Never mind the billables

Steve Matthews of Stem Legal has a thoughtful post at Slaw that talks about The Economist‘s recent article on the demise of billable hours. As Steve points out, focusing on how a law firm bills its services obscures the more fundamental conversations around value and cost that are needed to frame the process of negotiating price. Hourly billing’s real damage is that its over-simplicity and ubiquity make it hard to have those conversations.

It’s becoming clear that “value to the client” and “cost to the lawyer” are the only two concepts that have any utility to the legal services pricing process. Clients are getting their act together when it comes to determining exactly what “value” means to them in the legal services context. As soon as the value assessment process becomes standardized and even routine in the client world (and it will), then lawyers will suddenly inhabit a much less flexible pricing environment, one in which their customers understand exactly what they need and what they’re willing to pay for.

For this reason, those lawyers who intimately understand their costs of operation and production have already opened a lead on their competition, a lead that will widen into a gap over the next few years. That’s why the single most important thing you can do for your law business, right now, is to know your costs inside out, down to the last dollar, pound or peso. And then, once you understand your costs, streamline them — through technology, knowledge management, automation, and creative use of legal talent (including contract and offshore lawyers).

Every time you reduce your costs, you create an equivalent opportunity in your profit column, because the amount you spend to render a service to your clients has no effect on the value of that service to the client. (It never has.) Your client doesn’t care how much profit you make for yourself; the client only cares that you delivered excellent value in a cost-effective (to the client) manner. How you bill your services is between you and your client; how much it costs you to deliver those services has to be your number-one business priority.

The goal should not be to stamp out the billable hour once and for all. The goal should be an open, rational legal services pricing system in which the question “How many hours did you bill?” — whether asked by a client of its law firm, or by a partner of an associate — is, for the most part, completely irrelevant.

Casualties of the salary war

Dan Hull at What About Clients has stirred the smouldering embers of the associate salary debate with a post suggesting that new lawyers should pay law firms to apprentice with them. It’s a provocative idea, and while I voiced my disagreement with it in a comment there, I do appreciate the frustration he and other legal employers feel when the marketplace requires salaries that don’t correlate to the value they can realistically expect from rookie practitioners.

The problem, though, is that new lawyers don’t generally leave law school primed to deliver serious value to employers, and the largest law firms don’t have a lot of economic incentive to provide them with any real training — what they want are billable drones. So let’s be clear: it’s no accident that our current system delivers this result — it’s exactly what we should expect. It’s a problem we could ignore when times were good, but not anymore.

This is going to come to a head sooner rather than later, and it’s going to be the new lawyers themselves leading the charge, as this article in The Recorder about the tough lateral marketplace demonstrates: “[F]or a partner who isn’t holding a big book of business, moving may not be so easy — and for associates it may be impossible — as firms increasingly look only at the most productive partners.” [Emphasis added]

When large firms’ profitability is threatened, associates are the first ones cut loose and the last ones picked up elsewhere, and a lot of them are finding to their dismay that they’re simply not that employable. Their primary skill — a willingness to work long hours on middling-level tasks — isn’t in huge demand by large firms right now and is never of any use to smaller ones. These new lawyers are going to be squeezed hard, and they’re going to start asking hard questions: why are we left holding the bag? How is it that the law schools and the large firms, to which we had entrusted our development as lawyers, are sitting pretty, and we’re left banging on doors trying to get work?

In point of fact, it isn’t fair — and it’s no way to introduce the next generation of practitioners to our profession. A few of us have been saying for a while that the lawyer education and training system needs a massive overhaul. Expect to hear many more voices join that chorus over the next several months — those of the thousands of stranded new lawyers who are starting to pay the price of our cavalier approach to bar admission.

The day after tomorrow

As Patrick J. Lamb of Valorem Law Firm reminds us, change is inevitable once a marketplace has decided to do things differently. In a week in which the American Bar Association not only gave offshoring a passing grade but positively embraced it (Ron Friedmann and Russell Smith contribute their thoughts), and in which the prospect of publicly traded law firms is discussed not in a mere blog but in the hallowed pages of The Economist (as the Australian pioneer in this regard reports more financial success), then you’ve got to know tumult is underway. Maybe law schools will get it too, though they have farther to go, judging from the latest silliness involving the US News and World Report rankings (see me vent my frustration at Legal Blog Watch yesterday). But ready or not, no matter where you are in the law, change is here, and it’s real.

You know, I read a book a few years ago that helped reshape how I view geopolitical and sociological change. The Fourth Turning contends a whole bunch of things, not all of which I necessarily buy, but for present purposes, the most significant is that roughly 80-year chunks of history can be divided into four “seasons,” and we’re now firmly into Winter: a period of destructive crisis. Whereas the preceding Fall (by my estimate, from the mid-’80s to 9/11) was a time of institutional unravelling and decay, Winter is a time of dynamic upheaval, when an old civic order is replaced with a new one. Change and reform that seemed impossible in the Fall come fast and furious in Winter, and there’s no guarantee the change will be for the better.

Looked at in this context, the waves buffeting the legal profession can be understood as part of a cyclical pattern of evolution rather than an unforeseen bolt of upheaval. We’ve been talking about reform in the practice of law for decades — the first article calling for the death of the billable hour probably dates from the Jurassic Era — but the social and institutional paralysis of the past couple of decades has frustrated these efforts. Now, though, greater forces than simple goodwill are in motion, and boulders that once seemed impossible to move now suddenly shift with greater ease than ever. All of which means it’s time for us to pause and take stock of where we’re trying to go.

Look, if you’re reading this blog, you’re aware of the changes manifesting themselves in the law, and probably you’d like to see things change for the better: a more effective and fulfilled legal profession, a more informed and satisfied client base, a more focused and responsive legal education system, a fairer and more accessible justice system, a more collaborative and innovative spirit of lawyering. Those of us so motivated constitute a small minority in the legal community, but we’re growing. And I’m greatly cheered by the thought that at this time of crisis in our profession, we have the means and the opportunity to help direct the forces of change into positive channels, and to help make the profession better than it is and maybe even as good as it needs to be. Continue Reading

How David beat Goliath

Reading to my three-year-old from her new book Bible Stories for Toddlers last night, I was struck by something about the story of David and Goliath that I hadn’t fully appreciated before. David is often held up as a symbol of bravery in the face of insurmountable odds, as well as the power of divine protection. But it struck me that courage and righteousness aside, young David was no fool: he didn’t engage a gigantic opponent in hand-to-hand combat. He kept his distance, picked up a sling and stone, and took out a heavily armed warrior with missile fire. David was one of history’s earliest recorded asymmetric fighters.

There’s a lesson here for lawyers who work in smaller operations, from midsize firms all the way down to sole practices: taking on your bigger competitors on their terms is a losing strategy. Either avoid their strengths or capitalize on their weaknesses, but at all times remember that you can’t do business the way they do and you shouldn’t try. Recent news items offer three examples that bear this out:

1. Technology: The 2008 ABA Legal Technology Survey Report sent out some highlights in a press release, including this one: 37% of respondents use case or practice management software. But what’s interesting is that smaller firms have better uptake: 24% of large-firm lawyers use the software, versus 33% at firms with 10-49 lawyers, 50% of respondents from firms of 2-9 attorneys and 40% of solos. If you’re in a small practice, you absolutely must capitalize on big firms’ unwillingness to adopt these programs, which pay for themselves almost immediately in terms of increased productivity and efficiency. Biglaw’s failure in this regard is a gift to its smaller rivals, one that won’t last forever.

2. Receivables: The Daily Business Review reports on a raft of firms that, in the face of a weakening economy, are cracking down on overdue receivables and getting their cash flow pumping harder. Firms could ignore outstanding bills when times were good, but now they’re motivated to collect those debts — or at least, judging from the article, the midsize and smaller ones are: the only large firm in the story says it “touch[es] base periodically” with clients whose lack of payment suggests the firm has “fallen off their radar screen.” Small firms can and must take cash flow seriously, because it adds an extra layer of profitability that some larger firms still feel, for some reason, they can ignore.

3. Exclusivity. Your ABA reports on a session at its annual meeting in New York on how solos can get referrals from large firms. The critical feature, as is always the case for smaller practices, is focus: develop a specialized niche that offers a complementary, not competing, profile to firms that could send you work. True enough, but the greater point is that large firms seek to be as many things as possible to as many clients as possible. You need to do the opposite: be very few things to a limited selection of people, so that you can own that cross-sectioned block of work and clients. Large firms think constantly about their fellow big-firm competition; your goal should be to have as little competition as possible.

Taking an asymmetric approach to strategy allows you to think of other big-firm weaknesses that you can turn into small-firm strengths:

* Overhead: One of the two biggest expenses for large firms, which feel compelled to occupy tony premises in expensive locations, can be a competitive advantage for you. Take steps to reduce your real-world footprint by going wireless and mobile, accessing caselaw and precedents online, sharing office space, or working from home or outside urban centers.

* Payroll: Here’s the other major expense for your huge competitors, whose business models assign many highly paid young lawyers tasks that have them punching below their intellectual weight. Hire experienced lawyers on contract, or let them work from home, and try to send at least some work offshore every month. The big firms have made salary a weakness for you by driving up market prices, so compensate by offering the flexibility and satisfaction that they can’t. Which brings us to:

* Women: Large firms’ inability to retain women past their sixth year of call is well-known, thanks to an economic model that pretends women don’t carry a disproportionate amount of child and home responsibilities. Women lawyers are an undertapped source of talent, a Moneyball-esque market inefficiency. Take advantage: find out what women lawyers are looking for in a legal employer and shape your workspace accordingly.

You can adjust and add to this list based on your own community, practice area, talent pool and client marketplace. What it comes down to is: don’t try transplanting a large firm’s business model to your more modest tract of land. Identify your bigger rivals, figure out their vulnerabilities, and make the appropriate changes to your own smaller firm’s profile.

But one final note of caution; beware of focusing too much on your competitors and not enough on your own strengths and vision. David was smart enough to use a sling and stone against a giant. But he was also adept enough with that weapon to take the giant down with one shot.

The rise of good enough

Developments last week in the world of electronic discovery have gotten me thinking about matters of a weightier nature. The Wall Street Journal published an article about the rise of automated e-discovery services and the degree to which they’re eliminating the need for lawyers in this area (it’s subscriber-only, so I’m relying on the good graces of Carolyn Elefant at Legal Blog Watch, who provides some highlights).

New e-discovery tools, says the article, promise cost savings of more than 85% — something bound to elicit sweet hosannahs from clients, but perhaps rather different responses from lawyers. One such lawyer, a partner at Fenwick West, cites a cautionary tale of a client that decided to go the cheap route and handed over an e-mail archive search to its internal IT personnel. You can guess the result: disastrous disposal of necessary files and big money paid to the law firm to clean up the mess.

Now, there are two things worth noting about this example. The first is the dichotomy it suggests: either have the professional lawyers do the work or give it to the complete non-specialists, and no in-between. But in fact, there’s a lot in between, and some law firms are figuring this out. Ron Friedmann at Strategic Legal Technology brings us word that Dorsey & Whitney has launched its own e-document review service, at fixed prices to boot. As Ron says, this is less a challenge to e-discovery providers than it is to other law firms, who might have to start rethinking how their business models incorporate e-discovery.

But there’s another angle here, one that goes to a more foundational matter in the law. The example above presents a familiar, even archetypal warning to clients: engage a lawyer now to do the job right, or engage the lawyer later, for more money, to fix the mess you made by trying to do it on the cheap. You might even call this the Cardinal Principle of Lawyer Marketing: the short-term cost of hiring a lawyer is less than the long-term cost of going without one. We’ve all heard it, and many of us have used it, but few of us have examined its foundation or implications. Continue Reading

Preaching to the choir about innovation

Legal Times reports the release (2nd ed.) of Fair Measure: Toward Effective Attorney Evaluations, by the ABA’s Commission on Women in the Profession. Fair Measure offers law firms instructions and materials to help them conduct performance evaluations free from gender bias. And it offers us a useful prism through which to view the most important role innovation plays in the practice of law.

I haven’t read the book, but its central premise — that evaluations are (a) key to lawyers’ career progress in law firms and (b) extremely susceptible to both overt and unconscious gender bias in favour of men — seems unassailable. But the book also seems vulnerable to two underlying assumptions: that (a) most law firms systematically rely on evaluations or indeed any other rational method when assessing and promoting lawyers, and (b) most law firms are sufficiently troubled by their clear inability to retain women lawyers that they’ll actually do something about it.

In a typical law firm, when partners evaluate associates, they often do so in a peremptory manner that reflects the low priority management has accorded the task — it’s not billable, it’s not tied to the partner’s own status or compensation, and it’s not part of a holistic approach to associate development that includes mentoring and training. Similarly, decisions to extend partnership offers are often made with subjective criteria that reflect partners’ own personal likes and dislikes, which invariably includes stereotyped beliefs about gender and ethnicity.

The real problem is the absence in many firms of rational, consistent mechanisms for evaluating and nurturing talent, and the untroubled attitude towards the negative impact that absence has on fairness and diversity within the firm. In other words, Fair Measure is a book designed for the small minority of firms that actually believe they have a weakness and actually want to fix it. The bulk of the profession likely will pass it by.

But you know what? That’s fine. Continue Reading

Capped fees, limited innovation

To the well-known list of companies that have consolidated their roster of outside counsel to one firm (DuPont, Tyco, and Linde, most prominently), you can now add Pfizer, which Corporate Counsel magazine reports has given all its employment litigation work to Jackson Lewis and its 500 lawyers across the US. But this one comes with a twist: in exchange for its sole counsel designation, Jackson Lewis is capping all its fees to Pfizer, issuing one invoice a month containing one-twelfth of its annual fee and an accounting of its its time spent on Pfizer matters in the last 30 days.

There are three interesting points to take away from this story. The first is to note that when Pfizer’s GC was asked to list the reasons why Jackson Lewis won this ten-firm competition, the first thing she cited was trust: “We were putting all of our eggs in one basket. Before, we had a choice among ten firms. Making this decision meant that choice was gone.” Never mind the economics: you don’t win a contest like this unless the client has the utmost faith in your reliability and wisdom.

The second is to observe what happens in the absence of trust: tucked away in a sidebar at the bottom is an account of Pfizer’s frustration with fat, vague law firm invoices that didn’t comply with the department’s well-established billing guidelines. So the company hired a legal bill assessor called Legal Cost Control, which found that Pfizer’s outside counsel were billing for things like making copies, sleeping on airplanes and assembling budgets. Now Pfizer sends all outside counsel invoices to a billing review team — and it’s fair to assume that firms submitting questionable bills won’t be in that trusted inner circle, if they remain counsel at all.

But the third, and most significant, aspect of this story is that while Pfizer is combining two innovations here, convergence and capped fees (well, UK law departments wouldn’t call law firm panels exactly innovative), it missed an opportunity to add a third when it retained the right to recoup Jackson Lewis’s unspent fees at the end of the year. Continue Reading

Podcast on conflicts of interest

Law21 was quiet for a week while I worked the Canadian Bar Association’s Canadian Legal Conference in Quebec City. Among the highlights for me was moderating a podcast on the CBA’s just-released Final Report of its Task Force on Conflicts of Interest. You can access the podcast by clicking the third link in the right-hand column on the CBA’s Conflicts Home Page.

The podcast, which runs less than 25 minutes, featured three members of the task force: Chair Scott Jolliffe, managing partner of Gowling Lafleur Henderson LLP, and members Gord Currie, EVP and General Counsel of George Weston Ltd., and Simon Chester, a partner with Heenan Blaikie LLP and fellow Slawyer. We talked about the report’s principal recommendations, the valuable Toolkit that accompanied it, and why conflicts matters so much to both lawyers and clients. Hope you find the program interesting and the report useful, no matter where you practise.

The Web is bigger than you think

A watershed moment is occurring at the Beijing Olympics — or more accurately, in the head offices of the broadcasters covering it. Online viewing of Olympic events has shot into the stratosphere — this Globe & Mail article on the subject uses terms like “shattering” and “unbelievable” to communicate the enormity of what’s happening. Here are some statistics to make the point.

CBCSports.ca is averaging two million page views a day. A year ago at this time, the site was getting about one million views a week. The CBC’s live streaming and video-on-demand services are receiving close to 250,000 hits daily. …

At NBC.com, it took only four days to surpass the entire Athens Olympics in page views. Beijing has 291.1 million views so far, compared with 229.8 million for all of Athens. On the first day of the Athens Olympics, NBC had 65,346 video streams. For Day 1 at Beijing, the number was 1.65 million.

The Olympics are the perfect webcast event — numerous events taking place simultaneously, each with its own devoted audience. In the past, networks had to choose the one event likely to garner the highest ratings and televise it, to the chagrin of the long tail of other events’ diehard fans. But with the web, the broadcasters can “televise” as many events at one time as they like on separate streamed web pages, with the added viewer bonus of reruns and replays on demand.

For the last few years, all the major networks have been poking around with the Internet like a new toy that they haven’t quite figured out how to use yet. The Olympics should prove to be the tipping point at which the networks (and their advertisers) realize an important truth: television is only one medium through which content can be delivered, and compared to the web, it’s a limited, inflexible, single-channel medium. The CBC’s Scott Moore reported a conversation with the IOC’s Jacques Rogge: “We both agreed that it is not the wave of the future. It’s the wave of the present.”

Is this still a blog about the legal profession? Yes, it is. And I think there’s an important lesson here for lawyers: we’ve all been thinking about the Internet too narrowly. Continue Reading

The questionable future of partners and associates

The evidence is growing that neither “partner” nor “associate” is going to be a meaningful term in law firms of the future. Both of these hallowed pillars of law firms’ talent structure are starting to be used more as means to an end rather than as ends in themselves.

In terms of partners, consider this article from The Lawyer about firms trying to expand overseas but having difficulty persuading lawyers to transfer to the new offices (especially in Dubai). One tactic firms are employing is to offer lawyers who accept the foreign posting the opportunity to make partner much more quickly than they normally would. Think about that one for a moment.

Partnership, which was once considered the ultimate law firm goal, is being reduced to an incentive the firm dangles in order to get what it really wants — boots on the ground in fast-growing locations worldwide. It’s been a while since admittance to partnership actually was a genuine endorsement of a lawyer’s skills and professionalism through invitation to an exclusive, tight-knit community with common goals. But it’s still surprising to see the fast track to partnership deployed as just another behavioural incentive — especially since partnership really doesn’t turn so many associates’ cranks nowadays.

To get a sense of how firms view those associates, take a look at how the chair of Simpson Thacher responded to a rumour that his firm was culling 30 associates through poor midyear reviews, an attrition tactic not unknown to large firms: “This is something that was made up by that rag in the U.K., it’s just complete nonsense” — the rag in question being The Lawyer, not a newspaper normally associated with Fleet Street standards. Continue Reading