October 2009

 

In a private email, Jordan Furlong observed that most lawyers begin law school with little to no business experience or business education. Law School adds no relevant business knowledge. Yet when most lawyers begin to practice in whatever area they choose, they find themselves encountering businesses, whether as clients or the adversaries of clients, and business issues. And because they lack both business experience and training, they are poorly equipped to advise clients in the context of the problem the client faces or even to understand that which is motivating a client’s decision-making.

Take the simplest proposition: should I settle this lawsuit? Well, what is the cost? A certain number of dollars? Really? What’s the accounting treatment of the settlement? Do I have a borrowing cost? Do I want the settlement pushed into next year so that I can report higher earnings per share this year? There are even more questions, but with these basic questions, one begins to see that even the simplest decision is informed by a myriad of business and accounting issues. Even something as divorced from business as First Amendment/Free Speech law is dramatically impacted by global issues triggered by the Internet and the ubiquity of speech that really has no geographic origin. Lawyers and law students receive no training in budgeting or project management, or even a taste of things like Six Sigma and Lean—things that are close to the hearts of many businesses or from which many businesses could benefit.

I received an email yesterday from the Executive Education division of Harvard Business School that started this way:

In today’s business landscape, corporations look to their law firms to be more than the providers of standard legal services—they expect them to be trusted advisers and knowledgeable business partners. Those who cannot fulfill this role are being quickly relegated to commodity service providers forced to compete on price often with company’s own internal legal team. To meet these increase expectations and to ensure that they are providing the highest level of value, law firms need to be able to provide thoughtful guidance that accommodates not only the law, but also the strategic direction of client companies. This new HBS Executive Education program provides the business knowledge required to understand how clients formulate and execute strategy and how law firms can add value in this process.

It’s good to see a recognition that this type of education is needed. But much more fundamental knowledge is needed. For example, while excellent accounting skills are always helpful, even basic knowledge is helpful. Understanding the factors that go into Earnings Per Share and other critical numbers that influence the market’s view of a company or how a bank lending money to a company would view it are immensely  helpful in advising clients. Another critical thing is understanding the difference between cash basis and accrual accounting, as well as the process of setting reserves and what variations in philosophy are appropriate or permissible in that regard. It is essential to understand company budgets—how they are set, what they are used for and how management makes decisions in ways influenced by budgets.I am sure my own education is lacking and in-house counsel and business persons could add considerably to this list.

On a slightly more esoteric level, law school teaches people to be lone wolves and tear everything down, to identify risk rather that evaluate it. It requires a high level of certainty in order to offer an opinion. Businesses operate in a world of considerably less certainty, and that "certainty gap" is one of the fundamental causes of out of control legal expenses. 

Business school (indeed business in general), on the other hand, is more about team work and problem solving. While risk identification is part of that process, it is not the end result the way it is with lawyers. Business school can really foster creativity—I read where one Stanford professor gave her class an assignment where each team was given $5. The team had the weekend to invest the $5 into an activity and then would be expected to give the class a three minute presentation on Monday. While most teams organized car washes or sold lemonade or something similar, the winning team realized that $5 wasn’t important—it was the three minutes. It sold that three minutes as advertising time to some off-campus stores and generated $600. Law school ties people to prior decisions and doesn’t reward the creative thinking found in this business school example.

The deficiency in law school is not just on a subject matter basis, it is the entire way of thinking. Think back on the old movie “The Paper Chase” with John Houseman in the role of Professor Charles Kingsfield uttering that famous line, “ You teach yourselves the law. I train your minds. You come in here with a skull full of mush, and if you survive, you’ll leave thinking like a lawyer.” Great theater, but in today’s world, thinking like a lawyer leaves you so far behind the pace of movement in the modern world that you render yourselves a dinosaur before you even begin to work.

What’s the answer? Taking the long view, law schools need to change the way the teach, and partnerships with business schools should become the norm. Smart students are well advised to pursue joint JD-MBA degrees. But on a more immediate basis, I think the answer lies along the lines Harvard Business School is considering, though programs will need to be at a variety of levels and priced far more conservatively than the nearly $8,000 price tag Harvard has set for its 3 day program.

There is probably a real business venture here waiting for the right entrepreneurial person to step in a craft a curriculum to could be web-based.  The market? Well, there are over a million lawyers in the United States and 45,000 or so law school graduates each year.  You do the math (I’m a lawyer so I probably would get the answer wrong!).

 

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AmLaw Daily contains an interesting post today noting that several UK firms were cutting their profit sharing.  From the post:

Several big-name U.K. firms have cut or delayed quarterly profit distributions to partners to cushion the blow of the continued recession.

Interesting choice of words–"cushion the blow."  The translation is that we don’t have enough profits to give them to the shareholders.  The post goes on to point out:

The same phenomenon has been occurring in the U.S. In March, we broke the story about Dewey & LeBoeuf severely cutting monthly draws to under-performing partners and holding back some larger distributions. Later that month, DLA Piper slashed partner pay by 11.5 percent.

Many other firms have been identified in various reports as having taken similar steps.  One reason may be the firm’s covenants in their bank line agreements, many of which contain performance criteria.  But whatever the reason, the bottom line is that firms don’t have enough money to make distributions to partners. 

Okay, so the firms have slashed expenses and personnel and there still isn’t profit there for the partners.  So what kind of pressure to extract money from clients do you think partners feel from their peers?  If I were a client, I’d be watching my wallet more now than ever. 

 

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I’ve been spending a lot of time flying around, and one of the places was to Disney World for my nephew’s wedding (which was spectacular, by the way).   I was struck by the incredible difference between the air travel experience and the Disney experience from a customer service perspective.

Let’s be frank.  Airlines don’t give a damn about you.  I can’t think of one thing about the air travel experience that is designed to make the customers feel good about flying that airline.  At best, the attitude is “my airline isn’t any worse than the others.”  Whoop-de-do.  The rich irony is that I spent my time on the flight reading Secret Service by John R. DiJulius.  I wish people from the airlines would read it.

Then there’s Disney, who are so maudlin in their client service that it is sort of creepy.  It is so over-the-top as to not feel authentic.  You know why?  Because every person follows the same recipe.  Unlike Ritz Hotels or Nordstrom, which empower staff to solve customer problems on their own, Disney uses a recipe formula–systems and training.  The scope of their enterprise in Florida is so breath-takingly large that they probably have no choice, and they certainly rank high in customer satisfaction surveys.  So far be it from me to question what they do.

In terms of time and thought given to the customer experience, is your law firm an airline or a Disney?

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In this space, I’ve discussed the "4-bucket" theory of law (process, content, advocacy and counseling), and I was visiting with a law school colleague of mine about the missing elements of legal education.  I indicated that the single biggest missing element is knowledge of business, since that missing knowledge bears not only on understanding the business of your firm, be it your own or someone else’s, but the business of the profession, and finally, and most acutely, the issues your client is confronting.  For those just starting law school, the answer probably is a joint MBA/JD program.  But for those  already practicing, here are some resources that might be of assistance:

Manager Tools, a website devoted to business types with podcasts on various management issues

University of the People, and open source web education system with a focus on business

One client advisor suggested The Ten Day MBA.

You can listen to a story on 848, a Chicago Public Radio program, about open courseware.  If you’re interested about open courseware, read The World Is Open: How Web Technology Is Revolutionizing Education.

Any other suggestions?

 

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Jim Hassett of LegalBizDev was kind enough to send me a  preview edition of his AmLaw 100 survey of alternative fees.  Very interesting reading, and Jim is to be commended for his work in this area.  This most recent report includes the results of surveys and meetings with C-suite executives from 37 of the the AmLaw 100.  I was intrigued by a comment Jim made about defining alternative fees:

Unfortunately, different experts use the term “alternative fees” in different ways. Many agree with the narrow definition used in this survey: alternative fees are fixed or contingent billing arrangements that are partly or totally non-hourly.

However, many lawyers prefer a broader definition that also includes discounted arrangements that are strictly hourly, such as blended rates.

The fact that two conflicting definitions are in wide use can add considerable confusion to an area that is already confusing enough. These days, it is becoming commonplace to hear both in-house lawyers and outside counsel say that 10% or 20% or 30% or more of their work is performed on an alternative basis. But it is often unclear whether they mean that they are getting away from the billable hour, or simply lowering the hourly cost.

Lawyers manipulating numbers?  Imagine that. Students of diversity numbers or PEP numbers will be shocked, I tell you.

But let’s cut to the chase.  Fees based on the calculation of time rather than the result obtained are not alternatives.  Such fee structures–discounts and blended rates being two prime examples–are simply more of the same with a word other than "straight" serving the adjective to describe hourly rates.

It’s easy to see why firms want to use this definition.  Under this view, most firms have been using "alternative fees" forever and it is a great marketing ploy to tell clients and prospects that "50% of our revenue comes from alternative fees."  That sure sounds a lot better than "clients accounting for 50% of our work get steep discounts because otherwise they will move their work to another firm." 

Lost in the ruckus of what constitutes an alternative fee is the real point of alternatives–to shift risk from the client to the firm, creating a structure that pays for results not time, and places squarely on the firm the profit motive to do work cheaper.  Hourly work with whatever adjective is used is still cost-plus work, and it is marketing "happy talk" firms are starting to use with more frequency to avoid any critical analysis of the firm’s business model and to justify to themselves and their clients why nothing has really changed.

For firm leaders that want to argue in favor of including blended hourly rates, discounted hourly rates or some other version that leaves in place the structural incentives for your people to charge your clients more rather than not, I encourage you go to www.amazon.com and purchase the book, Who moved my cheese?  You need to read it more than you know.

 

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"An object at rest will remain at rest and an object in motion will remain in motion unless acted on by another force."

Sir Isaac Newton’s First Law of Motion, also know as the Law Of Inertia

I have to confess that when you discover gravity, you’re the kind of historical figure who gets my attention.  For that reason, I have always been a big fan of Newton.

Yesterday, I was trying to explain to my son why he was better off developing the habit of doing whatever it was we were discussing [cleaning his room maybe?].  I had tried the idea of the practice habits of great athletes like Michael Jordan, Tom Brady, Tiger Woods and others, explaining that when you did things repetitively in practice, you would automatically do them in a game.  The explanation fell flat.  And I realized in a nanosecond that it should–I wasn’t talking about what athletes do–performing under pressure, although certain of my kids might disagree when talking about the pressure to clean their rooms.  Instead I was talking about the idea of, well, inertia.  If you do something everyday, you are more likely to do it the next day.  If you don’t do something very often, it usually takes some special energy to make it so.  Inertia.  Momentum.  Great concepts for explaining why its easier to keep a room clean instead of trying to clean it all at once before Dad goes nuclear.

So as I am driving in this morning feeling all proud for this "good dad moment," I started thinking about whether I am following my own advice.  How good am I about calling my clients and talking with them on the phone every now and then?  How am I about reading the Google alerts on my clients or others I’m trying to represent?  How often am I reading press releases or SEC filings on my clients so I am up to the minute on their business?  How good am I about my marketing efforts? 

These examples illustrate the countless questions I’ve been asking myself all morning.  Damn that Isaac Newton!

 

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At first, I thought the multitude of thoughts was simply the failure of one’s mind to bring order to the thinking process as a result of too many cocktails.  But I didn’t have that many last night, so maybe I just needed to think harder to bring order to chaos.  Maybe there was a central theme to the chaos of my mind.

Thought 1.  I saw something that reminded me of what remain two of the most popular posts I’ve made since I started writing this blog, After the Mistake andAfter the Mistake Redux.  The central theme is the importance of owning up to mistake and saying you are sorry for it.  Easy to say, hard to do.  I know that from firsthand experience.

Thought 2.  The laughable way celebrities and athletes (and others to be sure) apologize for bad behavior.  "If anyone was offended by my stupid remark [or replace with description of your stupid behavior], then I want to apologize for the fact that your were offended by something I did not mean to be offensive."  You get the drift.  Randy Pausch includes a chapter in one of my favorite books, The Last Lecture, on why a bad apology is worse than no apology at all.

Thought 3.  My friend Dan Hull frequently uses his fantastic blog What About Clients? as a pulpit to teach lessons on the importance of writing well.  I love every such post.

Thought 4.  I am a fan of passion in argument, mainly because that’s how I am.  I never have been able to pull off the "aw shucks, I am just a country lawyer" approach of Jimmy Stewart, or the scholarly, dispassionate Supreme Court advocate.  Think Spencer Tracy in Inherit the Wind.  I’m no Clarence Darrow, but I live in that neighborhood.

Thought 5.  This one might be the outlier, or the trigger.  Who knows.  But I listened to Roseanne Cash and Bruce Springsteen sing Sea of Heartbreak.  I cried, it was so moving.  "The lights in the harbor don’t shine for me ….on this sea of tears, the sea of heartbreak…"  The way great lyrics evoke feeling is one of life’s great mysteries, at least to me. 

So, how does this come together?  Effective communications, whether written, spoken or sung, have the ability to evoke feeling.  In the case of apologies, they should as well.  If you or your team has screwed something up for a client, follow the approach discussed in my earlier posts on handling mistakes.  But you should feel pain about the mistake, and you darn sure ought to communicate that to your client in a manner that evokes feeling.

Okay, so maybe it was the Bushmills from last night after all.

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They (and have you ever, like me, wondered who they are?) say that nature abhors a vacuum.  I was reminded about the wisdom of this gem during a recent deposition.  My witness was testifying about the sale of a company and management’s why management was releasing information to the employees.  As she said, " you can never stop water-cooler conversation, so you’d better be influencing what’s said.

This made me wonder how many law firms have visited their clients to talk about how the firm is responding to the new economic reality, what the new business model will be, and so forth.  Seems like a great excuse for an invaluable conversation.  But that’s just me.

 

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