I have been a renter. I have been an investor in homes. I have been a buyer of homes and I have worked with a builder to design and build a home. Each experience has its pros and cons. The critical thing to making each role a successful one is to decide in advance what role you want to play. The same lesson holds true for operating a business and for operating a law department.
Earlier this year, Vincent Cordo, the Global Sourcing Officer for Shell, and Casey Flaherty, a consultant to law departments, wrote an article for the ACC Docket, Shell Legal—Shadow Billing. Let me begin by disclosing that I have enormous respect for the work Vincent Cordo has done at Shell and that Casey is a friend whose work I also respect greatly. However, respect and friendship do not translate into complete agreement on all issues, and this article presents an area where I disagree. I know Casey won’t be surprised.
If you want to take a vacation, there are a few basic steps.
- Figure out where you are. Travel requires a starting point.
- Figure out where you want to go. Tropical paradise? Check. Ski chalet? Check. Great wall of China? Check.
- Figure out how to get from 1 to 2. Plane? Check. Train? Check. Automobile? Check.
- With figuring complete, move. Move to computer to book travel. Move to airport. And so on.
It’s not a complicated process.
Figuring out how to deal with the massive changes in the legal landscape and the even greater changes that are plainly now coming is not any different, though some might be harder.
- Figure out where you are. What is your firm, really? Are you innovative? Change-resistant? Cutting edge? Wedded to quill pens? It is hard to conduct a candid and honest self-assessment. But it is essential. And if you delude yourself, you’ll find yourself going to O’Hare for your flight when your train leaves from Union Station.
- Figure out where you want to go. What type of business will be successful in 5 years? Don’t look farther ahead. Ten years ago, most of us didn’t have smart phones. Now, does anyone other than my 89 year-old mother not have one? Five years is the right time frame. Will artificial intelligence help LPOs or start-ups capture work you are now doing? Very probably. If so, your leverage model might not be a good thing. Indeed, your whole business model might be a liability. I think you get the point–figuring on where to position your business is a difficult process. But if you don’t engage in it, start getting used to the odor of the trash heap.
- Figure out how to get from 1-2. Very. Detailed. Step. By. Step. Plans. Timelines. Burden yourself with realism. War-game the process. This, too, is a very difficult step. People tend to turn into Pollyanna for this stage. Don’t, unless you really want to go to O’Hare instead of the true departure station.
- With the figuring complete, move. To share a quote on my partner’s wall, “Vision without execution is hallucination.”
Saving your firm for the future is not like taking a vacation, except when it is. But remember the role a travel agent can play in making your vacation successful. The odds are, you will need help going through this process. Ask for it.
I just finished reading Mary Juetten’s post in Above the Law, Time Is The New Black. I was struck by this statement:
“Also, all should reject the value billing theory that recording time is unnecessary.”
Since there are few statements with which I would disagree more, I decided to parse the article and respond to the arguments the author makes in favor of the necessity of timekeeping.
Argument No. 1: “Considering the Big 4 accounting firms track time, BigLaw should pay attention.”
Apparently, we are left to simply accept the notion that the Big 4 do everything precisely the right way. I am not ready to make the blind leap. The leverage model is a dying one. Most of what young lawyers and accountants do day-to-day will be automated in the near future. Indeed, a lot of it already has been. If a machine can do weeks and months of tasks in a milsecond, how is that hourly model working for you then? Beyond that, real businesses don’t sell time—they sell outputs. Law firms provide outputs and that is what clients want to pay for. Deal with it.
Argument No. 2: “Timekeeping is the key to understanding your costs and pricing because human effort is still the law’s largest expense.”
Again, the growing significance makes this statement less than accurate and less true with each passing day. If a law firm invests in technology for the betterment of its clients, it should be able to charge for the value that software provides, not the time it takes for the computer to do a task. The author makes a nifty argument that “Ford knows precisely how much it costs to build my F150 for both materials and labor.” What she ignores is that Ford knows that information before it begins to manufacture the vehicle and if there is a breakdown and the time to complete a vehicle is longer, the price does not increase. Third, there is a discrepancy between using time as an element of “cost” when the resource devoting the time is not paid based on time. A lawyer who works 7 hours to complete a task is rarely paid more than a similar lawyer who takes 6 hours. When that is true, what difference the difference in time make? And what about lawyer who can reuse work? If time plays a role in price, you end up overcharging purchasers of the work-product.
Argument No. 3: “Recording the non-billable or non-client hours can also help evaluate the efficiency of the department or practice administration.”
The time from task assignment to task competition may be a slight indicator of efficiency, but the number of tasks completed over a period of time is a much more important piece of information, as is the number of tasks completed in a given time period to meet required quality standard. Time devoid of quality assessment is just not important.
Argument No. 4: “[T]he hour information will help you identify where attorneys and paralegals might be struggling or have gaps in their training.”
This necessarily implies you have an existing baseline you can use tocompare the hourly total. If you have the baseline, you certainly don’t need to hours for pricing. And do you really think looking at time data is the best way to evaluate productivity? Businesses around the world regularly evaluate productivity of their professional works and they manage to do so without requiring those professionals to keep time. And they have been doing so for decades.
Beyond these arguments, the author wholly ignores the costs incurred by firms in recording and tracking time. Timekeeping also allows firms to default to time as a basis for evaluating and rewarding their lawyers. Not a good thing. But most importantly, all of this focuses on cost of production and not on the clients’ interests in buying. If Ford’s market showed that people did not want to buy F150s and instead wanted a low-priced vehicle, making the cost accounting for the F150 isn’t really worth much. The focus needs to be on the buyer, not the producer.
Lawyers always seem to look to our own profession for reasons to justify the practices we follow. The horizon for such justifications should be our clients, not our competitors. If a firm has clients where the law department professionals track their time and are compensated based on how much time they bill, then maybe the law firm can claim to track their clients as a justification for the focus on time. But if anyone finds a department like that, let me know. I have not heard of a single one in 10 years of practicing without time sheets.
I read this and immediately started thinking about my Saturday morning encounters with our washing machine. Walk by, put the towels in and then feed the dogs. Swing by later after grabbing morning coffee, put the towels in the dryer and put the whites in the washing machine. Lather. Rinse. Repeat. Episodic encounters with the washing machine while life goes on. So as I returned my thought to the tweet, I wondered if this “washing machine” frame of mind was the right one.
Artificial intelligence aims–or at least it should–to solve a problem for the consumer of the AI. If it doesn’t do that, I am not sure what role it will play for the user other than being a shiny new object. Think
(yes, I confess to having one of these) Don’t get me wrong, shiny objects can be fun and you can sell a lot of them. But they don’t last and they don’t make an impact.
So, how my washing machine and shiny object obsession fit in with AI? I believe buyers need something more than a washing machine to use it. The AI must integrate with existing life and reduce or eliminate a problem. If a General Counsel is forced to add a whole new platform or file system to get a benefit, I think the likelihood of success of the AI is reduced.
It seems to me a useful exercise would be to define the attributes that must be manifest if something new is to capture the market. To me, a starting point would be: simplicity; ease of use; eventual benefit; time to achieve eventual benefit; “fit” with what I am doing now. I think the holy grail in attributes is holism. HAL 9000 offered these attributes. Washing machines, not so much.
I just read an article in Law360 discussing Microsoft’s commitment to shift 90% of its work to alternative fee arrangements. Michael Rynowecer of BTI Consulting is quoted as saying the move is “one of the most aggressive” adoptions of AFAs he knew of. “Ninety percent is on the leading edge. It’s an enormous step; it’s making a bold statement to all the law firms with whom they work, saying this isn’t an effort du jour.” If Microsoft is serious, and if it truly seeks the real value of alternative fee arrangement, the Microsoft law firms are in for a wild ride.
We’ve been a non-hourly fee firm for almost 10 years. Our practice is complex commercial litigation and related areas of litigation. It was a wild ride for the first several years of our transformation. When hourly billing is part of your DNA, you need to undergo surgery to alter your DNA. It is hard to overstate how hard it is for billable hour lawyers to make the transformation to being alternative fee lawyers. There are so many areas where your view of the world needs to change. Dramatically change. If the firms want to get the maximum profit out of fixed fee engagements, they will need to change the way they handle matters, account for matters, determine value of lawyers and others, compensate partners and associates, and more. They need to learn how to litigate “skinny.” How to assess outcomes with less than perfect information. To advise clients when less is more. These things reduce the path to output. Clients, in turn, need to push firms to make these changes so they get more than billable hour fees using a different name.
It will be interesting to see if firms and clients go to school to learn the changes and create systems to be sure they are making these dramatic changes, or if they adopt a learn as they go approach. The latter is a path to needless pain and waste. But the payoff can be great. For firms, high profit margins are a great thing. For clients, the financial benefits and predictability are great, but the real payoff is in results. As the Law 360 article noted,
“Most large companies are reporting that they’re getting better outcomes,” Rynowecer said. “They’re finding that one of the big benefits of AFAs is that it requires more discipline and planning than [billable hours], and it requires highlighting strategic goals earlier for clients.”
Better outcomes are a wonderful thing. But the investment in them is a wild ride. Here’s hoping clients and firms take advantage of the the lessons painfully learned by others who carved the trail.
After concluding that the billable hour model for pricing legal services needed to change, Nicole Nehama Auerbach helped form Valorem Law Group in 2008 to give clients an alternative. Valorem went from being one of the few firms created to provide alternative fee arrangements (AFAs) for commercial litigation, to being named one of the 22 Firms Best at Delivering AFAs by BTI Consulting in 2017 (along with such powerhouse firms as Kirkland & Ellis, Morgan Lewis and Seyfarth Shaw). Auerbach is a frequent speaker and writer on topics related to AFAs, innovation and the impact of the billable hour on women and minorities. In addition to her role as a thought leader on AFAs, Auerbach has had a notable year representing clients. In April, she obtained a $13.4 million verdict in federal court against the City of Chicago and six Chicago police officers for violating the civil rights of a client (Patrick v. City of Chicago, et al.). She is also the co-founder and current national board chair of the Coalition of Women’s Initiatives in Law.
And here’s what her Valorem colleagues thought of this honor:
We’re glad the rest of Chicago is learning what we’ve known for a while.
Jeff Carr sent me a link to a post by Richard Smith of Sydney, Australia. I don’t know Mr. Smith. He is a “business development expert with over 20 years’ experience.” He works to develop and implement “successful business strategies for leading professional services firms; including working closely with stakeholders to maximise revenue potential from existing and targeted clients.” He recently wrote a commentary on an article by Firoz Dattu and Dan Currell of AdvanceLaw. I do know Firoz and Dan, both highly respected members of the legal service community. I hope my acquaintance with them does not color this post, but perhaps its does. The Advance law post that leads to this article is here.
Richard Smith takes issue with this paragraph in the Advance Law article:
Third, flat fees. A natural question about flat fees or other alternatives to the billable hour is whether they are cheaper. You now know that we think this is a half-question (and not the interesting half). The whole question is: do alternative fees work better, all things considered?
Mr. Smith responds with this:
Let’s look at that third question again with highlights by me:
“A natural question about flat fees or other alternatives to the billable hour is whether they are cheaper.”
Actually, that’s a very, very long way from the natural question.
But then we get…:
“The whole question is: do alternative fees work better, all things considered?”
And while that question may seem a lot closer to the answer we seek, it is still – well – the wrong question.
Flat fees, or other alternatives to the billable hour, should not be about whether they are cheaper. In many cases they are more expensive.
Nor, per se, are they about whether they work better (and by that i am unfairly reading “easier”). In some cases they are far more complicated and getting them to work is a real art of communication (that is, if you have scoped the matter and given appropriate thought to LPM, etc).
But, crucially, what alternatives to the billable hour should be about is simple: ‘Do they offer better value?’; To the client? And to the lawyer?
And if they don’t, the simple truth is this: maybe you shouldn’t be using them.
It seems as if Mr. Smith ignores the fact that the AdvanceLaw team is writing about questions presented by data they have accumulated from their clients. Of course it is interesting to know if flat fees have proven to be cheaper that hourly fees for similar work. Is Mr. Smith really suggesting we should not examine relevant data? And then, even though the AdvanceLaw authors make it clear that there is a more important question that simply the comparison of fee totals, Mr. Smith quarrels further, leading to the conclusion that AFAs have to provide better value to clients and to the lawyer, or they shouldn’t be used.
Having been using AFAs for nearly 10 years, AFAs can provide great value to lawyers, but only if they change the way they do their work. The old way is burdened with fat and excess, and it is why clients grew so frustrated with the billable hour. Second, firms need to decide if customer service is a core value of the firm. If it is, you find out what is of value to your clients and you figure out how to provide it. It is an exceptionally rare matter in which, over the duration of a matter, an AFA cannot be used. The challenge must be to carefully and precisely identify the client’s objectives. Once that is done, a fee to incentivize the accomplishment of those objectives is possible.
Forgive this rant–it is unfair to take a point made in one context and criticize it for not addressing points that are not in the context you want.
I was just having a conversation with a passing acquaintance, who runs a mid-size law firm. He told me the firm had decided to be innovative, in the sense of saying “starting next Tuesday, we will be innovative.” I hope I kept my smile inward.
Innovation is not something you simply flip a switch to turn on. It is hard work, and there is no simple recipe for “doing” innovation.
I am a firm believer that every law firm should have an innovation lab, where the right people, in the right environment, with the right objectives, can undertake the work needed to become innovative. A good starting point would be to debrief as many acknowledged innovators as possible so you can develop a working list of characteristics, tools, processes and kickstarters. What are the things that make innovators innovative?
Research. Learn. And then do the hard work.
Before leaving for the Amazon, Nicole left an article for me from the Illinois Bar Journal, The Checklist Manifesto for Lawyers. It discusses Atul Gawande‘s incredible book, The Checklist Manifesto. The IBJ article is not special, but Gawande’s book is a must read. Many years ago, I bought copies for everyone in Valorem and we became disciples. When I wrote Still thinking: More things I think I think in 2014, I lauded checklists and Gawande’s book. Nicole’s note to me was “They are only a few years behind!” It surprised me that in this day and age, when efficiency is become so important and firms need to lower they cost of production on matters being handled on fixed fees, firms still have not enthusiastically embraced the power of checklists and that it was worthy of an article to mention them.
Actually, it doesn’t surprise me. But it does baffle me how these firms continue to operate.