Galileo Was Wrong: The Earth Revolves Around Lawyers!

In Biglaw, there's an established hierarchy: Partners are at the top of the heap, followed by junior partners, non-equity partners, senior associates, associates, paralegals and then staff (although some C-level administrators have risen to a more exalted status). Where do clients fit in? It depends. Sometimes they are listed in strategy documents as more important than the partners, but generally we know this not to be true. In actual fact, few law firms rely on client needs as their driving force. Law firms are law firm-centric. In fairness, the legal market is at the tail end of a cycle of near limitless demand for legal services. In a demand-rich market, existing clients and new clients will come calling no matter what you do, so it's hard to expect a change in behavior when it's so profitable to stay the course. But where clients are concerned, there is general agreement that the client's law department, represented by the General Counsel or Chief Legal Officer, is the appropriate focus of attention. By and large this works. Many business leaders aren't sophisticated enough to grasp the nuances of legal issues, so it's best to have a buffer between the businesspeople and the lawyers/counselors. I don't buy it.

I've had the good fortune to lead divisions of publicly-traded businesses, and I can't recall a single instance where I or my colleagues felt insufficiently equipped to address business or marketplace issues and as a result needed to turn to our in-house law department or outside counsel for insights. In fact the opposite was often true. In over a decade of boardroom participation, only a few enlightened colleagues of mine regularly invited the General Counsel or law department liaison to our strategy meetings. These were the same leaders who invited the head of HR to attend as well. The feeling was, it's important for everyone to understand what we're trying to accomplish as a business, and what challenges we face, so everyone can execute their function in accordance with the agreed-upon goals. Very rarely did the HR leader or the lawyers have a speaking role in the substantive discussions, though they were expected to provide updates on their functional areas. This is not a slight to the in-house lawyers or HR professionals. It's merely a fact. In any enterprise there are those who formulate strategy and those who execute. The legal department and the HR departments executed.

On a number of occasions where we gathered with the board or executive team of an acquisition target in a secret location to discuss a business combination, we always invited the lawyers because there were items on the checklist that only they could handle. But they otherwise didn't speak much. When outside lawyers were invited, they sat next to the in-house lawyers and spoke even less. Again, none of this is meant to demean the important role lawyers play in doing deals, but the point is they were there to identify and quantify risks in executing the deal so the business people could incorporate this into the financials, or choose to build versus buy if the risk was too great. We never asked for a go/no-go decision, and we didn't ask for exhaustive explanations of the legal issues in play. We asked about the obstacles, the techniques to overcome the obstacles, and the cost of doing so -- and not the legal cost, i.e., the legal bills, but the cost to proceed. For example, I wouldn't want to know how much the law firm will charge to counsel us on new regulations; I wanted to know how complying with new regulations would impact the cash flow projections. Again, the point is, on the business side we rarely think of things in legal terms, but in terms of how legal issues impact our ability to proceed.

In point of fact, the earth does not revolve around the lawyers.

I met recently with the managing partner of a well-established mid-size firm. I was advised that he was brilliant, an incomparable mind in a firm of brilliant minds, which led to his status as the firm's leading rainmaker for a generation. Indeed I found him charming, engaging and clearly of high intellect. But his "secret" approach to winning business is simple and he knows it: he discusses business issues with his prospects and clients, always looking at things from a business perspective rather than a legal perspective. As a result, he has become a trusted business advisor to his clients, not merely a lawyer. This partner is held in high esteem by his colleagues, but many find his approach mystical and unconventional. I find it to be perfectly in keeping with the sentiment expressed above. Business executives don't need legal advice; they need to identify and quantify how legal issues will impact business decisions. This managing partner is concerned that not enough of his young lawyers get this point. I think he's right.

You may have heard about the brilliant dialog taking place on Legal OnRamp regarding the hoped-for demise of the billable hour, which picks up the gauntlet thrown down by ACC in its Value Challenge to change the in-house counsel/outside counsel dynamic. Along these same lines, a very smart colleague of mine, Ron Friedman, recently wrote a short discourse positing how a corporate CEO and his CFO likely came to the conclusion that finally, after years of waiting for the law department to reign in legal spending, it was time to change the game. It's a clever piece and you should read it. My only quibble is the premise for the conversation:

CFO: We need to talk about how much we spend on legal. Since our fiscal year ends in November, I usually have time over the holidays to do some real thinking. This year, I read up on the legal market. It’s not pretty. And I’m not sure our general counsel is the solution.

CEO: Ok, you catch me at a good time. Yeah, I agree our GC is not controlling costs. What can we do?

CFO: Legal costs keep going up, both in absolute dollars and as a percent of revenue. Other cost centers – HR, Marketing, Facilities, and even my own Finance department – have driven costs down as a percent of revenue. Sure, we face more regulations and law suits. But give me a break. Lots of articles report on in-house lawyers complaining about costs. The GC response? Precious little beyond begging for discounts.

CEO: You’re preaching to choir. I hear lots of complaining about legal costs. The whole legal thing is like that movie Ground Hog Day with an even worse twist. Every day is the same but nothing ever improves, lawyers don’t learn from re-plays. It’s hard to figure out how a whole economic sector got so stuck.

CFO: Actually, it’s easy to see why we’re stuck. Who buys legal services? Lawyers. Where do our lawyers come from? The law firms we retain. Do our lawyers think the same as our outside firms? Yes. Are lawyers trained to manage? No. What do our inhouse lawyers do? Lawyering, not managing. So we’re stuck with buyers who share the same bad traits as our suppliers and who travel in the same circles. The hard question is how to get the system unstuck.

In my experience, it's very unlikely that a CEO and CFO would frame the issue in terms of the evolution taking place in the legal industry any more than we'd investigate changes in coffee bean production when looking for cost savings from the company's hospitality vendors. More likely the annual (more often quarterly and lately even monthly) exercise to identify and reign in uncontrolled costs will eventually paint the legal department as the only function unable to provide and stick to a budget. I've written before about how division heads are required to submit revenues and costs 18 months in advance, incorporating whatever uncertainty we can and notwithstanding exogenous events we're held to these targets, and for acquisition or new product business cases we're often held to 5 to 8 year cash flow projections. However, we routinely receive reports from the legal department indicating that they can't provide even a broad range for legal costs for the usual transactional items, e.g., immigration, employment, real estate, etc., let alone pinpoint complex litigation or M&A costs. So a more plausible premise for the discourse above might be:

CEO: Have we identified the cost centers that have unallocated funding and swept them of all but the costs linked to our strategic priorities?

CFO: All but the legal department. They claim there are too many uncertainties to fix a budget beyond headcount costs, and even these may fluctuate depending on the volume of legal work.

CEO: Hogwash. Give them another chance to establish a budget using a decision tree or Bayesean analysis or whatever methods they feel are appropriate, incorporating the risks and complexity of our strategic priorities. If they can't do it, assign them a fixed reduction percentage and then tie the GC's bonus to achieving the funding envelope.

CFO: Done.

If this conversation hasn't occurred in the board room of most companies in recent months, it will. In a recent interview a colleague conducted with a General Counsel, we learned that the GC was given a mandate by his CEO to reduce legal spending by 70%.  Ouch!  If you're a law firm partner, are you ready to help your client identify and quantify the risks associated with his organization's business strategy? Do you understand that if you are unable to participate in this discussion, there are many other law firms who are gearing up for this exact conversation? What will you be doing instead?

I Stink, You Stink, We All Stink - A Note On Accepting Responsibility

Lots of noise lately about the billable hour, the dissatisfaction of corporate counsel, the awkwardness of every idle lawyer calling long dormant clients "just to say hello." Actually, only the volume has increased; these are the same discussions that have taken place for years. It's true in every business, and no less true in the practice of law: if you don't like the service, don't return.

I once attended an excellent training class (shout out to the American Management Association) about 6 months after my promotion to manager after years as an individual contributor. The instructor gave the class a simple assignment. Take a clean white sheet of paper. Turn it sideways. Along the left margin list the names of your employees. Along the top list the competencies (skills) expected of the employees. At the intersection of each name and competency, rate your employees' performance as great, average or poor.

We gleefully went about the task, amidst snickering like "Boy, it turns out all my people stink" and "I wish I could get new people." As young managers heady with the wisdom bestowed on youth, we were as confident in our competence as we were dismissive of our employees. For most of us, there was no bell curve: most of our employees were poor performers in most categories.

Then the instructor dropped the bomb.

He characterized the grid as less an indictment of our employees than a report card of our own skills as managers. If we know what it takes to succeed in the roles, and we know which employees are not performing to expectation, then as managers we have an obligation to address the situation by providing the tools, training or alternatives so the employees can succeed. It's not just sensible, it's our fiduciary obligation as managers of the firm.

I can assure you, the room was silent as those of us who gave such poor grades to our employees realized we had just been our own harshest critics.

The object lesson is that if you know what the problem is and you don't do anything about it, then you're complicit in the outcome.

If the local pizzeria consistently forgets the mushrooms but you keep going back, whose fault is that? If your doctor continually disrespects the value of your time and makes you wait 45 minutes after your scheduled appointment, why are you surprised? If you encounter the same slow service every time you walk into your local electronics retailer, then why not find a new retailer?

I'm not alone in enjoying the horror stories of terrible service committed by law firms against their in-house counsel clientele. I've moderated countess roundtables of corporate counsel and outside lawyers and I've been the instigator in asking for juicy anecdotes to liven up the "law firm bashing" session. In fact, there's one fantastic corporate lawyer who has spoken on several panels with me. Whether true or apocryphal, she has the most outrageous stories of outside counsel blunders and so I keep inviting her.

But this begs the question. Has she gotten any better at hiring outside counsel over the years? Does she fail so spectacularly in instructing her outside law firms that the outrageous outcomes should come as no surprise? Those that bemoan the billable hour, do they have such low standing in their organization that they can't negotiate an alternative structure and then defend this to the business owners? Is the average corporate counsel so lacking in credibility that when a deal goes sour his job hinges not upon the merits of the deal (or lack thereof!) but upon the brand name of the outside firm he hired -- a name that in all likelihood (with apologies to Biglaw lawyers everywhere) most business owners don't know or care to know?

We're in this together. It's nice to see the usual dialog finding so many new venues. But these aren't new problems. Corporate counsel are as invested in finding a new model as outside counsel. Whether the billable hour is dead, I don't know (Bruce MacEwen has a perspective). But like that new manager grading his employees, are we ready to take responsibility for implementing the change we know is needed?

Let's all take out a clean white sheet of paper and find out.

What's More Important -- Business or the Law?

Do you recall the Monster.com television spots from a few years back, with kids expressing their hopes and dreams?  With lines like "I want to claw my way up to middle management" and "I want to be paid less for doing the same job" Monster.com captured the quiet desperation of the American workforce. This blog focuses on the corporate and large law firm legal marketplace where we carry out our own version of this melodrama every day.  Readers of this blog will quickly note that I believe the purpose of a business is to produce a compelling product at a sustainable profit, and the legal function -- encompassing the in-house law department and its outside providers -- serve to support that purpose.  We who spend all day every day in this legal marketplace at times lose focus on this objective.

How many actors have we seen who love the stage but appear to struggle with life in the public eye?  How many professional athletes excel on the playing field but fail spectacularly managing their finances?  This ancillary baggage is not what they signed up for, but it's a necessary component of the path they've chosen.

In the same way, entrepreneuers who wish to build impressive buildings, or develop fuel-efficient vehicles, or design innovative tools for web commerce, or invest funds for charities, or who are engaged in any other business, rarely understand the extent to which they must deal with legal issues.  It's not an indictment of the importance of the legal function for me to suggest that we should strive to minimize the extent to which legal issues distract businesses from their main purpose.

After all, most businesses provide coffee in the break room yet there is far less hand-wringing in the board room over the plight of coffee vendors, or how technology is disrupting the traditional means of production, or whether the coffee producer's billing models appropriately reflect the value of the product, or whether globalization should displace the role of traditional suppliers, and so on.  It would be unfair to equate law with coffee, of course.  But it's also unfair to saddle business with the burden of sustaining an inefficient legal marketplace.

Occasionally I'll get a note from a reader thanking me for some insight, but asking for more or better examples.  So lest I ever sound like the armchair quarterback who's never played the game, or the Sunday morning talking head who's never been elected to office, I am delighted to provide relevant examples from my own experience to help illustrate a point.

Some years ago I worked for a publisher that specialized in printing large reference volumes for businesses to find other business services.  These volumes included both free content and paid advertising (think of the white and yellow pages).  We invested heavily in technology to modernize our production processes, but occasionally mistakes happen.  In one notable example, after shipping we discovered an error that resulted in a paid advertiser's contact information appearing at the end of a multi-column ad rather than at the beginning.  It appeared as if the robust ad copy referred to the prior advertiser while this advertiser published merely his contact information.  The client was not happy.  He threatened to sue and demanded that we reprint and ship replacements to all buyers, after retrieving the erroneous copies.  Our cost for this would be substantial, far exceeding his ad revenue.

We presented the challenge to the CEO and to the General Counsel.  The GC laughed it off, dismissing the threat of a lawsuit as minor, reciting all the reasons why such a suit wouldn't prevail, and suggested that at most our obligation was limited to providing a sticker that all recipients could choose to insert in the right place.  The CEO took the issue more seriously, realizing that not only would the sticker not appease the client, it would call every advertiser's attention to our error.  Furthermore, while the threat of a lawsuit was minimal, the PR impact of our error and our refusal to take ownership superceded the legal concern.  He asked us to negotiate a settlement.  We ended up reprinting the volume, re-shipping it to all buyers (and asking them to destroy the earlier copy due to "product flaws") and in return we signed the client to a long-term contract with substantially better terms than we had previously been able to negotiate one year at a time.

I've managed businesses with a global footprint and regularly hired and managed people overseas, but I know nothing of immigration laws.  In one reorganization my management team and I decided to consolidate territories and asked several salespeople to cover multiple countries.  This wasn't a problem in the EU, but post 9-11 it posed a problem for our salesperson in Toronto to visit the US regularly.  She called us in a panic one day, reporting that she had been detained at the border at Niagara Falls and couldn't proceed or return home until certain paperwork was in order, unless she was willing to accept being officially deported, a designation which would effectively end all future business and pleasure travel to the US.

We quickly consulted our regular outside counsel who suggested they could, within 48 hours, present our options for applying for proper Visa paperwork for the salesperson, and present support for their contention that she was being improperly detained under recently changed immigration laws.  Best case, the salesperson would be allowed to stay overnight in a local hotel with travel restrictions while expedited Visa paperwork worked its way through the system, likely in a matter of weeks.  So we cold-called a small immigration firm in Buffalo, and within an hour a lawyer was en route to the border crossing to negotiate a release.  It turns out that her paperwork was not fatally flawed, but indeed there was a need for additional approvals.  She was able to return home later that day without the dubious distinction of being deported, and within a few days she had the proper paperwork to successfully cross into the US with no hassle.

Let's recap the obvious:  In the first example, the GC didn't properly realize the business implications or opportunities and instead cavalierly dismissed the threat of a client's legal action.  In the second example, the large firm embraced the intellectual challenge of clarifying immigration policies but didn't sufficiently consider the plight of a salesperson detained indefinitely at the border.  Careful readers will also note that my team and I would most likely have prevented this had we consulted counsel before assigning cross-border travel.  (No one ever said business management is infallible!)

Despite the above title, it's not a question of whether the legal function is or is not important.  The legal function is critically important.  The real question we should continue to ask is whether the legal function is supporting the objectives of the business.

Meddlesome Clients Often Drive Changes

Should in-house lawyers allow their internal clients, the business managers, to micro-manage the law department budget?  Should business people be allowed to help select outside counsel, to sit in on transaction or litigation updates with outside counsel, or even to attend trials or participate in negotiating sessions that are beyond business issues and deep into legalease?  Moreover, should business managers be allowed to interact directly with outside counsel, bypassing the in-house lawyer completely? Many in-house lawyers say no.  The in-house lawyer's job is to run point on these legal tasks, filter the issues and then provide wise counsel to business management, they say.  There is often an unstated belief that many of the legal issues are slightly beyond the grasp of most business managers.  Does this attitude change if the in-house law department allocates its costs via charge-back to the internal clients of its services, making business managers the more direct buyers of legal services?

Rees Morrison, as he so often does, gets right to the point in a recent blog article describing how many in-house lawyers reject such oversight:

"One reason for such reluctance is a fear that clients will then believe they have a right to say which law firm to use and how to manage the firm, to meddle in the management of cases, to pick and choose which associates and partners, as if even to sit second seat at trials."

In my various roles in business management, I've had the opportunity to retain outside counsel for a variety of projects.  I've also had stewardship over the in-house law department (also called, alternatively, the "Department of No" and the "cost center").  In not one case did I or my colleagues in the executive management ranks feel overburdened by the legal issues.  We felt pretty confident that we could grasp the nuances, though our objective was determinedly fixed on how these legal issues aided or impaired our ability to accomplish the business objectives.  Indeed, there might be something to gain if the legal department were to take some cues from its internal clients.

In many businesses we are required to estimate revenues and costs well in advance -- in a typical planning cycle we submit our budgets by August for the following year.  And there is no easy forgiveness if we fail to properly predict the future.  You can surely imagine the challenge in quantifying uncertainty in a businesses own production capacity, market demand, competitive threats, economic or regulatory or other exogenous influences.  When allocating capital expenditures or targeting acquisitions, we must calculate cash flows 5 to 7 years out.  So when the legal department submits a budget that adds a 20% premium over last year, intended to address likely outside counsel rate increases and to provide sufficient cover for an unknown number of transactions and unforeseen litigation, you can imagine our skepticism.

Without question it's a challenge to predict legal costs in the face of uncertainty.  But this isn't a binary situation, where you either can or cannot provide useful estimates.  Not everything is uncertain to the same degree.  Divide and conquer.  For recurring legal work, there is a greater chance of predicting variability.  For others, such as litigation which is often a lagging indicator, look to leading indicators.  Is there a significant share price drop this year that will likely lead to shareholder action next year?  Do your internal compliance metrics suggest a potential whistleblower or FCPA claim?  How about the rate of defective returns this year, is there a chance of a products liability suit next year?  You get the picture.

As for outside counsel selection, we've all heard about the fear of hiring the "wrong" firm even at the right cost, because when the deal goes south the in-house lawyer will be held responsible.  In reality, I've been in numerous transactions and negotiations and rarely have I felt our position to be so tenuous that success or failure is primarily going to be influenced by the quality of our advocacy.  Furthermore, with all due respect to in-house counsel, if your own contribution is deemed to be so tenuous that your retention is tied primarily to the proper selection of outside counsel, then perhaps there are other issues in play.  And finally, I'm confident that even where these fears are valid, allowing business management to participate in the selection process will diffuse the responsibility for a poor selection.

Just imagine how that conversation would go.  We're sitting in the board room conducting a day-long law firm beauty pageant, with 5 or 6 firms lined up to make their pitch, each toting beautiful binders of elegant prose about the firm's history, the well-educated lawyers, the focus on clients, and so on.  Imagine if instead of allowing the firms to read their brochures at us, we ask the following questions:

• What do you know of our business challenges?
• How would you approach working through these business challenges with us?
• What will you charge for these services?
• If your rate is substantially higher than other firms, please quantify how your approach is substantially better.

Most business executives are approached by an endless parade of suitors who wish to sell us something, partner with us, forge an alliance or joint venture, use our sales channels to sell their products, use our capital to grow their business, and so on.  We get pretty good at quickly ferreting out the pretenders and for the remainder we focus on how their contribution is additive to the business. If they've done their homework, they can help write this storyline.

As the legal marketplace evolves, and as law departments are tasked with <gasp!> bringing their expenditures in alignment with the fiscal controls used elsewhere, and with the emergence of multiple alternatives to the "classic" way of delivering legal services, it's incumbent on in-house lawyers to move along the continuum from lawyer to business leader.  There are a number of approaches in use in every business today which can improve the budgeting and management of the legal function, including the selection of outside counsel.

When we in the business ranks meddle, it's because funds inefficiently diverted to the legal function create an opportunity cost elsewhere.  Let us behind the curtain, because we might have something to add.  And what's the worst outcome?  Perhaps after a day of sitting through law firm presentations we'll end up like the young teenager whose parents provided her first cigarette.  While choking and turning blue, she exclaimed, "What a stupid idea. I won't try that again."