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.

Seems that Client Relationship Management (CRM) expenses aren’t the only perceived wasteful expenditures on a law firm’s balance sheet. One other costly resource that firms seem to be taking another look at lately is their Martindale-Hubbell contracts. One librarian from a mid-sized Georgia firm decided to query her peers to see if they also thought that M-H was worth the investment. Although this isn’t a comprehensive or scientific survey, it seems to show that the return on investment for Martindale-Hubbell doesn’t seem to match up with the cost.

Hmm… anyone else notice that both the CRM and M-H products are touted as resources for the attorneys, but end up essentially as resources for the Marketing department??

Here are the comments from other librarians about the ROI of M-H:

One thought:  can the firm attorneys QUANTIFY how many referrals (how much business) they got in the past calendar year?  Versus where referrals and new business originated?  Was enough generated to offset the firm’s cost of listing?  You may have to piece this together depending on how your firm does things, but in-house data will carry far more weight than outside studies.

One reason we dropped was the lack of business M-H generated.

[from a corp. legal department] I don’t know if this will have any sway or not, but as a huge consumer of legal services from many, many law firms throughout the US, we do not use MH when making a decision on what outside counsel firm to use.  And we dropped our own listing last year.

Have you tried getting Marketing in on the “Drop M-H Bandwagon”.  It worked here but the change came from Marketing since they were paying for it. I just verified that no one ever used it (housed in the library). Then we showed them how to access this same information on online.

A couple of years ago after we decided not to participate in Martindale, we had to make the decision again because the publisher gave us a free year.

I had an intern and a case clerk go through Martindale online to see which of the AmLaw 100 and 200 firms had listings in M-H and at what level. Don’t “the powers” always ask what your competitors are doing?  You can see the results in the attached (now dated) spreadsheet.

We opted out and put the money into other marketing projects (like a refurbished website).

I have that MH in a budget too.  I think transferring it to marketing or some other department will go a long way to having the cost reviewed.  My attitude towards MH is completely indifferent when I don’t have to pay for it out of library funds.

This is a comment from our marketing director re canceling MH:

“I am happy to discuss with someone. It is a complicated discussion…but the evaluation we completed clearly indicated that the ROI on the dollars spent were no longer justifiable.”

I remember discussing this via email with the local law librarian group, and many had canceled MH. One reason is that many folks, both attorneys and the public use Google to find attorneys. Plus MH’s cost were too high.

I’m not sure whether your request has drawn much response.  If not, you just ask librarians to tell you whether their firm has dropped M&H.  I suspect that the resulting list would be a Who’s Who of American Law Firms.

Based on comments received and related blog posts I thought I would clarify my Convergence post. References to “convergence” can touch on two separate issues:

  1. Limiting the number of ‘panel’ firms will you entertain bids from?
  2. Limiting the number of firms you want to manage?

When it comes to #2, I agree that a smaller group of providers is easier and more cost effective to manage. This is especially the case when using the billable hour. In-house counsel who spend their time pouring over time entries making sure they are getting ‘value’ do better with a smaller universe of timekeepers. They get familiar and comfortable with the style and method of the timekeepers involved. So they become more efficient and effective at managing the outside counsel involved. (Of course this begs the question: Why spend your time reviewing time entries?)

When it comes to #1, and this is where my original post comes from, I think in-house counsel should not be converging in a buyers’ market. The RFPs I have seen lately are not about adding competent providers to the list – they are about narrowing the list of firms. These RFPs state something to the effect of, “We are reaching out to the firms we know and trust to respond to this RFP. In this process will we cut the number of panel firms down to …”

First off they are spending significant resources going through the RFP process. Second, the result is fewer firms “they know and trust” bidding for their work.

Huh???

I would suggest in-house counsel let ALL the acceptable firms bid for your work. In a buyers’ market, price and value will narrow the number of winners down for you (meeting #2 above) and this will all be done … for free.


In an attempt to out do the “X for Dummies” approach, Greg and I are going to use the “Whadya Stupid or Somethin?” brand and see what we can make of it.

This week I saw one too many RFPs stating something along the lines of, “in order to better control our costs, we are going to trim the number of outside firms we use.” Like my ranting post on the term “Loss Leader,” this was the proverbial last straw.

And like my Loss Leader post, I’d like to go back to Econ 101 thinking. In a market that has made a dramatic and lasting shift towards a buyers’ market, that also happens to be aligned with the biggest recession of the past 100 years, what’s the best buyers’ strategy?

  1. Take advantage of these market forces and get sellers bidding against each other along the lines of the good ole supply and demand graph? or
  2. Stifle that competitive force, cut out most of the sellers in the market and realize greater leverage with fewer providers.

The correct answer is 1. By definition, in a buyers’ market you already have that same leverage with every provider. Why would you want to eliminate competent competitors from bidding on your business, putting downward pressure on prices (a.k.a. your costs)?

My best guess: GCs (and their consultants) checked the ‘convergence cycle’ calendar and it said it was time to converge. I think they must have missed the “Spring Forward” announcements over the weekend.

Toby and I have talked to a lot of folks about the profits that legal research vendors (AKA Wexisberg™) make and how they are lagging indicators during a down economy.  Mostly because they have locked firms into multi-year contracts –some with built in annual increases.  It seems that our thought were verified today when LexisNexis’ parent company announced it had a “Robust” 2009.  Sales were up 14% and operating profits 13%.  Not too bad in a year that had most of its customers scrambling to slash budgets as much as possible.  Not as good as those 30% profits that ThomsonReuters are claimed to have, but not too shabby.
There were two things that caught my attention with this announcement.  First was the funny comment I saw on Twitter:

And second was the ‘corporate-ese’ that backed up Toby and my beliefs that they are lagging indicators in a down economy.  Take a look at this sentence attributed to Reed Elsevier’s Chairman, Anthony Habgood:

“The late cycle nature of some of our markets makes for a tough environment in 2010.”

How could you not love a phrase like “late cycle nature”???  I’m definitely saving up that phrase for my next contract negotiations!
[gl]

“Always and never are two words you should always remember never to use.” Wendell Johnson A recent ‘debate‘ on Ron Baker’s Verasage site got me thinking about hourly versus value or fixed fee pricing. The substance of the debate between Ron and Colin Jasper focuses on whether hourly billing is ever justifiable. As reflected by the above quote, I am skeptical when someone claims you can “always” do one thing, or “never” do another. So I respectfully disagree with Ron on this one, noting that it is not the law firm who will decide if hourly billing is the right option, but the client. Where I agree with Ron generally is that fixed fee pricing isn’t rocket science. Engineers, architects, construction companies, even plumbers are service providers who have been doing this for years. As a provider, you develop a scope of work and then give the client a price for it. From my growing experience in dealing with alternative fees, I can tell you the scope of work effort is the part outside and in-house counsel struggle with the most (alluded to in Colin’s reply to Ron). For years both sides have used this problem/challenge as an excuse for not having fixed fees. The common reason was that “there are too many variables” to possibly develop a scope of work for a matter. Although lawyers don’t use the term ‘scope of work’ they are referring to their inability to define the parameters of a legal matter due to outside influences. This reasoning applies to both litigation and transactional matters. But let’s take a pragmatic look at this approach. At the outset of a case it may be very difficult to develop a useful scope of work. At that point, many critical unknowns may exist, like opposing counsel, jurisdiction, judge and most of all, the complete facts of the matter. In contrast, at the end of a matter all of this is known. So the question becomes: At which point in a representation do we know enough about the matter to develop a useful scope of work? Even the well-known ACES model from Jeff Carr provides for a period of time for lawyers to gather the relevant information before they give a hard budget for a matter. So based on numerous alternative fee deals, I predict something in the future along these lines for value pricing legal services:

  1. Matter comes to law firm
  2. Law firm and client agree to an investigation stage. The fee for this stage may be fixed or hourly, based on the clients’ needs and the complexity of the case. On some matters this may be done for free.
  3. At the completion of that stage, the law firm provides a scope of work and fixed fee for the matter. There may be phases priced out separately (e.g. trial).
  4. If events drive work outside the scope: a) The scope is redefined and the price re-set, or b) A fee is set for the out-of-scope work (hourly or fixed as preferred by the client)

The more routine the work, the more likely all aspects can be fixed fee (but not necessarily). The more complex and ‘bespoked’ the work, the more likely hourly billed components will be utilized. If something has changed in the legal market (and I believe it has) it’s that the excuses for developing useful scopes of work will no longer be tolerated. What will (and should) be tolerated are efforts to bring focus to a legal matter to properly develop the scope. These new efforts will bring a high value proposition to clients and lead law firms to more profitable structures. To reiterate, the hard part of value pricing and alternative fees will be developing useful and effective scopes of work. This is a new thing for law firms, and it will lead to more and deeper changes in the profession.

One of the bad things about a down economy within a BigLaw library is that you need to reevaluate the way you are spending money on your resources. One of the good things about a down economy within a BigLaw library is that you need to reevaluate the way you are spending money on your resources. In the previous post, Mark Gediman mentioned:

“Most law firm decision makers believe that actual costs, while important, are secondary to perception when it comes to budgeting decisions.”

In reality, the Partners tend not to focus on the actual cost of a resource they need, because they see it as necessary for their matter or business development (or they wouldn’t have asked for it in the first place!) But those on the Administrative side of the BigLaw library have to care about actual costs (because that’s their responsibility!) As I mentioned in the previous post, the Administrative side is generally winning this “actual cost” vs. “actual need” debate.
There is a definite paradigm shift going on in the BigLaw libraries where lawyers will no longer be able to add ‘actual costs’ to the library budgets, without showing the ‘actual need’ for the product. The justification of resources seems like a change that has been long overdue in may BigLaw firms. One of the reactions to the change that I fear is that the pendulum will shift too far the other direction and that firms will create a “slash and burn” policy when it comes to library resources. If the partners do not take the time to justify the resources they need, the Administrative team may set up a method of review where the default answer is “cut the resource.”
The “slash and burn” policy on cancelling subscriptions (both print and electronic) may start out being a good process that will get rid of resources that are not really needed in the law firm. The attorneys in the firm have demanded a lot of resources over the years, and some of those resources were used a few times, then never really used again, or were duplicates of existing resources, because a certain Partner liked the “other” resource better than the one the firm already has. With the “slash and burn” policy, all of those resource have to be defended in order to keep them. Plus, now that firms are using additional monitoring tools (OneLog, LookUp Precision, etc.) librarians and administrative bean counters now have the ability to call Partners on those resources that aren’t being used.
The problems that are going to arise over the “slash and burn” policy is one that is as old as the law firm itself. The firm is not a corporation, it is a partnership. Each Partner believes that his or her work is vital to the survival of the firm. If a $10K research tool is needed in order to help on a $1 million matter, then so be it. The true test is going to be not in the ability to cut resources and identify what is essential and what is not. Rather it is going to be stopping the firm from winding right back where it is in 10 years through placating Partner demands to add new resources. When you have dozens (or hundreds) of Partners to deal with, and each believes his or her requests are necessary expenses, you’ve got an administrative nightmare on your hands. Some firms are erecting barriers to these types of individual Partner requests, such as purchasing committees, but most of us know that it doesn’t take long for Partners to find ways around those barriers.
The reality of the current situation is that creating a “slash and burn” policy is a desperate attempt by the leaders in the law firm (both Partners and Admin) to say “Please save us from ourselves!!” There’s going to be a lot of conflict over the next few years when those tasked with controlling research costs are approached by different Partners that say “I know we’re cutting costs, but this expensive resource is absolutely needed for my important cases.” These exceptions build up over time and tend to be approved more often than not. I’m just afraid that we’re not going to learn from our past mistakes, and all we’re going to wind up with is another bloated budget, and a big stack of “CYA” paperwork to show how we ended right back where we started.

Toby pointed me toward Ron Friedmann’s post Slashing BigLaw Libraries where Ron reviewed the AmLaw Law Librarian Survey and asks whether law firms and librarians are “fundamentally” rethinking the way the library works and delivers services. I shared the following response with my good friend Mark Gediman, and Mark gave me back some comments and an alternate view. I thought I’d put both of these together to offer a couple of views on how law libraries are changing the way they service the law firm in a fundamental way. My thoughts focus on some of the problems I see with how library services are being changed to increase the overall efficiency of how the library works, while Mark’s views are more positive and lay out some specific examples of how services are changing, but continue to focus on the value that each individual contributes to the firm.
[Greg Lambert]
The “fundamental” change in library services that I’ve been seeing is one of organization. The structure of library services is changing in a way that fits what the Administrative leadership of the firm views as the most efficient method [think of “The Bobs” from the movie Office Space.] Here’s a breakdown of some of the fundamental “structural” changes in the law firm library:
  1. Library services are adopting the “IT” model of the centralized help desk.
  2. The Administrative leadership of libraries wants all of the researchers to be “generalist” rather than “specialist”. a. That way each researcher can handle any question. b. This makes scheduling easier (since every researcher is basically the same) .
  3. Attorneys still want “specialists” that are their “go-to” people on particular issues. Obviously, this creates a conflict between the “efficiency” that Admin is being asked to design, and “effectiveness” that attorneys desire when calling upon the research staff to assist in their matters
There is a conflict between what the Administrative Leaders of the firm are being tasked to do with the library and the desires of the attorneys that use the resources found within the library. The administrative side is focused on cost cutting and reducing overhead of the library. The cuts range from physical space, to electronic and print collections, to staff. The attorneys within the firm want a library that responds to their needs, on an as-needed basis.
This is not a new conflict between the Admin and the Attorney sides of the firm, but we’ve reached a point now where the Admin side is winning. My fear is that the resulting economically efficient library will no longer effectively handle the needs of the attorneys it serves.
[Mark Gediman]
I think that too little has been said about the significance of Greg’s points #1 & #3. We have adopted the helpdesk approach to wean the attorneys from calling only their go-to people as well as leverage our far-flung staff. The helpdesk approach addresses the following issues:
  1. complaints about lack of service when the attorney’s favorite person is not available.
  2. Staff located in peripheral locations are not fully utilized
  3. a frustration factor sets in as the attorney works his/her way down a directory looking for someone to assist them.
I think having everyone with basic reference skills is necessary in this time of “lean and mean” staffing. But I also feel that having specialties can enhance the quality of the library service. For example, having a legislative specialist on staff enables the firm to take costs that were originally “pass-throughs” from contract services and add them to the firm’s revenue stream. In fact, these specialists can generate revenue in excess of their salary which allows the library to provide additional admin services without being a drain on resources. Members of the library should also be liaisons/specialists to specific practice groups. Combining a helpdesk with allowing (and encouraging!) the library staff to specialize is similar to the law firm IT model where everyone provides level 1 (help desk) support, including the level 2 specialists/engineers. It also allows the firm to ensure that help is always available without making a large investment in staff.
The Library as a department needs to make itself indispensable to the firm. Performing unique specialized services that add to the success of the firm, like Competitive Intelligence / Business Development and practice specialists, serves to emphasize that fact. Most law firm decision makers believe that actual costs, while important, are secondary to perception when it comes to budgeting decisions. The Library manager needs to constantly remind the firm of why they exist and the services they provide. This is accomplished by offering to present at retreats and attorney meetings, visiting each office regularly and putting on regular CLE programs in each office taught by various library staff members. This elevates our visibility, puts a face to a voice and showcases the individual skills of the library staff as well as reminding them that we are here and we perform a valuable function.