Mark Chandler, a Senior Vice President and the Secretary and General Counsel of Cisco, gave a speech last week in San Diego at the Northwestern School of Law’s 34th Annual Securities Regulation Institute, which has been getting a fair amount of play online, and deservedly so.

Called "The State of Technology in the Law," it’s actually far far more than that; it’s his vision of how our industry will be transformed by technology—and client demands—as the 21st Century unfolds:  Indeed, as some of us who hope to have decades left on our career will experience ourselves.

I’m quite confident I’ve never used the phrase "must-read" on "Adam Smith, Esq.," but this is my first nominee.  I’ll attempt to highlight some of his key points and give you my take on them; but you should, to be sure, read it all.

Chandler frames his talk thus:

"I offer you three questions for our discussion today.
"First, how is technology driving change in knowledge-based industries?
"Second, what are the key areas of vulnerability in the legal services business to these technological changes?
"And third, what will it take to succeed in this changed environment?"

Chandler runs a "metrics-driven" law department, which is required to run that way "just as other corporate departments are run." 

And because he’s driven by the imperative of productivity improvements, he expects the legal department’s share of revenue to get smaller as Cisco grows. And he’s brutally dismissive of law firms that have a different agenda:

"Letters from law firms telling me how much billing rates are going up next year are therefore totally irrelevant to me, or as we say in Silicon Valley, orthogonal to my concerns. Think about it: not one of the CIOs of your firms expects to get a letter from Cisco explaining how much more our products will cost next year. And not one of our suppliers comes to us to tell us how much their prices will go up next year. So from my perspective, I don’t care what billing rates are. I care about productivity and outputs."

You may think this is spoken like a procurement manager in disguise, but he’s barely getting started.   The transformation of our industry is a subset of the transformation of access to information, which is moving from centralized, command-and-control hierarchical dispensers of content, to zero-marginal-cost transmission and duplication.  (What did in Tower Records?i ITunes and Kazaa; and recording industry revenue is down 25% in the last 5 years.)

Michael Spence, co-winner of the 2001 Nobel Prize in Economics, has said that the worldwide networking  of computers is the most important development in economic history since the opening of the trade routes between Europe and Asia in the late Middle Ages.  Why?  Because it changes where and how people can work.  And Chandler reels off a litany of Old World entities built on the information-is-scarce paradigm, suddenly made obsolete by information-is-free upstarts:

  • Encyclopedia Britannica vs. Wikipedia
  • Frommers and Fodors vs. ePinions and TripAdvisor
  • Corner bookstores vs. Amazon
  • Newspapers vs. eBay and craigslist

And then he turns to law-firm-land, meaning to question #2, "key areas of vulnerability."

The heart of the matter is that devil with nine (or ninety) lives:  The Billable Hour.  "Put most bluntly, the most fundamental misalignment of interests is between clients who are driven to manage expenses, and law firms which are compensated by the hour."

And while the Baby Boomers may have bought into the model of toiling ceaselessly for a decade or so in an attempt to win the tournament for a chance at toiling ceaselessly for a few more decades, today’s associates aren’t buying it:  Associate attrition rates are 20%/year and higher, and Chandler adds that "The chairman of one firm told me that only people in their 50s and 60s are willing to put in long hours these days, that associates regularly turn down the chance to work on major deals if it interferes with social plans or a vacation."

This, may I hasten to add, is not the associates’ problem:  It’s your problem.

Would you rather bemoan it?  Fine:  Be my guest.  Denial is always a superb adaptive strategy.

But as Chandler puts it: 

"Upending one’s life to support inefficient means of communication, driven by a billable hour system, to maintain a relatively slim chance of making partner, just doesn’t cut it. And when the next generation heads for the exits, it’s a sign of a business model under stress."

"Under stress" happens to be my own nominee for best single turn of phrase in the entire piece.

Here on "Adam Smith, Esq.," and in my life in the real world, I devote a fair amount of attention to knowledge management:  It is, I believe, at the very core of a high-performance firm, living at the intersection of professional development, marketing, and client service.  A firm with a frustrating or ineffective KM system is at a serious competitive disadvantage.

But KM can be a double-edged sword, as Chandler astutely observes.

His problem is that clients cannot benefit from firms’ KM systems without going through the tollgate of the hourly billing model:  "The legal industry has spent millions on IT to up speed access to information. But the only way I can get that information is through an individual billing me by the hour."  Chandler is fed up, and he’s not going to take it any more.

The issue is that the gatekeeper, the one-on-one relationship of client and lawyer, is profoundly obsolete:

"My contention is that the very source of success for firms today – the ability to manage client access to information and require clients to use bespoke 1:1 systems – will be the source of failure in the future.

"So my answer to question number two is that the greatest vulnerability of the legal industry today is a failure to make information more accessible to clients, to drive models based on value and efficiency. The present system is leading to unhappy lawyers and unhappy clients. The center will not hold."

Chandler foresees a world with law firms sorting themselves into a "dumb-bell" distribution:  At one end, a group who are able to commoditize and standardize services to manage costs and ensure predictability, "where very good is good enough."  And at the other end, providers of top-notch bespoke services.  Rare will be the firm that can pull off both.

Don’t count Chandler an ingrate.  He understands the integral role of outside counsel, and proudly (and rightly) cites Cisco’s record of "no records with its stock options,
minimal comments on our 10-Ks, and only one piece of litigation listed in the last 10-Q, and that one has subsequently been resolved."  He’s proud of our profession.

But:  New technology has resulted in new business realities.  Clients are demanding greater value.  Associates are demanding greater engagement. 

As tempting as denial may be, I for one do not believe it’s an equilibrium
solution.  Personally, I don’t even believe it’s remotely tempting—not in the least.

Let me propose a vision for a law firm that Chandler would hire, and hire enthusiastically:

  • A powerful and supple knowledge management system is its key competitive weapon.
  • The firm is not afraid—indeed, it trumpets—sharing this system with key clients (obviously, within the bounds of confidentiality, privilege, etc., etc.).
  • Lawyers are freed to work on truly higher-value work.
  • For which they bill based on a measure of value-received instead of by "cost of production," a/k/a the billable hour.

What does this accomplish?

  • It aligns the firm’s economic interests with its clients’.
  • It separates the firm from the pack, which means
  • The firm can (honestly, truly, deeply) tell its clients that it understands what they’ve been through in terms of
    • down-sizing
    • outsourcing
    • streamlining
  • And that it’s doing the same things its clients have been doing.

Let’s face it:  Corporate America (corporate-world, for that matter) has gone through the looking-glass of rationalizing every process they execute into as streamlined, efficient, and cost-effective a posture as they can possibly imagine; and they’re still challenging costs every day.  Law firms haven’t even thought about it.

But the Mark Chandlers of the world are telling us that we’d better start reading from the same playbook they’ve been using for a decade or more.

Is this the opportunity of a generation, or what? 

Imagine if your firm was not pushed kicking and screaming into this absolutely positively inevitable future, but if it led the way?  What competitive distinction would that be for you?  How enduring would the advantage to your reputation be?

I was discussing Chandler’s piece with a good friend a few nights ago, a fellow who works for an AmLaw 50 in a senior managerial slot, and his reaction was:  "I wish we had more clients like that; imagine what we could do for them."  He’s ever so right.

You read it here first.


Update: Feb. 13:

Doug Caddell, CIO of Foley and Lardner, and a friend, writes as follows and asks me to include this as a comment. If you don’t know Doug, yes, he’s droll.

I generally agree with the above comments of Mark Chandler, GC of Cisco. However, I do take exception with one statement in particular.

Mark says, “Letters from law firms telling me how much billing rates are going up next year are therefore totally irrelevant to me, or as we say in Silicon Valley, orthogonal to my concerns. Think about it: not one of the CIOs of your firms expects to get a letter from Cisco explaining how much more our products will cost next year.”

I thought about it: I don’t know about my peers, but I receive a “letter” from Cisco every year informing me of my increased cost of doing business with Cisco. While these “letters” are not printed on stationary, the do arrive on Cicso invoice “letterhead”. And each year the topic has been price increases. This is especially true with Cisco Smart Net, their maintenance “insurance” on routers, switches, etc. What used to be reasonable has gone the way of first year associate salaries. So much that we now only put critical gear on Smart Net, and “self-insure” the rest.

I’m waiting for this year’s letter from Cisco. But, I don’t need to open it to know what it says.

Doug Caddell, CIO
Foley & Lardner LLP


Update, Feb. 13:

Marco Antonio P. Goncalves writes me from Rio de Janeiro with these thoughts:

"Bruce, congratulations on the post. The subject is really interesting and has lots in common with something I wrote in a book on legal marketing that I’m co-authoring with another Brazilian legal marketing consultant. The book is not yet finished, but I try to explain the increase need by companies to look up to law firms that operate like them, like a business, as "corporate mirroring" (I believe this is the best translation from the Portuguese term I have used). In other words, companies want to see them reflected in the law firms they do business with. If they don’t get this "reflection", they will simply look for another law firm who does."

Marco raises an insightful point: As the pressure relentlessly increases on Fortune 1000 GC’s to operate their departments more and more the way marketing, manufacturing, finance, etc., operate—like a business—GC’s and their teams will naturally look more and more for law firms that follow the same philosophy. The question is not whether your firm will get there, but when: And I invoke the bromide (in this case, truthful): "Lead, follow, or get out of the way."

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