Thursday Jun 18, 2009


I shake my head whenever I read articles like this that suggest that the legal services profession will continue unchanged. It feels like so much "whistling past the graveyard." The reality is that we are in the early stages of a seismic shift in the traditional cost and delivery model for legal services. I see it every day in my interactions with the law firms that support us and in my discussions with peers at other companies. This change is the result of three major factors: the current economic downturn, the rise of alternative legal service providers and the lifestyle choices of the newest members of our profession.

The global recession is causing all commercial enterprises to scrutinize their cost structures. As part of this, in-house legal departments are expecting their legal service providers to provide similar efficiencies. Recently, we asked one of our partners, Howrey, to represent us in some corporate litigation. As part of this engagement, we had an initial meeting with two partners from the firm, Robert Gooding and David Lisi, to discuss case strategy and also the anticipated cost of defense. To my surprise, Bob and his partner proactively offered a variety of cost structures (including flat fee and quarterly fee caps) as alternatives to the billable hour. They were also happy to work with the legal staffing vendor we use for litigation support and offered other suggestions for lowering our litigation costs. I can tell you that this is a conversation that would never have occurred with any firm five years ago. At least, not without significant prodding on our part.

The availability of alternative legal service providers in lower cost geographies is also increasing competition in the legal services market. In part, this is due to the almost frictionless ability to transfer legal work around the world via the Internet. The result is that legal service providers in lower cost locations are able to use price to more effectively compete for work. Over the last few years, we've seen this in the way important, but more routine and repeatable work, is being handled in lower cost areas in the U.S. and other countries. As professional licensing regimes are harmonized, this trend will continue and, as these lower cost providers gain greater experience and training, they will move "up the stack" providing increasingly more valuable and higher margin services.

The career perspective of the newest generation of attorneys is an additional factor in driving these changes. They desire a different lifestyle than what was offered in the past. I know this from first hand experience. As I'm writing this, I'm sitting in a conference room with a number of our law school summer interns. They work differently than I did when I was in law school - collaboratively, in communal spaces, streaming music, while interacting with peers via Twitter, Facebook and other social networking sites. To many of them, flexibility, mobility, a collaborative environment and interesting work are paramount - and not always what law firms can currently offer.

Interestingly, I had lunch yesterday with the managing partner of one of the larger firms that support our company. (I'd disclose the name, but I feel that much of what we discussed was in confidence.) It's clear that he understands where our profession is heading. His firm is automating routine work like the creation of incorporation documents; increasing it's use of cost accountants to better understand his firm's cost structure enabling it to more effectively price work; and encouraging clients to use flat fee and other alternative billing models. His firm is also actively exploring ways in which they can better meet the career desires of their newest generation of attorneys. Some of the things that are being considered include abandonment of the traditional partnership track structure (based in part on graduating class year); training partners to be more effective managers; and creating a career path for those attorneys who are more interested in lifestyle balance than a corner office. At the end of our discussion, he expressed certainty about the changes to come, but with some wistfulness for the past.

Change is always difficult. But, all of us in the legal profession - whether in-house or firm - need to embrace it. For as Benjamin Franklin once said: "When you're finished changing, you're finished.

For those of you that are interested in being part of the conversation, here's a good place to begin.

Monday Aug 11, 2008

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.




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