January 2011

Like other parts of business, law departments have budgets to cover their internal costs. The budget typically does not expand even if more work comes over the transom, at least until a case for growing the department is made during the next budget cycle. During this budget cycle, more work typically means that the law department members must “suck it up” and work harder to complete the needed work. Not to put too fine a point on this, but the law department cost is fixed even if the work and output is variable.

Most law firms don’t work the same way. At least not now. Nor, does it seem, do legal technology vendors. I say this after reading a fascinating article, The Lure and Lore of EDD Commodity Pricing. The article strongly resists the idea of “commodity” pricing. Given the pejorative use of “commodity,” that isn’t revelatory. I thought this statement, however, was a gem:

            Pieces of the e-discovery process like bulk document scanning, backup tape restoration, or small, straightforward cases may be done for a set price. However, vendors are in fierce competition for business, and pricing plans obscure the true cost of e-discovery services. For example, some vendors offer free or inexpensive collection but charge for processing. "That all sounds good in theory, but you have to know that if a vendor offers one piece for free they have to be making money somewhere," says Speros.

Unfortunately, there is no standard pricing model used by e-discovery consultants and vendors, and their models are often deliberately opaque. Some aspects of the work are billed by volume, others by the hour or by gigabyte of data processed. Often, these pricing models can provide bad incentives for vendors and lead not just to overbilling, but poorly designed processes. Speros says that too often lawyers do not understand what vendors are offering.

In fact, many times the pricing models may actually induce vendors to perform unnecessary tasks, but which generate more fees. "When vendors were getting paid per page produced, you’d see a lot of blank pages printed and unnecessary documents produced," says Speros. "Pricing per gigabyte of data produced is more predictable, but you find that when compressed files or other unforeseen issues are stumbled upon, the true size of a discovery request explodes."

The problem is the same one law firms have: there is an expectation that “more work” must correlate to “higher price.” Particularly when dealing with software solutions, I question this premise. I have asked countless e-discovery vendors what is the actual cost was of running data—wildly divergent amounts of data—through their system. None have answered directly, and when I suggested the notion of sunk cost versus variable cost, some have acknowledged the obvious: there is no marginal cost for running additional data through software solutions.

When I think back to the situation I described at the beginning, that is, law departments and the fixed cost on which they operate despite variable amounts of work, I am forced to ask “why”. Why must law firms and EDD vendors work differently, price themselves differently? To ask the question is really to answer it. There is no requirement that they do, it is a choice. Certainly for labor intensive jobs, costs are, to a degree, variable. But they are not variable to the degree that law firms and EDD vendors make them out to be. Not all hours contribute equally to overhead, for example. I mean, why do law firms love associates who bill those extra hours? The revenue produced falls almost entirely to the bottom line. Same with vendors.

Expectations are good things. But they are not unquestionable. To the contrary, expectations should be continually questioned. Chief among the expectations to be questioned are the manner and means of pricing.

If instead of assuming that every hour must produce a certain measure of profit or more, firms and vendors looked at their delivery of services the way a law department does, pricing would not be the same. It would be possible to predict costs and price accordingly. And best of all, it has nothing to do with “commodity” (turn and spit) pricing.  It is just a manner of pricing, a system, just as hourly billing is a system. It is possible to do this. I just checked and there is no 11th Commandment that says “thou shalt bill by the hour.” Or the gigabyte.

My partner Nicole Auerbach and Karen Klein, the General Counsel of our client, Kayak.com, began blogging today as part of the Association of Corporate Counsel  Client-Firm Value Series.  You can find the first post here.   Aside from my obvious delight in having Valorem and Kayak featured in the ACC offering, I think one of the most interesting parts of the series will be Karen’s evaluation of the return on her time investment in establishing the alternative fee at the outset of a case.  You see, like every inside lawyer, Karen is insanely busy and didn’t have time to really think through a new case and the real value of the case and thus the fee.  But finally a moment was found and an alternative fee was agreed to, and we were off.  I suspect this obstacle is one many inside lawyers will identify with, and Karen’s evaluation of whether the upfront time investment paid off will be an interesting point of further discussion.

Congratulations to Nicole and Karen for undertaking this project.

 

 

Yes, this is the story of "the Fountain Lady."  A woman walking in a mall, texting away while oblivious to her surroundings, tumbles into a fountain.  The episode is captured on video by mall security, the video is released to YouTube and goes viral.  No one knows who the Fountain Lady is and no person can be recognized from the grainy video.  Let sleeping dogs lie, right?

Not in today’s world.  What’s an embarrassed person to do?  Hire a lawyer and go on national television to lament your grievous injury.  And what is lawyer to do?  Grab 15 minutes of fame and say profound lawyerly things to a national audience.

Thankfully, in this instance, Anderson Cooper could not restrain himself. To the Fountain Lady (who, by the way is Cathy Cruz Marrero of Reading, PA): "Coulda, coulda coulda."  "You needed a towel, not a lawyer."  And to the lawyer: "Oh my god, come on lawyer. An explanation for how this happened?  ‘Ladies and gentlemen of the jury, the lady was texting, so she didn’t see the fountain and fell in."

As an aside, Google now reports 235,000 hits for Cathy Cruz Marrero.  For fountain lady? Over 6 million hits.  But now everyone knows Cathy Cruz Marrero is the person who walked into the fountain.  Oh, the world also knows she was arrested in October 2009 for theft by deception and receiving stolen property, and that she has four convictions for retail theft in the late 1990s.

Moral of the story?  Sometimes lawyers need to tell their clients to suck it up and remain silent.

 

Let’s piece together some insights from the Hildebrant Baker Robins/Citi Private Bank 2011 Client Advisory:

  • “The growth in demand (“total billable hours recorded by firms included in a particular database. [fn.1]) for legal services has been negative in each of the past seven quarters.”
  • Billing realization rates (“that percentage of standard rates actually billed to clients”) have fallen from Q3 2007 to Q3 2010.
  • Collection realization rates have fallen faster during the same period.
  • Law Departments reduced their total spending on outside lawyers in 2009 by 5%, the first decrease in memory.
  • The demand picture shows no signs of improving.

That, my billable hour friends, is an ugly, ugly picture. What is an hourly firm to do? According the Advisory, “most firms will implement modest rate increases in 2011.” (I wonder what the over/under is on how much collection and billing realization rates will fall in 2011.)

Remember the national outcry in late 2008 when the CEOs of Ford, GM and Chrysler all flew private jets to Washington for their appearance before Congress to provide a bailout? The most commonly heard phrases at the time were “tone deaf” and “blind to the optics.” Don’t those same phrases apply here?

Raising rates is the easy way out. It allows one to provide nicer budgets and projections (using historic averages on realization rates, of course). Damn the optics, and damn how clients feel about this.

The preferred approach should be focusing on delivering value so the realization rates increase. If a client feels the bill reflects real value provided, within approved budgets, the bills get paid.

For those lawyers who believe things are “quieting down,” the HBR/Citi Advisory should feel like a cold bucket of water is being dumped on you in the middle of a Chicago winter.