Spin the Wheel and Determine the Future of BigLaw

Lots of press lately about an innovative and, it appears, fun exercise led by Professor Bill Henderson of Indiana University's Maurer School of Law and Anthony Kearns of the Australian lawyers insurance operation, to envision the potential future of BigLaw.  The role-playing game, called FutureFirm, encouraged participants to outline what a new law firm model might look like, given the state of the economy, client push back on the billable hour, the commoditization of legal services, and so on.  Participating law students vied for a cash prize of $15,000, which was generously contributed by prominent legal consultancy, Hildebrandt. I applaud the innovation, as readers of this blog well know that I am all for improvement in the practice of law, particularly in the BigLaw space.  It's also about time we educate our law students on more than critical thinking.  So many leave law school with no idea how to practice law, let alone how to counsel business managers on commercial issues.

Ron Friedmann, one of the wisest observers of the day, points out the irony of the sponsorship by a "large and long-serving consultancy serving BigLaw"  The implication is, if you're able to guide law firms through an uncertain future, why are we in the state we're in?  This is a bit unfair.  As any consultant knows, you can only make the recommendations, you can't force the client to execute.

But BigLaw in particular is challenged by a certain myopia.  In a precedent-based and risk-averse profession, where what others have done is often sufficient rationale for me to take the same course (see: associate compensation, layoffs), many lawyers don't know what they don't know.  Until someone else goes first, they are at times unable to envision a future substantially different than the present course.  So even progressive consultants can be stymied by an unwilling audience. 

Indeed, my own organization some time ago predicted the changes taking place today.  My colleagues have spent quite a bit of time educating law firm leaders about the changing climate, and offering counsel on how to adapt.  I'm confident there are thought leaders in other consultancies trying valiantly to raise awareness and help guide law firms to an improved future.

But Ron's point is well-taken.  During my courtship by several law firm management consultancies, I met one of the culprits who, if not harming, was certainly not helping law firms adapt to the changing times.  When presented with my credentials, which include leading global businesses larger than most law firms, a couple decades providing business development services to law firms, including a role at a global law firm, and a deep understanding of in-house counsel buying habits, she was mystified.  "What in the world could you possibly know about law firms?  I really don't see how you could contribute to our practice, given that you aren't presently engaged in law firm consulting."  Exactly right.  I would not fit in well in an organization devoted to maintaining the status quo.  But as law firm leaders have undoubtedly noticed, the status quo is not a growth business.

Non-Lawyer Ownership in Law Firms

In today's Birmingham (UK) Post, we learn that the law firm of Blackbourn & Bond have appointed a new director of business development.  Law firms hire marketing and business development professionals all the time, so what's newsworthy about this?  Mark Callahan, the new hire, is not a lawyer (he's a "non-lawyer" to BigLaw insiders) but he holds the distinction of now serving as an owner of the law firm. Under the recent UK legislation known as the Legal Services Act, UK law firms may now move along the continuum toward more conventional businesses and may take in external capital and share fees with owners who don't practice law.  Traditionally, as readers of this blog undoubtedly know, law firms operate as a partnership with only practicing lawyers allowed to have an ownership stake and share in the fees.  This is a welcome change, at least to anyone who has worked closely with BigLaw and has witnessed the colossal waste and inefficiency that takes place as very smart, very capable but extraordinarily inexperienced lawyers play dress-up in running a large enterprise.  (We don't mean to offend. Of course there are many fine law firm leaders. But the greatest challenge lies at the practice group level, where managing the business is often treated as a distracting hobby.)

But is it only about operating more efficiently?  Of course not.  The entire point is to better serve clients.  As Callahan points out, “This will also ensure that [the lawyers] concentrate on what they do best; advising clients on business and commercial property law."  Nick Blackbourn concludes, "This will in turn assist us to develop the firm, and become even more commercially focused as lawyers for business.”  Hear, hear.

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.

How to Make the Complex Simple

I'm a longtime fan of newspaper comics. The ability to succinctly make a point or to set up and deliver a punchline in a few words is an admirable skill. In today's paper, Chip Sansom's The Born Loser riffed on this theme of converting complex data into simple analysis. It calls to mind a skill I've worked on honing for many years, that of distilling a large amount of information into the most relevant, and more bite-sized, pieces for consumption.  This skill is useful whether one is a worker bee reporting to his manager, or a manager reporting to an executive, or an executive reporting to the board, and so on.  With technology we now have access to more data than ever before which we can incorporate into our analysis and decision process, and yet so many of us often overlook the critical step of distillation.

Some years ago my team devised and launched the first conference on the use of competitive intelligence (CI) for law firm planning efforts. In those days the predominant tools seemed to be publisher rankings with accompanying demographics, which serve as catalysts to drive strategy.  For example, a law firm partner may observe that several peer firms have launched an office in London, or in Silicon Valley, and therefore the firm takes steps to follow. Such a process appeals to the risk-averse and precedent-driven mindset of many lawyers -- if others have done it, it must be a good idea.

The anecdote is most likely apocryphal, but is it so hard to imagine the law firm leader who viewed the AmLaw 100 summaries in July of 2000 and immediately set about looking into launching a Y2K practice, which for some reason seemed to be enormously popular with his peer firms the prior year?  Today the situation is very different, with most large law firms using current competitive intelligence databases and techniques to assess their clients and competitors and understand market trends in order to incorporate this information into the strategic plan.

The most common use of CI, it appears, is for routine pitches and lunch meetings. The usual process starts with a call from a partner, indicating that he needs to know all there is to know about a potential client in advance of a pitch meeting. Some combination of a reference librarian and a marketing analyst research the various databases, capture all the relevant information, de-dupe it (remove repetitive information), clean it, add a summary, and deliver a beautifully bound dossier to the partner.  Trouble is, many times the information presented is too voluminous to be useful.

I recall a project where a partner asked for my help preparing for two pitches -- one to a major US automotive manufacturer; the other to a major pharma manufacturer.  We commissioned reports from the CI team and a few days later when we met to review the material, the conference room had two foot-high stacks of binders, one stack for each target. The binders were useless, as they consisted of lengthy printouts of financial statements, annual reports, analyst commentary and news articles. The summary was merely an index to the tabs separating the content.  Needless to say, neither the partner nor I had the several hours it would take to read the material, so we prepared without it.

I later sat down with the reference librarian and the marketing analyst to discuss a better approach. Both felt their respective efforts represent best practices.  The reference librarian felt his role is to access as many of the right databases as possible and present the content essentially unfiltered, except for de-duping.  His credibility depends on him delivering everything, because the worst case scenario is to omit an important fact.  The analyst felt her role in cleaning up the data means organizing it and creating an index.  She can't eliminate much because she can't possibly know what the partner might find relevant.  Each was surprisingly dogmatic and inflexible.

One law firm marketer I know well has a very different approach.  She wields a red pen and uses it liberally, sending CI reports back to the researcher or analyst time and again until the output is concise and impactful.  For example, she allows financial reports only in an optional appendix, and instead demands a trend summary in a line or two. "Revenues and earnings increased 7% and 11%, as a result of the recent acquisition of X Corp and the resulting post-merger pruning.  These results compare with a 5-year CAGR of 4.5% and 9% respectively."

Rather than merely listing all filings found through docket searches, she includes a pie chart showing major categories of litigation. This may also be accompanied with commentary culled from the data: "IP protection in emerging markets has been the greatest challenge in the past, but the trend has recently shifted toward products liability defense. As its products gain wider global distribution, the company faces increased scrutiny from regulators and safety advocates."

She may also provide insights into areas of opportunity:  "There are regular employment-related lawsuits, suggesting an opportunity to present our compliance training which reduces employer exposure" or "The recent JV in Brazil and other IP protection efforts in the area may suggest this is an important growing market.  Perhaps our South American office can help their executives by making introductions to the various commerce officials with whom we have solid relationship."  You get the picture.

In these examples, the CI reports rarely reach a full two pages; they reference the source material if the lawyer wants more background (they rarely do); and the distillation provides the marketing team an in-depth understanding of the potential opportunities so they can begin working on pitch materials that will help highlight the firm's capabilities in these areas.

Competitive Intelligence is the forum for today's example, but the same fundamentals apply to so many other situations.  It's obviously much harder to distill complex information into succinct portions, but doing so flexes analytical muscles and positions the analyst as a value-added resource rather than a paper-shuffling clerk.

You may wonder yourself if I could have delivered these points more succinctly.  Probably.  But then again, I am not a professional cartoonist.

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."