December 2008

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.

 

 

I’m not sure it’s ever happened before.  I received an email this morning attaching Dan Hull’s post, "The man, the firm and the blog to watch in 2009."  Dan is the prime author of What About Clients?, consistently voted one of the best law blogs.  Those who know Dan or read his blog know why I am speechless at the honor of being the subject of today’s post.  Here’s what he had to say (and I’ll save you the picture of this ugly mug):

The man, the firm and the blog to watch in 2009.

It’s Pat Lamb, his Chicago-based firm Valorem and In Search of Perfect Client Service, his well-regarded and enduring blog. Together they give us all we may ever need on (a) leadership, (b) law firm models that work and (c) the art of the client at the Terrible Crossroads of 2008/2009. We all face recovering economies, changing markets, new markets, new governments, and new ideas on economic growth, monetary policy and regulation. Watch Lamb closely. We don’t agree on everything. But if anyone can make value billing work, and the Billable Hour go away, it’s Pat. And then on to the next Dragon.

I am honored and touched.  My great thanks to Dan.

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!).

 

  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.

I like this guy and I never met him.  Tom Asacker describes himself as "author, renowned speaker, provocateur."  Tom Peters describes him as a "marketing guru."    He just wrote an article that contains 9 predictions for 2009.  Here’s a taste:

#1 The Earth will complete its 584 million mile, 67,000 mph trip around the Sun without incident. I know, that’s a pretty lame kick-off prediction. But think about those numbers for a minute. We’re all outgrowths of a living mass that is rocketing through space around an enormous ball of fire. Does that make any sense to you?  Me either. So stop trying to figure it all out. Stop trying to protect yourself from an unknowable future and instead be a connected and passionate part of the here and now now. “What is important in life is life, and not the result of life.”⎯ Johann Wolfgang von Goethe

Anyone who can quote Goethe in a prediction for 2009 deserves a tip of the hat.  But then again, there’s wisdom in the words, and both wisdom and some humor in the article.

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.

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.

$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.