Timelessly - Building Professional Firms Without Timesheets

Blawg Review #246

The best way to predict the future is to invent it.

— Alan Kay, computer scientist, 1971

The future is already here — it's just not evenly distributed.

— William Gibson, author, 2003

In gathering the best and the brightest from the blawgosphere for this first full week of the 2010s, I thought I'd look at them through the lens of a crystal ball. Many of us are wondering what this new decade will be like, especially in the world of the law. First, though, let's talk about what this decade will be called.

A decade with no name

Look, we just went through a decade that had no name, let alone a cool one. No Roaring Twenties, no Gay Nineties (the 1890s). Even the decades that lacked ready-made adjectives could easily summon up images and memories: the eighties (bad hair), the sixties (bad hair, but in a different way), the seventies (bad lapels), or the nineties (the 1990s; nothing but irony). And don't talk to me about calling it the "Aughts" — what are we, soccer fans now? No, we're stuck with calling them "the two thousands," which stinks because you can't tell if you're referring to the decade or the century. (Kind of like my problem with calling law blogs blawgs, because you can't tell the difference when you're saying blog or blawg aloud. But for today, "Blawg Review" it is.)

First prediction: this decade will be called the "twenty tens" (or the "tens," for short).

Not "teens," not "tweens," not "tennies," or anything silly like that. And for Pete's sake, quit with the "two thousand and ..." business. People, especially lawyers (who generally are people, though some would argue), tend to clutter their speech with extra words. Don't. This year is "twenty ten," not "two thousand and ten." Check out this website devoted to this cause: twentynot2000.com. Also see this discussion at Wikipedia, and this article at TechCrunch.

OK. Now that we've got that settled, what's the law going to look like in the tens?

Killable hours

Second prediction, and this one's a bit of a layup for me, and will come as a surprise to no one, given the source: The billable hour will die die die. If it survives in any form at all by the end of the tens, it will be at the kind of fringe firms that will cause you to sadly shake your head and maybe cross to the other side of the street.

But don't just take my word on it. Over the past year, the blawgosphere and oldstyle-media traffic on the topic has taken on the shape of a hockey-stick graph, without all those embarrassing Climategate emails and tree-ring proxies. For example, legal-marketing guru Larry Bodine's Law Marketing Blog covers Comcast's recent insistence that its lawyers stop billing them hourly; Ashby Jones at The Wall Street Journal Law Blog also has the story.

Even more novel, Matt Homann recommends that we let our clients set their own price. Matt, whose name is synonymous with innovation, writes at the [non]billable hour that if lawyers focus on value to their clients, rather than their costs (their time), their clients will reward them. Across the pond, Michael Scutt at Jobsworth asks "Is it all about price?" He answers his own question, writing that lawyers need to be salespeople and recognize and apply his "single sales principle": your client's compelling need plus your credible solution plus your perceived value equals a sale.

Speaking of value, Ed Kless of the visionary Verasage Institute deftly shows how price has nothing to do with cost. His post has a graph showing that HP black ink is far more expensive than bottled water, which is in turn far more expensive than crude oil.

Jason Mendelson's Musings discusses what the failed hourly billing system has wrought — namely, clients who demand ever-increasing discounts and clients who don't pay. These are just symptoms of the problem, of course. Another symptom is that the billable-hour system pays lawyers more if they do more work, rather than enough work. Ron Friedmann discusses "good enough" at Strategic Legal Technology. But let's not get too focused on counting and measuring and reporting hours and documents and other output. The Wall Street Journal this week wrote approvingly about firms' having electronic dashboards to monitor their hours. The article's behind a paywall, but we discussed it here — disapprovingly.

Lawyer wannabes

In Ron's post, he mentions a New York Times piece written by two states' chief justices (NH and CA) that calls for the "unbundling" of legal services — namely, more do-it-yourself work by would-be clients. Revolutionary legal-learning genius Susan Cartier Liebel covers this in more detail at her Build A Solo Practice @ SPU. It all comes down to what your clients need. Third prediction: this DIY lawyering will becoming a growing trend. Look at WebMD. Lawyers have to stop thinking of themselves as special, as members of a priestly caste.

As our clients dabble with being do-it-yourself lawyers, we need to become more entrepreneurial. Big-hearted and big-minded Tim Baran of uMCLE talks about this killer app of a personality trait. Over at Wired GC, John Wallbillich explains how law firms need to look at their business models right now, before it's too late.

Client says what?

You can tell from the title of this blog that it's supposed to be focused on clients. Similarly, Dan Hull's ecletic and passionate What About Clients? reminds us to always ask that question (except when it's called "What About Paris?"; I haven't figured that out). The current post (by Holden Oliver) admonishes lawyers to get over themselves and act like professionals ... focused on clients. Likewise, the always-inspiring Carolyn Elefant tells us at My Shingle to see our clients as our new partners, and she does it convincingly without irony or cliché.

Also sidestepping the dangers of an overused phrase, change agent and quixotic Toronto Blue Jays fan Jordan Furlong explains at Law 21 what it really means to be a "trusted advisor." Jordan makes the fourth prediction: that lawyers will be competing with other service providers for clients' dollars (even Canadian ones), and that our lawyerly sense of service and trustworthiness will be competitive advantages.

Over at Legal Ease Blog, Allison Shields warns lawyers to be specific, meaningful, and realistic in setting goals for the new year. Heather Milligan at Legal Watercooler advocates a daily resolution for marketing over a yearly one. And the musically clever Jared Correia over at Mass. LOMAP instructs lawyers to resolve to maintain client contact. It sounds so simple, and yet we all end up letting it slip.

Benched

This past year has been brutal on associates at firms big and small, with nearly 5,000 reported layoffs. Law Shucks has done an incredible job of basically becoming the National Bureau of Economic Research (in a good way) when it comes to law firms, who are usually stingy with their information. Fifth prediction: Law Shucks will become the new NALP (also in a good way). And here's what the incomparable Elie Mystal at Above the Law has to say about the old NALP:

I don’t know. Increasingly, I’m of the belief that the old system just needs to be blown up and a new one should be built from scratch. How can a firm make a realistic hiring decision nearly two years in advance based on one year of law school? How can a law student make an informed choice when firms straight-up lie to them?

Elie is a wise, funny man. And speaking of funny men and making realistic hiring decisions years in advance, how's NBC's 2004 decision to hire Conan O'Brien to host "The Tonight Show" in five years look now? Does the word "d'oh" mean anything to you? Here's some advice, for TV networks and law firms alike: hire people when you need them, not when you think you might need them in a few years.

All these layoffs have had many unforeseen consquences, such as diminishing participation in lawyers' sports leagues. The Am Law Daily reports that some basketball and softball leagues are down as much as 30 percent since last year. Sixth prediction: Participation in laid-off lawyers' leagues will continue to rise.

Don't weep too much for laid-off associates. As Larry Ribstein at Ideoblog writes, lawyers are paid too much. They're also paid too little.

Don't say "pursuant to"

If we're looking into reinventing the legal business, we should spend some time rethinking how we write. Lawyers use words like carpenters use hammers and nails. Except that they tend to use too many nails, and the nails are often fancy, overpriced, weak, feckless, and pompous (OK, maybe I went too far with the nail metaphor at "pompous"). Mister Thorne at Set in Style explains how lawyers are authors, and like all authors, need editors. If you care about writing, you should be reading Mister Thorne. (I swear he's the only person I call "Mister.") Over at Feminist Law Professors, Ann Bartow offers some hysterical media examples of why every writer needs a good editor. ("I never thought to look in the sandwich.") Meanwhile, The Namby-Pamby, Attorney at Law, shows that even potty-mouthed plain English is better and more readable than legalese. It's an important lesson, motherf@*&!%.

Social (media) security

It used to be that lawyers just had to write briefs, memos, and letters. Then in the nineties (the ironic ones, not the gay ones), lawyers started writing emails. Now, social media has opened up a whole new world of words for lawyers. And pictures and videos too. But lawyers are conservative, wedded to tradition and bound by precedent. Turns out that lawyers have been a little slow in embracing Web 2.0. Award-winning blogger Robert Ambrogi notes at Legal Blog Watch that only 29 of the Am Law 100 firms have vaguely active Twitter accounts, and only nine of them tweet regularly. Seventh prediction: Law firms will be dragged kicking and screaming into Twitterville. Not being on Twitter in the tens will be like not being in Martindale-Hubbell in the nineties (ironic ones). And still being in Martindale in the tens will be like being booked as a guest on "The Jay Leno Show" ... at ten o'clock. (Actually, the new Martindale is really LinkedIn, where you absolutely have to be, with a complete profile and headshot. Do it now. I'll wait. Mine's here.)

Molly DiBianca at Delaware Employment Law Blog lists her three principles for being a good social-media citizen: community, conversation, and transparency. Similarly, pioneering Twitter interviewer Lance Godard of 22 Tweets says that social media is all about connecting, contributing, and community. Check out his slideshow on social media here.

The brilliant Michelle Golden at Golden Practices wants to make sure that we're not turning people off with negative postings and status updates. Stephen Seckler at Counsel to Counsel advises that social media has to be a part of a firm's marketing plan. He's right. But Twittering lawyer extraordinaire Adrian Dayton at Marketing Strategy and the Law warns that Twitter is not a game to see who can get the most followers; they have no cash value. If they did, Adrian would be one of the wealthiest lawyers on Twitter.

The blawgerati

Lawyers have been somewhat more social-media savvy when it comes to blawgs, as you can see from all these excellent links. Besides Blawg Review, there are many other sources for aggregated links. The Brits are trying their own new version of Blawg Review with UK Lawyers Blog of Blogs, with the first edition hosted by Michael Scuff (see above). The ABA has a good collection (by Joshua Poje) with the Practice Management Advisors blog roundup. Blogging in-house lawyer Colin Samuels has what he calls "A Round Tuit" at Infamy or Praise. A terrific link collector, Colin is also a "sherpa" for Blawg Review. Walter Olson at Overlawyered, the original law blogger (since 1999, which makes him the Homer — as in Odyssey, not Simpson — of law blogging), always has a great roundup of legal news that will often make you spit-take your coffee.

Lawyers can provide a great clearinghouse for information. Conveniently named Ernie the Attorney (what would his parents have called him if he had been destined to be a plumber?) has a terrific post telling us his favorite sources for information.

Of course, not all law blogs are created equal. Social-media-for-lawyers guru Kevin O'Keefe, who writes Real Lawyers Have Blogs, takes issue with the so-called blogs that West Publishing–owned FindLaw puts out. As Kevin shows, these are not real blogs posts, but rather search-engine-optimized ads for its lawyer-directory service posing as actual content. In an indirectly related story, knowledge-management expert Greg Lambert of 3 Geeks and a Law Blog reports on how West has laid off a third of its law-library-relations team. Eighth prediction: The traditional providers of legal information — now freely available on the Web — are headed the way of the billable hour: West, Lexis, Martindale-Hubbell, and others. Their time has passed. They could save themselves if they could get ahead of this wave, but like newspapers and video stores, they're showing no sign of doing so. Already, Google is starting to make free online legal research available. Rick Georges over at Futurelawyer argues that law-book publishers are in the same kind of danger from e-books. Bruce MacEwen, who writes the always-excellent Adam Smith, Esq., boldly predicts which industries will survive the digitalization of the tens before making his Cassandran warning for our little industry.

There's an app for that (of course)

Soon it won't be enough for lawyers and law firms to have a website, a blog, a Twitter presence, a LinkedIn listing, and maybe a Facebook fan page. You're also going to have your own iPhone app. Jeff Richardson at iPhone J.D. shows how a couple of firms are already doing it. At last week's Consumer Electronics Show, according to tech blog Cult of Mac, a panel said that businesses must have a mobile app or "they don't exist." As for the iPhone itself, Enrico Schaefer at The Greatest American Lawyer has just gotten his own, and is declaring the BlackBerry platform dead for lawyers.

Gerry Riskin at Amazing Firms, Amazing Practices wonders whether we'll soon be delivering our marketing materials on a slatelike device. The video, which is a prototype demonstration of a fake but awesome slate, is worth a look ... at least until two weeks from now, when Steve Jobs (as rumored) introduces the Apple slate. Ninth prediction: He will, and it will completely change the way we interact with media.

R-E-S-P-E- ... aw, you can spell it yourself

One final thought, and then a final prediction. There is a theme in many of these posts, and while it's not always explicit, it's found in the best advice of these wonderful blawgers. It's this: treat people with respect. Respect for a client that goes with giving them an agreed-upon price — not a rate — before the work is done. Respect for different types of clients and what their needs are. Respect for associates to whom you promised jobs. Respect for readers of your written words, who have limited time and attention to devote to what you have to say. Respect for members of the social-media community that we're increasingly becoming a part of. And respect for people who are adapting to the forces of change in the new decade.

My last link is to our sister blog, Gruntled Employees, which discusses an interview with an airline executive who understood about respect: "If you treat me with respect, I'll do more for you." Seems like a fair trade.

And our last prediction, giving us ten for the tens: The Red Sox will win the 2010 World Series. They might have gotten a little weaker offensively, but it's a cardinal law of baseball that pitching and defense win championships.

Enjoy all these posts. Shepherd out.

• • •

Blawg Review has information about next week's host, and instructions how to get your blawg posts reviewed in upcoming issues.

Why lawyers can't win the Cy Young Award

There is an active major-league pitcher with a career win-loss record of 59-68, and he is a mortal lock for the Hall of Fame. Now, if you're a real baseball fan, you immediately realized that I must be talking about a relief pitcher, and probably a closer. And you'd be right. Trevor Hoffman, the closer for the Milwaukee Brewers, has 591 saves to go with that seemingly unimpressive W-L record, more than anyone in major-league history.

You see, wins are a useless statistic for a relief pitcher. Whether a relief pitcher wins or loses the game often depends on what other players (on either team) do. In fact, it's possible for a relief pitcher to win a game without throwing a single pitch. (This has happened 15 times since 1957, according to the hardball geniuses at Baseball-Reference.com. The scenario involves throwing out a baserunner to end an inning, having your team take the lead immediately after, and then getting relieved by someone else.)

The win-loss record for starters is a more-useful statistic, but it is still seriously flawed. For example, on October 2, Adam Wainwright was denied a chance to be the Majors' only 20-game winner in 2009 when the St. Louis bullpen imploded. He pitched six strong innings, striking out eight and allowing just one run. Then the first two batters reached in the seventh. The playoffs were around the corner and Wainwright had already thrown 90 pitches. So manager Tony La Russa (a lawyer, by the way) replaced him with Kyle McClellan, who promptly allowed Wainwright's two runners to score and let in four more of his own. As a result, Wainwright finished with 19 wins, which probably cost him the National League Cy Young Award. It wasn't his fault that he didn't get that twentieth win, still considered a magic number.

What is unusual is that both Cy Young winners announced last week had even fewer wins than Wainwright. Kansas City's Zack Greinke won with just 16 wins, and Wainwright's teammate Tim Lincecum won with 15 wins, the lowest win total ever (for a starter in a nonstrike year). In Sunday's New York Times, Tyler Kepner discusses this novelty in a piece called "A New Generation of Statistics Redefines Baseball." (Actually, the article appears online with a different title: "Not Your Grandfather’s Stats: Baseball Redefined.") Kepner makes the point that the sportswriters who vote for the awards are becoming savvier about which statistics are better indicators of a player's performance. Win totals have long dominated the Cy Young voting, and Kepner and ESPN.com's Rob Neyer point out that Wainwright would have beaten Lincecum if the Cardinals bullpen had held on to get him his twentieth.

Kepner compares the 1990 seasons of Roger Clemens and Bob Welch. Clemens pitched substantially better according to the more-meaningful statistics: many more strikeouts, fewer walks, far fewer home runs, fewer baserunners per inning pitched, much lower OPS against (that's opponents' on-base percentage plus slugging percentage, for you nonseamheads). But Welch won 27 games, six more than Clemens, and thus won the American League Cy Young Award.

The point here is that if you're going to measure performance, measure the things that matter most. (Brace yourself for the segue to law firms.)

So how do law firms measure associates? By the number of hours they bill, of course. Oh, sure, they have evaluations, and 360-degree reviews (whatever that means), and other methods of assessing performance. But the one number that matters — the win totals for associates, if you will — is hours billed for the year. (If this were baseball, we'd call it "HB." Of course the Times would call it "H.B." with the periods, just like they write "E.R.A." and "R.B.I." That bugs me.) This metric is so important that many BigLaw firms have a threshold: if you don't bill 1,850 hours, no bonus for you.

[It's worth noting that unlike baseball teams, law firms usually don't pay their associates based on performance. At least at the larger firms, they pay their associates (in lockstep) based on years of service. Under that system, Alex Rodriguez (who debuted in 1994 — call him a 16th-year associate) should get less than Cliff Floyd (who debuted a year earlier). Of course, the Yankees paid A-Rod $33 million for 2009, while the Padres paid Floyd a mere $750,000.]

And what's the most important measurement for the firms themselves? Profits per partner. This is how they keep score, with the numbers voluntarily reported and shared with The American Lawyer. (Why law firms, which are all privately held, would share their profit numbers is beyond me.)

But how do these "win totals" — HB and PPP — measure real performance? In other words, the performance that the clients care about. I submit to you that like relief wins, they don't.

It's difficult to measure performance when you're talking about professional services. Lawyers aren't playing baseball. But it's not impossible. Value-pricing guru Ron Baker has an entire book devoted to key predictive indicators, or KPIs: Measure What Matters to Customers: Using Key Predictive Indicators. In it, Ron talks about the sort of KPIs that law firms could use, such as turnaround time (which is basically the opposite of billable hours, if you think about it), innovation sales (selling new services), customer loyalty (retention rates), share of customer wallet, and others. You could learn a lot about how to run your law firm better — buy it here.

Lawyers: stop worrying about relief wins, and start measuring what actually matters to your customers.

[Update: Ed Kless, who comments below, has a great sidebar in Ron's book that discusses the topic of using the right stats in baseball. A must read.]

Glengarry Glen Ross, LLP?

My brother Bill Shepherd is a world-class salesperson. Literally. He has sold many millions of dollars of services and products all over the world. (Fans of our sister blog, Gruntled Employees, will remember Bill from "Of sticker shock and empathy," which describes his near-death experience — my wedding).

Bill and I often talk about business — at least when we're not talking about the Red Sox. He often has terrific ideas on how I can further grow my law firm's business. Many of them are about running the firm more like a business than like a law firm — which is something I've consistently tried to do over the past eleven years.

One of his suggestions was to do what most businesses do to stimulate sales: hire salespeople. That's an idea that makes a lot of sense. But there's a major problem. Salespeople are generally paid on a commission basis. Rule 5.4 ("Professional Independence of a Lawyer") of the Model Rules of Professional Conduct (which govern the conduct of lawyers in almost every state) mandates that

A lawyer or law firm shall not share legal fees with a nonlawyer ….

(There are four exceptions, which aren't relevant to our discussion; they have to do with dead lawyers and things — call Haley Joel Osment). Bottom line: you can't pay commissions to nonlawyer salespeople. So that idea's a bust.

Or is it?

If you can't pay commissions to nonlawyer salespeople, what about paying commissions to lawyer salespeople? Saleslawyers, if you will. (You would never call them that, of course. They would be business-development attorneys, or something.)

As our friends over at the incredibly well-written, popular, and snarky blawg Above the Law have chronicled, it has been a tough year for associates at large law firms. (See their joint project with Law Shucks: the Layoff Tracker.) There have been more than 5,000 associates laid off by major US law firms since the beginning of last year.

What percentage of the 5,000 laid-off associates would have the aptitude and desire to be commissioned saleslawyers? They would still be lawyers, of course. But their focus would be on selling their firms' services to prospective clients. They would get valuable experience interacting with clients and learning about their firms' practices, but they wouldn't have to worry about billable-hour requirements and office memoranda. And if they were good at their jobs, they could make a bunch of money.

What do you think? Too Willie Loman? Too Alec Baldwin in Glengarry Glen Ross — "Always Be Closing"? (Warning: Alec Baldwin had a NSFW vocabulary even back then.) Too unlawyerly?

I particularly want to hear from associates, especially laid-off ones. Could you see yourself working as a business-development attorney? Put your thoughts in the comments below, or reach out to me with an @reply or DM on twitter at @jayshep.

• • •

By the way, just how popular is Above the Law? Well, last Thursday, ATL ran a seven-word blurb in its daily "Non sequiturs" post that included a link to this blog. Those seven words plus a link caused Client Revolution traffic over the next two days to increase by 2,300 percent. Yowza. Thanks, guys!

Are your associates working?

When I talk to other lawyers about our law firm's business model, their reactions range from envious to incredulous. No, we haven't billed an hour since 2006, I tell them. OK, fine, they say. But don't you internally (they sometimes say "secretly") keep track of your associates' hours?

No, I tell them.

Then comes the look on their faces like I'm an idiot or a rube or a naif. Often they wait a moment to see if I wink or otherwise let them know that I'm joking. Once they see that I'm serious, they almost always ask this question:

"Then how do you know if your associates are working?"

I lean in, like I'm going to let them in on my secret formula.

"By managing them."

This is the point where they usually wander off, muttering and shaking their heads.

Seeing a timesheet with a figure like 8.4 hours on it at the end of the day doesn't tell me that an associate has been working. And it certainly doesn't tell me anything about their work. What law firms have done over the past three generations is replace the need to manage associates with an overly simple reliance on hours billed.

A law-firm partner — a manager — has to do more than look at a number on a timesheet to actually manage his or her associates. The partner has to know what the associate is working on, and how it's going, and if he or she needs any guidance. A number on a sheet doesn't tell you this.

If you want to know whether your associates are working, you have to manage them. A timesheet can't manage anything.

What if the Apple Store billed by the hour?

A few weeks ago, I was out to dinner with my wife and girls. Nearby was an Apple Store, so while we waited, I scurried over for a quick purchase. I needed to get a new antiglare plastic sheet for my iPhone. Not for the glare, mind you; the screen protector does a great job at repelling fingerprints and other smudges. (Here’s a link.)

Keep in mind, I was going to buy what is probably the least expensive item in the Apple Store.

So I get to the store and I make my way over to the iPhone accessories (there are about six million of them). I grab a screen protector and take a moment to see if there’s anything else I need (need being a vague term here). A store representative, Anil (or it could have been Pete or Algernon; I don’t remember the names, so I’m inventing them. It’s dramatic license, so deal with it) comes over and asks me if I need any help. Not in a hovering, vulturelike salesperson way, but in a I’m-here-to-help way.

“No,” I say, holding up my screen protector and my iPhone. “I just needed to get this.”

“Great. But that particular protector is for the original iPhone. You have an iPhone 3G. You need this one.”

He’s right, of course. I switch protectors with the one he hands me. He then leads me over to Angelina (license again), who has more visible piercings than I have teeth. You don’t notice them so much on account of the neck tattoo.

Angelina takes my credit card and quickly rings me up on her little handheld device. She asks me if I had found everything I needed, and I confirm that I did. She makes pleasant chitchat, which I have trouble following because of all the body-modification stuff.

“Do you want help putting that on?” she asks, pointing to the screen protector. Now if you’ve ever tried to put an adhesive sheet of plastic onto a piece of glass, it’s tricky. If you stick it too early, you end up misaligned and, well, stuck.

“Sure.”

Angelina calls over Pam, telling me that Pam’s the best screen-protector sticker-onner. She also has fewer piercings.

Pam brings me over to another table. She takes my iPhone and gently and carefully cleans the glass face. Then, with the movements of a nimble surgeon (license, or just plain-old hyperbole), she peels the backing off the protector and lines it up, lowering it to about a millimeter above the glass. Then — and this is the cool part — she just drops it that last millimeter. The protector floats down and lands evenly on the screen. Pam then takes a card and squeegees the protector so that no bubbles can form. And that’s it. My screen protector is perfectly installed, my receipt’s being emailed to me, and the whole process took about six minutes. I return to my family just in time to sit down and order dinner.

So to recap: three Apple Store team members waited on me, all working together to make the smallest posible Apple Store sale. No one cross-sold me anything. I didn’t get snookered into a new Apple Cinema Display or a new MacBook Air. Three employees: $14.95 in sales revenue.

Now what if the Apple Store was run like a law firm? What if the Apple Store billed by the hour?

First of all, Anil, Angelina, and Pam would all use timesheets to keep track of the work they do each day. They would be required to divide up and account for their time in tenth-of-an-hour increments. I only spent about six minutes in the store, but each one of them would have to put down his or her interaction with me. Since six minutes is the smallest amount possible, each would record a “0.1” on that day’s timesheet.

Anil would write, “Conference with client in regards to optimal protection for said client’s iPhone 3G screen, to wit: a screen protector. Referral to Angelina for point-of-sale transaction … 0.1 hours.”

Angelina: “Conference with client in regards to point-of-sale transaction for one (1) screen protector for said client’s iPhone 3G (three G). Discussion in regards to additional products needed for purchase. Referral to Pam for screen-protector installation … 0.1 hours.”

And Pam: “Conference with client in regards to installation of iPhone screen protector. Cleaning and maintenance of said client’s said iPhone screen. Further conference with client in regards to having a nice evening … 0.1 hours.”

But in reality, law-firm clients resist double (or triple) billing by multiple lawyers. So firms often have to write down the time of other lawyers. In this scenario, two of the Apple team members would have had their time cut. Since only Angelina actually generated revenue (by swiping my credit card), Anil and Pam’s time would have been cut. This is ironic, since Anil (by helping me get the right protector) and Pam (by affixing it) gave me the most value.

Of course, law firms want their associates to bill as much time as possible, and they discourage nonbillable time. So if the Apple Store were run like a law firm, Anil and Pam would have been discouraged from such “nonbillable” work as helping me choose or affix an inexpensive screen protector, in favor of “billable” work like selling a new Mac Pro. If the Apple Store employees focused on selling billable hours, they wouldn’t be wasting time helping customers with little things like this.

But then again, if that had been the case, maybe I wouldn’t have returned to an Apple Store a few weeks later to buy the $2,500 MacBook Air that I’m writing this post on.

In law firms where lawyers are measured by the hours they bill, they are effectively punished for nonbillable time spent helping clients. Which is why people love going to the Apple Store, and hate dealing with lawyers.

• • •

A coda to this story: This afternoon, after this post was mostly written, I went to the Chestnut Hill (Mass.) Apple Store to buy a conversion cord (USB to Ethernet) for the aforementioned MacBook Air. Anthony Radzicki, an Apple Store “business partner,” greeted me and offered to get the cable. In chatting with him, I happened to mention that I bought my Air about three weeks before last week’s Apple Worldwide Developers Conference. At the WWDC, to my chagrin, Apple had announced a $800 price cut on the Air I had just bought. My purchase was a few days too early to qualify for the discount.

“Let me see what I can do,” Anthony said.

And here I was just making small talk. I had resigned myself to unlucky bad timing; I hadn’t been asking for an exception.

A short while later, Anthony had rerun my MacBook Air purchase with the $800 discount. Wow. All I can say is “wow.”

Here’s a guy who’s worked there for three years, loves his job, and excels at helping people. To be sure, his help took $600 out of Apple’s sales revenue today (I bought a few more things I wouldn’t have bought). But the bottom line is that I spend thousands of dollars with Apple each year. (Our whole law firm is on Macs and iPhones.) In the long run, Anthony’s help will encourage me to spend thousands more in the future.

If Anthony billed by the hour, this never would have happened.

Lexis, coffee filters, and associates: law firms' overhead

My law firm pays the same amount for LexisNexis online research every month. For a fixed price, we get unlimited access to the caselaw and statutes that we use in our practice. Now don’t get me started on the absurdity of paying money for free, public-domain, governmental content; that’s a topic for a different post. Instead, let’s talk about how we handle this expense.

Unlike many firms, we don’t pass this cost along to our clients. For one thing, it’s impractical to do so. Who wants to bother with dividing up the total monthly nut for all our Lexis research and then apportioning it by client? What if we reuse research originally done for one client in another client’s case? Who pays?

Who cares?

Online research is overhead. It’s the cost of doing business as a modern law firm. We don’t apportion our rent, insurance, taxes, coffee, or legal pads (actually, who even uses legal-sized legal pads anymore — it’s an eight-and-a-half-by-eleven world, kids). Yes, it’s possible that in a month where we do a ton of research for one massive case and an unusually small amount of research for all our other cases, it could seem fair and appropriate to have the research-heavy client bear the expense of the legal research. But why would we? Again: I’m not going to have that client pay its “fair share” of rent for that month. So why is online research different?

It’s not as if my online-research expenses go up as a result of this heavier usage. As I mentioned, I negotiated a fixed fee with LexisNexis. (And your firm should, too, unless you’re too ill informed to understand the value of your monthly legal research. In which case, get better informed.) If I do a ton more research in June than in May, my expense isn’t going to go up. So why should I bother to “pass along” (or worse, pass along and mark up) these costs to the client. Overhead is overhead.

My costs are my costs. They don’t change much month to month. I pay our rent, payroll, insurance, taxes, fees, supply costs, and so forth every month, and it comes out about the same each time. This is the cost of doing business, and as long as we can bring in enough revenue to cover it, then we’ll remain in business.

Which brings me to associates and their time.

Why do law firms feel the need to “pass along” the cost of the associates? How are associates any different from LexisNexis or coffee filters or photocopy toner? Most law firms pay their associates an annual salary, divided up into monthly, semimonthly, or biweekly pay periods. As with LexisNexis, insurance, and coffee filters, the firm knows what its monthly payroll nut is going to be. Whether they work harder or less hard, for one client or fifteen clients, the associates’ pay isn’t going to change from month to month. The law firm’s cost isn’t going to change either. So why feel the need to apportion this cost to clients?

Associates are overhead. Just like coffee filters.

(Partners are too, but that gets more complicated. Let’s stick with associates for now. And coffee filters.)

Law firms don’t apportion and pass along their rent, insurance, taxes, coffee-filter expenses, or fancy-artwork costs to clients. Why not? Because it’s all overhead, and clients wouldn’t tolerate it. Send a client a bill for some portion of your month’s rent and see what kind of reaction you get. You’ll have clients marching in with rulers and floor plans to make sure they’re not getting ripped off. (That’s not actually true; the clients would simply fire you.)

So why do they tolerate it with associates’ time? Habit. And a sense that they have no other choice.

Now folks at other law firms will whine that they need to know how profitable an associate’s work is, and how profitable a particular matter or client is. Without tracking and billing for time, they can’t possibly tell.

Nonsense. Take an accounting class. Profit is revenue minus expenses. The question is whether the firm is profitable, not whether an associate or a client is profitable. The relevant question for a client is whether you’re delivering enough value to the client to justify the best price they would pay. The relevant question for an associate is whether he or she does good work for your clients.

The whining continues: But if we don’t track associates’ time, how do we know if they’re working?

After your accounting class, take a management class. You know by managing your associates.

Bottom line: Overhead is overhead. Clients don’t want to pay for overhead.

They want to pay for value.

What AIG bonuses and BigLaw associate salaries have in common

Like many of you, I almost choked on my pancakes when I read the lead story of The New York Times this morning: “At A.I.G., Huge Bonuses After $170 Billion Bailout.” (Why does the Times put periods in all its abbreviations? It seems a waste of I.N.K.) Turns out that AIG is paying $165,000,000 in bonuses to 400 executives in its financial-products unit. (The Times also forgot that hyphen. Maybe it couldn’t afford it after the superfluous periods.) Where have we heard about that unit before? Oh, yeah: they’re the folks who drove the world’s largest insurer off a cliff by writing trillions of dollars of credit-default swaps, leading to a massive federal-government bailout paid for by you and me. The United States now owns 80% of the company.

Naturally, AIG felt the need to defend the bonuses. First they lawyered up and claimed that the bonuses couldn’t be legally cancelled. As if. (Trust me: good lawyers could get them out of it if they wanted.) Then, in a letter to Treasury Secretary Timothy Geithner, AIG Chairman Edward Liddy sings a different chorus to explain why they needed to pay the bonuses:

We cannot attract and retain the best and the brightest talent to lead and staff the A.I.G. businesses — which are now being operated principally on behalf of American taxpayers — if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury.

(I particularly like the line about how we're doing this for you, America.) It seems too obvious to mention that the folks running the show at AIG’s financial-products unit probably weren’t the best or the brightest, given how disastrously they screwed things up. But what struck me the most about Liddy’s wheedling was that I have heard this reasoning before in an industry I know a bit more about.

That’s right: law firms. Time and time again, when the clients of large law firms complain about the $160,000 starting salaries of first-year associates, the law firms sing the same tune as AIG: they need to pay fantastic money to zygote lawyers to attract “the best and the brightest.” And when a firm’s competitors see that, they all march in lockstep. Which is fine, until the economy collapses and the model fails. (See “Expensive associates threatening big-firm model.”)

The bottom line is that companies should pay for value, rather than throwing demented amounts of money at people who aren’t worth it, figuring that the money will never run out. Sooner or later, when you have a broken business model, the money will run out.

Expensive associates threatening big-firm model

In the recent past, large law firms could justify skyrocketing salaries for incoming associates by passing the costs along to their clients. But with the economy in shambles, clients are finally starting to say no. And this has put the economic model of large law firms in grave danger.

So says the Boston Business Journal's excellent Lisa van der Pool in her article, "When the dust settles: Surveying changes to the legal landscape." Writes Lisa:

Change is coming to law firms. In the wake of attorney and staff layoffs in recent weeks, the relentless call among clients to slash billing rates, and the sharpened focus on the ballooning salaries for young associates who begin their highly paid gigs with zero experience handling legal matters, change is inevitable.

Tweaks to the model will likely include smaller summer associate class sizes, flexible hourly billing rates and even lower compensation for young lawyers who are still cutting their teeth and don’t deserve their inflated first-year salaries, according to experts.

These experts then play a dirge for the large law firms' economic model. (OK, truth be told: it's me playing the dirge — but others join in.):

"The law firm model that we’ve been using is not going to keep working,” said Jay Shepherd, founder of Boston-based law firm Shepherd Law Group PC. “(The economy) is going to expedite change in the law firm model. I think without the recession, the change would have taken longer to come. We’re seeing a number of industries where the models don’t work anymore: airlines, recording studios, newspapers — and large law firms.”

While the article focuses on one of the problems — that of insane salaries for inexperienced junior associates — the real problem is more rudimentary. The legacy economic model at traditional law firms is based on cost-plus pricing. The firms charge their clients a price based on the law firms' costs plus a desired profit. Under this system, there is no incentive for the firms to lower their own costs (and by extension, their clients' fees). And this works fine (for the firms, that is), so long as the clients are willing and able to pay. But recessions have a tendency to smoke out one-sided pricing models. (For more on cost-plus pricing, see "Clients of the world, unite!")

Bottom line: High associate salaries are just a symptom of the greater problem. The big issue is not overpaid associates. Nor is it hourly billing versus "alternative billing." It's about law firms' interests being aligned with their clients' interests, which cannot happen under a cost-plus system like hourly billing.

The Revolution is coming. And the recession is speeding it up.