The Client Revolution

Modest billing-rate increases? As if

If you see lawyers with their arms in slings, it's probably from too much patting themselves on their backs. According to a recent survey in the National Law Journal (subscription required), law firms raised their rates in 2011 by "only" 4.4 percent. The story now is that this is the third year of "modest" increases.

From the National Law Journal:

For the third year in a row, law firms showed restraint with hourly rate increases, inching up at a rate only slightly higher than inflation in many cases. The average firmwide billing rate, which combines partner and associate rates, increased by 4.4 percent during 2011, according to The National Law Journal's annual Billing survey. That followed on the heels of a 2.7 percent increase in 2010 and a 2.5 percent increase in 2009 — all of which paled in comparison to the go-go, pre­recession days when firms could charge between 6 and 8 percent more each year.

via www.law.com

But if you get out the trusty slide rule, you'll see that rates have gone up fully 10 percent since the start of 2009. That's 10 percent during a massive recession. How many clients out there feel like their legal services are worth 10 percent more than they were three years ago?

Many firms had record revenues this year, all the while paying lip service to clients' "being in the driver's seat now." Let's not get ahead of ourselves. Just because firms aren't raising rates by 8 percent doesn't mean that clients are now thrilled.

Alternative fees kill major law firm. Or not

One of the largest firms in the country, Howrey LLP, voted to dissolve itself yesterday. In an interview with The Wall Street Journal yesterday, the firm’s final CEO Bob Ruyak blamed Howrey’s demise on “alternative fees.” (You know how I feel about that ridiculous term.) He also blamed discovery vendors (those vicious law-firm assassins), impatient partners, and, of course, The Economy. Funnily enough, he failed to blame a creaky, outdated business model or, you know, himself for the collapse of the firm. But trust me when I tell you that the story going forward will be how those dastardly alternative fees killed Howrey dead.

As if.

I mean, give me a break. It’s not as if Howrey was on the cutting of edge of trying to get rid of the billable hour. In a nationwide survey by the National Law Journal showing larger firms’ use of so-called alternative billing, Howrey declined to participate. (See “The numbers behind the lip service: Part One.”) In an article on their own website, their Northern California managing partner Henry Bunsow whinged about how hard it was to do litigation without the billable hour, and doubting whether clients really wanted it:

Howrey bills about a third of its work with alternative fees and is trying to grow that number. But he said it is a somewhat difficult task because “in the highly important types of cases, [clients] probably don’t want a fixed fee arrangement.”



Bunsow’s observation is one echoed by many: Nonbillable-hour fee arrangements often cease to be effective in major litigation, especially in matters that go to trial.

(My emphasis.) Not exactly a revolutionary.

In a November 2010 article in The American Lawyer, “The Story Behind Howrey's Very Bad Year,” writer Julie Triedman explained the problems Howrey had in pricing its services:

Over the past couple of years, notes Ruyak, clients have insisted on more alternative billing agreements, success fees, and extended payment plans, making cash flow lumpier, financial reports more confusing, and projections less accurate. In 2008, some $35 million in contingency fees helped drive profits to record highs, but last year, notes Ruyak, the firm had negligible contingency revenue and was plagued by “poor pricing.” Last year’s dip “was a big swing,” Ruyak says. “I understand many partners’ psychological anxiety. But I can’t really do a whole lot about that.”

(Wow, way to channel your inner Shackleton.) Triedman also says that when Howrey was trying to tweak its old business model, “some experienced and independent advisers would have come in handy.”

In a May 2010 American Lawyer article, which discussed how fluctuations in Howrey’s contingency fees affected its bottom line, Ruyak conceded that they didn’t really know what they were doing:

Ruyak says that even with limits in place and years of experience with these types of billing arrangements, the firm is still in the process of “figuring out how to do them well.”

So we’re starting to see the real problem here. It’s not that “alternative fees” killed Howrey; it’s that Howrey didn’t know how to change their business model and price the knowledge that was their stock-in-trade. And you really can’t blame them. The billable-hour model was invented in 1919, and big firms like Howrey have known nothing else. As Triedman pointed out, some experienced advisers would have come in handy.

Let me put it to you another way: When I first played golf, I sucked at it. But I didn’t blame golf. And over the years, if I tried a different approach to my swing and it didn’t work well right away, I didn’t decide that the new approach was bad. Just that I hadn’t figured it out yet. (And never actually did.)

When it came to alternative fees, Howrey was a duffer.

Changing a hundred-year-old business model isn’t easy, but done right, it can work. And I’m here to help.

I take no pleasure in yet another BigLaw firm shutting down. A lot of excellent lawyers are now out of work. And changing the way you've always practiced is scary. But just because the change is scary and difficult doesn't mean you shouldn't do it.

If Howrey had learned how to price, it would be atop the Am Law 100 list today, instead of being its latest casualty.

What do you think? Do you think “alternative fees” killed Howrey? Or that video killed the radio star? Share your thoughts in the comments.

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Ruyak’s finger-pointing interview is unfortunately behind Rupert Murdoch’s paywall, but the ever-awesome Ashby Jones has kindly pulled back the curtain to show some of the better bits on the WSJ Law Blog. (See “CEO Ruyak Partly Blames Contingency-Fees, Discovery Vendors, for Howrey’s Fall” and “What Else Happened to Howrey? Here’s More From CEO Ruyak.”) And see the excellent continuing Howrey coverage over at one of my many other jobs, Above the Law.

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.

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

The final Client Revolution post

That's it. I'm shutting it down. The party's over. After a year and three days, the Revolution is complete. Turns out, it was easier than I thought.

How do I know? Well, I read it in The Wall Street Journal. Tuesday's paper reported that large-firm lawyers had figured out how to deliver value to their clients. The secret? You'll never guess.

Web 2.0.

I know. Ironic, isn't it. Lawyers, who have been so reluctant to put down their buggy whips and typewriters and powdered wigs, have now connected to the Interwebs to help their clients get more value for their legal spend. (Brief aside: when did spend become a noun? Answer: it didn't.)

Nathan Koppel, who's one of the Journal's excellent legal-beat writers and whose work I've mentioned here before, penned the article. The title and subtitle say it all: "Using web tools to control legal bills: Big law firms turn to technology to provide clients with real-time expenses, automate tasks." (The link appears to get you to the article despite the usual WSJ subscription firewall.) (Update: Naah, it appears that Rupert has strengthened the pay wall. You apparently need a subscription.) The premise is that law firms are "turning to technology" to help their clients see how freakin' expensive they are. In real time. On the Interwebs. Two-dot-oh, baby! Woo!

Woo, indeed. Koppel describes how one huge firm has made their costs transparent:

Foley & Lardner LLP, a firm with 1,000 lawyers and offices throughout the U.S., has developed a Web-based system designed to provide its attorneys and clients with a real-time and comprehensive picture of legal costs.

From their desktops, lawyers at the firm enter and continuously track the amount of attorney time and costs that have been incurred on a particular matter. Foley clients have direct access to the data through a secure Web site, which also provides access to court filings and correspondence.

Now don't get me wrong. Foley's a fine firm with some world-class lawyers. And I respect that they, like some other firms, are trying. I don't mean to pick on them, but they're the star of the article. And I'm sorry to say that they're missing the point. Cue the boldface message:

Clients don't care one whit about attorney time and costs. They care about the value the services have to them.

Koppel goes on to describe how this system lets the lawyers or the clients "crunch data" to see if the firm is using the right mix of associates and partners. Two points here: computers may be, as they say here in Boston, wickit smaht, but they can't possibly tell anyone what the proper mix of associates and partners on a given matter at a given time is. And second: again, clients don't give a rolling donut about that, as long as the job gets done on time, done well, and for a price that's less than or equal to the value the client places on it.

The system also "pings" lawyers with automatic email alerts when a case reaches certain budget levels. Whoa. Paging George Jetson: your flying car is double-parked. Guys, I've been getting "automatic email alerts" from bookstores and coffeehouses for years. This isn't exactly groundbreaking.

Here's the money quote, showing how law firms just don't get it:

Recently the firm could see a certain lawyer was spending more time than had been projected to complete one aspect of a business transaction. Foley alerted the client, a global manufacturer, and asked the company whether it had anyone in-house who could do the work.

Instead, an agreement was reached to have a law student then clerking at Foley handle the task at a "very favorable billing rate," Mr. Kalyvas says.

ZOMFG! All right, where do I start? First: a lawyer was spending too much time. Uh, dudes. Lawyers at big firms don't qualify for bonuses unless they bill a certain number of hours, usually in the 1,800–2,000 range for a year. So you're giving lawyers a financial incentive to bill more hours, then having the Interwebs ping them when they're billing too many. Hmmmm.

Next: asking the client, "Uh, you guys got anyone who can do this?" Imagine if you went to a hospital and the doctor's Web 2.0 system pinged her saying it was costing too much and so she asked you, "Uh, can you just take care of this at home?" Uncool, guys, uncool.

Finally: "We'll hand it off to Billy the 2L. And we'll give you a good rate. He doesn't know anything, but he's feisty!" Uh, no.

This fancy system, like similar systems at other firms, doesn't do jack for the problem of making sure that clients get value. Having a computer tell you that a case is getting expensive doesn't give the client the power to do anything about it, other than moving their work elsewhere, doing it themselves, or putting their trust in Billy the 2L. Do you think for a minute that if a firm asked the client about these alternatives before they signed on that the client would say that that was fine? Not a chance.

Clients want to know the price beforehand — not when it's too late. Koppel writes:

Now when Foley attorneys turn on their computers, messages occasionally pop up on their screens reminding them that clients do not want to be surprised about their legal costs.

"That has helped focus our attorneys," [partner James] Kalyvas says, "and has created the willingness to change."

Sorry, guys. This isn't change. This is bells and whistles. This is a coat of paint on a busted old horse buggy. Change is open prices, where the client can decide if the cost matches the value before agreeing to the assignment. Pinging emails and Billy the 2L are not solutions to the problem of high legal costs or surprised clients.

• • •

All right, never mind. Despite what the Journal says, the Client Revolution isn't over after all. See you next time.

What does your law firm say about you?

No one ever got fired for buying IBM.

So goes the saying. What it really means is that buying a big-name product is generally seen as a safe bet, a lower-risk purchase. A cautious move.

The same thing is said about hiring big law firms. No one ever got fired for hiring Cravath. Or Sullivan & Cromwell. Or here in Boston, Ropes & Gray.

The logic goes this way: If your big law firm wins your case, then everyone says, "Well, of course they did. They're Cravath." And if they lose the case, everyone says, "Well, that can happen to anyone. No one wins all their cases."

But if your company chooses a smaller, lesser-known, perhaps-less-expensive boutique, the conversation goes differently. If they win your case, everyone says, "Well, it was a risky move. It's a good thing they won." And if heaven forbid they lose your case, everyone says, "Who the hell is Boutique Law Firm? And why didn't you hire Cravath?"

So risk-averse buyers of legal services buy the big-name firm, despite its being more expensive. In fact, they buy the big-name firm because it's more expensive. They go through a silent casuistry that goes like this: "The firm must be good because they charge so much. People wouldn't pay that much if it wasn't."

The truth is, we all do this. We ascribe qualities to products and services based on price and name recognition. Asked to choose between two glasses of wine, those of us who aren't oenophiles will usually say that the more-expensive one is better if — and only if — we know the prices beforehand. We buy status-symbol products because we think they're better, when in fact we're really buying them because they're more expensive.

Confessional time: I wear a Breitling watch. It was an anniversary gift from my lovely wife, but I got to pick it out. It's supposed to be a high-performance chronometer (not just a mere watch). Actually, it says it's a chronometre, which is better because it's in French. (Of the Swiss variety, of course.) It certainly seems to work well. But the truth is, I really don't know if it keeps better time than a Casio. And I've haven't fallen off a boat with it and sunk to 500 meters, so I can't really test if the claim in tiny letters on the face is true.

But if you held a gun to my head, I'd say ... well, I'd first say, "Whoa, what the hell's with the gun to my head?" — but then I'd tell you that the real reason I wear the Breitling is because it is expensive. (And because my lovely wife bought it for me.) It is a bit of a status symbol. Because people who notice it and know a little bit about watches will recognize it, and maybe they'll think I'm successful and good at what I do. I wear it because of what it says about me. Is it a good watch? Sure it is. It must be. People wouldn't pay that much if it wasn't.

What expensive things have you bought because of what they say about you? Clothes? Cars? A MacBook Air? An iPhone? Organic lettuce? A venti latte? Single-malt scotch? Share your own confessions in the comments.

But back to law firms. You might hire an expensive law firm because they really are the best. Or you might hire them because it says you can afford an expensive law firm. Or because it says you made the cautious choice, even if it was more expensive.

If you hired a discount law firm, what would that say about you?

And if you hired a law firm that used open, upfront prices based on the value of the desired result, what would that say about you?

One revolutionary year

Besides ushering in a new decade, today — January 1, 2010 — marks the first anniversary of The Client Revolution. It's been quite a year, both for this blog and for the concept of a client revolution. First, the blog:

In its first year, The Client Revolution has had just over 30,000 pageviews. In addition, nearly six hundred readers subscribe to the blog either by email or RSS reader. The ABA Journal named it to its "Blawg 100" list of "the 100 best websites by lawyers, for lawyers." To our subscribers and readers, I offer my sincere thanks and appreciation.

As for the Client Revolution — the concept: the economic turmoil of 2009 has accelerated the drive for change in the legal industry. Law-firm clients are increasingly dissatisfied with the status quo of hourly billing, legalese, and the legacy systems of a guild mentality. More firms — even the whitest of white-shoe firms — are at least paying lip service to the need to modernize the law-firm business model, if not actually acting. The Wall Street Journal Law Blog declared 2010 to be "the year of the flat-fee arrangement." While we prefer the term "open prices" (as opposed to the hidden prices that hourly billing creates), we appreciate the sentiment.

The question I get most often from law-firm lawyers is "How do you set your prices?" Funnily enough, it's also the same question I get from law-firm clients. Both groups want to know more about open-price lawyering, but they don't know where to start. So today, my commitment to you is to make this blog more of a resource for you — outside counsel, inside counsel, and clients — to help you figure out how to value and price legal services. I'll need your help, though, through your comment and questions and tweets. Share with me your questions and your ideas, your concerns about hourly billing and your fears about open pricing. In turn, I'll devote this site to answering those questions and allaying those fears.

One final note: Yesterday marked the third anniversary of the last hour that my firm, Shepherd Law Group, billed. We haven't missed timesheets and hourly billing. Over the past three years, our clients have gotten the benefits of a modernized law-firm business model. Many have saved tens or even hundreds of thousands of dollars in legal costs as compared to hourly billing, with the same or better quality than they would get at a large law firm. (And that's not just me talking: the peer-review panel of Law and Politics magazine has cited each and every lawyer who has ever worked at Shepherd as a "Super Lawyer" or "Rising Star.") And ours is a litigation practice (defending employers), which the naysayers say can't be done on a fixed-fee basis. Think again.

Lawyers: if we can do it, so can you. Clients: if our clients can enjoy the benefits of open prices, so can you. Let's make 2010 the year the Client Revolution goes into full swing. Happy New Year, and thanks for reading.

The numbers behind the lip service: Part Two

In Part One, we talked about how BigLaw was congratulating itself for slowing the growth of its annual billing-rate increases. The jumping-off point was the National Law Journal's 2009 Billing Survey, in which 190 of the top 250 firms participated. The main story, written by Karen Sloan, requires a subscription.

One of the messages in the Billing Survey is that the lousy economy has increased the role that alternative billing plays. (Readers know that I hate that term. See "An alternative to 'alternative billing.'") Sloan writes:

Increasingly, clients are asking firms to enter into alternative fee arrangements that take into account the overall costs of their legal matters.

She again quotes our good friend, the ACC's Susan Hackett:

Some [clients] might say, "I really don't care what your rates are — that's not my problem. This is what I'm willing to pay for the work ... you figure it out from there."

The survey asked the firms about their use of alternative-fee arrangements (it didn't use the hyphen — ack!). Fifty-seven percent (up from 50% last year) reported that these arrangements accounted for ten percent or more of their firms' revenue. I suppose this is progress, but I remain unmoved. Here's why:

First of all, what's with this magic threshold of ten percent? Ten percent is a trial balloon, not a commitment to change. What is more, an astounding 43% don't even reach that level. The article cites a recent American Lawyer survey of 587 general counsel, finding that 39% of them have increased their use of alternative-fee arrangements this year. That means that 61% of the GCs reported that their use of these arrangements stayed the same or decreased. A nice one-page PDF summary of the GC survey is here, and a Law.com summary article is here.

Second, and this is an even bigger reason, is that "alternative-fee arrangements" is a weaselly phrase that obscures more than it informs. The National Law Journal's 2009 Billing Survey, after allowing the firms to congratulate themselves about their restrained rate increases and their perestroika-esque (admittedly not a common word, but whatever) attitudes to "alternatives," probes a little deeper behind the numbers. In asking about alternative arrangements, the NLJ sought some qualification. For example, the survey reports that an incredible 95% of the revenue at Paul Hastings came from alternative billing — in the form of discounted or blended rates.

What the what? Newsflash, people: Discounted and blended rates are still hourly billing. They are not "alternatives" to the billable hour. They are just forms of discounts. (For more on discounted rates, see "Legal advice: 30% off! (Why discounts don't always save you money).") Turns out that the other 5% of revenue at Paul Hastings comes from real "alternatives," including fixed, contingency, and retrospective fees. (Retrospective fees have their own problems, which we'll deal with in a future post.)

Not to pick on Paul Hastings. Others had similar results. Ogletree Deakins: 91% discounted or blended. Husch Blackwell: 98% discounted or blended. Dykema Gossett: 84% discounted or blended. And on and on. And many of the "real" alternatives include hybrid fees — that is, a hybrid of fixed and hourly fees.

Look: I credit the sentiment that many lawyers are saying that the time for "alternative fees" is now. But when the American Lawyer GC survey reports that the law firms initiated these alternative arrangements only 3% of the time, I wonder just how deep these sentiments run. And when the "alternatives" turn out not to be alternatives, I wonder if a lot of this is just lip service.

Clients: hourly fees — whether discounted, blended, or hybridized — are hidden prices. It's time to demand open prices.

The numbers behind the lip service: Part One

That loud noise you hear is the sound of large law firms patting themselves on the back for jumping on the so-called alternative-fee bandwagon. The December 7 issue of the National Law Journal has extended coverage of its 2009 Billing Survey. The lead article pronounces in its headline: "Reality dawns on hourly rates: The recession forced firms to moderate or forego rate increases." (We can't forgo the opportunity to point out that forego means "to go before," while forgo means "to do without." Just sayin'.) The story, written by Karen Sloan, requires a subscription. (A shorter version with a less-congratulatory headline — "Firms' Billing Rates Inched Up During 2009, NLJ Survey Shows" — is available here.)

Sloan's lede is this:

It took a global economic meltdown and a major upheaval of the legal industry, but law firms seemed to get the message that 2009 was not the year to substantially increase their billing rates.

Clients: hold off on your jigs just yet. Seventy-six percent of the large firms raised rates in 2009. And Sloan reports that a survey by The American Lawyer has 81% of the top 200 firms expecting to raise rates in 2010.

The NLJ article trumpets, in bright red figures, that the average billing rate at the 250 largest law firms rose only 2.5%, to an average hourly rate of $372. By comparison, rates increased 4.3% in 2008, and 7.7% the year before. But check out the numbers behind the numbers and do the math. That means that BigLaw rates have jumped 15.1% since the start of 2007. I should just shut this blog down, since we're all revolutionaries now.

Sloan writes, "Not everyone is convinced that simply reducing billing rate growth is the right strategy for law firms in this economic climate." Then she gets the money quote from my friend Susan Hackett, the visionary general counsel of the Association of Corporate Counsel and torchbearer of its Value Challenge:

I can tell you that whenever I talk to clients they actually laugh when they hear about firms raising rates in this environment.

Maybe the law firms can't hear that laughing over all that backslapping.

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.]

Why law firms should be treated like pizza joints

Less than a mile from my house, just over the town line, is the village of Wellesley Lower Falls. It's not quite as quaint as it sounds. Basically, it's a quarter-mile strip of fairly busy road (Route 16) right by the Charles River. There are maybe a dozen retail establishments on this quarter mile, and five of them are pizza joints.

Now despite what Mel Brooks has said about pizza, you might think that's a lot of pizza for a small space. And you're probably right. First there's Wellesley House of Pizza. Around the corner is Mark's Pizza and Subs. And just up the street half a block is Peter's Pizza. All of these are the quintessential New England–style Greek pizza that you would find at any one of hundreds of pizza shops in Massachusetts. Recently, a fourth store opened up, aspirationally named Wellesley North End Pizza. (The North End is Boston's Little Italy.) And across the street is Papa Razzi, which is a more-upscale sit-down Italian restaurant, but which also sells pizza that you can order out.

It's a safe bet that we have more than enough pizza choices in this quarter-mile strip, and it's a also a safe bet that one or more of these stores will not survive the Wellesley Lower Falls Pizza Wars. But in the meantime, all this pizza competition is great for the citizens of Wellesley and neighboring Newton Lower Falls. These pizza peddlers know that we have five choices of where to spend our pizza dollars. And they know they must compete for our business. And that's a good thing.

Some will open on Sundays, knowing that people actually eat on Sundays. (Actually, all of them do except Mark's. Which is right next to Taylor Rental Center, which is also closed on Sunday. Because no one does home projects on Sunday, right? Does the word "duh" mean anything to you, fellas?) Some of them will deliver. Some of them will offer breakfast foods (because that's what I think when I think about breakfast — let's go to the pizza place). And some may compete on price.

All this competition means more choices for my family, and a more-motivated group of pizzamakers to try to win and keep my business.

Why on earth would I want to limit this? Why would I want to discourage these pizzerias from working harder to get my business? I mean, other than having to keep five menus in my kitchen drawer and five speed dials on my iPhone, how does having choices and competition hurt me?

Now it's certainly true that people develop favorites. Maybe your daughters don't like the sauce at one place, and only like the crust at another. Maybe you are devoted fans of Mark's (unless you really need a pie on a Sunday). You might go there all the time.

But you would never formally limit yourself to one pizza joint. Or even a couple.

You would never make an official list of your Preferred Pizza Providers.

And yet.

And yet corporate law departments do this all the time. They set up preferred-provider lists of outside law firms. Especially at huge companies. They set up lists of preferred providers and then they make a PowerPoint chart that shows how they've cut the number of outside law firms they use from 325 to 115. Nice big downward-sloping line. Mmmmm ... efficiency. And the bean counters hear the magic word — cutting — and they think that's a good thing. You know, like cutting the number of lifeboats on White Star cruises.

Last spring, Microsoft made news by revealing that it had dropped K&L Gates from its preferred-provider list. (Why is this news? Because the eponymous Gates in the firm name is Bill's dad, Bill Gates Sr.) Here's what Microsoft had to say about its PPL, as reported by The AmLaw Daily:

"We have had a preferred provider program in place for several years to consolidate a portion of our legal work and manage our legal costs efficiently," Microsoft spokesman David Bowermaster said in a statement. "We recently decided to refresh the program. We solicited competitive bids from a number of firms and conducted an extensive review. That led to a selection of ten firms across the country."

Maybe having a PPL allows a law department to "manage its legal costs efficiently." But it also ensures that it has fewer options to choose from. It means that the anointed PPL firms don't have to try as hard to keep the company's business. Sure, you can get kicked off a PPL, like Bill's dad's firm was. But since it takes a pretty involved process to create the list, as the Microsoft flack said, once you're on the list you're more likely to stay on.

For me, I don't see any reason to tell one or two of the local pizzerias that they are on my preferred-pizza-provider list. I'd rather have them continue to compete for my business and strive to improve their offerings. Maybe it's less efficient to deal with five menus and five speed dials, but I'll make that sacrifice in favor of having more choices for quality pizza.

Hourly billing: the end of the beginning

Over the past day and a half, I've gotten bunches of emails and tweets all asking the same questions: Had I read the Wall Street Journal story? What about the Corporate Counsel piece? Is the billable hour really dead? What do you have to say?

Here's what I have to say:

Come on in. The water's fine. What took you so long?

(Our firm, Shepherd Law Group, completely abandoned hourly billing nearly three years ago. We haven't billed — or even tracked — a single hour since 2006.)

In fact, the billable hour isn't dead (yet), but you're forgiven if you thought this had happened based on what you read Monday. Quick recap: The front page of The Wall Street Journal had a story called "'Billable Hour' Under Attack" (subscription possibly required). The story was written by Nathan Koppel and Ashby Jones, who wonderfully cover the Journal's legal beat. It's a great piece (although I have no idea why "billable hour" is in quotes in the headline). They report on the efforts of companies like Pfizer, Cisco Systems, and American Express to rein in legal spending by moving work away from hourly billing and into fixed-price arrangements. They write:

The companies are ditching the hourly structure — which critics complain offers law firms an incentive to rack up bigger bills — in favor of flat-fee contracts. One survey found an increase of more than 50% this year in corporate spending on alternatives to the traditional hourly-fee model.

Make sure you also watch the video sidebar with an interview of Amy Schulman, Pfizer's general counsel (it's about three minutes):

Also Monday, Corporate Counsel magazine ran a piece called "Two Veteran Lawyers Say Now Is the Time for Fixed Fees." WilmerHale lawyers William Lee and Benjamin Heineman wrote it (I hope they didn't suggest the title). In it, the veteran lawyers decry the billable hour and trumpet the benefits of fixed prices:

For in-house counsel facing tremendous budgetary pressures, the fixed fee addresses the problems caused by the hourly rate, such as unpredictability, high costs divorced from actual value and, most importantly, the maddening law firm definition of "productivity" — defined as more lawyers and more hours per matter.

Both articles are steps forward in the war on the legacy systems and guild mentality entrenched in most law firms and reflected in the billable-hour business model. But don't think for a moment that this is the end of the billable hour, or even the beginning of the end. But it is — to paraphrase Churchill — perhaps, the end of the beginning.

As I've often said, the issue is not about invoicing methods. It's much deeper than that. We're talking about changing the dominant business model of an entire industry, and that's not going to be done with a couple of articles. In fact, these two articles show how far we have to go.

Let me explain: There are three basic concepts that are at the root of misunderstanding about how the law-firm model works. They are cost, profit, and price.

• Cost. No customer anywhere gives a flying something through a rolling doughnut what a law firm's costs are. That's the firm's problem. Think about it: have you ever gone to a store to buy something and wondered about the retailer's costs? Of course not. Yet when you read the veteran lawyers' article in Corporate Counsel, costs are about the only thing they talk about. Clients don't care about whether you can reduce your costs, boys.
• Profit. Profit is what's left for a firm after you subtract cost from revenue. A customer shouldn't really care about your profits, other than having a vague understanding that a vendor needs to make profits (eventually) to justify being in business in the first place. Beyond that, though, the customer doesn't care. In fact, there's no earthly reason why the customer should even know what your profits are. It might be different if you were publicly traded, but no American law firms are. It's ironic that large law firms voluntarily self-report their profits (and more importantly, their profits per partner) and then have clients complain about the firms' profit margins. When you listen to the Journal's video of Pfizer's Schulman, notice how many times she refers disparagingly to law firms' profit margins. ("You're going to have to get used to making less money.")
  


• Price. And what is price? Get ready to write this down: Price is simply the measurement of something's value to a customer. It's as simple as that. It has nothing to do with profit. It has nothing to do with cost. The price of anything is the value that thing has to a particular customer at a particular time. Anyone who tells you otherwise needs to go audit Economics 101 at the local community college.

Nearly all law firms practice cost-led (or more accurately, cost-plus) pricing. In other words, they base their prices on their costs. WilmerHale does. Pfizer's "legal alliance" firms do. All these firms track their lawyers time on timesheets, and base their associates' performance and pay at least partly on hours billed.

Read what the Wilmer veterans have to say about cost:

As in all business, a total price for a matter or a book of business is built up from costs (and, at times, also derived from the significance of the matter). One of the most important issues in setting fixed fees is distinguishing between a law firm's actual costs (which firms see), and the actual costs, plus profit margins for the partners (which is what clients see in a firm's bills). A second, related problem is that the history of costs to the company may be an imperfect guide. Past bills are an aggregation of hourly rates (plus out-of-pocket costs), which may reflect inefficiencies.

Huh? No, fellas. The price depends on only one thing: the amount the customer will pay at that time. You can prattle on all you want about costs and budgets and efficiencies and inefficiencies, but it doesn't matter a whit. It's up to you to set a price that is less than or equal to the value the client places on your service. If you do, you'll be hired for the job. If the value to the client is high enough, you should be able to charge enough so that your revenue exceeds your costs, giving you a profit. But don't expect your client to care about your costs or your profits — that's not their job.

Both articles talk more about controlling costs and lowering law firms' profit margins. They don't talk about increasing value to the client. To really change the system, value — not costs — must lead pricing. Then firms won't have any use for timesheets.

As I said, it's the end of the beginning. But there's a long way to go.

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.

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.

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.

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.

A corporate lawyer wonders about value billing

A top Boston corporate lawyer who's made a name for himself in the financial industry responded with a thoughtful question to something I wrote earlier. He wanted to know how value billing could work in his environment — a large-firm, corporate-transactional-work practice. To be sure, that's worlds apart from my employment-litigation-defense boutique, but that doesn't mean it can't work for him, too.

Here then is our back-and-forth discussion on the topic, starting with his question:

Here's the million-dollar question on alternative billing from where I sit: I can control everything that happens in a transaction that occurs in my firm, and price around 80% of the various structural things that can complicate a deal. I'd win some and lose some.

The wild card is the opposing lawyer: efficient and competent, or not? How much internal cost do I have to allocate to carrying both ends of the canoe, after setting my fee with the expectation of carrying one end? This seems to me to be the stumbling block for alternative billing in transactional engagements. Thoughts, law-firm revolutionary?

(I think he means me, and not without a tinge of irony.) Thoughts? Yes, many. First, you can't control everything in your firm. You don't know what rabbit trails of online research your junior associates might travel down. You can't always predict if one of your key partners will be overwhelmed with a competing project, or with the flu. Second, if you hold yourself out as an expert — as you should — then you should have enough experience to be able to price things notwithstanding your fellow canoe carrier. Third, why do we think law is any different from everything else? It's not.

Let's say you take a trip to Florida, and your flight cost you X dollars. If a headwind or a storm or congestion around Wilmington, Delaware, caused the airplane to burn up more fuel, will the airline change the price of your ticket after you land? No. Those "variables" didn't change the value to you of your flight. (If anything, the variables made your trip longer and less pleasant, lowering its value to you.) There are variables in everything. Saying "I can't price this because of the variables" is a complete cop-out.

That works for some of my clients, but not all. Clients who tend to use us deal in and deal out see the benefit of pricing in all of the variables. Clients who look separately for counsel for every deal, though, just want the lowest base price. The lawyer who sets a price that factors in all of the variables is going to get killed selling to this second kind of client because the competition will give an estimate based on a smooth execution and add on to that. Because client type 2 here usually purchases on the basis of the lowest base price, the lawyer who successfully prices in all the variables won't get any deals. I'm trying to figure out a way to use alternative billing for the second kind of client — it's much easier for the first.

The easy answer is that you really don't want Type 2 clients. Someone who comes to you for price will leave you for price. So set your price high enough to attract serious clients and weed out those Walmart shoppers.

The more-nuanced answer is that you, like 99.999% of all lawyers, are stuck in the Marxian labor-theory-of-value mindset. You believe that the value of your excellent service is based on the amount of work you have to do to provide it. The funny thing is, your clients don't believe that at all. They, like all customers, measure value subjectively: what it's worth to them at that time.

Plus, your method values all your time equally. To see why that's a problem, read these three posts: — "Billable showers," "What's my time worth?" and "Watching the time go by."

Typewriters and carbon paper — tried and true

Imagine if in the 1970s, the former head of a huge law firm came out against the rise of word processors and their challenge to typewriters and carbon paper. Imagine that he scoffed at this notion of "a better mousetrap," groused that people had been trying to come up with new systems for years without much success, and made a throwaway crack about "young people." People probably would have ridiculed him as a Luddite defending the status quo merely because that was what he was used to. Even if the "better mousetrap" did a better job than the old system.

Sure enough, the former head of a huge law firm recently came out against the anti–billable hour revolution. Richard Gary, former chair of Thelen Reid, was quoted in a California Bar Journal article, "Will a bad economy force more changes in the profession?" Here are Gary's thoughts on typewriters billable hours:

Still, he said, he doesn’t think the billable hour is going to disappear. “We’ve been talking about going to a different model for 20 years and it’s never happened. Maybe young people will come up with a different mousetrap.” However, he added, “I still think it’s the best way to measure value because it is a mechanism of measuring the amount of work that a lawyer did for a client on a particular matter.”

Let's read that again: The billable hour is "the best way to measure value ...."

I don't have too much to add here, other than to point out that Gary now runs his own law-firm consulting shop offering "strategic solutions for law firms."

And the 600-lawyer firm he ran for 11 years, Thelen Reid? Above the Law has the 411 here: "Thelen Officially Dissolves." (Ouch.)

I'm not saying that the idea of billable hours being any measure of client value — let alone the best measure — is what's causing firms like Thelen to fold. But it can't be helping.

• • •

Hat tip to Melody Kramer, who wrote about the CBJ article and the Gary quote in her excellent post, "Quality vs. Quantity - the billable hour mousetrap" at the Freelance Legal Professionals blog. Also, the required-reading Greatest American Lawyer had a nice summary post a few weeks back on the CBJ article.