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!

Yesterday, I took my soon to a church function that, frankly, neither of us was too thrilled about attending.  But lessons are learned in the most unexpected places.  We were in a group of about 50, and were treated to a performance by Tony Melendez.  Tony is a thalidomide baby--he was born without arms.  Even without arms, he is an accomplished guitarist and singer.  One of he kids asked Tony whether he ever feel sorry for himself.  His answer?  "Why would I?"  "Uhh, Tony, you have no arms."  His wisdom: "It's better to celebrate what you have than spend time worrying about what you don't."  Message heard.

"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?

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.

What was unsaid in this conversation is what forms the basis of this post.  We both knew the adversary's lawyer.  He was a very good lawyer, but he was one of those lawyers who is never wrong and is going to win every case, or at least that's what he thinks.  And he somehow convinces clients that whatever technicality he has seized on, or whatever obtuse theory he has concocted, is THE winning play.  And, sure, sometimes he wins, but more often not, and more often still the client ends up settling after paying huge attorney fees.

There is a place for this kind of lawyering, but it should be rare.  Unfortunately, it happens way too often.  Lawyers who lack real world business judgment or who can't smell what they're shoveling convince others to believe them.  They are, after all, highly accomplished advocates who are preaching to the choir, their client.  Their client obviously wants to believe that they've done no wrong and that winning should be a walk in the garden.  Too often, it is far too late when the client realizes the garden was a mirage and the walk is through a desert.

There is a second model that frequently proves to be the client's undoing.  I refer to these as the "follow-the-script, paint-by-numbers, what-me-think?" lawyer.  The lawyer whose only concern is that he or she can point to having done each thing that somebody once said should be done in that kind of case.  I had an example of one such lawyer for a client for which I serve as National Counsel, having to spend hours and hours dealing with a simple choice of law issue.  Even after I decided the course, hours were spent because what I had decided was outside the lines even if destined to shorten our involvement in the case.  Doing something a certain way because that's the way its been done before is a damn poor excuse for lawyering, but that is precisely what clients often get.  And because they don't have time to micromanage a case and because the outside lawyer is a fine advocate, the client frequently doesn't learn what it deserved but missed.

I wish I had some good advice on how to spot the good lawyers from the pretenders in these situations, but I don't.  Anybody care to weigh in on this?

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." 

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.

 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.

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.

Not so clear?  Let me explain.

With every technological advancement, opportunities arise.  The article on supercarrier design discusses the change from the use of full-scale wooden models when the ships were last designed (a generation ago).  Wood models vs. virtual reality.  Change happens.  Sometimes its really big change.

When change happens in the real world, the legal world eventually catches up.  Can you imagine filing a brief that allows a judge to see in virtual reality what happened in the event at issue?  Can you imagine the ability to bring the parties together on the facts when you can see what transpired?  Maybe less lawsuits or quicker resolution.  Articles like the FastCompany supercarrier article have to be viewed as keys to unlock our imagination. 

Close your eyes.  Imagine.

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.

My great thanks to Adrian Dayton, the person behind Marketing Strategy And The Law--Social Media Edition.  I was honored to be Adrian's guest on Weekly Voir Dire, a weekly podcast.  The interview in available here.  I thoroughly enjoyed the discussion with Adrian.  Some of the discussion focuses on the billable hour, but also on the growing importance of social media, even to an old guy like me.  Thanks so much, Adrian (great website, by the way).

"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..."

For the next 48 hours, Paula is offering a collection of free bonus gifts to anyone who purchases "21 Days." The gift includes a compilation of advice from more than 30 of the most respected experts (plus me too!) in the legal arena.  I've had a chance to review many of the bonus submissions--there really is a lot of insight offered.

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.