All posts by Jonathan Perle

Why Are Lawyers Counting Words By Hand?

The Wall Street Journal last week contained an article by Jacob Gershman titled “Why Lawyers Object to Making Legal Briefs Briefer“.  The subject of the article is a proposal to sharing the number of words allowed in federal briefs from 14,000 to 12,500.  This is being considered because it is believed that the original formula for shifting from a page count to a word count incorrectly estimated the number of words on a typical page of a brief.

For those interested in the use of technology within the legal profession, the interesting part comes one third of the way through the article:

Michael Gans, clerk of the Eighth U.S. Circuit Court of Appeals in St. Louis, who oversaw the word-count study, says the process couldn’t have been more painstaking. It was carried out by a high-school graduate who interned at his office and spent a recent summer in a cubicle counting every single word of 200 printed-out briefs that served as the sample.

“I felt sorry for her, but that’s what she did all summer,” Mr. Gans said. “She still wants to go to law school.”

While the young woman may have gathered some value from the exercise, overall it was pointless.  Assuming that these were briefs filed before electronic filings, the clerk could have used a scanner and optical character recognition technology to compete the task in a day, instead of causing an aspiring lawyer to spend hundreds of hours on a tedious task.  Moreover, in this type of situation – where no analysis is required – a computer is far more likely to be accurate.

Using technology would have freed up the young woman to perform more interesting tasks and would have led to an answer in a far shorter time frame.  When technology can replace repetitive and routine labor, lawyers should embrace it and focus their efforts on complex tasks that require analysis and judgement.

 

Add Value

Why Cross-Selling Legal Services Is Hard In One Word: Value (Part 1)

One the great buzzwords of law firm marketing is “cross-selling,” leveraging a firm’s existing relationship with a client in one area of the law to get the client to use the firm in another. It makes eminent sense for a firm strategically. It make sense for a firm financially. And it is hard. Very hard.

Cross-selling sits at the top of the law firm business development wish list, behind institutional clients and inclusion on “preferred lists” for major financial institutions and corporations. And it should. Academic literature will tell you that it is far, far cheaper to keep an existing customer than to obtain a new one. While there are no definitive numbers, it is clear that it is far easier to sell to existing customers than new ones, existing customers are likelier to comprise a larger share of your future revenues and attracting new customers costs a company somewhere between 4 and 8 times more than retaining an existing customer.

All of these facts augur that cross-selling should be a priority for law firms. However, as many people in the industry know, cross-selling is something that is very difficult to do for a variety of reasons, some of which are quite nicely spelled out here. Some reasons are structural – a client has no need of new legal services, compensation schemes lack proper incentive structures, the firm lacks relevant expertise. Some barriers are cultural – the firm doesn’t emphasize information sharing and communication, attorneys think about clients as “their” clients rather than “firm” clients. The list of obstacles typically identified is quite long.

I would like to focus on one reason that I believe is at the heart of the cross-selling problem for law firms, and one which is often overlooked: value. Most discussions of issues in cross-selling start with a basic assumption – that a law firm has something of value to give to the client beyond its current legal advice. That, of course, is not necessarily the case. However, because most discussions about cross-selling challenges assume the firm already has something of value, they tend to revolve around the internal barriers to successful cross-selling.

But let’s assume that we are dealing with a firm that has both a relevant practice group and well-respected attorneys capable of performing the client’s work. Let’s further assume that the law firm is not impeded by structural, personal or other issues that would make it difficult to create a cross-selling opportunity. The attorney representing the client wants to cross-sell, management wants to cross-sell, the expertise is there and the resources are there. In short, everything is as optimal internally as it can be.

Now we come to the critical question: what value does the firm bring to the client in that cross-selling opportunity? Too often, lawyers believe that superior talent is equal to value. It isn’t.

While lawyers may feel that they should be able to compete based on talent, in many cases that simply isn’t true because the baseline legal representation that the client needs can be met by a number of different attorneys who are all above a minimum threshold. Sure, for bet-the-company litigation or a company-altering M&A decision a client is going to look at the landscape and choose the best that money can buy; for matters of lesser importance, many firms will fit the bill, and expertise is just one facet (albeit the most important one) of an overall value proposition.

To illustrate this, let’s assume that a GC rates its law firms on a scale from 1 to 10. If a firm is at a 7 or above, the GC uses the firm. Furthermore, let’s assume that the satisfaction score is based upon a composite of multiple factors: quality of the legal representation, responsiveness of the firm and price.

Now let’s assume that the GC is represented by Bob at Smith & Smith in its corporate work, which has a satisfaction score of 8. For its litigation work, it uses Mike at Jones & Jones, which also has a satisfaction score of 8. Mike would like to perform GC’s corporate work. To do that, it needs to provide value to the GC. How does Mike achieve this?

  1. He can try and appeal to the GC by claiming the Jones & Jones lawyers are better. Since Smith & Smith already performs solid work, that appeal has little value to the GC, even if true. Yes, Jones might do better work, but it also might not. If the GC’s normal corporate work only requires a level of 7 to do and Smith is performing at an 8, even if Jones is, theoretically a 9, there is a risk to switching for which there is not much added value. Only if the GC has a complex matter that requires a 9 is there substantial value in competing solely on expertise.
  2. He can try to appeal on price. Decreasing the price of Jones & Jones’ corporate work to a level below Smith obviously adds value. The measure of that value will, of course, be weighed against the risks of switching. All other factors being equal, level of service, quality of legal advice, etc., we would expect the GC to switch if the value of the lower price more than offsets the potential risks in using a new attorney.
  3. He can compete on service. Just as in the case of price, if the value of the potentially better services is greater than the risks of switching, we can expect the GC to switch firms.

All of this is simply to say that it is the external value (and perceived value) delivered to a client which matters in cross-selling at the end of the day, not the absolute ability to deliver better expertise, price or service. Better legal work, while always desired, is not necessarily more valuable. There are no extra points for crafting the world’s most elegant merger agreement if a simpler, cheaper one will do the trick. The law school joke that one’s goal should be get the lowest passing bar score should be on attorneys’ minds when they think about what value means to a client.

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Altman Chief Legal Officer Survey

Altman Weil’s 2014 Chief Legal Officer Survey is out.  Question 14 gets to the issue of what value in-house counsel offers its board.

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Just behind advising company leaders, chief legal officers at firms rate supporting business objectives as their most important function.  What that should tell law firm leaders is that anything they can do to enable in-house GCs to better support their companies’ business functions will be met with a receptive audience.

 

Lightbulb

Innovation For Firms Is Required

LegalFutures new report “Innovation in the City” is worth a read for those looking at the long-term future of the legal industry.

It is clear that the BigLaw legal landscape is changing in the wake of the financial crisis, albeit slower than in many other industries. At the very top of the prestige ladder sit a handful of the most recognized law firm brands in the world. These firms, while affected by the crisis to a limited degree, mostly weathered the storm unscathed. Their long lineage, coupled with their extraordinary reputations served to insulate them from many of their peers. Most importantly, their ace card – institutional clients that have been handed down through generations – made them immune to some of the larger market forces affecting the legal world.

The next set of firms has not been so lucky. These large firms, with top-tier talent doing top-notch work but who lack the institutional clients of the most prestigious firms have found themselves facing more pressure from clients. While they have institutional clients, in general the next set of firms (and all of those below) must fight for every engagement. The general counsels of the companies that they represent are themselves being pressured by their executives, and they pass on that pressure to the firms. The pressure comes through tougher negotiations on fees, increased bidding of new matters and sourcing legal expertise from lower-cost providers, such as in-house attorneys and offshore firms.

The recent PwC study done in the United Kingdom for British firms reveals this dynamic:

Top 10 firms have recorded their highest ever average net profit margin at 40%, and Top 11-25 firms have finally started to reverse the previous five year trend of margin deterioration, posting an increase from 26.0% to 28.2%.

Firms in the Top 26-50 are the one banding who have continued to suffer declining margins; they are reporting increased fee earner numbers alongside lower levels of staff utilization, with margins therefore depressed by a high total staff cost ratio of 43%. However, this pool of mid-tier firms continues to include some high-performing firms, who have carved out a successful niche through a combination of sector focus, quality brand and innovation. Those firms whose differentiating qualities are embedded and recognized by clients have taken advantage of opportunities to move up the value chain.

In a world where clients want more for less from their law firms, the overriding question for firms that find themselves outside the very top group is how will they adapt their businesses to meet the new demands? Simply cutting rates in an effort to compete is insufficient. Clients will be happy, but competitors may easily adapt, leaving firms worse off than before, creating a new normal.  Alternative structures and new value propositions will need to be found that allow firms to deliver more for less.

Increasing Revenue Means Increasing Value

Over at Above the Law, Jeff Bennion is a lawyer who understands business. He has succinctly described the formula that accounts for a lawyer’s salary:

Salary = $(my worth to my firm) – [$(the administrative expense of keeping me employed) + $(the amount of profit my firm plans of making off me)].

He then sums up the ways in which an attorney may increase his salary:

If you want to increase your salary, you can either increase your worth to the firm, decrease your administrative expense, or talk your boss into making less money off of you. I recommend increasing your worth.

At Privileged Communications, we believe Jeff Bennion is 100% correct. Individual attorneys can (and should) capture more upside when they increase their worth to the firm, either by delivering better performance or bringing in more revenue.

Likewise, law firms can (and should) be able to increase their revenues when they increase their value to their clients, either by delivering better (and/or cheaper) legal performance or by helping their clients with their non-legal objectives.

A firm that is good at business development provides its clients with quality legal advice which causes the clients to return. A firm that is great at business development provides its clients with quality legal advice and uses the firm’s resources to advance the client’s business goals.

Delivering Business Opportunities to Clients is Worth Real Money

business introductions
Source: http://www.margaretpage.com/the-art-of-introductions/

One thing that denotes sophisticated corporations, private equity funds and hedge firms is their willingness to pay for value. A phrase we heard in a meeting with a major private equity firm the other day was “we love to pay fees” [to banks]. Why is that? Because those fees represent a fraction of the value extracted from the banks’ activities. It is the same for legal services. The same clients that pay banks millions of dollars in fees are the ones that will pay $1,000 per hour for a partner but not a dime for a first year associate. The $1,000 investment generates a return – superior insight, better negotiated terms, a novel approach – that can never be obtained from a first year associate, no matter how inexpensive the hourly rate.

Given that serious businessmen and women are willing to pay – and pay very well – for value, the quest for all law firms that service such clients should be to figure out how to increase the number of chances to provide their clients with valuable opportunities. The traditional and obvious path is to obtain highly-regarded talent that can add outsized value in important transactions. This makes unimpeachable sense. A law firm’s primary asset is (through its attorneys) the legal advice it can sell to clients. However, it is not the only asset, and legal advice is not the only item of value a firm can provide.

Law firms, by the nature of their business, are institutions with incredibly powerful networks. The average 500 attorney firm has 18,000 clients. Even better, the contacts that firms have are often at the highest levels of a client’s organization. Working with a client’s senior personnel on a yearly, monthly, weekly and daily basis allows attorneys to have a great deal of insight into their client’s business objectives. This places the attorneys in a unique position. They sit in the center of the deal flow for their own clients while they are simultaneously connected to all of the other clients of the firm through the other attorneys. If Attorney A representing Client X knows that Client X has a problem and also knows that three other clients of the firm could potentially solve Client X’s problem, then Attorney A possesses very valuable information.

This is the great untapped resource of corporate law firms – the ability to connect clients together who have compatible business goals.

The anecdote below is a true story. While the advisor was an investment bank, there was nothing magical or special about what the bank did. Wherever you see the word “bank”, replace it with “law firm.”

 Company X, a publicly traded oil exploration and development company, was in financial distress. It had outstanding commitments pursuant to a joint venture contract that it could not meet. The stock price was very low, and the traditional capital markets were closed to the company. To survive, it needed an infusion of capital. The company contacted its bank and asked it to help figure out a solution. Because of the nature of the transaction, the bank was never going to make a significant deal fee from Company X. However, the bank made introductions to several potential partners. One of those partners was Private Equity Firm Y, for whom the bank had done a large amount of work in the past. Private Equity Firm Y told the bank that if it completed the transaction it would pay the bank a $1.5 million fee, merely for bringing it the opportunity.

Think about that. $1.5 million for an introduction. Even better, that is $1.5 million the private equity firm was happy to pay. It recognized that the value it would receive from finding the right deal was far in excess of the fee it was paying the bank. Undoubtedly, being under financial distress, Company X’s law firm was advising it on legal matters related to its problem. However, the law firm never took the initiative to help the client find a business partner. The firm probably collected its hourly fees, but it never took the extra step to bring enhanced value to its role. Had it done so, many benefits would have accrued to it, both from a financial and a relationship perspective.

Clients come to firms because they need help in solving their business issue, whether it is the sale of a division, the creation of a joint venture or the financing of a new power plant. Most of the time, clients come to the firms after they have made the business decision and they are only looking for advice in execution. However, there are many times when clients come to attorneys before the business decision is made, when they are considering whether they should sell a division, or expand into a new market or build a new power plant. They come for advice on how to best proceed in the event the transaction goes forward. In those cases, attorneys can provide value to their clients, not only by advising them on the legal framework, but by actively helping them to find the right business partner.