image [cc] Karan Jain

It may appear I am on some Defend BigLaw run with my recent posts. It’s actually not that, but merely some pent up pet peeves I need to air. This one addresses the attack on law firms for how they come up with matter budgets and fixed fees.

The scenario goes something like this: When a client asks for a fixed fee (typically with little to no scope) and the law firm calculates that number by adding up the number of hours and multiplying it by hourly rates, they apparently are committing some act of near-fraud. The audacity of a firm to just add up hours to give a fixed fee to a client. How stupid do they think the client is?

My response: How exactly is a firm supposed to develop a budget or a fixed fee? Should they just make up a number? Or should they put on their value thinking caps and derive a number that way? Even if they look up fees from past, similar matters, those numbers will be based on … hours.

Now I realize the client is attempting to limit the number of hours a firm might utilize in providing a service and shift fee risk to their outside counsel. And that is definitely one of the outcomes of using a fixed fee. But a firm still needs a method for determining what the fee should be. And hours times rate is the most practical method for doing that.

Once you have the fixed fee, or even just a budget, the goal of limiting hours has been met. So why would you attack the firm for using time and materials to derive a budget? If a client has an issue with a proposed fee, they may want to negotiate.

I believe this tension is symptomatic of the market-level breakdown of trust between client and lawyer. This issue is a pet peeve because I think the concern is seriously misplaced. If clients and firms want to better align cost and resources, instead of attacking the number of hours, they should be sitting down,setting strategy and prioritizing resource allocation (can anyone say Legal Project Management?). This type of approach drives a clear alignment of law firm effort with client needs and goals. I suggest fewer hours should be an aspect of the clients’ cost management goals, but not the only one. As my mentor used to say, “If reducing outside legal spend is your only goal, stop hiring lawyers. Just pay the settlements and move on. Your cost will go to zero.”

If you truly want to meet cost management goals while continuing to meet the legal needs of your clients (internal clients for in-house lawyers, external clients for law firms), then: Have The Conversation. Throwing stones only leads to shattered glass.

image [cc] Andrew Mangum

Following on the heels of recent posts on the market value of BigLaw and the behavior of partners as workers, we explore the merge-point for those two topics in discussing partners as equity owners.

The market refers to the owner level of law firm partners as “equity partners.” After giving this term some thought, I came to the conclusion that equity is not the right word. Equity implies a share of ownership (beyond what “partner” implies). And when you own a share of a business, you have certain rights. One is the right to receive dividends based on your proportional share of ownership. Another is having a say (a.k.a. a vote) in the business. This vote is usually focused on choice of leadership or management. Finally, you own an asset which you can hold or sell.

For law firms, and presumably most professional service firms, these rights take different forms. Instead of dividends, partners in firms receive a proportional share of profits. This difference may appear to be nuance, however as we have previously explored, partners are both owners and workers. Yet their pay is based on some sort of modified ownership share that is based heavily on their effort as a worker (ala billable hours) . The point: partner pay is not a dividend like those paid on a share of stock.

The second right to vote on leadership is actually enhanced and expanded in a law firm. Here the owners have a say in far more than leadership selection. Often they have a say in the minutiae of operations. This right makes it difficult for leadership to make decisions and implement them, since the various and numerous owners have the ability to influence, amend and outright thwart those decisions. The impacts of this are far reaching and left for another day’s discussion. Needless to say – this type of ownership right makes it hard for firms to make effective operational changes. And again, this is not like the equity rights of a stockholder.

The final right – to sell your asset – does not apply to equity partners. Most firms have some level of capital buy-in for partners. However, that does not equate to buying a share of the firm. If that were the case, then partners proportional ownership and income would be determined by how many shares of the firm they had purchased or earned as executives. Instead, a ‘modest’ capital account exists. Partners cannot sell their shares from this account but can only withdraw some proportional share when they leave or retire. My guess is most of these capital accounts are pennies on the dollar compared to the annual revenue of a given firm, evidenced by the recent Dewey press, Therefore the asset value of a partner’s ownership stake is negligible to nonexistent. This fits with the concept that BigLaw firms have zero market value, since that is how they are internally valuing the “real” ownership shares.

My epiphany related to this subject came into focus based on a call with a colleague at another firm. It’s partner compensation season at his firm. If you have never lived this experience, you are not missing much. At its foundation, this effort is a battle for partnership share, which determines individual partners’ incomes. The epiphany came when I considered that partners’ incomes go down when their shares are reduced. This can occur on a relative scale or via a direct reduction. When laterals are added to a firm, an individual partner’s proportionate share is reduced. This reduction is similar to a company issuing more stock and technically shouldn’t result in a reduction in income, since the value of the firm should rise at the same time. 

 When the second method is employed, a redistribution of shares occurs. And here’s my epiphany: companies cannot do that. This would be a ‘taking without compensation.’ Taking shares from one owner and giving them to another is not legal. Yet law firms appear to do this on a regular basis when they conduct the partnership compensation dance.

The epiphany in practical terms: partners do not hold ownership shares in the standard business sense. If they were shares, they could not be taken. Borrowing a political phrase, equity partner implies on ownership share, when in reality equity partners are better called Partners In Name Only (PINO). Law firms (and perhaps many professional service firms) have convoluted ownership. Thus my assertion that “Equity Partner” is a misnomer. This odd blend of ownership and compensation drive unique behaviors. Are they good or bad? Is there a better way? 

 I can see the value of a much brighter line between ownership and compensation having value for a firm. Partners could have two distinct rewards pools. Once for driving the success of a practice and thus the firm, much like an executive would receive. The other purely based on share of ownership.

This post is a bit of a rambling since I see no definitive conclusion in the short-run. At its base is yet another question about the business model of a law firm. Law firm business models are unique and evolved out of a certain market circumstance that no longer exists. This equity question is another manifestation of that apparent disconnect. And more evidence law firms need to rethink fundamental aspects of their business.

Image [cc] StockMonkeys

Some recent activity on Twitter got me thinking. People love to bag on BigLaw (me included). Much like taking shots at Microsoft or Blackberry, BigLaw is an easy target for many. Large firms move slow, are managed by committee too often, and appear to have an aversion to decision making (see how I did that?).

But recent comments about how BigLaw has been making too much money have struck me as odd.The crowd appears a bit fickle and hypocritical. We attack BigLaw for not acting like a business, then we turn around and attack them for acting like a business.

From my economics porthole, BigLaw has behaved quite rationally for the last 15-20 years. The market presented a scenario and BigLaw moved to maximize profits in that situation. And unlike Microsoft or Blackberry, BigLaw did not hold some monopoly, or near monopoly on the market. Admittedly, it did have a favorable market with growing demand, but no one firm was in a position to dictate terms and pricing. And based on BigLaw’s performance in this period, any other business would be jealous of its sustained growth in profits over time.

Yet now, not just based on the recent Twitter remarks, but also based on an apparent client backlash, this rational market behavior is being held up to scorn.

The market dynamic has now changed and BigLaw will adapt or it won’t. Last summer I posted on 2012 as the Year of Pain for law firms. It turned out it was less painful than I predicted. I am still reviewing year-end reports and thinking about how that played out, but the bottom-line seems to show BigLaw is not crumbling. Does this mean they are they adapting? Without enough pain it’s probably too early to tell. However, I will say there is significant and growing motivation for change and some really smart people running these firms (for the record I am not talking about me). So I wouldn’t count them out.

Unless making money suddenly becomes socially unacceptable, I expect BigLaw to continue in its rational market behavior, finding ways to maximize profits, likely with a modified business structure.

Image  [cc] calliope_Muse

I’ve been on the ‘value’ bandwagon for quite some time now, but I recently had an epiphany courtesy of Ulla de Stricker during the recent CLA webinar “Becoming Indispensable: The Value Proposition”. It was one of those moments where you understand that you’ve been headed in the wrong direction; a real lightning bolt. I was so affected that I followed up with Ulla for a further discussion.

So, what led to this epiphany? Okay, here you go: accept “what is”. Sounds like a simple concept, right? But in fact, this is the exact opposite of what we’ve been doing for the past few years. Ulla’s theory, in a nutshell, is that we work within the current value perception of our organization and stop fighting to demonstrate our value in areas that it is actually not valued. While this makes perfect sense, it isn’t necessarily what we’ve been advocating. Instead, we try to prove our value using our own definitions, but does any of it align with the value perception of the organization? If it doesn’t, what are we doing besides beating our heads against a wall?

Ulla takes a pragmatic view and says, “it is more productive to work with the existing perception of value” than to create a new one. I believe we have all been blind to this fact and then wonder why we aren’t valued by our organizations. As Greg recently stated in his post on Value:

There’s a fine line between providing value every day and having to explain to those we work with why they should understand why we are valuable.

So, what should we be doing? Ulla suggests a very simple solution: follow the money and you will be able to tell what the organization values. It may not be what we value or even where we think we can contribute at the highest level, but if X is what the organization values, then X is where we must be. This means there is no identical road map for everyone. We must each create our own value within each individual organization based on that organization, and not some preconceived notion of the value of an information worker. That, when you think about it, actually sounds more valuable.

Note: See also Ulla’s recent blog post: Working with Reality: Times Have Changed…So Can We

Honestly answer the following questions:

  • What did two of your High School classmates do this weekend?
  • What is the favorite band of one of your peers that you hang out with at your professional conferences?
  • Can you find a link to an article that someone you follow on Twitter, but you have never actually met, wrote the last week?

Now, answer these same questions:

  • What did two of your law firm Partners do this weekend?
  • What is the favorite band of the Practice Group Leader you talked to last? (Or, any PGL for that matter.)
  • Can you find a link to an article that ANY attorney in your firm wrote last week?

Isn’t it a bit strange that in this age of information, we know more about people we haven’t met in 25 years, if ever, than we do about the people that work down the hall from us?

Of course, most of us are gathering this type of information through our Facebook, Twitter, LinkedIn, and apparently, even Google+, these days. At the law firm, however, many of these same resources are blocked or discouraged, and no viable (AKA, “secure”) alternatives are being offered to help co-workers get to know each other beyond the breakroom discussion, or the occassional CLE luncheon.

Is it really important to know what the Associate down the hall is planning this weekend? Is it critical that you can name a band of the PGL for Bankruptcy? Will you suffer in your work if you didn’t know that Partner X wrote an article in the State Bar Association Journal last month?

If your firm doesn’t allow for social media interaction, then it would seem the answer is no. It seems that there is a lot of interaction going on in the world, but within firms, the only approved version is actually a platform called InterAction, and it has very little to do with the type of communications we are using to connect with others in the world. It does seem a shame that I know less about the people I spend 8 – 10 hours a day in the same office than I do about someone I haven’t actually met face-to-face.

I suspect as long as this type of social interaction is seen as wasteful by most law firms, I’ll continue to get updates on the status of my High School friend’s new Great Dane puppy, Max, than I’ll know about what’s going on in the life of the Partner down the hall. After all, it’s probably safer that way. Ignorance is not only bliss, it’s secure!

“To provide the public with open access to electronic federal court records.”

That is the plan for The Open PACER Act being pushed by OpenPACER.org.

Today there was a cross-posting on the Law Library Blog (not to be confused with the Law Librarian Blog), and Legal Research Plus. You can read the proposed bill and see how it asks for open access to the federal court records.

We’ve talked before on PACER and open access (which I took some criticizm.) I think that the idea of a free PACER system, especially one that better modernizes the platform, would be great. However, I do not want to see the Federal Court System chopped off at the knees by removing a source of funding for the Courts without offsetting those cuts. So, if the Courts lose PACER revenues, then Congress should make sure they balance that by offsetting the costs through increased funding. Currently, I do not see that in the Open PACER Act. Any chance for a friendly amendment??

Image [cc] Tim Pearce

Law firms invest in associates. That seems obvious. They bring in the best and brightest, planning to groom them into future partners. Firms spend considerable sums, investing in these assets. So for fun, let’s take this “investment” as a strategy at face value.

My recollection of the stat is that after five years only two out of ten new associates will still be at a firm. That stat alone suggests ‘investment’ may not be the right word or at a minimum, we would call this a poor investment model. Unless a firm can realize 4 times the return on the associate investments that actually stay, it will be difficult to make the ROI case. 

Perhaps equally interesting from a business perspective is the matter of what is happening to these investments. Where are they going when they leave the firm?

Obviously these trained associates become available for someone else to capitalize on. Historically this was done primarily by clients. As much as they may like to complain about paying to train first and second year associates, they seem to have no problem hiring them once they are trained. To my knowledge, not many clients hire lawyers right out of law school. Why would they? These people are not trained to practice law.

But now many others are joining in, happy to make a return off of the castaway investments of law firms. Non-firms such as Axiom, LPOs like Pangea3 and even new alternative firms such as Valorem Law Group are more than happy to cash in on these investments. Even accounting firms are hiring up trained associates. It’s my read that these new business models are dependent on this flow of trained lawyers.

And why wouldn’t they take advantage of this situation? There’s a glut of these investments out in the market right now, begging to be picked up.

Enter the Conundrum: This pool will dry up … soon enough.

Although the market may currently have a glut of trained, castaway associates, firms are now hiring fewer and fewer of these investments. Not because they expect to improve their retention above the 20% number, but merely because demand for hours is down. So as the demand for castaway associates is rising, the supply is dropping. Adding fuel to this fire – law school applications are down by 30%.

So even though the market is currently over-supplied with these people, the market forces appear to be quickly correcting that imbalance. In many respects this is truly a conundrum. Trained associates are obviously a valued asset, to everyone in the market. Yet the market is seeing fit to devalue them to the point that fewer people even want to try to be one. Or at a minimum, the willingness to train them is disappearing.

As an economist, I am very curious to see how the market will respond once the pool has dried up. You would have to assume the gap will be filled since markets tend to fill a vacuum. An alternative for training these people should emerge. But here’s the real question: Who will be able to make a return on that investment? If you figure that out, give me a call. I may have a few bucks to get things started.

Big hat tip to my friend Jason Wilson in pointing out the new rebranding of Westlaw into the new “Legal Solutions” product, and for pointing out that Thomson Reuters is using a very familiar looking color and layout design that seems to be borrowing heavily from the Bloomberg Law product. Perhaps Orange, Gray, Black, and Blue are just the hip trends in New York these days. But, seriously, if you took away the mention of Bloomberg Law and Thomson Reuters’ Legal Solution, you might be hard pressed to tell the difference in the two products. [Note: an Arthur Andersen alum pointed out that they actually had this color scheme by in 2002 way before TR or Bloomberg started using it.]

Jason sums up my thoughts quite nicely on the similarities:

TR pages are getting dangerously close to the same color scheme of Bloomberg Law, and it makes me wonder why they are trying so hard to compete with something that hasn’t seen widespread adoption?

Alright Lexis… apparently you’re late to the game. Time to switch Lexis Red, and go with a Bloomberg Orange! After all, anyone that is in the know, knows Lexis is much more in the crosshairs of Bloomberg than Thomson Reuters is.

Judge for yourself (FYI – Bloomberg=Left; Thomson Reuters=Right):

I’ve written about Andy Hines, Futurist Professor from the University of Houston, before on this blog, but I just watched his TedXHouston video on what it is like to be a professional Futurist. The talk really caught my attention around the 6:55 portion where Andy starts delving into understanding how new ideas and change tend to be viewed by the members of your organization. He breaks them into four groups and defines how the members of each group tend to react to organizational change. For any of you who have implemented change in your organization, this will make perfect sense to you.

  1. Frogs – Understand foresight and they are good at getting things done in the organization. However, they are rare. The value of Frogs is that they can help you sell your ideas, and they can be champions for change.
  2. Lemmings – These are the people that pop out of the woodwork when a new idea comes around, and they say “Cool!” They can be an excellent support group, but they are the early adopters and not the mainstream of the organization. If you start to believe that they are the norm of the organization, then you all go off the cliff together.
  3. The Vultures – They don’t like foresight, they don’t like change, and they probably don’t like you. Best thing you can do is avoid The Vultures because you cannot change them.
  4. The Rats – This group is the vast majority of any organization. The Rats are really good at diagnosing what’s going on during the process of change. If the idea is a good one, they come running; if it is a bad idea, they are the first one off the sinking ship.

After breaking down the four groups, Hines turns the focus back on the person attempting to introduce and move the idea forward. First and foremost, “Good ideas don’t necessarily sell themselves.” You need to constantly sell people on your ideas.

Second, “You can’t be too worried about credit.” Once the organization adopts the idea, you may be pushed to the background (or completely out of the picture.) That’s okay. You’ve done your part in getting the organizational leaders to adopt your ideas. (Just remember to remind your boss that you were the generator of this idea.)

One other point that Andy Hines makes toward the end of the presentation, probably defines most of you reading this article. Hines calls them “The Futurizers.” These are the people that read articles, go to presentations, listen to their peers, and then come back to the organization and asks “Why aren’t we doing this? Why aren’t we thinking that way? Where are we going?”

Check out Andy Hines’ presentation below, and also check out his blog.

Image [cc] Loren Zemlicka

I attended a seminar last week on process management in legal departments. Onit sponsored it and the content was quite useful.

However, beyond the value of the content on process innovation, I retrieved a golden nugget of wisdom. Bradford Power, an expert on process innovation and change, was speaking on the value of process improvement. He gave two corporate examples highlighting two different models for driving change. The first one was “identify fat and fire it.” This model was self-repeating every few years, since the fat would reappear in time since the poor processes remained. The second model was ‘change the process.’

Fire the Fat is obviously demoralizing for a team. This lead to a discussion about how this approach is counter-productive. Then Bradford mentioned studies on what really motivates employees, which lead to my nugget. He referenced the outdated “command and control” management model too often used by organizations. In that world motivation is obtained through carrots and sticks. Here Bradford made the point that carrots and sticks are poor motivators. Studies show they may provide some short-term motivation, but in the long-run they produce negative results.

This is where PAM comes in.

He commented on how change is 10% systems and processes and 90% people. So people is where you should focus your change resources. And PAM is the proven way to entice that motivation for change. PAM actually has benefits way beyond change management. She results in happy, productive people.

Meet PAM:

P = Purpose. Employees that have a known, shared purpose are happier and more motivated. For law firms a shared purpose might be better client service (e.g. phone calls returned timely). Or it might be faster resolution of cases, or it might be better settlement outcomes. Whatever it is, having an understood, shared goal will drive people to success.

A = Autonomy. People, especially in knowledge worker roles, do not like to be micro-managed. They prefer to be given a goal and some resources, along with the autonomy (and responsibility) to get it done.

M = Mastery. People also like to be masters of their domain (hold the Seinfeld references). They enjoy being respected as a knowledgeable expert on a given subject.

Which brings us back to PAM and why I want to work for her. Bradford’s words really rang true for me. Yes, I want to be paid what I am worth. But more importantly, I want to feel the value of that worth in my job. If you ever get to work for PAM, count yourself as lucky.

PAM also highlights the apparent gap between lawyers and other professionals in the industry. She’s probably there for many lawyers, but only makes rare, guest appearances with the other professionals in a firm. Firms should really consider bringing PAM on-board for the entire firm as they embrace change.