this discussion.  On pain of death, I will not disclose the name or city of the firm, but the firm thinks there "is room" for the increase.  It will be a most interesting next few months as we find out whether firms will have the temerity to raise rates while their clients are suffering through generational economic displacement.  From a competititve standpoint, I hope firms do raise rates.  It only serves to make the Valorem approach look that much better.

On the other hand, part of me hopes that the profession takes a long and sober look at itself and sees the folly in the system, even if only for this year.  It is hard for outside lawyers to appreciate the pressure to squeeze costs that our in-house colleagues confront each day.  This could be the year when tolerance for that lack of understanding ends.

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The Marketplace section of today's Wall Street Journal  features the headline, "Food Marketers Cook Up 'Value' Campaigns."  Seems like, in today's world, value is is de rigueur.  We at Valorem certainly hope that it informs purchasing decisions in the legal world.

What?!?!?!?  Value in the legal world?  Yes.

I'm being serious here.

I know, it's hard to believe.  The law, particularly BigLaw, is not where one would look to find a focus on value.  Until now, the focus has been on buying and selling hours--high priced hours.  I've written before about the Perfect Storm altering the profession.  But evidence is accumulating that change is coming faster than many believe.

On Friday, the Association of Corporate Counsel unveiled its Value Challenge, which ACC describes this way:

The ACC Value Challenge seeks to reconnect value to costs for legal services. Our aim is to provide networks, tools, and dialog for both in-house and outside counsel to help us all better manage our clients’ legal affairs.

I was on-hand at the launch on Friday.  It was an impressive affair, with a number of prominent in-house lawyers and representatives of several large firms reflecting on the necessity of change.  ACC's goal in spearheading this effort is provide their members the tools and support needed to change the way legal services are consumed, with the anticipation that firms are smart enough to see that change will help them attract the clients looking for value instead of hours.  Nothing but best wishes to Susan Hackett and her fabulous team who have worked incredibly hard to start the ball rolling.  The success of this effort won't be able to be judged for several years (it is the legal profession--change does happen at a pace somewhat slower than the business world), but if the launch reflects the future, the legal profession will look back to Friday as a watershed moment.

On this same note, I draw your attention to an article by Paul Lippe, CEO of Legal On Ramp, in today's The AmLaw Daily,  Paul's article is Welcome To The Future: Law After The Boom.  Among Paul's many important points:

Many folks in law firms have come to believe that the law business operates according to a different set of economic rules than their clients' businesses, but the truth is much simpler: when you're inside a boom, you always think your industry has achieved immunity from the laws of gravity because it's the only reality you can see. I was in Silicon Valley in 1998, believe me, I know.

Paul characterizes his goal this way:

I will relentlessly challenge the conventional wisdom of today's law firms. Those of you who think I'm way off, I ask, indeed beg, that you comment on my post and explain why I'm wrong.

I, for one, think he is right on the money.

Let me close this post with a quote from General Eric Shinseki, Retired Chief of Staff of the United States Army:

If you don't like change, you're going to like irrelevance even less.

Welcome to the revolution.

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As many of you know, I was privileged to attend the Association of Corporate Counsel launch of the ACC Value Challenge this past Friday.  The entire program was recorded and is will be available soon on the ACC website.  One of the things that caused me to smile was the repeated reference to "commodity work".  The firms present ran from that label faster than than a political candidate in Mississippi runs from the dreaded "liberal" label.  They did so by trying to distinguish their routine work for clients from the routine work others do for their clients.  Apparently, one gi-normous document production is really not the same as other gi-normous document productions.

The lame efforts to draw distinctions that don't exist got me thinking.  Is "commodity work" a meaningful label?  I think not.  Commodity work originally meant repetitious, paint-by-numbers kind of work such as collections.  The term has evolved over time to mean something more routine, eventually coming to encompass anything that isn't "bet-the-company" work.  The  distinction was become too vague to be meaningful.

Let me suggest a different concept.  Picture a continuum ranging from "everbody-chuckles-and-the-GC-pulls-a-dollar-from-her-wallet-to-settle-the-dispute" on one end to "the-CEO-sweating-bullets" at the other end.  On that continuum, the closer the case is to the perspiration end, the more the client will be willing to invest in the matter.  At the other extreme, short of the time necessary to send the matter to a paralegal to prepare the paperwork, no time or real money will be spent on a matter.  And everywhere in between, the challenge will be to find the right balance between time, money and result.  This approach eliminates the "either-or" debate about whether work is (picture guy in really expensive BigLaw suit turning his head to spit) commodity (gasp!) work or (BigLaw suit dude smiling) bet-the-company. 

I think the Lamb Continuum Theory helps focus the issue on the client's interest--the client doesn't care what label firms apply--and not on the firm's desire to look like they are better than everybody else.  At the end of the day, my law firm colleagues, let's keep our eye on the ball.

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"When the going gets tough, the tough get going."

This quote is frequently attributed to legendary Green Bay Packers coach Vince Lombardi, but it appears to have been uttered first by Joseph P. Kennedy.  The source is less relevant than the concept.   When confronted with a problem, some give up.  Some turn the problem into an opportunity and, in so doing, not only survive, but thrive.

I wrote about this in my most recent post, Silver Lining in Black Economic Cloud.   This morning, I ran across a similar group of entries on Tom Peters' blog.  His first is Thriving on Chaos.  The second is Surviving and Even Thriving Amidst the Perfect Storm.  The last of the trilogy is The Basics Are the Basics Are the Basics Are the Basics: The Worse the Times the Better They Work; Or, Listen to Grandfather Snow.  Excellent lessons for those who believe in opportunity.

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In my last post, I picked up on Gerry Riskin's most recent post on our troubled economy.  Gerry first raised the red flag on the economy last August, and I have picked up on the issue from time to time, including posts about the Perfect Storm, the bad economy being a long term issue and a discussion of whether lawyers had any reason to smile yet in light of economic news.  The moral of these posts is that the economy is a once in a century meltdown, things are not getting better yet and the magnitude of these problems is such that one must anticipate profound change in the profession.

There, I said it.  Profound change in the profession.  I using the C word given how it has become the centerpiece of the US Presidential election and there both overused and misused.  But here is the inescapable fact:  General Counsel, indeed all in-house lawyers (save, perhaps those in the oil and gas industries) are facing unimaginable pressure to lower legal costs.  The pressure is no different than that experienced by those in charge of procurement, sales and others responsible for the business of business.  But the key factors are (1) the pressures to save are enormous, and (2) law department leaders are not immune from the pressure, or the accountability that goes along with it.

I recently was having a discussion with an in-house lawyer about cost control.  He said his boss was very interested in the topic.  His next sentence will stay with me forever: "What interests my boss fascinates me."  I'm sure that line or at least the sentiment has been used by many, but what a lesson for we outside lawyers. 

The title of this post asks if there is a silver lining in the black economic cloud hanging over our clients' heads.  If you don't see the opportunity to restructure relationships in ways that produce savings for your clients while at the same time strengthening your relationship with that client, you need to open your eyes.  There is no formula--I'd write about it if there was--because each client's situation is unique.  But there is surely a topic of discussion there that all should pick up on.  If you do it right, you'll like back and say that your response to these unprecedented difficult times was your finest hour (with my respects to Sir Winston Churchill).

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Alan Greenspan appeared on This Week yesterday and indicated that the black cloud hanging over the US economy would not be leaving us anytime soon.  See his comments here.  These pessimistic comments led Gerry Riskin to restate his challenge to Law Firm leaders:

Punchline:  You are getting fair warning - are you acting on it?  This is not a time for traditional strategic planning - it is time for scenario planning that will create "dynamic resilience" that may become the life support system your firm will need should the economy worsen.

Gerry, you may recall, was one the earliest to raise the specter of economic meltdown and its impact for the legal profession in his Doom and Gloom For The Legal Profession from last August.  Those listening to Gerry had more than a year to prepare for today's environment.  But with the likelihood that the economy will continue to worsen, law firm leaders who do not take the difficult but necessary steps to prepare will have only themselves to blame.  But beyond Gerry's comments, in light of the comments by Alan Greenspan, the bankruptcy filing of Lehman Brothers, the meltdown of the banking industry, and all the other economic problems,partners who firms where leaders fail to pick up the phone and reach Gerry or others who advise law firms and talk through the difficult choices firms must make if they are to survive should reevaluate whether they are receiving the leadership they need.  As Greenspan said, it is a once in a century experience.

Is there a silver lining in this black cloud?  See my next post.

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True story.

I was interviewing a potential admin assistant.  She was asked why she was thinking of leaving her position as a very prestigious firm.  Her answer didn't surprise me since I had heard rumors of this--the firm was not that busy and she was the kind of person who liked being busy.  Good answer.  But the next piece of information floored me.  The associates, (and I'm guessing partners too) were typing their own briefs so they could keep their hours up.

Well, I'm sure that ought to make the clients feel better. 

The creativity of lawyers in finding ways to take advantage of clients never ceases to amaze me.