How High Quality Are Your Lawyers? (How Can You Tell?)

This is a column about wringing our hands.

Our first text, from the Old Testament conventional debate,
stems from today’s WSJ story on "Axiom
Legal," headlined Newcomer Law Firms Are Creating Niches with
Blue-Chip Clients, discussing the business model of Axiom and other firms,
which is to provide highly credentialed attorneys to corporate law departments
on a contract or project basis, typically at savings of 25-50% vs. what an
AmLaw 100 firm would charge.   Other components of the model are:

• The lawyers are recruited very very selectively—about 1 in 100 applicants
  to Axiom gets hired, according to its founder;
• Their pedigrees need to be gilt-edged, with backgrounds from places such
  as Cravath, Simpson Thacher, and Davis Polk;
• Work is typically performed directly at the client’s, or the lawyer’s home
  office, drastically cutting real estate overhead; and
• Axiom lawyers are provided benefits whether or not they’re working on a
  particular engagement, but obviously only get paid for work performed.

Firms such as American Express, Cisco, Deutsche Bank, GE, Goldman Sachs, Morgan
Stanley, Sun Microsystems, UBS, and others, have signed up and Axiom’s revenue
was $39-million 2007 and is "on pace" to be about $66-million this year.  So,
yes, it’s a real business, even if it will never be an existential threat
to BigLaw in the complex deals or litigation.  Stuart Popham of Clifford
Chance puts
it nicely:  "Clifford Chance has always been at the forefront
of developments in the legal world and welcomes innovation, but does not see
it as a threat, nor as a challenge."

So what’s the problem?  What’s the conventional wisdom about this?

For that, we go to the source for the voices of the anonymously-empowered
cranky observers who comment over at the WSJ Law Blog.  Herewith
a sampling from the piece covering the Axiom story:

• For all the prancing and hot air, they’re still just another temp agency
  peddling flesh that didn’t cut it on the most grueling track. An unfortunate
  and painful fact of life is that excellence in the performance of legal services
  can’t be delivered by dilettantes. People with “other interests” — whether
  it’s playing with their kids or writing an opera — may very well be healthier
  and more interesting people than those who wed their souls to the inhuman
  demands of private law practice. But they are not going to be as good lawyers.
  There is always a market somewhere for less-than-excellence at a discount
  price. Temp firms like this one serve it. But please, enough about the “special”
  quality of their inventory.

• It is fascinating that, yet again, the perception is voiced that unless
  one is willing to work ridiculously long hours and bill exorbitant rates,
  (not to mention in expensive suits and behind mahogany desks) that the resulting
  work product is not good. Says who?

• This [article] highlights a mindset in the legal market which consistently
  causes larger corporations to pay exorbitant premiums for legal services
  of questionable quality. However, it ignores that “pedigree” and large
  firm experience are not reliable indicia of quality touches on a demonstrable
  fact that is largely ignored by the legal market…

  That salient fact being that at most large law firms, in the first several
  years of practice, the only experience that associates receive is doing
  work that could be handled by a competent paralegal or secretary. Moreover,
  in large firms, the billable hour and marketing requirements generally
  mean that the amount of quality mentorship conducted between senior attorneys
  and those highly compensated young lawyers who are mostly engaged in doing
  the work of a clerk typist is minimal.

  By contrast, in a small firm environment, the working relationship between
  partners and associates tends to be very close, with ample opportunity
  for supervision and mentoring. Further, opportunities for all manner of
  legal tasks come to associates much more quickly. The natural consequence
  is that after six years of practice, an attorney whose lack of pedigree
  limited her options to small firms is likely to be a much more polished
  professional with significant amounts of meaningful experience in the actual
  practice of law. By comparison, after six years in a megafirm, the associate
  is likely to be paranoid, jittery and harried from the toxic work environment,
  while having very little meaningful experience in the actual practice of
  law.

• There certainly are “bet the ranch” matters out there that warrant elite
  law firms. But 99.99% of what big law firms deliver is overpriced. These
  guys have identified a nitch [sic: niche] that is waiting to be filled.

• Axiom’s model works if you assume all Axiom projects will have plenty of
  lead time for staffing, have discrete start up and wind down dates, will
  keep the lawyer fully utilized during the project term, won’t morph into
  additional projects, won’t have intermediate deadlines that require late
  nights or weekends and won’t require supervision or input from other practice
  areas. If this was realistic, no one would ever leave big law. It’s the lack
  of control that causes stress, and once you have all of these variables in
  play, it’s going to be the same no matter what sign is on the door.

What exactly is problem these commenters—and the existence
of Axiom to begin with—are highlighting?

I submit it’s an inability, or at least a failure, of clients
to measure quality of legal services.  With no real handle on
what’s extraordinary work, what’s acceptable work, and what’s unacceptable
work, clients buy the "proxy" of prestige firm, law school pedigree, and, yes,
high hourly billing rate. 

Axiom is attempting to perform arbitrage on
that market by promising the gilt-edged pedigree (erego the 1 in 100 hiring
number, which sounds impressive regardless of its statistical integrity), without the
prestige firm name and without the eye-opening hourly rates.  As an admirer
on general principles of firms that try to find localized market failures and
capitalize upon them, I am glad to see Axiom evidently successful and growing. 

On
the other hand, it strikes me they have not addressed the core market information
failure, which is clients’ consistent and nearly universal inability to assay
quality of their lawyers.

Back in February, Steven Pearlstein wrote a column called Failure
in Need of a Theory in The Washington Post (online version
now only available for $$), positing the following:

"I’m wondering if we need a new theory of relativity for economics,
where the standard models are unable to explain a growing number of situations
where highly competitive markets are delivering less-than-optimal results.
The recent credit bubble is one example of a very big market failure for
which we all will pay a serious price. But other, smaller failures also come
to mind.
Think of skyrocketing tuitions among elite colleges and universities that
spend lavishly on winning sports teams, rock-climbing walls and scholarships
for those who don’t even need them, all to attract top students.
Or the runaway compensation for chief executives who would be willing to
take the job for half of what they are being paid.
Or the ridiculous prices paid for "it" handbags, fancy watches
or houses in the Hamptons.
How do we explain why cities are still tripping over themselves to offer
subsidies for baseball stadiums and convention centers in the face of overwhelming
evidence that these diminish economic efficiency and welfare rather than
enhance them?
And how is it rational that first-year associates at top law firms are
paid more than federal judges? …  And how many law firms
have sacrificed the quality of their work and the collegiality of their culture
to improve their profit-per-partner, the all-important metric in the annual
American Lawyer rankings?" [Emphasis supplied]

Mr. Pearlstein fingers the culprit as "relative competition:"

"One thread that runs through all these "market failures" is
that they involve a kind of competition in which "winning" is more
a relative concept than an absolute one — that the goal is not so much to
maximize profits, income or welfare, as economic models assume, but to beat
the competitors. In the process, perfectly rational investors, businesses
or consumers wind up doing things that are irrational, leaving them no better
off than before.  …  The desire for ever-bigger homes, ever-fancier
gas grilles, ever-more powerful SUVs is based not on some absolute notion
of what is good or sufficient, but rather on the relative basis of what everyone
else has.  …  [As] Chuck
Prince, the former Citigroup chairman,
who famously gave this explanation last July for why Citi was continuing
to lend aggressively into what everyone could see was a credit bubble: "As
long as the music is playing, you’ve got to get up and dance.""

Now we’re getting somewhere.

AmLaw firms seeking to confirm their prestigious status (or aspiring
thereto) cannot compromise on matching the "going rate" for associates,
or on the pedigree of law schools they draw their partners and associates from,
nor (once the overhead expenses associated with those decisions have
been assumed) on their hourly rates.  They can’t compromise not because
it’s purely rational homo economicus behavior:  No, the reason
they can’t compromise is because none of their peers is compromising.

But we still haven’t broken the "quality" code.

Our second text, from The New Testament a Fortune
500 law department, tries to do just that.  In an email I received earlier
this week from Jeff Carr, GC of FMC Technologies (granting me permission to
share it, by the way), he writes:

"Bruce – interesting exchange on egos’s, capitalism and win
ratios as opposed to P3 (profits per partner) data.  Here at FMC Technologies
we maintain that the best and most effective way to approach this issue and
to align divergent interests with performance and value is to use a performance
based pay system.  Nearly
100% of our engagements are on one of two models.  The most simple, and
the one that would in our view address your points as well as those of your
interlocutor, is the “report card system.”  We directly tie compensation
to evaluations – firms receive between 80% and 120% of the amount billed based
on how they do on 6 criteria.  Our evaluation form and fee calculator
is attached. 

We have over 1000 attorney evaluations in our own database and we are very
disciplined in performing the evaluations and delivering the results to the
firm – indeed we stack rank our firms with the other firms.  If you want
to increase performance and customer satisfaction, all one needs to do is to
unleash the competitive instinct of a bunch of smart, overachievers, tell them
that they aren’t at the top of the heap compared to our other legal service
providers!  Our experience with this system yields demonstrated results
– firms are making more than 100% of their invoice (on average) and our total
legal costs are static absolutely and down as a percentage of revenue.

If we in-house folks started to aggregate customer focused evaluation data,
we would create a very powerful and very real assessment of attorney and firm
capability, effectiveness and value."

Here’s a screenshot of the evaluation form:

On a 1 to 5 score, from unacceptable through mediocre, good,
and very good to excellent, the criteria are:

• Understood client’s goals
• Expertise
• Efficiency
• Responsiveness
• Predictive accuracy (about budget and results); and
• Effectiveness.

Then there is the uber-question:  "Would you recommend that we use this
attorney/firm for similar work in the future?"

But wait, there’s more. 

In its one-page, plain English "Covenant with Counsel," FMC specifies
additional conditions and expectations.  Among the more fascinating, FMC
will:

• Organize and participate in “after-action” reviews at the conclusion of
  each matter to help us continuously improve performance
• Be flexible, accommodating and creative in dealing
  with potential conflict of interest issues that may arise
• Provide training
  opportunities for your associates through short term secondments or other
  creative arrangements
• Understand that this relationship is built on mutual trust and that by
  eschewing a “no stones unturned” approach, we accept some risk.

And the Firm will:

• Bill you fairly and understand that you seek neither education, elegance,
  new law, nor perfection unless these provide value consistent with your company’s
  objectives.
• We will always seek simple, effective solutions
• Seek to reduce our costs creatively and constantly and share those savings
  with  you while also increasing our profitability
• Not ask for blanket conflict waivers and be responsible to bring actual
  or potential direct, client or issue conflicts to your attention
• Exploit technology to our mutual benefit.

In other words, FMC establishes specific performance criteria for its outside
firms, evaluates their adherence to those standards discipline, and rewards
firms that excel (and punishes those that fall short) by specifying up front
that the final fee may be from 80% to 120% of the estimate.  As Jeff summarizes
(my emphasis):

"It’s
not rocket science, it just takes discipline.  If you pay for hours,
you tend to buy hours regardless of quality and effectiveness.  If
you reward performance, then your firms will perform."

Start thinking creatively
(BigLaw and F500 firms, I’m talking to all of you) about what "quality" in
legal services really means.

Enough with the hand-wringing already.