I wasn’t going to write about the DLA over-billing allegations that came to light about 10 days ago because I didn’t think there was much to say except that they reflect badly on all of us, and on second thought that they reflect badly on all of us.
But as it turns out it launched an interesting train of thought if you care to put together Law Firms and Overcharging: The System Itself Is Rotten, by Mark Harris, CEO of Axiom, and Tim Bratton, the GC of the Financial Times, writing Client power: why it’s up to GCs and their budgets to drive real change in law. Disclosure: I know Mark, pretty well, and Tim, not all that well, but I haven’t discussed what I’m about to say with either of them. And, although I wish I could say this was an “exchange” between Mark and Tim, their pieces were published in separate media (Forbes and LegalWeek, respectively) and five days apart. And while the corporate interests of both Mark and Tim are probably well-served by what they each have to say, I urge you to set that aside as you read their pieces and focus instead on the longer-term implications for Law Land and client relations.
Mark kicked things off with an admittedly familiar assault on the billable hour, saying it creates an incentive structure that is “inherently adversarial and zero-sum” and says that “bad behavior is going to result.”:
Like most denizens of the legal profession, we were somehow both completely shocked and at the same time not at all shocked by the recent reporting on alleged bill-padding at the global law firm DLA Piper.
But Mark has two more nuanced points:
- First, no matter how loud the drumbeat of calls for reform of the pyramidal/leverage structure becomes (including from many young associates themselves), by the time one is a sufficiently senior equity partner to actually be in a position to effect change, you’d “be crazy to follow through.” After all, you only have a relatively short number of years at the top of the food chain in which to reap the rewards of all the hard work you’ve put in.
- Second, assuming law firms aren’t going to change things radically unless they have to, Mark points out they may have to: Change could be driven by clients.
The calls for change from general counsels must be answered if for no other reason than they, and they alone, control the hundreds of billions of dollars spent on corporate legal services annually. And because, for the very first time, that’s a muscle they are willing to flex.
Indeed, if we’re going to see real change, then clients must allocate their business accordingly, as many are starting to do. How does that saying go? Fool me for 100 years, shame on you. But fool me for another 100 years . . .
Now comes Tim Bratton, who pretty much dismisses the substance of the DLA emails with a dose of candor:
I’m willing to bet that most organisations, not just law firms, have some emails hiding on their servers that would – if taken literally and out of context – show that organisation in a bad light. That’s email for you and you can’t control the uncontrollable. So anyone doing too much hand-wringing at the email etiquette of others had better keep their fingers crossed that their luck holds in the future.
Next, Tim (as have I) states pretty much the obvious, by writing that the billable hour remains very firmly entrenched:
Despite constant (in fact boringly consistent) talk of market change, believe me the hourly rate is alive and well and remains the starting point of most fee negotiations and the cornerstone of law firm metrics.
And he, like Mark, concludes that change will come—if ever—only if clients insist. Syllogistically, Tim argues that (a) clients hold the purse strings; (b) money is control; and (c) control can demand change, and pointedly says that “No amount of blogging, tweeting, or legal ceremony award giving is going to change the fundamentals of legal service provision. Only the reallocation of client budgets is going to do that.”
So it would appear that here we have violent agreement between Mark and Tim; what’s so interesting about that?
Actually, I’d like to take one step forward and one step back.
- Pro what they’re saying: Law firms will, to be sure, do what clients demand. Self-interest dictates no less, and since firms have a solid track record of not changing unless they absolutely have to, this may be the only—or surely the fastest—way for change to come about. But there’s another side to it, namely:
- Con: All clients are not alike. Not in their legal spending budgets, their sophistication, the size of their in house departments, their purchasing metrics, and so on. So long as Mark and Tim are only talking about, say, Fortune 500 or FTSE 100 clients, who can seriously disagree? And indeed, those corporations, at the top of their own food chains, spend a lot on BigLaw. But there’s another world of smaller and medium-sized corporations, publicly and privately held, that don’t have Ben Heinemann as GC, not to mention the enormous sector of the 1% high-net-worth individuals. Will they insist on change? Are they even aware, more than dimly, of this conversation?
Now, what this means to your firm depends primarily on your client mix. I’ve recently gotten to know a firm that gets over half its revenue from a single client, as well as a firm that has 15,000 active clients, with the top 100 accounting for barely 25% of total revenue. If you think Mark and Tim’s prediction is a clear and present danger, wouldn’t you rather be Firm #2?
Between the “classic” work that Big Law does for Fortune 500 companies and the legal needs of small/medium size companies is the immense legal landscape controlled by the claim-related litigation of insurance companies. That encompasses both the firms they hire to represent themselves in coverage disputes and the firms they hire to represent their insureds. When they abandon the billable hour, perhaps it will be toast; not likely before that.
i think this just a fitting example of what Clayton Christensen discusses in “The Innovators Dilemma”. Incumbents will likely not embrace fundamental changes to both their values and processes.
In order to adopt the billable hour, a firm would need to set up a completely separate group which it owns but might be branded differently and have that group work only through fixed pricing. The billable hour is too ingrained in the heart of Biglaw. If the companies/clients want it to change they need to understand this concept, especially when dealing with lawyers. It difficult enough to get businesses to move quicker and adapt but to get lawyers, whose business depends on constant legal arguments and finding loopholes to regulations.
The best solution to clients is to look to new entrants in the legal sector, like Clearspire, Axiom, and LPO’s who charge significantly less. They were formed on the premise to find lower cost methods to providing needed legal services.
They could also pick a select group of attorneys they want to work with from the firm and propose that they leave the firm to start their own firm where they work on a fixed fee basis. They could offer them some type of incentive in either funding or exclusivity type agreements.
Trying to change the fundamental characteristic, ie the billable, is a losing strategy. Hopefully In House Counsel will see that and take the appropriate actions.
Legaltruth:
One real life example is Riverview Law – a fixed fee firm that has DLA Piper as a main investor: http://bit.ly/15j5BWn.
I would add to Jess’ observation any serial litigants, both insurers and those organizations with significant self-insured retentions. They do exercise the market power that Bruce describes, usually in the form of rate pressure and in that respect have been forcing efficiencies and innovation from lawyers who want to be profitable under a lower revenue model for many years. LT is also right about the stickiness of the billable hour, but not just for firms–for many clients who have no other way to gauge the value of law firm “outputs” than using hours as a starting point. But no matter how clients want to pay us,they largely want to pay less, and most firms will need to re-think legal process managment to maintain profitability.
I work in a corporate law group that focuses on early-stage technology companies (lots of small to mid-size clients), but that is attached to a major law firm that serves multi-billion dollar clients. I can tell you that demand for efficiency and technology adoption is several orders of magnitude greater on the small company end.
To give you an idea, 10 years ago a convertible note bridge financing for a tech startup would typically run $15-20K in legal fees. Five years ago, that number was about $5K-10K. Now firms like Wilson Sonsini (not exactly a discount firm) will close one for free on AngelList.
I documented the history of this “deflation” a while back on my blog: http://siliconhillslawyer.com/2012/09/14/the-economic-deflation-of-startup-law/
It’s not that these small tech clients have somehow banded together and told their attorneys “adopt document automation or I’m going elsewhere.” All it takes is a handful of entrepreneurial law firms to make the first move, and not be shy about letting the world know that they can do it faster, better, cheaper. Couple that with networks, blogs, etc. where entrepreneurs find out about it, and a “sink or swim” culture among law firms develop.
When I talk to attorneys doing work for much bigger clients about the way we operate in tech, they almost always ask questions like “why on earth would you want to charge a fixed fee, or do the same work in half the time?” They must not have had a client go to Axiom yet. Yet.
And when they do, the only chance in hell that they’ll have of surviving is by talking to those denim-wearing tech attorneys within their firm who knew how to spell “disruption” ten years ago.
So here is a new idea that I haven’t seen proposed yet as a method to change the legal billing issue: have clients put pressure on AmLaw for a new ranking based on market share. It could be on the number of clients each firm has or the number of cases each firm is working on. This information could actually be given by the clients rather than the law firm; clients could just report on which law firms they have used during the year and for how many cases. If AmLaw developed a ranking for either the number of cases or number of clients a firm had I believe we would see a shift in the thinking of law firms. They would need to get more clients or cases in order to be ranked higher.
Some may question why firms would want to be at the top of the list, well I suspect that clients like to work with firms that other corporations are using. Corporations like Law Firms can be very risk averse too. If they see that certain firms have greater market share they may want to go with them because they are the less risky firm to go with or they may seem them as the elite firm. If something went wrong in the legal work and the Board of Directors had this ranking they may question why the company used a firm few others were using.
How will this improve the legal industry issue? A new focus needs to emerge in the legal field over marketshare and not on profits per partner. The list title could include the word “Rainmaking” or something closely associated with it. If marketshare was a major concern for both clients and law firms you would see the firms making pricing and process adjustments to be able to take on more clients. That might include unbundling services which likely leads to greater efficiencies being reached or dropping the hourly rate proposed in order to get the work. There are many ways to gain market share but the point is that clients need to use more indirect methods of reshaping the legal industry then they are currently using, and the ranking systems are a good start. Google started as just a new ranking system, but see where that has taken us. The US news seems to have a great deal of power of the legal education system and I suspect that a new AmLaw ranking dealing with “Rainmaking”/marketshare would also have a great influence over the industry.
All good and valid comments. The billable hour is toast – the tipping point has been reached and alternatives are now actually out there for the “early adopters”.
The insurance industry – with its “faux” solutions (blended rates, basic guidelines, caps, etc. – is certainly not an early adopter and has only helped the billable hour hang on.
The tech companies as Jose points out (and classic “early adopters” have already blown past traditional billing.
For those in the middle, the bridge to the future are the Axioms and Clearspires, LPO’s (which BigLaw is finally embracing), and scoping and LPM’s that currently abound. All these are viable solutions, but still playing at some level within the billable hour paradigm.
BigLaw’s fundamental problem seems to be whether the unwieldy partnership model can change fast enough in these heady times. I believe that answer is a big fat NO. The rest of the world is bringing business organization to the law (ABS) which allows for fast and nimble change. The U.S. continues to resist and is starting to look like the those bloated sloths laying about during the last days of Rome…
I agree with Mark that the issue is a systemic one, but that in itself means that no one actor – even the GCs – can change things in isolation.
The underlying philosophy behind law firm (and other professional services) pricing models is based on a cost plus model. It just so happens that in a services context, the cost is predominantly time based. The reason that change is so slow to happen is that the basis of the cost of sales has not changed – it is still the cost of the people delivering the work.
Changing the system means breaking the nexus between the cost of sales and the fees charged. Doing this allows the law firm to reap the benefits of (and be incentivised to seek) efficiency for its own sake, rather than just enough to remain competitive. However, the experience of the Big 4 has been that pricing becomes a race to the bottom, and any efficiency gains are immediately given away as discounts. At this point the firms revert back to “cost plus” as their minimum price.
The GCs cannot impose this discipline alone. The more they try to do so, the more they drive discounting and the more the firms become locked into the cost plus mindset as they race to the bottom. The system as it sits is adversarial, but trying to change that by having one of the existing adversaries become more intransigent will just reinforce the entrenched position.
Systemic change is hard, but it is not impossible. What it will take for change to happen is increased collaboration and understanding between the clients and the firms. This will include a redefinition of what the clients actually want and value from those firms (I would expect this to include disintermediation of several services). A key piece of this (and in my prior roles a personal bugbear) is that any solutions will require increased price discipline within the firms – allowing individual partners to take one-off decisions that are “strategic investments” undermines the credibility of change.