The Client Revolution

On Michael Jackson, the media, and law firms

I learned about Michael Jackson's death yesterday on Twitter about an hour before CNN reported it.

I use TweetDeck on my Mac, and one of the columns I keep open is TwitScoop, which flashes Twitter's hottest topics and newly trending items. The trending words and phrases literally grow in size with their increasing popularity. As I watched late yesterday afternoon (at 5:36 p.m. EDT — click image on the right to magnify), I started to see "Michael Jackson," "MJ," "hospital," and "died." Pretty soon, that's all anyone was tweeting about. CNN and other traditional newsmedia websites had nothing. As I said, it took a full hour before the networks "confirmed" his death.

There will be many stories written about this new phenomenon of news dissemination; that the story first broke on a blog (TMZ.com — click image on the left to magnify) and was tweeted around the world at lIghtspeed; and that the old media couldn't compete with the new social media. Digital-journalism guru Jeff Jarvis is already the leader in the clubhouse with his post, "The King of Twitter." (I'm a big fan of Jeff and his book, What Would Google Do? See my earlier post covering it.) Here is the money quote from Jeff's piece:

If the Iraq War was the birth of CNN could Iran and Jackson mark the start of their decline in influence?

Jeff answers his own question, "Too soon to say." But he follows this up with what I find to be a more important conclusion:

Journalists end up playing new roles in the news ecosystem.

To that I would add the qualifier successful. Successful journalists and media organizations will play a new role, but many will shuffle off into oblivion, carping about the death of newsprint.

Now don't get me wrong: I love newspapers. My brother-in-law and sister-in-law have been print journalists. I get two newspapers each day: The Boston Globe seven days a week, The Wall Street Journal six days, and The New York Times on Sunday. A few weeks ago, I was quoted for the first time in a Journal article about a noncompete case I litigated. I read the story online the night before, but it wasn't real for me until I saw it in print. But I suspect that that's just a generational thing, and my millennial colleagues wouldn't have had that same reaction.

But no one will deny that newspapers are in serious trouble. The old model doesn't work anymore. Fewer people will accept the rising subscription costs for something that they can read online on their iPhones and not have to worry about recycling.

This brings us to one of the central themes of The Client Revolution:

A business model succeeds, and then the world changes. The most successful players under the old model resist the change, and then the old model gets replaced.

In this blog, we talk mostly about the guild model of law firms with their anticlient legacy systems like hourly billing, lockstep salaries, and legalese. But we're seeing it in many other industries, where market dominators with previously successful business models are slipping away as the world changes out from under them. Newspapers, television networks, record companies, American automobile manufacturers, real-estate agencies, video stores, airlines … and, yes, law firms.

Management über-guru Peter Drucker had this to say about how successful companies greet innovation:

Market domination tends to lull the leader to sleep; monopolists flounder on their own complacency rather than on public opposition. Market domination produces tremendous internal resistance against any innovation and thus makes adaptation to change dangerously difficult.

The story of Michael Jackson's death will inform on the need for newspapers and cable-news companies to change — and fast — before being made irrelevant by blogs and Twitter and other forms of Media 2.0. The newspaper model succeeded for more than a century, but it might not survive this decade. The CNN model took off during the first Gulf War, but its demise may be reported alongside stories of the Iranian elections and the death of Michael Jackson.

Even Michael Jackson himself could be a case study. He released the most successful album in history, with twice as many copies sold as the runner-up. Pundits explained his unmatched (and unmatchable) commercial success with his ability to appeal to audiences black and white, male and female, American and international; he was the first real "crossover" star. His success led the way for countless other artists to broaden their appeal. He changed the music business.

But he released Thriller nearly 27 years ago. He enjoyed incredible success, but then the world changed, and he never reinvented himself, and his leadership was gradually replaced with nostalgia. He released just four more albums with declining sales figures. Unlike other artists who were able to reinvent themselves over time to maintain their success — the Beatles and Madonna come to mind — Michael Jackson did not. (None of this is intended as serious music criticism. "Paul, I think I told you, I'm a lawyer, not a fighter.")

Reinventing a successful business model is very difficult. It will be hard for the newsmedia. It will be hard for law firms, especially the ones that have been so successful.

But their futures depend on it.

How Ed McMahon taught me to be a lawyer

Ed McMahon died yesterday at 86. The thousands of articles about his death and his life will refer to him as a “second banana” or “sidekick,” will cite his catchphrase “Heeeeeeere’s Johnny!” and will touch upon the financial troubles that plagued the latter part of his life.

What they won’t do is talk about Ed McMahon as an author, who wrote a book that every law student and lawyer should read.

Turns out McMahon wrote a few books. The biographies (one inevitably entitled Here’s Johnny), of course, and a book called Ed McMahon’s Barside Companion (perhaps also inevitably). But the book I read was a slim volume (122 pages in paperback) published in 1986 called The Art of Public Speaking. It’s a gem, and it helped make me the lawyer I am today.

To many of us who watched McMahon on “The Tonight Show,” it seemed he had a pretty easy gig. Basically, his job was to introduce Johhny Carson (the classic “Here’s Johnny,” stretched out to three or four seconds), then sit on the couch as the foil for Carson’s bits, throwing in an occasional "You are correct, sir.” He was warm, avuncular (which by the way means unclelike, and nothing else), and familiar. (Many also don’t realize that he was a decorated Marine fighter pilot in World War II and Korea, retiring with the rank of colonel.) He probably got paid a decent amount to warm that couch.

But what many don’t realize was that he was a highly successful and sought-after public speaker. His natural ability led him to write this book, which is sadly out of print. You can find copies through Amazon, though.

In his book, McMahon reveals secrets of public speaking that every lawyer should learn. For example, he discusses the differences between written English and spoken English. He admonishes against writing out your speeches word for word, because — as he puts it — you should “write with your mouth.” Otherwise, you’re left translating your written speech into spoken English on the stage (or in the courtroom), and that’s very difficult to do.

He emphasizes brevity.

In fact, every chapter begins and ends with a suggestion of something to leave out of your speech (examples: self-deprecation about your speaking abilities, statistics, apologies, and long words).

He has other excellent tips for any speaker: Use pairs, repeated phrases, and the power of three. Use the active voice, vigorous words, and specific words. Leave out unnecessary words and phrases, tired terms (clichés), and redundancies. Stop decisively.

He also wrote the best advice I’ve ever read or heard on dealing with prespeech nerves. In fact, Chapter One is called “How to Turn Stage Fright into a Positive Force.” Believe it or not, McMahon got stage fright before every performance on "The Tonight Show." He writes:

If you exploit stage fright in a methodical way, you’ll give a better speech. First understand that stage fright isn’t something you’ll ever get rid of completely. I haven’t. Before every public appearance I feel the tension build; I have a sense of growing concentration; I feel myself rising to the occasion.… Forget about obliterating stage fright — your goal should be to help it give you greater awareness, higher concentration and a finer performance.

As a lawyer, I do a lot of public speaking. I give lectures and seminars, I run employee trainings, I appear in court. And after 15 years of doing this, I still feel nerves beforehand. And because of Ed McMahon’s little book, which I first read 23 years ago, I know that this is a good thing. Because it means that the adrenaline is flowing, and that I’m going to be up for the performance. Nowadays, the only time I get worried is if I don’t feel any nerves beforehand.

So for those of you law students and lawyers who aren’t comfortable with public speaking: “Heeeeeeeere’s Ed.”

Note While the book is out of print, you can find it through Amazon here.

Whose price is it anyway?

Think about it: Have you ever gone into a shopping mall and found a storekeeper asking you what something was worth?

"I'll take this one," you say. "What do I owe you?"

"I don't really know, sir. There are a lot of variables. What do you think? How do you think we should price this?"

Absurd, right?

Yet in my many conversations about fixed-price lawyering and law-firm value, one question keeps coming up: Who should lead the way to fixing the broken system?

Law-firm lawyers say that change has to be initiated by the clients themselves, by in-house counsel. Tell us what you want, the firms plead. Tell us how you want us to bill you, and then we'll do it look into it. If you don't give us guidance, we'll just have to stick with hourly billing. It's what we're all used to anyway.

And these comments are usually met with bemused silence from the in-house counsel.

On the other hand, the clients are looking for the law firms to lead. We're not here to tell you how to run your business, they say. Make us an offer, and we'll consider it. But you need to go first.

And these comments are usually met with bemused silence from the outside lawyers.

The 25,000-member-strong Association of Corporate Counsel has taken a leadership role in the discussion, issuing its ambitious "Value Challenge" to the law firms who serve its in-house members. It's a good start, and they're doing a terrific job educating their members about what they can do to increase the value of their outside legal work.

But in the end, it has to be the law firms who must lead the change away from the legacy systems and guild mentality to a partnership based on trust and effectiveness.

I want to hear from you, law-firm lawyers and law-firm clients: Who do you think needs to make the first move? Who should propose a new model? Leave your thoughts in the comments, or send me an @message or direct message on Twitter: @jayshep. (Make sure you tell me which side you work on, firms or clients.)

And while you're at it, take this quick, single-question poll.

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.

A one-question test for your law firm

To figure out how good your lawyer is, give him or her the following test. It only has a single question, so it will only take about three seconds to administer. On the other hand, it will take considerably longer to answer. And it should.

Here it is:

Question One How much will this cost?

That’s it. Five words only, but it’s the whole ballgame. If your lawyer can’t correctly answer it, then you’ve got the wrong lawyer.

Now for the Teacher’s Guide:

• Every case, every matter, every job will have a different answer.
• The answer your lawyer gives you won’t necessarily be the same as the answer he or she gives another client.
• “It depends” is not an acceptable answer. Neither is “Well, there are variables ....”

One of the commonest complaints I hear from CFOs and general counsels is that law firms pitching their wares always talk about how good they are and how experienced they are. Unlike other vendors, they never talk about how they’re going to save the company money. That’s because the law-firm business model doesn’t provide a means for doing that. In the billable-hour system, costs are passed on to the client, meaning that there is no incentive to reduce them. Meaning that they won’t.

A fixed price avoids that problem, and requires the law firm to be efficient. But a fixed price also requires the law firm to know and understand the value of its services, something it can only do well if it really knows its business.

Many lawyers have insisted to me that you can’t put a fixed price on litigation. There are variables, they whinge. We can’t control the costs. What if the other side hits us with a bunch of discovery? What then?

What then indeed.

If your law firm knows its business well, then it should know the value of the service it provides. Hiding behind a fear of variable costs is an admission that you don’t really know your business. An airline doesn’t say “there are variables” when charging you for your ticket. And yet headwinds, storms, airport congestion, and overtime can dramatically increase the airline’s cost of a particular flight. But your ticket price won’t change after they sell it to you.

The Red Sox won’t say “there are variables” when selling you a ticket for tonight’s Yankees game. Yet Sox-Yankees games tend to be much longer than other games; plus it’s raining lightly with more weather expected. A longer game, especially one with rain delays, means increased costs for the Red Sox in wages, overtime, electricity costs, and so on. But your ticket price won’t change after they sell it to you.

The Red Sox know their business. The airline knows its business.

Does your law firm? Give it the one-question test.

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.

"A melancholy pall of diminished billable hours"

Great piece by Alan Feuer in Sunday's New York Times chronicling carnage at a major US law firm: "A Study in Why Major Law Firms Are Shrinking." It talks about how White & Case has had to lay off hundreds; close offices in Dresden, Milan, and Bangkok; and cut the budget for its "depressive" holiday party to a mere quarter million dollars (oh, the humanity!).

Big law firms run on a peculiar business model, where profits per partner seem more important than plain-old profits. According to the article, White & Cases's profit rose 7.7 percent last year to $1.6 billion. But the all-important law-firm metric — profits per partner — declined six percent to $1.6 million. So they fired nearly 600 people, including 279 lawyers. Makes perfect sense, right?

As in many pieces on the current troubles in BigLaw, the tendency is to place the blame on the economy and the failures of Wall Street. But as readers of The Client Revolution know well, I believe that the problem is more fundamental than that, and has more to do with a system that focuses on billing hours rather than delivering value to clients.

There are some great lines in Alan's article. My favorites:

• [T]he corridors of White & Case are quiet, the happy buzz of business having gradually been replaced by a melancholy pall of diminished billable hours.
• The gentleman’s profession of the law is becoming a vestige of the past, removed enough from reality to be remembered, like phone booths or fedoras.
• "You used to feel the intensity in the office,” said a longtime partner at a big New York litigation firm. “When people walked to the bathroom, they would actually scurry. Now it’s more of a stroll. For the first time in their lives, people feel sort of useless. All of a sudden, you can go to lunch for two and a half hours and really not be missed. It’s a blow to the ego. You’re talking about people who have never really failed.”

And the money quote:

• But the natural order of this world has been set on end by the economic crisis and the possible disappearance of fixtures like the pyramid system (under which associates are thrown en masse at certain cases, fattening the fees), and the billable hour itself (increasingly replaced by flat rates or retainers in a client’s market).

What do you think? Is it the economy, or is it the business model?

Read the whole article here.