November 2008

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.

   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 hereValorem’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)

 

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.

  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.

Everyone talks the client service talk.  To hear the law firms’ side of things, our profession’s clients are the best served group of customers in the history of service providers.

Well, we know better, don’t we?  Few clients (the judge that matters on this issue) believe their lawyers provide elite client service.  With that level of service as an objective, I encourage to read a post by Holden Oliver at What About Clients?  Holden’s analysis of the role costs in client service is right on the money. 

Mike Ditka was once quoted as saying that George Halas threw nickels around like they were man-hole covers.  When your client says that about the way you spend the client’s money, you will have achieved true client service enlightenment.  Perhaps one way to move toward this objective is to ask yourself if you would [buy, spend] the [whatever the "it" is] if you had to spend your own money.  If that mindset took hold, I suspect I would hear less stories about limo rides, flying first class and staying at the Peninsula Hotel than I have of late.

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:

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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.

"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.

 

"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.

 

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?"