“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.

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.

Even better, Entrepreneurship Talks will be hosted by Foley’s Gabor Garai and Brightleaf’s Dave Curran.  Gabor’s absolutely undoubtedly one of the best attorneys in Boston, and he speaks with clarity and insight about issues facing new businesses. Dave is a multi-talented business executive with deep and uniquely diverse experience in the business and law of growth-stage companies (and we’re not just saying that so he’ll be nice to us in the hallways).

It should be fascinating.  Be sure to sign up and listen in.

In an AmLaw Daily interview several months ago, Seyfarth’s chairman, Steve Poor, attributed the firm’s performance to its clear-eyed recognition of fundamental flaws in the large-firm economic model and the anticipation of what might happen to that model should the rising revenue waters recede.  Poor stated, “Everyone loves rate-insensitive work,” he says. “But we realized several years ago: That model is fundamentally flawed. We realized a day like [the downturn] would come.”  Armed with that realization, the firm redoubled its efforts to provide more cost-effective services. 

At last week’s “Controlling Legal Costs” conference at Manhattan’s Harvard Club, Seyfarth stole the show with a stunning presentation by Boston-based partner Lisa Damon about the depths of its dedication to process improvement and cost-cutting through Lean Six Sigma methodologies.

Six Sigma process management, for those of you who haven’t encountered it, is a management philosophy that rigorously defines and measures and refines a business’s core processes and maps them back reiteratively to that business’s conceptualization of “success.”  As Damon put it, this type of thinking has traditionally been “anathema” to lawyers.  Lawyers have not been interested in process-based efficiencies, she noted, because we have made so much money from inefficiency.  The more inefficient a process is; the longer it takes.  The longer it takes; the more hours we bill the clients.  The more hours we bill the client; the more money we make…up to the point when the client fires us.

Probably true…but Seyfarth is through the looking glass now.  As part of their Lean Six Sigma implementation, their internal Green Belt teams precisely map out each discrete step in their standard processes (say, for example, filing a single-plaintiff employment lawsuit in New York) and then rigorously work to eliminate any unnecessary steps while smoothing the necessary ones.   Then they constantly re-examine and refine those process maps.

How is this working for the firm?  Damon reports unprecedented cost savings and sharp increases in customer satisfaction.  And the firm’s overall numbers show how economic robustness and resilence can grow from a focus on efficiency.

Now…if they added a little document automation platform into the mix, I wonder how much further they could go?

All in all, the census tracks a loss of 5,529 lawyers in 2009 at these firms.  It also notes that 113 of these firms reported that they deferred a total of 2,784 associates

Interestingly, during the same time, the number of partners at these firms actually increased 0.9 percent, leading Altman Weil’s Ward Bower to conclude that the associate cuts “were made were done primarily to preserve workloads for partners.”

At Brightleaf, we talk to a lot of in-house and outside counsel.  From the latter, we occasionally hear commentary–usually from very senior partners–that alternate billing is nothing new.  Their argument usually goes like this:  “Back in ’88 (…or ’01..or whenever), another bubble burst in the economy.  That bursting also caused clients to pull back on expenses just like this one has.  We survived that. Therefore, everything will be back to normal when the economy rebounds just a bit further.”

And, they’re at least partially right.  In tough economic times, clients will naturally spend fewer dollars and will naturally expect more for the dollars that they do spend.  But when law firms make this argument, I think  they ignore several trends that suggest that not all of the traditional legal billing toothpaste is going back into the client tube when the Dow hits 10,500.

Here are just a few of those trends:

• Increasing realization by client that they don’t pay for anything else the way they traditionally have paid for outside counsel.
• Emergence of technologies (like e-billing and matter management systems) that have made legal cost structures more transparent to clients
• Increasing client dissatisfaction with the effects that the so-called “Cravath model” of associate recruitment and compensation have had on billings
• The still-rare, but increasingly popular practice where large, influential clients ban 1st and 2nd year associates fromworking on their matters.
• Continuing disaggregation, where partners pinch off from large firms to form tech-savvy high-end boutiques that scale far better today than they would have ten or twenty years ago.
• The growing influence of Purchasing or Finance departments on selection of outside counsel, and the resulting focus on cost structures.
• The growing glut of associates and the effect it will have on the ability to charge to dollar for their services.
• The influence of high-profile corporate counsel — Mark Chandler, Mike Dillon, Amy Schulman, Jeffrey Carr, Rich Baer – who speak and write and blog about their efforts to ref0rm client-firm economics.
• Competition from firms that do offer alternate billing models.

I guess that only time will tell.  It will be interesting to see where that 61% number is next year.  From what we hear, it’s not likely to go down.

Lynne, a former Proskauer/ Brown Rudnick associate, is Brightleaf’s new Director of Client Strategic Processes.  She’ll be working with our large firm clients to help them automate the way they create and approve and manage their transaction documents and free themselves from the strictures of their exisiting economics.  Lynne’s previous life gave her an up-close look at the some of the labor-intensive sausage factory processes that corporate clients increasingly disfavor in their outside counsel.  Now she gets to help re-form those processes.

We’re fortunate to have Lynne on our side.  BigLaw’s loss is our gain…which is ultimately BigLaw’s gain too!.

Article here.

Plus ça change, plus c’est le même chose.

The more it changes, the more it’s the same thing.

Forgive us if we go a little old-school here.  We were thinking the other day about the application of business practices to contemporary legal practice when we ran across the decidely non-contemporary Report of the Thirty-Ninth Annual Session of the Georgia State Bar Association, held at Tyree Island on June 1-3, 1922.

Yes. 1922.

While we ordinarily pride ourselves on being up-to-date and ahead-of-the-curve, this 87 year-old report caught our attention.  Two of its essays–confusingly, both were entitled “Reports on the Business Methods of Law Firms”–struck us for their clarity of expresion, their business-focus, and the odd timelessness of the issues they presented.

“It behooves us, therefore, to follow the lead of business men and study efficiency, the elimination of waste, the accomplishment of best results with the least effort, and the least expense, and the other principles which are recognized as necessary to the conduct of any successful business in these days of strenuous competition and most earnest endeavor.”
- George Jones, Esquire, of Macon, Georgia (p. 148)

When he’s not using the word “behoove” in gentle admonishment, the author above, George Jones, spends much of his nineteen pages arguing for closely tracked but flexibly deployed billing practices.  As his timesheet (pictured below) shows, Jones was a big believer in lawyers scrupulously recording and reviewing the increments of time they expended on client matters.  But, rather than solely invoicing clients for these increments he argues for a blended approach to billing, preferring to use his timesheets as backup to prove to disbelieving clients that amount of work their matters actually consumed.  

“Everyone will agree that the basis for charging fees is one of the most difficult and unsatisfactory of a lawyer’s problems…I maintain that they are four such bases, stated in the order of their importance:

• First, Time occupied [billable hour]
• Second, Amounts involved; [contingency]
• Third, Character and importance of the questions involved and work done; [matter-based] 
• Fourth, Results to clients. [success/outcome-based]

[italic text added]

It is the combination or aggregate of these elements which consciously or unconsciously actuates us in determining what to charge…It is important that clients shall be satisfied with the reasonableness of the charge made ..a client thoroughly dissatisfied with an exorbitant charge is likely to seek out somebody else.” (Jones, pp-144-145)

With the cascade of articles in this month’s trade and popular press about the viability of the billable hour, we thought Jones’ 1922 discussion seemed especially, um, timely.  Like we said: plus ça change…

Check out his state-of-the-1920′s-art billing and matter management system below or see the attached for complete copies of the two “Business Methods” papers.
reports-on-business-methods-in-a-lawyers-office_georgia-bar-association-19221