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Client’s Guide to Legal Spend Management: First Steps

October 22, 2013

Lao TzuJust in case you missed it, there is a no-holds-barred cage fight going on over in the “comments” section to Dr. George Beaton’s lightning-rod of a post, “The rise and rise of the New Law business model.”  A veritable “who’s who” of legal thought leaders have taken sides in the “Great BigLaw vs. NewLaw Debate.”  In my own recent post, I argue that regardless of who ultimately wins the war — BigLaw, NewLaw, or a combination of the two — the real winners are clients, who because of the fierce competition, now have more and better options to meet their legal needs.

But with a multitude of options comes uncertainty, and if we know one thing about BigClients, its that they loathe uncertainty.  Combine this with the power of the status quo, and far too many BigClients continue to fall back on the “tried and true,” rather than bravely forging ahead into the New Normal of 21st Century Law.

The BIG problem, however, with that “tried and true” method, i.e., continuing to blindly use the same ol’ BigLaw firms and their best friend, the billable hour, is that clients are likely overpaying by at least 30% to 60%.  Now, if you are okay with that, no need to read any further; instead you may want to skip to my post discussing the “Battered Client Syndrome.”  For the brave clients still reading, I realize that you have many pressures making change difficult, so I will offer a few “baby steps” that can be accomplished at little or no cost, and that carry very little risk.  For, as the ancient Chinese Taoist philosopher Lao Tzu famously said:

A journey of a thousand miles must begin with a single step.

Step One – Educate Yourself

Here are three quick steps that will get you up to speed in the least amount of time.

  1. Read “Tomorrow’s Lawyers” by Richard Susskind and “The Lawyer Bubble” by Steven J. Harper.  You’ll see the future and understand “the horror, the horror,” of the BigLaw world.
  2. Get acquainted with a couple of key blogs/sites:
  3. Get on twitter.  Follow @ronfriedmann.  Great curator of timely information.  If Ron’s not tweeting it, it’s likely not important.

Step Two – Kick Your Old Habits

Repeat after me.  I will not blindly hand over any new legal matter without requiring proper scoping, legal project management, and legal process management.  Say it over and over until you have broken this highly addictive, dangerous and expensive habit.  If you need liquor and cigarettes to help you conquer these demons, just remember that you are temporarily accepting the lesser of two evils.  A little bender on booze and the tar sticks will hurt you far less than continuing to write blank checks to your outside counsel.  Besides, you’ll have saved a ton of money by kicking your BigLaw habit, so you’ll have plenty of cash for a quick stint at the Betty Ford Center.

Step Three – Take Action, Any Action

Okay grasshopper, take a couple of deep breaths, and channel your inner Lao Tzu, because you are about to leave your comfort zone. I know it’s going to feel sketchy at first, so we we’ll start with some easy lifting and slowly work our way up from there.

a.  Choose a progressive BigLaw firm for your next new matter
  • This is a BigClient’s “safest” choice as you get the CYA of BigLaw with the not-so-BigLaw-like use of LPM and LPO.
  • The problem here, of course, is that trying to find a progressive BigLaw firm is about as hard as getting to see a wild Kiwi in the New Zealand rainforest.  I’ve been looking hard for a while now and can count the contenders on one hand.
  • My first choice here is Seyfarth Lean.  They’re way ahead of the competition (program started in 2005) and by using their substantial tools and experience, they can deliver a great outcome at a better price than the majority of their BigLaw competitors.  Once you see what LPM and process optimization can do, you’ll be far less likely to relapse into your prior bad habits discussed above.
  • Chief downside:  You’re likely to pay a premium for all those fancy downtown offices and highly-paid lawyers, who still have big billable hour quotas to hit, but at least your in the game.  Go ahead, pat yourself on the back, you’ve just taken your first step to legal enlightenment.
b.  Rethink your current firm selection process for new matters
  • Prior to engaging a firm for any matter, sit down and determine what you value and develop a simple and straightforward Request for Proposal.  This doesn’t have to be complicated rocket science, just a common sense, client-based, value determination.
  • Invite 3 to 5 firms to bid, including at least one new firm offering upfront fixed fee pricing, like Valorem Law.
  • Any firm that does not offer hard budgets and LPM/LPO should be immediately eliminated.
  • Once a firm is selected, write a win-win fee agreement, including success bonuses and/or holdbacks.  Better yet, make it an upfront fixed fee (which you would get from Valorem).
  • Other options:
    • Consider AdvanceLaw, which helps its client GCs match their matters to select firms that it has vetted for quality, client service and efficiency.
    • Another “safe” option with big returns would be to require any of your current firms to use Novus Law for all the document discovery and management work, as discussed here.
c.  Tweak your panels
  • Most larger companies have favored firms/panels they work with.  Many times the 80/20 rule applies.  If you have 5 firms doing 80% of your work/spend, it’s likely that 1 firm is great, 3 are good, and 1 is lagging somewhat behind.  Slowly move work from the bottom to the top.  Just concentrating on these top five firms is manageable and can deliver a major return on investment.
  • Other option:
    • Or you can call Elevate Services, who are successfully providing these types of services (and many others) as discussed here.
d.  Stay in-house
  • One of the best ways to optimize legal spend is to keep as much work as possible in-house.  This option has become much easier with the emergence of new firms that provide any type of specialized expertise on an “as needed” and/or secondment basis.  Examples include, Axiom Law, Conduit Law, Bliss Lawyers, Lawyers on Demand, etc.  Almost all of these  (if not all) offer fixed pricing, without BigLaw overhead and/or company overhead.
e.  Hire a legal spend strategist (or team, depending on the size of your legal spend)
  • The four action plans outlined above are just the tip of the iceberg of ways clients can bring about better outcomes at the right price.  Changes in the legal field are moving incredibly fast, and no legal department can be expected to keep up with this change while simultaneously doing their “day jobs.” Simply put, legal spend management is a full-time job.  Further, every dollar wisely-spent on LSM will be rewarded with a large return on investment.  As a general rule of thumb, spending 1% of the total legal spend budget on LSM should deliver at least 10% of total savings.  Thus, a company with an annual legal spend of $100 million, who invested at least a $1 million in legal spend management, should be able to lower overall spend by $10 million.  $10,000 spent on a $1 million case should save at least $100,000.  If anything these numbers are conservative at present, because of BigLaw’s almost pathological refusal to adapt to the post Great Recession environment.

There is simply no excuse not to take action to capitalize on the current client-friendly changes sweeping the legal industry.  Each of the actionable steps outlined above can be implemented by any client, at very little cost and with little risk.  All of them will deliver a substantial return on investment and will result in better outcomes at a far better price.  Time’s a-wastin’, grasshopper, take at least one of the above steps today.

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BigLaw v. NewLaw: Latest Reports From the Battlefield

October 15, 2013

Custer's Last Stand

The legal blogosphere is all atwitter predicting the winners and losers of the mighty battle being waged over who is going to provide 21st Century legal services.  At this point in the battle between BigLaw and NewLaw, no one knows who the ultimate victor will be, although many have strong opinions. Conflicting reports are streaming across the newswires from the numerous firefights on the front lines. Below is a brief summary of the various camps and their views:

The “Keep Calm & Carry On” Camp

The safe pick many feel is to bet on the status quo.  BigLaw has had quite a run and its demise has been wrongly predicted many times before.  The 3 Geeks (Not So Fast…) and The American Lawyer (Will Law Firms Adapt — or Go the Way of the Dodo?) are reporting that the rebels, despite some small successes, are not a real threat to the combined firepower of the BigLaw regime, at least not anytime in the foreseeable future.  The latter concludes that BigLaw, as a whole, is safe for one fundamental reason — BigClients need them:

Are law firms, particularly big law firms, the dodos of the professional services sector?  The short answer is no. And the reason is pretty simple. Big clients need them.  And unless and until a substitute provider of legal services at the high level appears, big law firms will have a future.  Here are the caveats: The future of any particular firm is not guaranteed—it never was—nor will this future be free of change.

Under this theory, BigLaw exists to represent and defend “big blocks of power and money.”  BigClient is not about to hand over the keys to the new kid on the block when billions are at stake.  In fact, this may just be BigLaw’s best defense.  No matter how wonderful the NewLaw alternatives, at present, none of them can come close to meeting all of a BigClient’s needs.  While BigLaw may not be perfect or efficient, it has one thing NewLaw doesn’t – a proven track record with BigClients.

The Geeks (or at least one geek, Toby Brown) argue that the NewLaw bandwagoners need to rein in their “irrational exuberance” that the Johnny-come-lately rebels are anywhere near to overrunning the well-entrenched BigLaw positions:

Instead watch for steady, incremental changes in the way law firms function and deliver their services. Next generation providers will continue their growth, law firms will merge and things will generally keep changing.

Toby compares the NewLaw Express to the coming of the railroads to 19th Century America.  Despite the initial exuberance and wild speculation in the potential of railroads, it took at least 50 years for the “revolution” to become “business-as-usual.”  While Toby thinks it won’t take 50 years for the legal industry transformation to play out, he expects change to proceed in a civilized and orderly fashion. Another Geek generally agrees with Toby (in a comment), but also notes that:

Change always takes longer to get here than you expect, but when it happens, it happens faster than you would otherwise believe possible.’

The proverbial $64,000 question then hinges on exactly what stage the current NewLaw invasion is on the change curve?  Are we still early in the curve, which leaves BigLaw plenty of time to dawdle, or have we already reached the tipping point?

The “Man the Lifeboats” Camp

Recent posts by Dr George Beaton (The rise and rise of the NewLaw business model & Last days of the BigLaw business model) and myself (What Clients Want and Why BigLaw Can’t Deliver) believe that the BigLaw ship is taking direct hits from the NewLaw gunboats, and is perilously close to sinking.   Dr. Beaton bases this conclusion on a variety of factors, including his modeling showing that firms’ high PEPP numbers are likely to fall substantially in the near future, and that at least “two-thirds to three-fourths of the revenue of BigLaw firms . . . is under threat from New Law.” (see his reply to comment #7.)  Recent proof of these trends are evidenced by the 30%-and-up growth of Axiom Law, Riverview Law and Novus Law, and the recent reports in Legal Week that Berwin Leighton Paisner’s (BLP) 2012/13 PEPP fell 40%, while their Lawyers on Demand services rose 28%.  In other words, the NewLaw business models are “being rewarded by clients.”  So much so, that Dr. Beaton predicts Axiom Law could be the largest legal service provider in the world by 2018.  Hard for BigLaw to “keep calm” in the face of  those numbers.

The “Feast or Famine” Camp

Dr. Beaton’s post has elicited a large number of high quality comments on both sides of the debate that are simply too varied to adequately summarize.   While all of the comments are great, one in particular (comment #13) stands out.  Jordan Furlong notes that:

Growth is not dead — it’s just changed addresses.  Law firms are suffering not from a drop in demand, but from a drop in demand for what they sell, at the price they sell it, in the way that they create and deliver it.

(A similar sentiment was recently posted by Jason Moyse [Growth is Dead? for Who?] on Slaw.)

Further, the larger problem facing BigLaw is not surviving the crisis caused by the Great Recession, but rather surviving the fallout the Great Recession created:

I don’t think it’s necessarily this current downturn that’s the major issue; it’s that this downturn is effecting and ushering in a new set of market conditions that make the environment essentially unsuitable for the traditional law firm business model, and that most firms lack the wherewithal to adjust to the new environment without tearing themselves apart in the process.

In the end, Jordan’s analysis may help us make sense out of the conflicting results being reported. Certain firms may be safe because of the reasons set forth in The American Lawyer – the biggest deals still need high-level lawyering that none of the NewLaw contenders can yet provide.  The same can’t be said, however, for for the the majority of firms, i.e.,  the AmLaw 11-200, who are at serious risk of going the way of the Dodo:

But if I were in a firm from AmLaw 11-200, I would be concerned, and as I go down that list, my concern would edge into panic. These firms are like houses of cards, impressive to look at from the outside but extremely vulnerable and structurally unsound at their core. They may survive the crisis — most are stumbling through alright — but I don’t see them surviving the change process that’s to come.

Even worse, a recent article from the Harvard Business review suggests that even the AmLaw 10 may be at risk of losing business.  In Why Law Firm Pedigree May Be a Thing of the Past, the authors discuss a recent survey of 88 GCs of major companies in which 74% responded that they would be willing to move “high stakes” work away from the “most pedigreed law firms” to a good lawyer at a “non-pedigreed” firm, assuming a 30% savings could be delivered (A counter argument was recently posted here).  While saying you are going to do something, and actually doing it are two different things, these types of survey results are become increasingly common in the New Normal, and are causing sleepless nights for all but the most myopic of BigLaw partners.

The “If You Can’t Beat ‘Em, Join ‘Em” Camp

While the status quo is usually a pretty stable place to set up camp, in the free-for-all environment that has emerged in the wake of the Great Recession, resting on your laurels is a very dangerous place to be.  Unfortunately, as both Jordan Furlong (Law firm innovation: From idea to implementation & Comment #13) and Pam Woldow (Adventures in Magical Thinking, Part I) have shown, bringing about real change in a law partnership is an incredibly difficult proposition given the unique cultural environment of traditional firms.  As I discussed in my last post, a couple of traditional firms, Seyfarth Shaw & Akin Gump (Jordan adds Littler Mendelson to the mix), appear to be embracing the new normal, and are either developing their own LPM and LPO programs (Seyfarth Lean), or are joining forces with the rebels (Akin and Novus Law).  Ron Friedmann (The Speed of Change) recently summarized Addelshaw’s future vision that the 2020 legal market “will have 25% fewer lawyers and 20% fewer firms, with new business models and disruptive legal technologies sitting at the core of the provision of legal services.”  Thus, rather than one or the other model, BigLaw or NewLaw prevailing, the future may be a conglomeration of both.

The BigLaw vs. NewLaw battle continues to rage, and only time will tell who will ultimately prevail, and which of the prognosticators best read their crystal balls.  There already is, however, one surefire winner, and that is the client.  The seismic changes that the legal industry are undergoing are all providing clients with better value options than they have ever had.  The vast majority of 21st legal services, whether delivered by BigLaw, NewLaw, or a combination of the two, will be delivered with a higher predictability of better outcomes at a fairer price than ever before.  Win-Win-Win.

What Clients Want and Why BigLaw Can’t Deliver

October 8, 2013

What modern legal clients want, or should want, is obvious.  We need look no further than the ACC Value Challenge which prefaced it’s 2013 ACC Value Champions with the following motto, essentially the win-win-win holy grail for clients:

Reduced spending •  Better Outcomes • Higher Predictability

Worthy goals.  I think if push came to shove, most corporate clients would actually be willing to pay more for better outcomes with higher predictability.  When clients perceive that they are receiving real value, they have little problem paying the providers of those solutions.

HolyGrail

The good news for clients is that there has never been a better time in history to obtain the right legal services at the right price.  The bad news for BigLaw is that their current, long-entrenched business model can’t deliver the right level of service at a competitive price.  Worse, they can’t even come close. Think Blockbuster during the rise of Netflix.  Borders right before Amazon.  Tower Records when iTunes took off.  Poof.  Gone.  Powerhouses that simply disappeared overnight.  Their traditional business models didn’t have a chance against their better positioned new competitors.  People watch just as many movies, read just as many books, and listen to just as much music, but now they just get it from different providers.  BigLaw is facing an equally grave threat from a slew of alternate service providers, whom Dr. George Beaton, has recently labeled as “New Law.”  While BigLaw growth has remained mostly stagnant, some New Law providers like Axiom Law and Novus Law are growing at the speed of light.  They aren’t doing this through smoke and mirror mergers or accounting tricks (Swiss Vereins), but rather through organic growth.

Big Law, with its reliance on the inefficient billable hour and the leveraged pyramid, are in real danger of ending up on the scrapheap of obsolete business models.  The BigLaw Union has been broken by New Law.  BigLaw got very rich selling the snake oil that the vast majority of the work it did could only be accomplished by its high-priced lawyers.  For years, clients  enabled this false assumption by vastly overpaying teams of associates to toil away at mundane and commoditized work.  No one, other than truly-in-denial blue-haired equity partners, believes this self-serving fantasy anymore.  In fact, Stephen Mayson, during his recent COLPM conference keynote, estimates that perhaps only 20% of all legal work performed in the UK is work that must be performed by traditional lawyers.  I doubt you can find many investors willing to bet on a business model staring down an 80% loss in market share.  BigLaw’s problem is no better on this side of the pond as evidenced by the ABA’s recent article “Who’s eating law firms’ lunch?.”   A few highlights:

  • Using Novus Law instead of BigLaw associates to do document review saved Fireman’s Fund Insurance “an estimated 15 to 30 percent per case on outside counsel fees.”
  • Fireman’s considers Novus Law “better than any contract review attorney and most junior associates even at well-known firms.”
  • Novus Law claims that nearly 80% of the work it does is work large law firms would otherwise do.
  • While traditional lawyers focus “on inputs, number of people, hours and so forth, which is important if your revenue is driven by the billable hour,” the Novus model is based “on outputs – how much [they] can produce in a given period of time while minimizing the cost of inputs and achieving world-class levels of quality.”
  • For every dollar Novus receives, outside counsel loses four dollars.

What rational client faced with a complex litigation is going to choose a traditional BigLaw firm who responds “It Depends” to pricing requests, when Novus will do a better job at 15 to 30 percent less.  Short answer –  none.  Long answer – uh, none. Novus Law, like many New Law providers is delivering win-win-win value to clients.  Game, set, match to New Law.

So how does the traditional law firm model survive against this type of lower priced, better value competition?  Adapt very fast, or be lead to the slaughterhouse.  Unfortunately for BigLaw, adapting quickly is almost impossible for mini-fiefdom partnerships.  It’s simply not enough to fire some legal secretaries and cutback on summer associate programs.  They are going to have to cut to the bone, and then some.  BigLaw’s real problem, and it may be unsolvable, is that the leveraged pyramid model used by most firms can’t compete in the newly hyper-competitive free legal market.

To their credit, at least a few firms have realized that the old ways aren’t going to get it done, and “if you can’t beat them, you better join them.”  Seyfarth & Shaw, which began Seyfarth Lean way back in 2005, now have at least 18 dedicated Legal Project Managers and 5 Legal Solution Architects (tech specialists who are also JDs).  Akin Gump, who were required by Fireman’s to take on Novus for a complex litigation project, now proactively offer to team up with Novus to provide better value to clients. Both of these firms should be on any large client’s short list, especially so if the client is contemplating switching over to New Law providers, but wishes to hedge that move with a “CYA” brand name.

While I applaud the evolution being shown by Seyfarth and Akin, even these steps may not be enough to weather the storm without significant further changes.  The fundamental problem, even for the most forward thinking firms, is their massive overhead when compared to the new competitors.  The going rate for a BigLaw first year associate is $160,000 per year.  If that associate bills out 2,000 hours, his or her hard cost is $160,000/2,000 = $80 per hour.  Unfortunately for BigLaw, that number alone is above the current market rate for most types of commodity work, which is $60-or-less per hour.  When overhead is added to the mix, which has been estimated at BigLaw to be between $200K – $300K per associate, the hard cost of the lowest-priced associates is around $200 per hour.  Hmmm, New Law at $60 per hour vs. Old Law at $200 per hour -those are the price differentials explaining why New Law could soon be adding BigLaw’s “breakfast and dinner” to their menu as well.

Seyfarth and Akin, at a minimum, have bought themselves more time by embracing newer pricing models, LPM and LPO.  Those steps should win them, at least in the short term, new corporate clients who will pay a premium for a name brand.  The remaining question for even the fastest evolving BigLaw firms, however, will be whether those moves will be enough in the long run.  I’m not so sure that the even the fastest evolving traditional firms can compete against the Axioms and Clearspires, who both have far less overhead and can thus offer far better pricing while maintaining healthy profit levels.  I can also foresee a future where the Novus Laws are so in demand that they recommend which lawyers to use for the remaining 20% or so of high-level lawyer work.  Wait, isn’t that already happening on the other side of the pond with Riverview Law & DMH Stallard teaming up on M&A deals at 30% savings?  Did I mention they reduce the fixed fee by half if the deal doesn’t go through?   I’d be willing to bet that if Riverview brings Novus into the mix, they can squeeze at least another 10-20% savings on their deals.

Welcome to 21st Century law, an ecosphere that rewards agility and new thinking, but is a rather hostile and dangerous place to be for old, lumbering, 20th Century legal dinosaurs.

Update:  While indirectly linked to above, I highly recommend Dr. George Beaton’s recent article, “The rise and rise of the New Law business model,” which discusses similar issues and has inspired lively debate in the comments.

Transparency is BigLaw’s Kryptonite

September 16, 2013

KryptoniteThis is the fourth installment of “The Future of BigLaw” series.

Oh ye battered clients, the time has finally come to rejoice!  The Reign of Terror is over. Cue up some classic Frank Sinatra, because the end is near, and BigLaw is facing the final curtain.  And before any delusional BigLaw partners break out that hackneyed Mark Twain refrain about the rumors of their demise being greatly exaggerated, let me remind them that Mr. Twain, like Elvis, has left the building.  Might be a good time to look into a new line of work – I know Axiom and Riverview Law are hiring.

How can I be so certain of the pending crash and burn of the once mighty, all-consuming, BigLaw juggernaut?  Even Superman had a weakness, and BigLaw’s Kryptonite is the ever-increasing transparency surrounding the practice of 21st Century law.  BigLaw has made a killing by keeping it’s dirty little secrets inner workings out of the light.  For decades, BigLaw, like other professional service firms, relied on opacity to ward off disruptive competitors.  According to a recent article in the Harvard Business Review, “Consulting on the Cusp of Disruption,” co-authored by Clayton Christensen (author of “The Innovator’s Dilemma” and “The Innovator’s Solution“), disruption is inevitable in all industries.  You can run, but you can’t hide.  All things considered, BigLaw had a pretty good run.

The HBR article states that opacity and agility are the chief defenses of incumbents from the threat of outside industry disruption.  We can immediately dispose of the agility defense for BigLaw, since no one can reasonably argue that the large general partnership model is nimble or quick to change.  Quite the opposite really, with the traditional law firm model being the poster child for an industry allergic to change.  That leaves the last line of defense – opacity.  BigLaw, hiding behind tradition, obscure Latin phrases, and the impenetrable Canons of Law, has greatly benefitted from this lack of transparency, which made it difficult for clients to objectively measure their work.  The HBR article notes that:

It’s incredibly difficult for clients to judge a [lawyer’s] performance in advance, because they are usually hiring the firm for specialized knowledge and capability that they themselves lack. It’s even hard to judge after a project has been completed, because so many external factors, including quality of execution, management transition, and the passage of time, influence the outcome of the [lawyers’] recommendations. As a result, a critical mechanism of disruption is disabled.

In this environment, clients had little choice but to choose firms based on:

Brand, reputation, and “social proof”—that is, the professionals’ educational pedigrees, eloquence, and demeanor—as substitutes for measurable results, giving incumbents an advantage.  Price is often seen as a proxy for quality, buoying the premiums charged by name-brand firms.

Another related concept, “informational asymmetry” (hat tip to Tim Corcoran) can help explain the same type of client behavior.  “Information asymmetry” exists where one party has superior information than the other party, which allows that party to have the upper hand in the relationship or negotiation.  Without a clear understanding of the work being done in the secret world of BigLaw, clients had to grin and bear the ever-higher hourly fees they were being charge.  Worse, clients actually began to believe that the higher the fees, the better the firm.  Stuffy & Hotshot must be great because they have $1250 per hour partners and $800 per hour first-year associates.  Even when chronically dissatisfied clients pushed back and reasonably requested more predictability, i.e., estimates and budgets for any given legal matter, their complaints were brushed aside with the usual suspects:

  1. Legal matters are far too unpredictable and complex to allow us to give any useful estimates;
  2. Legal problems require a level of expertise and skill that can only be accomplished by highly-paid and specially-trained attorneys.

Even today, ask any BigLawyer what they do, and they’ll likely tell you that the vast majority of their work is high level and intellectually challenging.  This stock response worked for decades.  However, whether it was the real financial pressures clients faced as a result of the Great Recession, the increased flow of information brought about by the rise of social media, the explosion of technology and Big Data, or a combination of all three or other factors, the information gap has now been closed. The cat is out of the bag.  In “The $60 Per Hour Lawyer – Why Dewey Isn’t Abnormal,” Paul Lippe paints a far more accurate view of what the practice of law really entails:

When lawyers describe what they do, they may say “we do very sophisticated, unique, bet-the-company work.” In fact, most of the work that actually gets billed is process work.  Just look at an enormous bill like the Lehman bankruptcy. How many of those hours represent unique insight, and how many represent moving information from one place to another?

According to Lippe and Jeff Carr, the innovative GC at FMC Technologies, lawyers traditionally do four things:  advocacy, counseling, content & process.  BigLaw still does the first two well, and may even deserve the high fees they charge for advocacy and counseling (when done well.)  No one is begrudging Ted Olson or David Boies their fees when they are arguing before the Supreme Court.  But do you want to pay them $1250 per hour to review boxes of documents.  Not likely.  I doubt you want to pay anybody much more than $60 per hour for process work.  Last I checked, I haven’t seen any $60 per hour BigLaw associates.  Oh, they pay their indentured servants contract attorneys about $30 per hour, but  then bill them out at their associate’s rates.  They can’t do that, right?  Wrong.

The fundamental problem for BigLaw, and it’s a whopper, is that clients now understand that the majority of work that BigLaw has traditionally charged very high rates for, can now be done more efficiently and at a much lower cost by others.  BigLaw’s main source of profit – teams of associates doing huge amounts of content and process work – has been exposed for what it really is – old fashion price-gouging.  But the days of milk and honey are fading fast in the rear view mirror.  BigLaw, too bloated with past success, continues to churn away rather than take any real steps to adapt to the new normal.   What began as a slow trickle of disruption just a few years ago, is now becoming a raging waterfall.  Once disruption gets a foothold, a similar pattern emerges in all industries:

New competitors with new business models arrive; incumbents choose to ignore the new players or to flee to higher-margin activities; a disrupter whose product was once barely good enough achieves a level of quality acceptable to the broad middle of the market, undermining the position of longtime leaders and often causing the “flip” to a new basis of competition.  (Quote from HBR article.)

Sound familiar?  That pesky mosquito, Axiom Law, is now an 800 lb. gorilla (well, actually a 900-person-and-growing alternate legal service provider.)  At their current rate of growth, they could pass DLA Piper as the No. 1 revenue firm in the world within 5 years.  The little fixed fee operation on the other side of the pond, Riverview Law, just grabbed headlines by combining forces with DMH Stallard to complete a couple of mergers and acquisitions at a 30% cost reduction.  I could go on and on – and on some more, but I’ll save space and reveal the latest survey information from AdvanceLaw that “72% of general counsel said that they will be migrating a larger percentage of work away from white-shoe firms.”  Doesn’t sound like thriving incumbents to me.

Ah, but I can hear the cries of the Staunch Defenders that BigLaw is simply too large and successful to fail.  So was U.S. Steel.  In 1901 it produced 67% of all U.S. Steel.  One hundred years later that number was down to 8%.  It was experiencing record profits right before being unseated by the disruptive competition of mini-mills.   In fact, the HBR article ends with the observation that “there may be nothing as vulnerable as entrenched success.”

The party is over.  The fat lady is singing as we speak.  You just can’t hear her over the deafening roar caused by the stampede of alternate legal service providers galloping onto the wide-open playing field, all of whom BigLaw is almost completely powerless to stop.  Hey, it was a hell of a run while it lasted.

Consulting on the Cusp of Disruption was authored by Clayton M. Christensen, Dina Wang & Derek van Bever.

The other posts in the “Future of BigLaw” series:

How Fixed Fees Are Going to Change BigLaw Forever (Part III)

Feeling the Squeeze – The Future of BigLaw (Part II)

The Future of BigLaw, Part 1 – The Numbers Don’t Lie, or Do They?

How Fixed Fees Are Going to Change BigLaw Forever

August 28, 2013
Artwork by Brenda Hall

Artwork by Brenda Hall

This is Part III of “The Future of BigLaw” series.  It could also be seen as Part IV of “The Billable Hour is Dead (to Me)” series.  

BigLaw has big problems.  It’s biggest just may be its pathological reliance on the billable hour.  The fundamental problem with the billable hour – as all reasonable minds now agree – is that the model encourages inefficiencies.  The longer a legal problem goes on (hours), and the more resources thrown at it (hourly billing timekeepers), the more revenue and profit reaped by the law firm.  The financial interests of the law firm are in conflict with interests of the client.  This misalignment of interests helps explain the almost universal feelings of frustration that clients have toward their lawyers.

So why have clients allowed this sad state of affairs to exist?  Because, until recently, they had to – they simply had no viable alternatives – because almost every law firm used the billable hour model.  But the Great Recession of 2008 caused major seismic cracks in the billable hour hegemony.  Companies needed to lower their legal fees to survive, and many great lawyers were handed pink slips with very little chance to ever regain a traditional BigLaw job again.  Desperation (and fear of homelessness) bred creativity, and a brave new world of legal providers scratched and clawed their way into the post-Recession landscape.

Perhaps the most important idea to emerge from the Great Recession was the value-based fixed fee.  The modern fixed fees I’m talking about aren’t those tired, sad excuses for “fixed fees” trotted out by firms in the past, i.e., “billable hours in drag.”  The ones directly tied to billable hours, e.g., discounted, blended and capped hourly fees AFAs, or flat fees based on simple estimates of time multiplied by rate, with some wiggle room.  No, I’m talking about modern fixed fees, which do what the billable hour can’t do, realign the interests of the client and their attorney.  Or, as Kathryn Kirmayer notes “In Support of Flat Fee Pricing for Complex Litigation Matters:”

And that is the real upside of using flat fees in complex cases. They drive us back to relationships, and put client and law firm back in it together for the long haul. Law firms learn and know their clients’ business inside and out, and from year to year. Clients are not afraid to pick up the phone and call on their lawyers for informal advice, even when there is no big case pending. Each wants the other to profit and succeed. In that world, both client and law firm accrue benefits that far exceed the risk posed by negotiating a flat fee for a single case, even a big one.

Name a client who doesn’t agree with the above sentiment.  Who’s against transparency, value and predictability?  No one, right?  After all, doesn’t all of BigLaw profess a deep desire to serve their clients and meet their needs?  Great, so there must be a boatload of AmLaw 100 firms offering to ditch the billable hour and offer value-based fixed pricing?  I may need a little help here readers, because I can’t think of a single one, unless you want to count DLA Piper’s 21% ownership of the UK fixed fee pioneer Riverview Law.

So what gives?  Why hasn’t BigLaw jumped on the value-based fixed fee bandwagon?  Ready?  Because it can’t.  Competitive fixed pricing requires a mastery of budgeting, project management and efficiency. None of those attributes are BigLaw strengths.  Quite the opposite actually, according to Adam Smith, Esq. here:

BigLaw is fantastic at delivering very high end sophisticated strategic counsel, but frankly they are terrible at running processes in an efficient, organised, optimised way. They’ve never been asked to do it, so they’ve never developed that expertise.

Rather than address the ever-increasing demands by clients for “efficient, organised, and optimised” legal services, BigLaw, unbelievably, did quite the opposite, and actually raised it’s hourly rates!  This type of backward thinking actually makes the decision-making on Bachelor Pad look rational.  BigLaw Partner-think:  Hmmm.  If we raise rates, we actually can realize the same revenue when we have to give discounts.  And instead of having to use non-billing legal secretaries (since we just laid most of them off) to do the grunt work, we can now have paralegals, and partners do that work AND bill for it.  That will help with the revenue we lost because of those damn clients who won’t pay for $350 an hour associates to be trained on their dime.  Okay, all good so far.  Now, how do we deal with those annoying demands for value-based pricing?  Who do these clowns think we are?  A real business?  Jeez.  Okay, breathe…whew…just give ’em the same ol’ song and dance that has worked like a charm for the last 50 odd years.

Unfortunately, those dusty arguments, i.e., unpredictability of legal work, inability to provide hard budgets, need for skilled associates to complete all tasks, etc., simply don’t hold water anymore, given the myriad of new legal service providers who are now able to offer exactly those “impossibilities” at an upfront fixed price, with equal or better quality.  More on that from Adam Smith, Esq.:

The founder and head of one of these firms, which is in the business of applying Six Sigma processes to document review, and which has demonstrated consistently and convincingly that their quality is immensely superior to that produced by BigLaw associates working on the same document sets, remarked fairly casually to me not long ago that “for every dollar of revenue we gain, BigLaw loses three.” If you want to reduce what “disruption” means down to a size suitable for a T-shirt, this will do nicely.

Scarier memo to BigLaw.  It’s not just the legal thought leaders who don’t agree with your unholy marriage to the billable hour.  You might want to listen to your clients.  LinkedIn’s GC, Erika Rottenberg, says billable hours are persona non grata for her here:

‘If you get to the core of it, [billing by the hour] actually puts us on opposite sides,’ Rottenberg said. The outside lawyers they use are supposed to create value and maximize efficiencies, she said. ‘While purportedly that’s what you want to do, your law firm requires you to bill hours and increase revenue.’

Michael Caplan, GC of Marsh & McLennan Companies, Inc., is even more succinct here:

The billable hour at companies like ours is dead.

Doesn’t get much clearer than that, does it?

Value-based fixed pricing is now a real option, and a real threat to the billable hour.  Riverview Law just announced plans to double its workforce in the next year.  Quite a different story than the grim reaper news constantly swirling around BigLaw.  Done right, fixed fees provide clients with a win-win-win trifecta:  transparency, value and predictability.  The genius of fixed fees, from the client perspective, is that they solve all of the current problems of the billable hour, without sacrificing quality, because it shifts the burden to the fixed fee provider to deliver at the quoted price.  To realize their full profit, the incentive is on the legal service provider to maximize efficiency, thereby eliminating the primary drawback of the billable hour model.  Yes, clients will still need to do some real work at the beginning of the process, like identifying their real goals and desired outcomes, including the respective costs of those options.  However, once this work is done, it is up to the attorney to figure out the best way to get there. Say goodbye to unpleasant billing surprises and/or endless micromanaging and audits of your legal bills. Not your problem anymore.  Worried about windfalls to the attorney who settles a fixed fee case early? Discuss success bonuses and phased fixed fees.

The continued evolution of value-based fixed pricing is all good for clients.  You can let others argue ad infinitum about whether the billable hour and BigLaw are going the way of the Dodo.  Not your concern anymore, as you now have so many better options.

Feeling the Squeeze – The Future of BigLaw (Part II)

The Future of BigLaw, Part 1 – The Numbers Don’t Lie, or Do They?

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