Decoupling price from cost in legal services

Virtually all the talk these days in client circles is about the cost of legal services. It’s well established that institutional purchasers of these services are under great pressure to reduce costs by, for example, “taking bids, asking for discounts, shopping around for lower-cost options.” Patrick J. Lamb points out that many in-house lawyers don’t care what rates are charged, so long as they can bring back to corporate HQ the trophy of a 10% discount. One of the most popular discussions at Legal OnRamp right now is under the heading “Top Ten Ways for Clients to Save $” — and the list has grown well beyond ten.

What’s interesting is that most conversations about “reducing costs” are one-dimensional. They focus on the client getting the same kinds of services from the same kinds of law firms at a lower price; or, more concisely, the same-old same-old for less. They don’t envision rethinking the source of the services, or more importantly, the ways in which those services are produced. Ron Friedmann points out that when looking at ways to control costs, in-house counsel tend to focus on pricing elements — rate freezes, flat fees, discounts, alternative fees, and so forth — while ignoring the potential savings of reforming the process by which legal services are provided:

Where, for example, are efforts to require matter budgets, application of best practices, automation, risk analysis with decision trees, document assembly, and proper use of KM systems?… Real costs savings mean changing the process, focusing on how lawyers practice. The profession needs to overcome its “I am an artiste” attitude and develop better ways of working.

Both lawyers and clients have succumbed to the long-standing lawyer assumption that the price of legal services is directly connected to its cost. Lawyers produce work today pretty much the same way they produced it 60 years ago: through the individual-focused, time-insensitive application of principles and formulas to fact situations. Some time back, they figured out how much it costs them to do that, built in a percentage for profit, and arrived at a selling price for clients. And every year or so, to reflect both inflation and inflated earning expectations, they raised those prices. It’s an insulated, self-sustaining system in which price = cost + profit margin.

Here’s the really important thing that’s happening right now: the price of legal services is finally becoming uncoupled from the costs lawyers incur to produce it. Continue Reading

A high-calibre crystal ball

When Dennis Kennedy contacted me a few weeks ago, to ask if I’d like to participate in an online roundtable on the impact of the economic crisis on lawyers to be published in the ABA’s Law Practice Today e-zine, I of course said yes on the spot. But when I logged into the site and realized who my co-panellists were, I was floored. Check out this lineup: Tom Collins, Patrick Lamb, Bruce MacEwen, Patrick McKenna, Edward Poll, Allison Shields and Merrilyn Astin Tarlton. This was an all-star roster, and I suddenly felt a little like the lone representative of the Kansas City Royals.

In the event, the panel delivered some extraordinary insights about the incredibly challenging times directly in front of the legal profession. If you’re going to read only one article this week, make it this one: go to the November 2008 issue of Law Practice Today and hear what the roundtable had to say. It’s a tremendous resource, and I was honoured to be a part of it.

Here’s the contibution I was happiest about. One of Dennis’s questions was: “[W]hat changes to the legal profession will we attribute to this crisis when we look back in the near future – two to seven years?” This was my response.

Probably we’ll see a few changes we’ve been expecting and a bunch that we weren’t. I wouldn’t count on the billable hour being a casualty – I’ve come to conclude lawyers will be billing by the hour until shortly before the sun goes supernova. The biggest change will be the competitive environment – financially squeezed companies will use outsourced and offshored lawyers for 60-70% of their outside work, and recession-battered individuals will be encouraged to self-represent or hire “non-lawyers.”

The result will be that within a decade, there’ll be a lot of “legal process companies,” fewer “law firms,” and hardly any such thing as the “unauthorized practice of law.” A new class of law firms will emerge that make no pretensions to excellence — blue-collar lawyers who pointedly sell legal work that’s “good enough” will become remarkably popular.

Clients will gain more power in the relationship, but not outright control – while process work will become commoditized, high-end work will go even higher, because good legal advice will become more valuable when “bet the company” situations arise once a month, and good legal advisors will be able to name their terms. Outside investment in firms will accelerate in the UK and premiere in North America in part because law firms will require monetary injections to satisfy lenders and cash out partners.

Basically, the state of suspended animation in which law firm business models have existed for decades will come to a jarring halt.

Smart investing vs. law firm layoffs

I’m very satisfied with the status of my investments. The reason I’m very satisfied is that I haven’t opened a single RRSP update from my bank since mid-summer. I already have a pretty good sense of how ugly things are inside that envelope, and I don’t feel up to having it confirmed just yet.

But even if I knew the first thing about investing (and I don’t), I doubt I’d be spending my days moving cash out of this fund and into that one. Noreen Rasbach at the Globe & Mail doesn’t, and cites some studies in support of that approach.  What it comes down to, she says, is that the stock market gains and loses most of its value in very short bursts and at completely unpredictable intervals, so you might as well hold steady and look to the long term. Then she quotes an expert who makes an interesting point:

“What most people do is, when the market goes up, they want to get in. When the market goes down, they want to get out. And when fluctuations are large, that turns out to be a terrible strategy.” … During turbulent times like these, “part of the market discount is to provide additional rewards for staying in the market when a lot of other people just don’t have the guts to do so.”

It strikes me that this analysis applies quite nicely to law firm associate layoffs. Late last week came word that Orrick, Herrington & Sutcliffe has joined the parade by cutting 40 lawyers and 35 staff, making this a very bad autumn for lawyers in the Bay Area. The list of large firms tossing young lawyers overboard keeps growing — and the really alarming thing is that we’ve only scratched the surface. We’re still in 2008, and the recession is only just starting to settle in; the first few months of 2009 figure to be brutal.

[Let me sidebar here for a moment: if you’re an associate who has recently suffered one of these layoffs from a big firm, or you know someone who is, go to Legal OnRamp, a fantastic invitation-only online community for corporate counsel and private-practice lawyers. LOR is extending invitations right now to young lawyers who find themselves in these straits; request an invite at OnRamp’s front page and identify your former firm. Take it from me: this is a great community and an extremely valuable forum for networking and collaborating.]

Now, you don’t have to try very hard to unearth the cynic in me, and part of me can’t help but think that every time a law firm lays off associates, its rivals give a little smile. I can think of four reasons why. Continue Reading

The perils of squandering talent

Malcolm Gladwell has written a new book about the factors that most influence the likelihood that you’ll achieve (traditionally defined) career success. Outliers: The Story of Success posits that much of what affects our success is out of our control, and that arbitrary or even trivial factors play a disproportionate role in what we end up doing and how well we do it. As part of the book promotion tour, he spoke with the Globe & Mail the other day and made an observation that I think resonates deeply with the legal profession.

Giving an example of arbitrary success factors, Gladwell noted that a huge percentage of professional hockey players have birthdays early in the year. That’s because the standard cutoff date for hockey programs is January 1, so when all-star teams and other squads are recruited, the players who seem most talented are invariably picked — but in fact, they only seem more talented because they’re older and more physically capable. But then these players get special attention, more coaching, more opportunities, and by the time they hit their teens, they actually are more talented. The same applies in school — Jan. 1 cutoffs mean kids born later in the year are younger and therefore farther back on the learning curve. His point is that arbitrary dividing lines can have huge unintended consequences.

Then the interviewer asked Gladwell, at the end of their conversation, why anyone should care enough about this to actually do anything about it. His reply made me sit up straight:

Because we squander talent. Even in a country like Canada, where hockey is a priority, an obsession, we’re squandering a huge amount of hockey talent without realizing it. We could have twice as many star players if we just changed the institutional rules around finding talent. To me, that’s such a powerful lesson. Because it just says, look, in a simple area like hockey, in a country that cares more about it than almost anything else, if you’re still squandering 50 per cent of your ability, how much more are we squandering everywhere else?

I’d go further and say that squandering talent actually has two components: failing to realize the potential universe of talent at your disposal, and then failing to maximize the talent that you do choose. When you apply that analysis to talent identification, intake and management in the law, you come to realize just how arbitrary and undisciplined we’ve been. Look at it in these terms: Continue Reading

Can’t get no LSATisfaction

Here’s something interesting: the consultancy Kerma Partners recently conducted an in-depth study of more than 1,300 current and past “timekeepers” on behalf of an AmLaw 25 law firm. The study identified which personal qualities and attributes of lawyers correlated most strongly with firm success factors such as productivity and longevity. Lawyers possessing the best of these attributes, it turns out, doubled or even tripled other lawyers’ showings in terms of profitability. The authors don’t reveal what these “best” attributes are — presumably, the firm will keep that information close to its vest – but lawyers’ law school rank and GPA were not among them.

Those results are in themselves serious food for thought. What’s significant about this study, though, is that it happened at all – a very large and successful law firm set out to rationally reconsider all of the assumptions it makes and criteria it uses in its lawyer recruitment process. It’s part of what I’m coming to think is the quiet but very real advancement of empirical analysis in the process of how the legal profession understands itself.

Of course, rational, evidence-based analyses of legal education and legal practice have been around for a while. There are excellent blogs that examine empiricism in the context of law schools (Best Practices in Legal Education and Law School Innovation, to name two) and law firms (Empirical Legal Studies and Adam Smith Esq., to name two more). But just last month, I flagged some emerging studies that cast serious doubts on, respectively, the utility of the LSAT, the traditional criteria for law professors, and the importance of law school grades in identifying and shaping good lawyers.

There are also academic institutions that study how we train our lawyers and run our law firms. Georgetown Law’s Center for the Study of the Legal Profession is probably the market leader. But again, last week also saw the arrival of William Mitchell College of Law’s Center for the Empirical Study of Legal Practice, which aims to “research the daily realities of the work of a lawyer and the business of the legal profession.” The new center is led by political science professor Herbert Kritzer, who quotably describes himself: “I am to lawyers what Dian Fossey is to gorillas.”

Some smart and dedicated people are putting the profession’s habits and assumptions, particularly those relating to who should be a law student and what makes a good lawyer, under the microscope. Not a moment too soon, I say. And at this moment, the magnification is being turned up especially high on that old standby, the LSAT: the increasingly maligned test that figures prominently in many law school admissions systems (and in the equally maligned US News & World Report rankings of US law schools). Continue Reading

The power of positive blogging

It’s not often I can derive a blog post from a tweet, but Debbie Weil‘s recent Twitter entry sent me to this thought-provoking post at CopyBlogger, and got me thinking about the purpose of the legal blogosphere. Brian Clark’s entry talks about the phenomenon of “social proof” — people’s tendency to judge the quality of a thing, in the absence of other reliable indicators, by its popularity — in the context of social media. Among other things, social proof is the fatal flaw behind Digg’s claim to be a useful news filter, and to my mind at least, connects up with Jeff Jarvis’s recent admission that editors are necessary after all. (HT to Nick Holmes on that one.)

But as Clark points out, social proof is also dangerous because “[s]ometimes, your message inadvertently convinces people to do or accept the opposite of what you want…. [S]ocial proof tells us it’s okay to do what we already want to do. This isn’t all bad, especially when it involves the acceptance of your message. But it can also result in negative social proof, in that it motivates people to do the opposite of what you want because you’re trying to change behavior already supported by social proof.” He cites examples like littering statistics leading to more litter and suicide coverage leading to more suicides.

This got me thinking about law blogs, particularly those that, like this one, want to encourage positive change in how the legal profession views its role, manages its business and serves its clients. You might have noticed, if you read (or write) these blogs or are familiar with the whole LPM genre, that a common tone in these conversations is frustration, if not exasperation, with the irrationality and immovability of the status quo. More hair has been pulled out over the billable hour, the alienated client and the overworked associate than any of us care to think. I now wonder if we haven’t been part of the problem.

If social proof operates in the legal blogopshere, then we run the risk that by constantly returning to the foibles and failings of traditional lawyer business practices, we actually reinforce them. Your average lawyer who happens upon a blog post railing against the billable hour, and promoting all the competitive benefits that would flow from changing your approach, probably doesn’t think, “Ah! You’re right! There’s a better way to go, and I can profit from following it.” That lawyer probably thinks, “See? Most lawyers, like me, still bill by the hour and keep their clients waiting. I’m not the odd one out, and I’m in no danger of being left behind.”

What can we, who write about these subjects, do to avoid reinforcing what we’d prefer to erase? Our options are admittedly limited: when most lawyers are doing it one way, and human nature is to do what most people do, we’re kind of up against it.

But I think we can refocus our efforts to find examples of lawyers thinking differently and acting innovatively, and to broadcast those examples with sufficient frequency and volume so as to disrupt the notion that “everyone’s doing it the old way.” The Financial Times’ innovative lawyers list is a good example, but I’m especially proud of the College of Law Practice Management’s Innovaction Awards (which I’m chairing this year), which specifically seek out the pioneering innovators in the law and promote their achievements. We need to accentuate the positive, to shake the perception that it’s okay for lawyers to walk the old ways because they have lots of company. We should do all we can to make the traditional road feel a very lonely one.

And this gives me a segue into responding to a meme I received a few days ago (on my birthday, no less) from Mary Abraham at Above and Beyond KM, asking a simple question: “How do you decide how/what/when to blog?” The “How” is: at a keyboard, with coffee, whenever I’ve got a story I need to tell. The “When” is: whenever an opportunity presents itself, which I can tell you is not nearly as often as I’d like.

But the “What” is the most important:  I want to write articles that help advance the day when the power of social proof works to benefit lawyers and their clients, not hinder them, because the old ways of doing business have fallen into disuse. I want to write about the legal profession as it should be, as it could be, and as, increasingly, it is.

These are the days of miracle and wonder

I’m not American, I didn’t cast a vote in the Nov. 4 election, and I’m not especially partisan (nor is this blog remotely political). I just wanted to make a very brief entry here about the courage to innovate.

All of us have said, at one time or another, that there’s no point in trying to break the pattern — we can’t change our career, our law firm, our faculty, our company, our whatever. We tell ourselves to be realistic: we can’t get past the entrenched interests, irrational biases or suffocating inertia that stand in our way.

That excuse just lost a lot of its power. It’s now recorded fact and history that all these things can be overcome. The unconventional can prove wise, the remotest odds can be surmounted, the unprecedented can become precedent — and president. The world now has an astonishing template and argument for innovation; no matter your politics or nationality, you’re the beneficiary.

Twenty years ago, our parents would never have believed it. Twenty years from now, our children will take it for granted. But right now, it’s our tremendous fortune to stand right on the equilibrium between “It can never happen” and “It can happen,” and to marvel at it. Take a moment to revel in a game-changing victory for the courage to innovate — the courage to try.

Then go make some precedents of your own. It can happen. It just did.

Whatever happened to the talent war?

Funny, isn’t it, that you don’t hear many people using the phrase “$160,000 first-year associate salaries” these days? Along with its close relative, “$140 per barrel oil,” it’s a numeric mantra that enjoyed its heyday way back in that comparatively sunny era we call six months ago. Nowadays, though, no one seems to be talking much about what the next big lawyer salary bump will be. If you were decrying the mad escalation of compensation for rookie lawyers back then, you’re probably finding first-year salary deflation to be a small silver lining in the otherwise very dark clouds hanging over our heads.

Most of the talk thus far about the impact of the recession on lawyers and law firms has centered on clients: cutting back on legal work, clamping down hard on costs, and generally passing on their own fear and uncertainty to the lawyers who serve them. We’ve seen the first impact wave strike: associate layoffs at many large US and UK firms and the collapse of two California law firm stalwarts. Now comes what might just be the start of the second wave, news that global giant Eversheds has taken the remarkable step of suspending partner payouts for six months. All of it arises from the economy’s sudden jarring halt in the face of the credit market landslide and associated global recession.

But you know, the sun came up again this morning, and lawyers and law firms still need to think not just about today, but also about next year. Before the meltdown, the talent war was a hot topic in the profession, and the importance of matching the right lawyers to the right legal employers hasn’t disappeared. Things obviously have changed for both the buyers and sellers of legal talent; how much they change, and for better or for worse, depends on how much courage everyone brings to the table. Continue Reading

Follow your clients through the recession

And now, your legal services marketplace update:

Got fear? Not everyone is ready to head for the fallout shelter just yet, and rightly so. But I think it’s fair to say that we’re not looking at just another slump here. We have an historic financial crisis (hopefully nearing its completion) likely portending a deep and prolonged recession, coming at a time when law firms’ business and service delivery models are already under unprecedented pressure. You don’t need to believe the apocalypse beckons to recognize that this is, at least, an extraordinary period of transition for lawyers and law firms.

If you want to get the best sense of where the legal industry is going, though, there’s really only one place to look: at clients. Never mind what they’re saying — they always say the same things — look at their circumstances and watch what they do. The extent to which clients’ needs are driving actual changes in their behaviour is the extent to which lawyers’ worlds will also change. Continue Reading

E-document ethics and the rise of regulation

It’s been a great week for conversations with Law21 readers, because I’ve also had a terrific correspondence with John Gillies, head of Practice Support at Cassels Brock in Toronto. John brought to my attention an opinion issued this past summer by the New York City Bar Association regarding lawyers’ ethical obligations to retain and provide clients with relevant electronic documents.

The obligations set out in the opinion, while not unreasonable in any broad sense, set a markedly higher standard of conduct than many firms are currently maintaining. I think they’re noteworthy for two reasons: one, because firms with offices in New York (which include many global giants) are now bound by these standards (which could well become the de facto standard in other jurisdictions); and two, because we’re going to see a lot more of this: regulation of lawyers’ conduct regarding their work and their clients.

The NYC Bar asked itself the following questions:

What ethical obligations does a lawyer have to retain e-mails and other electronic documents relating to a representation? Does a lawyer need client permission before deleting e-mails or other electronic documents relating to the representation? When a client requests that a lawyer provide documents relating to the representation, may the lawyer charge the client for the costs associated with retrieving e-mails and other electronic documents from accessible and inaccessible storage media?

Read the whole opinion for the complete answer — it’s not long — but the gist is that standards that currently apply to storage and access of paper documents apply equally to e-documents. That might sound like common sense, but think about the impact. The electronic documentation that any given client matter produces is massive: emails to clients and colleagues, draft versions of memos, timekeeping records, Blackberry messages, and so on. If you printed out every e-document and added it to the case file (and please don’t), that file would be about ten times higher.

Here are some highlights of the opinion’s specifics (emphasis added throughout): Continue Reading