A matter of ethics: Qwest makes InsideCounsel Top Ten

August 23rd, 2010

InsideCounsel Magazine just released its list of the ten most innovative corporate legal departments.  We were particularly glad to see Qwest listed as the winner for innovation in the area of ethics leadership.

If you read any of the trade periodicals aimed at legal department management, you probably recognize Rich Baer’s name.  In 2008, Corporate Counsel Magazine named Qwest the country’s best legal department, commending Rich Baer on cleaning up the ethical morass created by the company’s former CEO Joseph Nacchio.  In particular, the magazine lauded the deftness with which Baer and a few top lieutenants safeguarded corporate assets in the face of a blizzard of shareholder lawsuits resulting from Nacchio’s reign. Or, as Corporate Counsel put it, Baer ”rescued the company from the brink of bankruptcy”  caused by with “the fallout for Nacchio’s unceremonious departure.”  (To see exactly how “unceremonious” Nacchio’s life is these days, check this little modern-day odyssey out).

In a few short years, Baer has transformed Qwest’s legal into a model of ethical innovation.  Working with the University of Denver Business School, Qwest now runs training sessions for its people that are aimed at the specific ethical issues confronting corporate lawyers.  The program has become so successful that other Denver-area companies now pay to send their legal departments to Qwest training (Qwest donates those fees to charity).

Our Chief Market Development Officer, Dave Curran, was a General Counsel and Chief Compliance Officer in previous lives, and he ran several Compliance Risk Management businesses, including Integrity Interactive.  Dave notes that at far too many companies, “corporate ethics programs are reactive, motivated by attempts to game federal sentencing guidelines by appearing contrite after a violation has occurred.   What Rich has done at Qwest is notable for three reasons:  it’s impressively proactive, it makes ethical corporate practice a deep part of Qwest’s culture, and, by involving other companies and the University of Denver, it really drives ethical leadership as part of Qwest’s brand.”

Much deserved congratulations to Rich Baer and Qwest.

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Posted in Legal department management | No Comments »

And Now For Something Completely Different

July 21st, 2010

Matthew Hudson, formerly of O’Melveny’s European operations and founder of Proskauer’s UK office, announced yesterday that he was leaving BigLaw and starting his own London-based firm, MJ Hudson, LLP.

“So what?” you say.  ”Partners these days are shearing off from large firms like ice sheets from Antarctic glaciers.”  What’s so different about this one?” 

Well, since you asked, two things, really:

The first is that when the United Kingdom’s Legal Service Act takes effect in January, 2011, Hudson plans to have his private equity clients buy ownership stakes in the firm and share in its profits.  Legal Week notes also the possibility that Hudson might also invest in his clients’ businesses, an idea that Hudson says he gleaned from Skadden’s practice of taking equity as compensation for the work it does for start-ups.  Interestingly, he spends almost as much space on his website detailing the sectors he has invested in as he does listing the clients he has worked for.

The second point of difference is that Hudson’s new firm plans to pursue aggressively a range of non-hourly billing models.  In an AmLaw blog interview, Hudson admits on this second point that “billing by the hour means that you may end up rewarding inefficiency.”   Now, this is a bit like saying that eating nothing but jellybeans may promote tooth decay.  Fundamentally, even if an hourly billing firm is extremely ethical, the less efficient it is, the longer it takes to complete a task, and the longer it takes, the more that firm charges for that task.  To clients, that pretty much sounds like the dictionary definition of “rewarding inefficiency.”     No matter.  We’ll forgive the understatement.

Speaking broadly about the raison d’etre for the new firm, Hudson says:

“This structure brings out the benefits of traditional advisory partnership while adding superior 21st century service and pricing. It is an idea whose time has come. The last two years have emphasised the need to re-think many of the ways people in the financial and legal world do business. From now on, clients will want to know that law firms genuinely understand their needs and want to develop a long term alignment of interests.”

“Alignment of interests” is something you hear frequently from law firms.  In this case, it sounds like Hudson means it.

Cool stuff.

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Nonsense on stilts

July 8th, 2010

Tuesday’s Boston Globe carried this front page story about the new University of Massachusetts School of Law.

Before we dig into it, a bit of background:  for the past several years, the Massachusetts Legislature  and Board of Higher Education have waged a tumultuous battle over whether the Commonwealth’s public university system should create a public law school by absorbing the private, unaccredited Southern New England School of Law and merging it into the University of Massachusetts’ nearby satellite campus in the town of Dartmouth.  The plan’s proponents noted that 44 states already had a public law school and promised to keep costs low enough so that the school would be reasonably affordable to its students without adding any cost burdens to an already-strapped state budget.  After several defeats, these proponents resurrected the plan in 2009 and won approval for the new institution, to be called the University of Massachusetts School of Law. (Sadly, my proposal to dub it “Dartmouth Law School,” gained no traction.)  The school, still unaccredited, began accepting students this spring for fall admission.

The author of the Globe article, Tracy Jan, compared data between the old private school and the new public one, and, citing a rise in applications for admission (from 201 to 462 ) and in average LSAT score for inbound students (from 141 to 146), pronounced the UMass Law off to a “strong start. ”

Jan continued on, noting that the school’s relative affordability makes it ideal for students who wish to pursue legal careers in public service fields since those fields traditionally do not pay well enough to accomodate the massive loan debt many law students graduate with.  Lower tuition equals lower postgraduate debt equals more freedom to pursue lower-paying work. Then she describes anectdotally the breadth of this fall’s incoming class, which apparently includes students as old as 59 as well as: “an MIT alumnus and son of Italian immigrants who is leaving the high-tech industry to pursue a law career to protect the rights of new immigrants,” ”a victim-witness advocate in the Bristol district attorney’s office,” and “an occupational safety professional who wants to ensure that workplace health and safety standards are enforced.”

To quote cranky18th century British philosopher, Jeremy Bentham, this article is ”nonsense on stilts.”  

We love lawyers.  We work with lawyers.  Many of us are lawyers.  We’re passionate about the future of the legal professsion and we live that future every day.

Jan’s entire argument is only focused on the front door:  a law school is fulfilling its purpose if its admissions policy and cost structure allow it to let in more students and different types of students than you might find at other law schools.  To the extent that any school does these two things, she feels it can be deemed “off to a strong start.” 

This is not the purpose of law school–or any graduate school for that matter–any more than the loading dock is the purpose of the factory.  The simple core purpose of any graduate school in any field is to (a) educate its students in such a manner that (b) prepares those students for successful careers in that field.   And here, UMass Law is destined to be a failure before it even begins.  Here’s why…

(a) Educating its students – The school is still unaccredited and cannot coherently claim that it will offer anything approaching an acceptible legal education until it becomes so.  It plans to seek that accreditation, which it describes as a “long-term goal,” over the next few years.  In the twenty-eight years that it existed as the Southern New England School of Law, it twice applied to the ABA for accreditation and was denied both times.  As a first rehabilitative step towards that accreditation, the fact that the “new” school made the “old” school’s professors re-apply for their jobs, and then re-hired all but one of them, is not likely a good sign of sweeping change.  According to the ABA’s former Accreditation Committee chair and that Committee’s lead consultant, it will likely take $90M-$102M to upgrade the school to the point where accreditation is feasible.  This means that UMass-Law will either have to break its promise to become accredited or its promise to not burden Massachusetts taxpayers. 

Whatever.  Let’s assume that somehow the school finds the money under a rock and pulls this off.  It still fails epically at…

(b) Preparing those students for successful careers in their chosen field.  Put simply, there are no careers to be successful at.  Okay…that’s a slight overstatement.  But only a slight one.  To say that there is presently a glut of law school graduates and a dearth of jobs for them would be a massive understatment.  Over the past 2-3 years, the legal industry has been shedding jobs at an unprecedented rate, and 2010 is shaping up at the worst year yet.  The National Association of Law Placement estimated that 2011 will be even worse, calling the market for future law school graduates “very compromised.”

Longer term, things are even more uncertain.  Most commentators forecast that technological and financial trends will force a contraction and overall re-shaping of how legal services are provisioned.  In his book, The End of Lawyers(?), Richard Susskind forecasts several general trends that will lower traditional attorney demand: in-sourcing, de-lawyering, relocating, off-shoring, outsourcing, subcontracting, co-sourcing , leasing, home-sourcing, open-sourcing , computerizing, no-sourcing.

[Check out Susskind's book for a deeper look at these trends.  Basically, they translate in aggregate to this:  the market for legal services will increasingly have less appetite for highly paid attorneys performing rote and repetitive tasks for which viable alternatives exist.  Attorney work will necessarily devolve to a more strategic core that focuses on consultative, high-end while process work is offloaded, automated, or eliminated. This will shrink the demand for the bottom end of the attorney market while transforming the industry.] 

So, as UMass-Law graduates begin to enter the job market in a few years, they will be fighting over fewer jobs with the graduates of the Commonwealth’s eight private law schools (Boston College, Boston University, Harvard, Massachusetts College of Law [unaccredited], New England School of Law, Northeastern, Suffolk, Western New England School of Law), as well as with the backlog of recent graduates who are still looking for legal work.  And those other graduates will likely be viewed by employers as more qualified.  UMass Law’s recent jump in median LSAT to 146 places it in the 29th percentile of all test takers.  The scores for the schools that UMass Law graduates will most directly compete with?  New England School of Law is at 152 (56th); Suffolk is at 157 (71st);  Northeastern at 161 (86th).  When you factor in that Massachusetts is already third among U.S. states in lawyers per-capita, it becomes very difficult to see where UMass Law graduates will find work. 

If you view, as the Globe article does, that schools exist to admit students broadly and not charge them too much, then you may well view the existence of UMass Law positively.  If, however, you think that maybe, just maybe, people go to graduate schools so that they might one day have jobs, that you’ll view this as the mistake that it really is.  And you might wonder why we weren’t launching a Computer Science school or an Institute for Clean Energy Technology.  You know, areas where the demand for graduates might exceed supply of graduates in the coming decades.

Don’t-take-credit-for-the-weather….One final note: the fact that the applications are rising  and that the school is therefore able to be slightly more selective should not be interpreted as signs of success.  Despite the headlines about law firms layoffs and serial deferrals of start dates for incoming first year associates, all of the Commonwealth’s private law schools reported increases in applications this year as well.  Nationwide, almost 20% more people took the LSAT last year than the year before.  This is what happens in a recession: people unable to find jobs retreat into school in the hopes that their prospects will be better in a few years.

Posted in In the news, Law school, The Future is Now | No Comments »

LZR on Why Carried Interest Matters

June 14th, 2010

Lynne Zagami Riquelme came to Brightleaf from a background at Proskauer Rose and Brown Rudnick.  At the former, she participated in spirited debates on the subject of carried interest taxation and its implications for the tech economy.  Here’s her well-informed take on this in-the-news issue…

In recent months, a lot of attention has been paid to the question of whether Congress, as part of a larger financial overhaul, will change the taxation of carried-interest income for managers of investment funds that are organized as partnerships.  In other words, Congress is poised to change the face of private equity and venture capital as we know it.

We know an overhaul is in the works – House and Senate bills are being debated, Elizabeth Warren is talking tough to NPR and ads for Fox News are asking whether America is broke.  We here at Brightleaf don’t presume to know the future (and we can’t seem to find a crystal ball on eBay), but we’re pretty sure we’re in for the biggest set of financial reforms since the 33’ and 34’ Acts were passed.     

Further, we bet that whatever reform measure is passed will include an increase in an important tax rate tied to long-term investment.  Congress has been trying, with limited success until now, to change the tax treatment of carried-interest income, which is the share of profits that private equity, venture capital and real estate fund managers receive as part of their compensation.  The problem, according to Senate Finance Committee Chairman Max Baucus (D., Mont.) and House Ways and Means Committee Chairman Sander Levin (D., Mich.), is that carried-interest is treated as capital gains (and taxed at a rate of 15%), when it should be considered ordinary income (and taxed at rates up to 38.5%).  Their argument?  That the managers running these funds have been paying capital gains rates on money that should be treated as wages because they earn this money for managing other people’s money (i.e. working).  Indeed, many proponents of the change argue investment managers should be thankful the U.S. isn’t proposing a U.K.-style excise tax of 50% on managers’ incomes.

So what’s wrong with that argument?  There are two important things to note: 1) fund managers take on a lot of risk when they make investments and 2) lots of people benefit when fund managers take these risks.  The first point boils down to this – fund managers don’t make money just by going to work, as the rest of us do.  Carried-interest, in the context of private equity and venture capital funds, is earned years after an initial investment is made.  Further, as Douglas Lowenstein, president of the Private Equity Council, points out, “earning carried-interest involves taking risks . .  . and exposing yourself to the possibility that you’ll have to return your earnings if things don’t work out.”  The rest of us simply don’t face consequences like this in our professional lives.

Second, saying that keeping carried-interest rates low provides an unfair advantage to fund managers is remarkably shortsighted.  When we begin orienting our tax policy around people, and not activities, we set a dangerous precedent.  Do fund managers sometimes make lots of money?  Yes.  But in the process, they provide essential funding to companies that in turn hire U.S. workers (indeed, emerging companies were the only ones to add jobs in 2009).  The Private Equity Council’s report on the proposed rate change states that the hike could prevent between 36,600 and 127,800 jobs from being created through private equity investments.  Taxing carried-interest at lower rates encourages capital formation, construction activity, and job creation, all of which are in short supply these days.  Can we really afford to discourage those activities at this point in history? 

We here at Brightleaf are inclined to say no.  In fact, we’ve spent the past few years growing and hiring talented workers thanks to the support of a venture capital firm.  While other companies were struggling, we were bringing in additional talent to respond to the demands of a changing legal industry.  We were advising law firms and corporate legal departments on ways they can incorporate document automation into their plans for the future.  And we will continue to do more of this.  Whether other companies will be as fortunate as we have been, we’re not so sure.

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Brightleaf announces Round Two of Entrepreneurship Talks with Foley Lardner

June 8th, 2010

After the success of our first round of Entrepreneurship Talks wth Foley Lardner, we’re glad to be heading back for a second at 2:00 PM (EDT) on June 17th.  We’re focusing this time on practical (!) solutions to the intellectual property challenges that face new ventures.  Details and official Foley press release here.

And, for those of you who want a re-cap of the first round, you can listen to our Dave Curran and Foley’s Gabor Garai right here.

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Jordan Furlong: Competing on Price

May 28th, 2010

Trained as a lawyer in his native Canada, Jordan Furlong has spent most of his career as a legal journalist and a strategic consultant to Canadian law firms.  He writes well and convincingly about fundamental economic issues in the contemporary practice of law.  His blog, Law21: Dispatches from a Legal Profession on the Brink, is one of the best sources we’ve read for good writing and deep thought on the subject. He does not mince words.

Jordan’s post earlier this week, How to Compete on Price, is superb.   He begins with the often-heard truisms that law firms can’t compete on price–that it provides a fast path to commoditization and that it is ill-suited for the specialized, knowledge-based nature of legal services.

But then Jordan shifts gears, saying in effect that the more he considers the subject, the more that he realizes that lawyers will have to compete on price.    ”Whether we like it or not, price will become a significant competitive factor, and it will be dangerous to run our businesses pretending otherwise.”

Fortunately, Jordan also offers a solution:  law firms can compete on price by competing on cost.  By lowering costs, they can price more competitely (or flexibly) while maintaining or even growing margins.  While this may seem obvious, it isn’t.  Law firms (epsecially larger ones) have famously been cost-oblivious.  They compete to pay higher and higher salaries to incoming associate classes.  And they traditionally occupy the most expensive real-estate in their respective cities (Side note:  I was at a meeting in Boston last week with several GC’s and large-firm partners when one of the GC’s blurted out, “Why are you guys all in the Back Bay or the Financial District?  When is a firm going to locate its offices in Woburn?  Because THAT’S the firm I want to hire!) .

Fortunately, Jordan offers several basic tenets of cost-competiton that firms should follow:

  1. Initiate project management
  2. Automate anything repetitive
  3. Focus your high-value people on high-value work.  Offload everything else.
  4. Use technology wherever possible
  5. Think seriously about outsourcing
  6. Adopt non-hourly billing and compensation

We often hear one or two of these tenets in our client meetings.  But it’s especially interesting to see someone list them all in once place in such a well-written posting. 

Nice work, Jordan.

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Brightleaf in the NYT (okay…it’s mostly Foundry)

May 14th, 2010

Two great articles in the New York Times Business section today:  one on the vibrant tech scene in Boulder and one focusing on our friends at The Foundry Group (featuring a nice little b.leaf mention towards the end). 

Boulder is a fantastic place for emerging businesses.  A “what if/why not” energy permeates the whole city.  As the Times points out, Boulder’s outdoor lifestyle and countercultural past contribute to making the place feel less stultifying and corporate-ish than Rte. 128 and Silicon Valley do.  Because of this, people there just seem to think in less restricted and more collaborative ways.  That freedom of possibility fuels a large portion of the city’s tech boom.

Foundry fuels the rest.  As we tell anyone who will listen, they’re the perfect investors because they believe viscerally in what their portfolio companies are trying to do.  When other VC’s tell you that they support you, they basically mean, “I think you will make money, therefore I believe in your mission.”  When Foundry says they support you,  they’re really saying, “Because I believe in your mission, I think you will make money.”   That doesn’t mean they aren’t rigorously analytical (trust me, they are, in spades).  But it does mean that they’re willing to go further than other VC’s in helping their portfolio companies to win because winning means more to them.

If you’ve spent time in other VC offices, where everyone is wearing khakis and sky-blue button-down oxfords and sporting pretty much the exact same haircut, and then you walk into Foundry, you know instantly that it’s a different kind of place.  Much like the city around them.

For more on how Foundry invests, check out Brad Feld’s blog post on thematic investing here.

Posted in In the news, Uncategorized | No Comments »

Thanks, Rees!

April 21st, 2010

Nice shout-out for Brightleaf from Rees Morrison, the most prolific blogger in the legal technology/management biz (we’re working on our second cup of coffee  and he’s already dropped five posts this morning). In addition to the dizzying pace of the work he produces, Rees is also perhaps the most respected legal department management consultant you could hope to find.  If you work in-house and you have not read his e-book “Effective Structure for Your Law Department,” I suggest that you do so.

In the post above, Rees touched on something that’s very important to us:  Brightleaf is a document automation platform, not just a document assembly application.    While it’s easy for any company to claim this (especially if they’ve been reading our website), the term “document automation platform” has a very specific structural meaning.

Document automation platforms combine three main components:  

  1. Applications (such as document assembly or document analysis or template creation) that automate repetitive, process-intensive legal work;
  2. Process automation engines that enable collaboration and workflow and compliance by allowing documents to “go” where they’re supposed to, when they’re supposed to; and,
  3. Powerful and secure database technologies that interconnect readily with existing systems so that clients have complete control over document privacy and retention.

Each of these components, by themselves, provides law firms and legal departments with huge value.  But by combining them, real document automation platforms can fundamentally transform efficiencies and economics at those departments and firms.

For more information, feel free to contact us anytime at info@brightleaf.com.

Posted in Document Assembly, Document automation technology, Legal document automation, Software-as-a-Service | No Comments »

Clifford Chance begins unwinding the hourly billing model

April 16th, 2010

Mega-firm Clifford Chance announced this week that it was de-coupling associate hours from associate bonus determinations.  Under their old model, associates were required to hit a certain hours threshold before becoming eligible for any bonus at all.  Above that threshold, the firm would consider a variety of factors, including (predominantly?) total hours in determining bonus size.   According to a firm spokesperson, bonuses under the new model will be discretionary. There will be no fixed correlation between hours and bonuses. Most importantly, there will be no hours target.”

While this might seem like just another blip on the “how firms are dealing with the recession” radar, it’s actually huge news.  Here’s why:

When you discuss flat-fee  or value-based billing with large law firms, the most common and explicit objection they raise is that the nature of the work is inherently too volatile.  If the client makes last-minute changes or the counterparty stalls or tomorrow’s newspapers contain adverse news, then transactions and matters will drag on.  And protracted transactions tend to require more lawyer output, so a $100,000 project can end up costing the firm $200,000.  Right or wrong, this concern at the top of the list of things you hear when you discuss flat-fees with lawyers.

If you’re talking to very senior partners at these firms, and you prod them a bit, you will also hear this objection:  the firm profitability model depends inextricably on the ability to bill on a time basis for lawyer output.  Firms recruit incoming classes and promote associates and reward partners and retain rainmakers with the stream of time-based money. Even as clients vociferously demand  a move away from time-based billing, firms worry that a broad or drastic shift might have adverse consequences for their whole model. 

Together, these two objections translate to:

  1. Because of the nature of our work, it is difficult to predict at the beginning how much law firm output will be required to complete a given transaction or matter. 
  2. Our existing model means that it costs our firm a lot of money to produce law firm output.
  3. Additionally, the way we measure law firm output and the streams of revenue we derive from it are critically important to how we get, promote, and retain our people.
  4. Unless we can get, promote, and retain our people, we don’t have a firm.

[Quick aside:  It's not like hourly billing is evil.  It roughly correlates to the amount of work done; it's easy to track and account for, and it creates an incentive for thoroughness.  But for a variety of reasons, clients are increasingly unhappy with it and are insisting on alternatives to it].

By starting to de-couple associate compensation from associate hours, Clifford Chance is loosening the link  between cost and production so that every extra chunk of work done doesn’t automatically cost the firm more.   To borrow an economic term, they’re injecting elasticity into their Cost of Goods Sold model.  And increased cost flexibility should theoretically allow the firm greater pricing flexibility.

Also, you have this:  if one associate spends 50 hours on a deal that makes his client unhappy while another associate spends 40 hours on a deal that makes her client ecstatic, who should be rewarded more?  At least now, Clifford Chance has the opportunity to decide.

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Posted in Uncategorized, law firm economics | No Comments »

The Future is Now: Brightleaf in Legal Technology News

April 12th, 2010

Kraft Kennedy’s Michael Mills writes about legal document assembly (and Brightleaf) in this month’s issue of Legal Technology News.  Mills comes to Kraft-Kennedy from 20 years at Davis Polk, much of it spent heading the firm’s knowledge management and technology functions, so he knows of what he speaks.

Posted in Document automation technology, Legal document automation, law firm economics | No Comments »

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