The New Normal
Why not improve value instead of doubling down on bad practices?
By Paul Lippe
Jan 22, 2013, 04:30 pm CST
As we move into 2013, firms face a basic choice between doubling down on Dewey or pumping up the value.
Reading the various things written of late (PDF) , it would seem that many firms are "doubling down" by:
• Aggressively seeking laterals and in some cases, merger partners.
• Maintaining high partner distributions in part through financial engineering, reducing compensation for less-powerful partners and raising capital that effectively goes into distributions.
• Raising rates.
• Hoping for a secular turnaround in the legal industry.
As any regular reader of this space will recognize, I think Dewey-nial is not very wise. For the strongest firms, it won’t matter, but for any others—especially those who have grown rapidly through lateral expansion in the last decade—it is very high-risk.
If you don’t believe me, here’s a "report from the front" (actually an email) from Patrick McKenna, the prominent law firm consultant:
“I've had the opportunity over the past few months, to read and review four different law firm strategic plans. … They are all the same. One might rip off the covers of each plan, shuffle and then return them to their owners, and it is likely that the firms wouldn't know the difference.
"From about 1985 to 1995, irrespective of what any firm's strategic plan might have articulated, the overwhelming strategy was to increase utilization. From 1996 to 2007, the overwhelming strategy was to increase billing rates (automatic 8 percent a year). And now the overwhelming strategy is to make lateral acquisitions. In other words, the typical 2012-2014 strategic plan that I reviewed contained six major strategic initiatives resulting in 32 specific action plans with at least 10 of those action plans involving nothing more than lateral acquisitions. Absolutely no reference to building attorneys' skills, finding ways to do our kinds of matters at less cost, or even meaningfully taking action to improve client service.”
Even Citibank, which had been the leading proponent of “old normal” Dewey-esque strategy, is now calling for a shift to the New Normal.
The fundamental problem with Dewey-ism is that the numbers won’t support it. Lawyers (in a commercial setting) create value in three ways:
• Knowing something the clients don’t know.
• Helping clients achieve a result that creates value or avoids loss in the context of their business.
• Providing reputational patina for when things go wrong (as they sometimes do). Like the (in)famous saying: “Nobody got fired for buying IBM.”
The problem is that
• In a Google-y, sophisticated in-house counsel world, the knowledge gap is narrowing.
• Lawyers are often reluctant to wade into the arcania of what it takes to actually create value in a company.
• The reputational “insurance” is pretty specious.
So the Dewey plan boils down to the most powerful partners appropriating more of firm’s value creation to themselves. But Dewey-esque strategies don’t create client value as fast as partner income expectations are rising. So the only way to close that gap is financial engineering.
Let’s call the smarter plan—committing to making the changes that enable the firm (at a partner, practice group, office or firmwide level) to deliver 20 percent more value at 20 percent less cost by the end of the year—“pump up the value.” In other words, compete like most successful commercial enterprises do and then take market share from less capable competitors. Unlike Dewey-nial, which assumes a law firm-centric view of value, the pump-up plan assumes a client-centric view of value. Here’s a simple set of steps:
Understand what clients consider value. Most law firms would consider value to be “a little more me, a little less cost.” But in fact, law plays a complex and interesting role at most companies, and improving value requires a much more nuanced conversation. In mergers and acquisitions, value may be more about speed of deal-making and ease of integration, and less about a marginally more favorable indemnification clause. In litigation, it may be about winning the case, but it may not. In contracts, it may be about global consistency and ease of implementation. But it’s almost always going to be about the client (which means in today’s world, some kind of end-end understanding of what the client does). We hear a lot about the new class of competitors today, green field law firms and new class service providers. But law firms have long since lost an overwhelming amount of work to their most fearsome competitors: in-house legal departments. Why? Because in-house teams understand value better and deliver superior value.
Shared access. Legal work is now overwhelmingly teamwork, but most lawyers start with a single-lawyer, single-matter view of things. So the best starting point is to organize legal documents (whether contracts or other) into a well-structured, searchable cloud-based storage accessible to both firms and clients. Historically, firms managed and organized legal documents for clients, making them extremely “sticky.” But now scale and complexity are such that most files are kept (albeit frequently poorly) by clients. Unless you have efficient access to and ability to search the relevant legal documents, you end up constantly reinventing the wheel. Modern cloud-based systems make this highly secure and quite cheap. We all now have experience with the ease and efficiency brought by consolidated storage, whether it's iTunes for music or Google Maps for navigation.
Common understanding. It’s not enough to know where the documents are, both the internal and external legal teams (and where appropriate, clients or auditors) should be able understand the basic “meta-information,” such as when contracts expire, how royalties are calculated or which information triggers which auditor conclusions.
Common processes. “Commodity” is a scary (and misleading) word for lawyers, but those who think every piece of legal work is unique are simply kidding themselves. Since legal work (10Ks, brief drafting, M&A) is all teamwork that requires input from lots of different people, we should strive to manage the processes as transparently and efficiently as possible and make sure roles are well-understood. Every other executive in a company has a dashboard to track what’s going on their world, and now, increasingly, general counsel do, too.
Common success. Anybody who thinks clients haven’t noticed that firms’ interests sometimes diverge from the clients’ is kidding themselves. Hourly fees have many virtues, but they fundamentally mean that firms do better (high billables) when the client does worse (lots of problems, lots of complexity). We’ve talked before about different ways to align firms’ interest with clients' (not just the legal team, but the true client). Betting against that trend is very risky.
Pump it up.
Paul Lippe is the CEO of the Legal OnRamp, a Silicon Valley-based initiative founded in cooperation with Cisco Systems to improve legal quality and efficiency through collaboration, automation and process re-engineering.