Renovating or tearing down?

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I grew up in a small city of about 80,000 and went to law school in a similarly sized town, so my first experience of a major metropolitan center was when I began working in downtown Toronto. I remember being a little overwhelmed by the massive bank towers in the financial district — not a patch on New York, obviously, but still impressive to someone who’d not seen many buildings above eight floors high. But I also remember thinking — and this might give you some insight into the sometimes skewed and contrary way my mind works — “How are they ever going to get those buildings down?”

It seemed to me at the time (and still does now) that putting up a very tall building, while an arduous and lengthy task, is also a pretty straightforward and orderly one. While traffic might be rerouted and the noise pollution might be substantial, still it’s a planned, supervised, rational process with a fixed start and reasonably fixed end date. But if you ever need to take that building down, what do you do? I’ve never seen anyone erect a scaffolding superstructure around a skyscraper and deconstruct it floor by floor. Generally speaking, buildings aren’t dismantled gradually, their component parts carefully carried off to be reused and rearranged for new or better buildings; they come down all at once in a destructive collapse. Sometimes they videotape the implosion, to be replayed at the end of a half-hour news cycle.

This brings me, in a roundabout sort of way, to the billable hour — specifically, a recent wave of articles that suggests a serious challenge to its lengthy rule is underway. Famously, Cravath Swaine & Moore managing partner Evan Chesler published an article in the Jan. 12, 2009 issue of Forbes titled “Kill the billable hour,” in which he sets out clients’ (and lawyers’) unhappiness with and alternatives to the billable hour. As you might imagine, that got a lot of people’s immediate attention. The AmLaw Daily noted a number of resonant examples in the U.S. profession, while lawyers in London piped up that they’re already ahead of that particular curve, thanks.

Around the same time, The American Lawyer named as its Litigation Boutique of the Year the Chicago firm of Bartlit Beck Herman Palenchar & Scott LLP, a crack litigation team remarkable in no small part for not billing by the hour and keeping few associates on hand. Based on all this and more, Legal OnRamp‘s Paul Lippe suggests we’re witnessing an actual, real-time change in the legal profession’s billing mindset. And Michael Grodhaus wonders if those who switch away from the billable hour during the recession will ever go back.

Me, I keep thinking back to those towers. Just as they took a long time to go up and won’t come down without a lot of noise and debris, so too the law firms inside them took many years to build, and if they ever need to be, um, re-purposed, it won’t be easy or painless. Buildings are demolished when their structural underpinnings become unstable or their basic design is rendered obsolete by new advances; occasionally you’ll see a retrofit, but most often you’ll see the wrecking ball, because something that big and rigid just can’t be reduced, reused or recycled.

I was prompted in this direction after reading a series of insightful posts by Toby Brown and Greg Lambert at 3 Geeks and a Law Blog. Toby started it by asking a really important question that hasn’t been asked often enough: how, exactly, does an existing law firm move away from the billable hour to a broader, more rational billing and compensation system? Let’s assume we all agree that the billable hour must go — what’s the next step?  How do you make that kind of fundamental change — and it is fundamental, striking to the core of many firms’ cultures and business models — in practical terms?

In my opinion, this is the challenge. Sitting down and talking with clients about value and price may be a new thing for lawyers, but it is not a particularly daunting task. In contrast, changing the entire way a firm functions will be a monumental challenge. Law firms’ entire structure is built on the billable hour. The way we intake business, the way we manage our knowledge, the way we hire and ‘train’ our people and most importantly the way we compensate our lawyers. The last point is especially important because “you get what you pay for.”

Toby followed this up with another post on the risk/reward split between lawyers and clients, and then Greg chimed in with some key observations about the many people in a firm who don’t bill by the hour. What they’re driving at, I think, is that the practical implications of shifting a law firm away from a billable hour system are enormous.

It’s not as easy as simply saying, “Okay, we’re going to adopt a more sophisticated, client-focused way to bill clients and compensate lawyers that better reflects value and rewards productivity.” That’s a great idea and every law firm should be set up this way; but how does an existing firm with massive institutional momentum actually accomplish that? How do you replace the engine, rewire the electrical system and change all the tires on a fully-loaded 18-wheeler thundering down the highway? How do you rebuild a office tower from the ground up with people still working inside? I’m coming to suspect that the answer, in many cases, might turn out to be: you can’t.

Look at the successful firms that have adopted innovative billing and compensation models, the likes of Summit, Valorem, Exemplar, Shepherd Law Group, and Bartlit Beck: small or midsize boutiques founded within the last decade or so, often by lawyers who left large firms. It’s much more feasible to adopt a better and more rational financial structure when starting a firm from scratch than it is to take an existing, legacy law firm and completely replace its financial foundation. The business and cultural costs of the latter approach just seem like they’d be extraordinary. The best-intentioned and most wisely led legacy firms might be able to pull it off, but surely those are the exceptions within the profession, not the rule.

A few months back, I wrote a post about innovation that suggested the options available to lawyers could be classified as “Repainting or renovating.” As a declining economy and demanding marketplace continue to tighten a vise grip around the profession, I’m starting to think that might underestimate the enormity of the challenge facing many firms. I’m starting to think that in a lot of cases, there’s only one way to re-purpose large structures that have been standing around for a long time.

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3 Responses to “Renovating or tearing down?”

  1. Nick Holmes

    I get (3 Geeks) that “the way we compensate our lawyers” is built on the billable hour, but what does “the way we intake business” mean? If it means “how do we sell our fees to the client”, surely that is part of the equation in figuring out what fee charging model to adopt? And I’m struggling to understand how “the way we manage our knowledge” and “the way we hire and ‘train’ our people” are built on the billable hour. Aren’t we just talking about cost accounting issues?

  2. Ravinder Casley Gera

    You’re starting from the assumption, it seems to me, that the impetus for this will come largely from within firms. But what if it comes from clients? ITV, a substantial media client here in the UK, just switched its panel to a fixed/value-billing arrangement; all its firms were happy to carry on. Du Pont, Tyco et al have got scores of firms working without the billable hour. It starts with one key client, and people within the firm see how it can work.

    Of course, what all these UK firms have in common is (modified) lockstep. In an EWYK setup it’s obviously going to be tricksier. Indeed, in *any* change in a partnership, isn’t it always money that gets in the way?

    Nevertheless, you’re surely overestimating the obstacles. A client win is still a client win without the billable hour; a rainmaker is still a rainmaker; a lucrative deal is still a lucrative deal. The challenges are in finding new ways to measure individuals’ contribution to the actual work done. Maybe – gasp! – more North American firms will have to reward the productivity of teams, not just individuals?

  3. Jordan Furlong

    Ravinder, my feelings are mixed about where the pressure to change billing methods will come from. On the one hand, I’ve found persuasive the arguments of Ron Baker at Verasage that firms and only firms have the power to adjust their pricing structure: http://tr.im/94ah. Here’s an excerpt:

    “One of the most frustrating aspects of teaching Value Pricing to professionals is their tendency to believe that customers have to be part of the change process.

    “This is demonstrably false. Customers may have to be convinced of a firm’s value in order to accept it’s price, but customers should not be expected to be participants in changing a profession’s (or industry’s) pricing strategies, any more than they should be expected to innovate new products and services.

    “I can find scant few examples in the history of commerce where buyers changed a pricing paradigm for an entire industry. Pricing changes are nearly always done by the sellers.

    “Why? Basic economics. Sellers sell hundreds, thousands, or millions, of times, whereas buyers purchase relatively infrequently. Therefore, sellers have every incentive to maximize the sales price, and as any economist knows, incentives matter. …

    “No customer ever asked the airline, hotel, cruise ship, retail, or software industries to adopt Yield Management (YM). Yet, YM is one of the largest innovations in pricing strategies since the airlines began to adopt it in the 1970s after deregulation.

    “They didn’t ask their customers if this was acceptable. They didn’t hold discussions and roundtables with both buyers and sellers, facilitated by third parties, trying to figure out if this was the right thing to do, as the legal profession has been doing for more than a decade. They just did it. Once it proved successful, the rest of the airlines followed.”

    This makes sense to me, and helps explain why, frustrated and irritated as clients might be about the methods law firms adopt to price and bill their services, they’ve rarely managed to do anything about it. Law firms, of course, have virtually no incentive to shift from a billable-hour system: it’s easy, it’s profitable, and it reflects the ancient labourer’s sense that the more time you put into something, the more you should be compensated for it. As I’m fond of saying, few revolutions ever started inside the castle.

    At the same time, as you point out, there clearly are examples of clients that have managed to impose a different price and sales model on their law firms. The UK panel system, uncommon in North America, gives clients there an edge, but companies on this side of the pond have managed it as well, Dupont, GE and Cisco being three famous examples. But in all these cases, the clients have an insuperable edge: they’re huge. They have so much market share and so much influence that firms will swallow a great deal of discomfort and inconvenience to get their business. It’s instructive that the new billing methods firms have adopted for these clients have not spread to the firm’s other client relationships — they remain exceptions to the rule and don’t reflect any real change of mind or heart within the firm itself. The other 95% of the client base simply doesn’t have the kind of clout needed to shift immovable objects like the billable hour.

    Now, size is a major factor in a client’s ability to command a different billing model, but it’s not a sufficient one: plenty of massive corporate clients pay their hourly-billed lawyers’ invoices every month with mute acceptance. A more fundamental problem is that corporate clients, even the biggest and most sophisticated, can hardly ever tell you, with precision, just what their lawyers’ services are actually worth to them. Rees Morrison points out just how difficult this is while deconstructing the ACC’s “Value Challenge (http://tr.im/955c):

    “The worth to a company of specific legal services can be exceedingly difficult even to estimate. What is the relevant time period? What about how the worth of something can change over time? What else is the “worth” dependent on?”

    And pity individual clients, the ones buying a will or getting a divorce or trying to immigrate — they’re all but helpless in this regard. But I don’t think this is because clients are stupid — I think it’s because of a far more fundamental problem: lawyers don’t know what their services are worth either. In most cases, they don’t have a clue.

    Ask your average $500/hour lawyer why she charges $500 an hour, and the average answer will be a variation on: “That’s the market rate for lawyers in my practice area and with my experience.” Ask the next logical question — “Why is that the market rate?” — and the reply will be a variation on what your father told you when you asked why the sky is blue: because it is, and it always has been. Ask a third question — “If you had no way of determining what any similar lawyer charged, how would you set your rate?” — and after an uncomfortable silence, you’d hear about paying off overhead costs, staff support, research and knowledge investments, student or partnership debt, etc. All of which is correct, but tells you only about the operating costs of being a lawyer, which as I’ve argued before (http://www.law21.ca/2008/11/26/decoupling-price-from-cost-in-legal-services/) aren’t logically linked to price. To stay in business, lawyers obviously charge a certain amount of money above their operating costs; but how much, and why? We don’t know.

    This is the conversation, it seems to me, that lawyers have never had among themselves: what are we worth? What’s the value of our services? And is there any way to answer the first two questions outside the context of a specific client matter and a specific client relationship? And if the answer to that last question is “no,” is there really any sense in setting a detached, floating, anonymous “hourly rate” for services that by definition cannot have a value unless grounded in a specific retainer?

    I don’t mean to single lawyers out here — professionals of all stripes face this problem. What’s the value to a patient of making his crippling migraine go away? What’s the value to a community of a bridge engineered well enough to give motorists the confidence to drive over it? Now, you might well ask the same question of any transaction — what’s the value of a plasma TV, or a haircut? — but most transactions take place in what approaches a free market, where many different entities offer a range of quality and styles in open competition. The professional marketplace, and the legal services marketplace in particular, is not free in that sense: it is heavily regulated by the professionals themselves, and they set the rules of competition. One of the reasons we can buy TVs and haircuts cheaply and easily is that there’s no such thing as the Unauthorized Selling of TVs or the Unauthorized Cutting of Hair. But the marketplace for legal services is heavily skewed by restrictions on competition created and enforced by lawyers. You can say that’s a good thing — protection of the public — or a bad thing — self-serving protectionism — but you can’t deny it exists and that it has a negative influence on, among other things, the ability of both clients and lawyers to assess just what the true value of a legal service is.

    So although I agree with you that “[t]he challenges are in finding new ways to measure individuals’ contribution to the actual work done….[and] to reward the productivity of teams, not just individuals,” I actually think that’s going to be very difficult. We don’t need a new method of billing our services in the law, hourly or fixed or value-based or whatever. We need a method, any method, for helping a particular lawyer and a particular client assess the particular value of a particular service, every day or the year.

    It’s my growing belief that outside the context of a specific fact situation and relationship, a lawyer’s services in fact can’t be valued — nor can a ship docked in a harbour, for that matter. Courts have ruled, when dealing with fiduciary responsibilities, that all such responsibilities must be tied to a specific relationship: “there is no such thing as ‘duty in the air.'” I don’t think there’s any such thing as “a lawyer’s value” in the air, either. Until we grapple with that, we haven’t begun to make real progress on the billable hour or the billable anything.

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