Finding Value

Years ago, I worked for an established New York based law firm. I was assigned to support one of our major clients, a large international pharmaceutical company. As a junior associate I grappled with billing - trying to juggle the minimal value of my limited legal experience with the pressure of meeting the firm's billable hour requirements. I shared this with the senior partner on the account and, to my surprise, he told me to bill for all of my time and that he would ensure that the firm received "compensation commensurate with the value the firm provided to the client".

At the time, I wasn't confident enough to ask how this was accomplished. But I later found out that this partner had a long standing relationship with the client's CEO. At the end of each year, the two of them would meet over a nice dinner and bottle of wine and review the work that the firm had done the previous year. Among other things, they would discuss the amount and type of legal support the firm had provided and the value of that work to the client. At the end of the meal, they would agree on an annual fee for the following year - usually memorialized on a napkin. Some years the fee increased; in others, it decreased.

I was thinking of this story while attending a meeting with lawyers from a number of San Francisco Bay Area companies and law firms. Under the aegis of the ACC we were together to discuss the devolution of legal services from the halcyon days described above to the present where law firms optimize for profits per partner while in-house legal departments focus on efficiency and value. It was a lively discussion and, although there wasn't a clear solution, some ideas resonated with me.

1. Legal Education - Law schools (especially in the U.S.) remain primarily focused on theory, rather than practice. As a result, a significant expense for law firms is attributable to providing practical training to recent law school graduates. In turn, this expense is passed on to clients in the form of higher hourly fees. Our legal education system needs to provide better practical training. In this respect it should mirror the residency requirements of medical schools or legal programs in other countries. For example, in Germany, a practice residency is already incorporated in the law school curriculum. In addition, law schools need to recognize that the "legal profession" is also a business for providing legal services. To be successful, lawyers need to be trained in how to manage a competitive business enterprise. Interestingly, future members of our profession already understand this and are focusing on the issue.

2. Legal Media - As a public company, Sun provides a very transparent view into all aspects of our business operations. This transparency drives increased competition in the marketplace for our products and services. Obviously, law firms aren't required to provide this type of information. However, the limited information that is available focuses on the wrong metrics. Legal media need to shift the focus from metrics like profits per partner to those metrics that are valued by clients. When legal periodicals begin to report firm operating expenses, average cost per billable hour and similar metrics, the legal world will change very quickly - and for the better. Law firms understandably dislike RFPs. In-house legal departments feel the same. Unfortunately, there is no other mechanism for clients (i.e. customers) to ensure that they are getting cost-effective value.

3. Law Firms - Law firms need to better understand that they are both licensed professionals and also employees of a business enterprise in an increasingly competitive (and global) market. This means they need to understand every component of their operating expense and business model. What is the cost of attorney turnover in the firm? What are its core v. non-core technical strengths? Can the firm manage sub-contractors (i.e. other legal service providers) to provide more cost effective services to clients in non-core areas? Does the firm fully understand its customers and does it tailor its services to the customer's specific needs? (In this regard, I note that I have never had a firm propose a non-standard billing relationship for a specific matter. Instead, I've always had to request it.)

4. In-House Legal Departments - We need stop complaining and be part of the solution. This includes not just considering, but engaging firms that provide alternatives to the traditional legal services model. (Some examples - Axiom, Paragon Legal and the recently announced Virtual Law Partners). We also need to be more willing to retain small to mid-sized firms and firms in other geographical regions. Above all else, we need to more actively share information about attorneys and firms that deliver the value that we need as consumers of legal services.

If you want to be part of the dialog, contact the ACC for more details.

Comments:

There is an interesting post on the topic of client satisfaction and value at the Adam Smith Blog that builds on some of the points you mention here.

http://www.bmacewen.com/blog/archives/2008/07/the_new_whipping_boy.html

Posted by Anon on August 13, 2008 at 03:34 AM PDT #

Mike - great post and happy to hear that the ACC meetings are going well. As a legal marketer I am concerned about the current trends. I've been blogging this week about solutions, and will continue to do what I can to promote the conversation from our side of the table.

www.legalwatercooler.blogspot.com

Posted by Heather Milligan on August 14, 2008 at 06:57 AM PDT #

Mike,

I have to disagree with your first point about post-graduate legal education. Post-graduate training is essential for attorneys to become specialized in various fields. Organizations that provide training are generally more up-to-date than academia. And although this sometimes raises billable rates, it also provides clients with attorneys who are better equipped to provide service that goes above-and-beyond. A firm’s investment early on in training in the field of patent law for instance will pay for itself in future work from the customer and in the absence of costly mistakes caused by an inexperienced practitioner.

I do agree, however, that law schools sometimes focus too much on theory. Not only do young lawyers need to learn how to manage “a competitive business enterprise,” but also how to apply law to benefit a business strategy. This is something that is under-taught in the classroom, and is the reason why post-graduate training is necessary.

But the real value that post-graduate training programs provide is the synthesis of knowledge that occurs when a course is taught by 3-4 experienced attorneys. Not only do students gain specialized knowledge, but they are learning best practices from attorneys with different viewpoints and approaches, which in turn creates skilled, nimble and knowledgeable lawyers.

Posted by Sally Sakelaris on August 27, 2008 at 04:09 AM PDT #

Mike,

I think this is a great piece and point 4 really hits dead on what we’re trying to achieve at FizzLaw. It’s a site for entrepreneurs, in-house counsel and small and mid-sized businesses to share information about their experiences with outside counsel. The driving force behind FizzLaw is the lack of transparency in the legal services market, and the idea that the best first-step towards making things transparent is information sharing. Useful information sharing that is (i.e. honest feedback about quality, cost and performance). For example, for in-house to start retaining small and mid-sized firms, they need to be able to identify those firms and vet the attorneys. With FizzLaw, they can find attorneys at small firms and read input from other people who have used those attorneys, and as such, get comfortable using an “unknown”. This is a self-funded venture and with FizzLaw we’re not generating any advertising revenue (or any revenue for that matter) so that we can maintain an unbiased community. The initial launch has been promising and we found your article to be very encouraging. Thanks!

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I was thinking of this story while attending a meeting with lawyers from a number of San Francisco Bay Area companies and law firms. Under the aegis of the ACC we were together to discuss the devolution of legal services from the halcyon days described above to the present where law firms optimize for profits per partner while in-house legal departments focus on efficiency and value.

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I was thinking of this story while attending a meeting with lawyers from a number of San Francisco Bay Area companies and law firms. Under the aegis of the ACC we were together to discuss the devolution of legal services from the halcyon days described above to the present where law firms optimize for profits per partner while in-house legal departments focus on efficiency and value.

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