March 2009

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.

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.

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?

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:

Re:Innovation during the Downturn 2 Minutes ago

 
Here is the attitude of large traditional firms. "we know clients want change, but the large firm business model will not change"

Morgan Lewis Chair is ‘Very Confident & Positive About the Future’
Law Practice Management
Morgan Lewis Chair is ‘Very Confident & Positive About the Future’
Posted Mar 10, 2009, 08:06 pm CDT
By Martha Neil

"We’re very confident and positive about the future," says Francis Milone, the chairman of Morgan Lewis & Bockius, in an interview today with the ABA Journal. As clients get bigger and seek legal advice about more complex issues, "I don’t believe that large law firms are going to be disadvantaged," he says. "I think we’re going to be in a strong position, frankly, going forward."

But "I don’t thing the business model is going to change," says Milone of BigLaw practice. "I think the client expectations are going to change–and they have been changing for several years now." Among other differences, corporate clients are more focused on value and costs today, he says, and "our big challenge" is delivering legal services "in the way that clients want them delivered."

Sort of a "sure, clients want change, but screw them" state of mind

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.

Yesterday’s online version of the Washington Post contains an interest article, Recession Sends Lawyers Homethat 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.

I’ve written before about my partners.  They are amongst the finest people I know, and they are damn fine lawyers.   One of the things I’ve never been able to convey in this blog is how much I learn from them and enjoy our encounters.  In so many respects, their views on the issues I cover in this blog are much more interesting and enlightened than my own.  So its a great opportunity for me to share a piece about one of them.  Ms. JD just posted Superwomen JDs and What You Can Learn From Them: Featuring Nicole Auerbach of Chicago, IL.

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.

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. 

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.