I recently had the chance to interview Chris Marston, founder and CEO
of Exemplar Law Partners, LLC,
based in Boston, which has been open for business for all of about 90
days. To
say that Chris is embarked on an ambitious attempt to rethink the practice
of law, down to its very roots, would be an understatement. Just
start with this, from "Our Approach":
"Exemplar is the first corporate law firm in the country to
completely abandon the billable hour and exclusively adopt a fixed price
business model. This progressive step forward in the legal industry is
designed to better align our interest with our customers while enabling
businesses to manage their legal budgets, and their expectations."
Certainly abandonment of the billable hour is the most
attention-grabbing aspect of Exemplar’s business model, but it’s far from
the entire story, nor is it even the most important part. Still, let’s
start there: When I asked Chris point-blank why he decided the billable
hour had to go, he guffawed and said, "Did you ever Google
‘billable hour’!?" Well, if you haven’t done it
yourself lately, here are some of the top results:
- "The Tyranny of the Billable Hour"
- "Both reviled and ubiquitous, the billable hour is the cockroach
of the legal industry…" - The ABA Commission on the Billable Hours Report (deeply critical
of it) - "The Billable Hour: Putting a Wedge Between Client and
Counsel" - "The Curse of the Billable Hour"
…you get the idea. In fact I’ve had some
things to say about it myself, which also turn
up in the results.
It probably won’t surprise you to learn that Chris is a JD/MBA and comes
at the challenge of how to re-engineer a corporate law firm from the
perspective of an entrepreneur. And he has some trenchant observations
about why the billable hour has endured as long as it has:
- For starters, lawyers are risk-averse, look to precedent, and seek
examples of proven success; as Chris puts it, these attitudes "don’t
really promote innovation and pioneering." But he also has
this to say about the motivations of those in a position to perhaps
change things:- People who have the power to change it (partners in AmLaw 100
firms) "have a very high opportunity cost" of changing the status
quo; - People in the middle, with mortgages and kids, don’t have the
wherewithal or the decisionmaking throw-weight to do it themselves;
and lastly - Kids coming out of law school with debt north of $100,000 are
in the poorest position of all to effect change.
- People who have the power to change it (partners in AmLaw 100
Chris began by listening to all the complaints about the industry:
nastiness, competitiveness, work/life [im]balance, lack of teamwork,
and he decided you can trace many of those behaviors to the business
model of the billable hour. So out it goes.
He also asked another intriguing question: Why do all the JD/MBA’s
who start their careers in law firms tend to leave? And his answer
(music to the ears of this economist): "There’s no economic value
to the organization [the law firm] of a JD/MBA—they bill exactly
the same hourly rate as a plain old JD. But you know what: This
is crazy; that’s a lot of talent leaving the industry who could contribute
a lot."
Result: Exemplar’s lawyers will be expected to have serious business
chops—if not JD/MBA’s per se. As they put it:
"Our entire team is comprised of experienced business people
with advanced business degrees or significant business experience. We
strive to be your strategic business partner, not just your legal counsel."
Many firms talk this talk; we’ll see if Exemplar can deliver.
But back to billing, because that’s where everyone’s skepticism will
focus: How on earth can you set a fixed price for an engagement
in advance?
The short answer is, if it’s a large engagement, or litigation, you
may not be able to fix a price for the entire matter (if you do, one
side or the other will end up being burned, which is not a way to foster
loyal, repeat clients).
And Chris readily admits when asked that, "Managing scope of litigation
is a real trick; you never know what your adversary or the judge will
throw at you." But, he continues, "the trick to fixed
pricing isn’t
about knowing everything that could be; it’s
about knowing what’s
certain. So you don’t price for everything that could conceivably
happen; but you can price by the ‘unit,’ say, the cost for filing or replying
to a motion, or taking or defending a deposition."
Further, Chris believes (as do I), that given a large enough "portfolio"
of litigation—hypothetically, all of Home Depot’s employment discrimination
work in the Southeast for three years—that a firm with the wherewithal
to handle it (Exemplar isn’t quite there yet…) could well quote
a fixed price, perhaps with an escape clause for the litigation equivalent
of an Act of God. After all, the insurance industry has survived
and profited for centuries on precisely this model, despite the occasional
Katrina.
Does Chris see any room at Exemplar for hourly billing? Say, for
clients who ask for it? Many of whom have been told by conventional
firms, as Chris attests, that going off the hourly rate "is a way
for you to get hurt financially." To the question of
whether a fixed-fee will entail a built-in profit cushion for the law
firm, to the client’s disadvantage, Exemplar has this to say on their
website:
"We are so confident we will deliver unmatched value in the
services we provide that we encourage you to determine what the value
of the service was worth to you based on your experience. If it was less
than the price you paid, call us, articulate the shortcomings, and we
will negotiate a fair price with you. What we ask in return is for you
to define the unmet expectation, or explain how we could have better
served you. In essence, you will be helping us make adjustments and improve
our service."Providing and improving value to our customers is the primary measure
of our success."
First of all, not a single client has asked for hourly rates instead—and
according to Chris, it would never cross the minds of his initial clientele,
entrepreneurial businesses.
But second, pay attention to this: The billable hour is
premised on an inverse relationship between efficiency and profits; and
fixed price billing is premised on a direct correlation between efficiency
and profits. Chris fundamentally believes that there’s
no way to blend or alternate between the two.
For starters, the
technology infrastructure of billable-hour firms is designed to reduce
only nonbillable time, not billable time. For example, if you can
retrieve a "model document" in five minutes through your KM system rather
than in two hours through walking around and asking, we all know the
five minutes is billable whereas much of the two hours would end up a
write-off.
But conventional firms’ technology does not, by and
large, exist to economize on billable time. And consider:
In a "blended" environment of fixed-rate work and billable work,
where would your incentives lie? To ask the question is to answer
it: The
incentive would be to spend all your time on the billable matters and
be done with the fixed price matter ASAP.
Finally, there’s the not-inconsequential issue of compensastion and
incentives. With a mixed bag billable- and fixed-price work,
there’s
no way to manage profitability because the workforce can’t think
and behave in two different ways at once. And benchmarks
that tie rewards to one model cannot be grafted on to the other one. Given
human psychology, this means the firm would all but inevitably self-select
into two camps, those pursuing billable work and those pursuing fixed-price
work.
And if you don’t think that would lead the Mother of All Wars at bonus
season,…
You may have already surmised the answer to my next question for Chris: "So
there’s no such thing as a partner or an associate?" No, was
the short answer; "everyone’s a revenue partner." But
the longer answer was more revealing: Exemplar is built on a corporate
model, with a CEO, COO, CMO, and soon-to-be CLO, CFO, and "HCL" (Human
Capital Leader).
Moreover, the entire partnership superstructure has been ditched: Because
the problem with a partnership model is that it assumes equity, power,
and profit share, are joined at the hip. But the best management
learning instructs that it’s optimal to disaggregate equity
(to the founders), power (to those who’ve
earned it), and profits (to those who’ve
earned it).
Who, then, can you recruit to buy into the Exemplar Law model?
People who:
- have entrepreneurial spirit;
- have business degrees, and/or business experience;
- believe in what they’re doing;
- have outstanding social skills;
- put character and values first and foremost—not just in
the larger perspective of integrity, but in what kind of person you
are: How
do you treat the waiter over drinks? Do you do fun things with your
life? Are you an optimist?
Is Exemplar the most
unorthodox law firm I’ve ever encountered? Are a passel of the
ills besieging our profession to be laid directly at the doorstep of
the billable hour? Do a large cohort of clients prefer fixed fees? Can,
in fact, high-end legal services be priced that way? Has
Chris Marston drawn a line in the sand? Yes, in spades, to
all.
After ending my conversation with Chris, I was reminded of one of the
more famous epiphanies in business history, when Intel, in the late ’70’s
as a maker of the becoming-commoditized D-RAM chips, was having its lunch
eaten by the Japanese, alternately petitioning Washington for trade barriers
and frantically trying to chase the vanishing hare of accelerating cost
reductions for the sake of survival. Andy Grove—and this
story helps one understand why he’s Andy Grove—brought
his three key people together in his office, closed the door, and said:
"If we don’t fix this, we’re all going to be fired by the Board. And
they will bring in new people who will start by questioning
why Intel is in the D-RAM business. So before the Board does it
for us, let’s walk out of this office and walk back in again as those
new people. Let’s see what they would decide."
Thus Intel entered the microprocessor business. (Update as of 20 May: See below.)
The moral is not only that this is why Andy Grove is Andy Grove and
you and I are you and I, but it’s a story about not being afraid to break
a little, or a lot, of china.
As I said earlier, the Exemplar Law model poses several radical questions
the the conventional model, the answers to which I believe are all resolutely
in the affirmative.
Will Exemplar
Law fly? That,
of course, is the only question on which the jury is well and truly out.
Thanks to an astute reader for pointing me to this more accurate reconstruction of the epiphanic moment at Intel:
Despite Intel’s efforts, the Japanese producers kept gaining ground. “Their principal weapon was the availability of high-quality product priced astonishingly low,” Grove wrote. By the mid-1980s, Intel’s memory chip business continued to head south, with steadily declining sales and rising inventories. Grove felt that he and his colleagues at Intel had lost their bearings and were floundering for direction.
In the middle of 1985 came a watershed moment. As Grove explains in a frequently quoted passage from Only the Paranoid Survive, he was sitting in his office with Moore, then Intel’s chairman and CEO, discussing their situation. “Our mood was downbeat. I looked out the window at the Ferris wheel of the Great America amusement park revolving in the distance, then I turned back to Gordon and I asked, ‘If we got kicked out and the board brought in a new CEO, what do you think he would do?’ Gordon answered without hesitation, ‘He would get us out of memories.’ I stared at him, numb, then said, ‘Why shouldn’t you and I walk out the door, come back, and do it ourselves?'”
Courtesy of Prentice-Hall Publishing.
