February 2009

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.

 

 

 

 

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.

 

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:

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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.

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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:

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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.

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.

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.

 

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.

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.

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.

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.

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.