William C. Cobb, is the managing partner of Cobb Consulting (WCCI, Inc.) based in Houston. He is a consultant in strategic issues affecting law firms and general counsel and has helped them improve their competitive positions since 1978. The counsel includes the impact of trends on the legal profession; pricing services and alternative billing; practice management; firm governance and structure; partner review, evaluation, and compensation; and other subjects of critical importance to law firm and legal department leadership.
Standing Near the Cliff Edge:
How Increasing Pressure from Clients for Fee Predictability Will Change the Face of the Practice
There is a tsunami wave coming to law firms caused by an earthquake out there called value billing. Every law firm, small to large, will be affected. The wave will wipe out and suck out to sea the old guild culture, organizational structure, the products and services, and the compensation systems. Although the idea has been around since the publication of books in 1989 and 1992, titled Beyond the Billable Hour and Win-Win Billing Strategies, respectively, there has been little progress throughout the legal profession. Lawyers still expect to bill by the hour based upon the false assumption that effort equals value. Clients are changing their views of value added. We are entering a new era where law firms must change the way
they must serve clients and value partner contributions.
What the printing press did to the priest and rabbis when people could read the Bible and make their own conclusions, the Internet will do to lawyers. At the same time, what the bloggers have done to the major news networks' monopoly on the news will affect the way lawyers give advice. The legal profession has operated under a guild culture since the inception of the profession, but the world has changed. Guilds are the association of persons of the same trade or pursuits, formed to protect mutual interests and maintain standards within the context of their own production of personal products. The legal profession is a guild. A Wall Street Journal article on the decision to kill the multi-disciplined practice had the following to say:
"Why is the ABA afraid of a little competition?" Tunku Varadarajan, a senior editor, said. "There is a character in 'The Master-Singers of Nuremberg,' an opera Richard Wagner intended as a benign parable, called Sixtus Beckmesser. He is the embodiment of prejudice against change, a nitpicking guild member who abhors a new challenge, a defender of the barriers that keep safe his cozy status. W[ere] he alive today and living in America, it's likely that he would be a member of the American Bar Association."
But there are trends that will change the nature of the legal profession. The trends signal a new era for law firms and a whole new business model. What are the major trends that will issue in a new era? Here are some example stories that identify them.
A general counsel tried in vain to convince his law firm that it should be able to give the client predictability in its legal fees because the law firm often did the same deals for the client. After years of negotiation with the law firm, the only answer coming back was: "We bill by the hour, so trust us." Finally the general counsel gave them one last chance and then changed outside counsel to a law firm that gave him a fixed fee for most of the work.
An old-line law firm that had represented a large client for 40-plus years lost a bid for future legal work to a relatively new firm. The question put to me by one of partners of the old firm was why that could happen when the old-line firm partners graduated from the best law firms and the new law firm did not have those credentials. My answer was this: "That firm went to the client and spent time understanding the client's problems, and then came up with solutions. They did not say, 'just trust us, we are great and have represented you for the last 40 years.'"
There are now many general counsel using a program called Client Connect to connect lawyers from various law firms to a conference server where the client can eliminate duplicate efforts in any transaction. Through the Internet, each lawyer involved in the deal is connected to a virtual conference room to review documents and conform to a budget for each phase of the transaction.
What does all this mean? First, clients want predictability and expect their outside firms to give it to them. Second, clients expect solutions based upon a knowledge of their business — not some law firm that says "trust us." Third, clients will expect a budget and the law firm will have to give some commitment to staying within a budget. This means, then, that the law firm will have to first understand what models to use in evaluating its environment and then change as quickly as possible. There are two useful models for understanding the changes in the legal profession.
First, there is a model that should define "What Clients Expect" (See Service Grid, below). Technology and product quality is important, but service quality is just as important. If you put the concept in a model, the "Y" axis would be Product Quality and the "X" axis would be Service Quality. Product Quality involves the quality of the product based upon a lawyer's understanding. But Service Quality involves giving clients a solution that will solve their problems whether they include timing, results, or budget. As an example, the perfect product may be a day late, which makes it useless. The perfect service could mean great service but little product quality.
The second Model is the "Cobb Value Curve". Let's break this down for this article. In the upper level is the Nuclear Event. The second level is Experiential. The third level, below the Price-Sensitive line, is Brand Name. The final level is Commodity. The way this breaks down is as follows: If the lawyer receives a call from the CEO, CFO, or General Counsel, it must be a Nuclear Event for which the client would be willing to pay by the hour for the most experienced lawyer. If the event is Experiential, the client will want a high level team to solve the problem. If one of the assistants to the above call, the service will probably be Brand Name or even a Commodity.
Implications for the Law Firm
There are some major implications of the changes coming in. The law firms will have to price their services in accordance with the Quality of Service mix and the Cobb Value Curve. The major implications include the following. There will be:
● A higher demand for effectiveness through process management;
● A stronger demand for greater efficiency to overcome the 30-year lawyers' assumption that "effort equals value added";
● A change in the way partners (and other professional staff) are measured and then evaluated; and
· New measures that will used to be used in the compensation system.
● Is the partner building a team of people that can serve the client?
● Is the partner exporting work to those who can best perform the services?
● Are the partners putting information out to others outside the firm who can better perform the services?
● Are client and practice groups really market facing?
● Do they really understand the cli-ent needs and are responding to the need?
Process management will have to accommodate the pricing changes by carefully evaluating what has to be done. Effectiveness will become the key. Doing the right things becomes far more important than doing everything right. Value added will be a function of how carefully the law firm and the lawyers work on the matter and choose what should be done. There is no value added in trying to build a Maginot Line for the defense and using up too many of the firm's and client's resources. Process Management will be the key. There is a real reason for looking at the process for producing and delivering legal services. The mapping process is the key to enabling lawyers to understand and use the most effective way to provide legal services.
A lawyer in charge of clients and matters must be able to plan, organize, manage, and control the process for delivering legal services. That requires a set of skills that is not taught in law school. Law firms must be able set up a curriculum to teach these skills, which involve the investment of non-billable time. If the law firm is only valuing billable time, nothing will happen.
A Change in the Evaluation Systems for Attorneys
The evaluation of professionals will have to start, evaluating leading indicators of performance such as plans, agendas, and events. Lagging indicators such as billable hours and the volume of dollars are typically examined, but the evaluation must be expanded to consider all the indicators, including realization that will show the true reflection of performance relative to the performance of other lawyers.
A Change in Compensation Systems
Firms must change the way in which they evaluate and compensate lawyers. They must look at the realization on billing rates as well as the size of a portfolio owned by a lawyer.
New Trends That Indicate a New Era
Open Source: Let's look at the recent past. When Andrew Kurth came up with the first Master Limited Partnership in the early 1990s, it was only days before other law firms had a copy and using it for their deals — even with the same typographical errors.
Standardization: As the world moved to standardization after the fall of the Berlin Wall, many started using many of the same standards. As standardization becomes clear, many firms can use the proprietary knowledge of other firms to build and use legal products. Documents online give every law firm access to all the legal knowledge of other firms. It is said that generation X receives more information in a day than our grandfathers received in a year. The outsourcing of legal tasks is coming on line. As law firms discover the maps for more efficiency, they are determining that others outside the law firm can perform the same quality services as the lawyers inside the firm.
Offshoring: More and more services of research and brief writing are going offshore. There are plenty of U.S. Law School graduates in India who can perform the same function associates perform in the U.S. Why wouldn't a general counsel or law firm begin to outsource work to out-of-country at $50 per hour instead of $200 per hour if they are working on a fixed fee for efficiency? There is a 24-hour turnaround doctors and other professionals are beginning to use in their delivery of services. What would happen if lawyers used the same service?
Supply Chaining: Building a supply chain will provide a coordinated approach to delivering legal services. What would happen if law firms started using outsourcing to bring in expertise and had to make sure the supply chain would insure that all products and information would arrive on time?
In-Sourcing: Using the UPS example — As outsource groups begin to work and gain confidence from law firms, more trust will be moved to these outside providers. They will start to do tasks that the law firm performed earlier to reduce legal fees in accordance with the pricing limitations placed on law firms by clients.
Efficiency: Matter management will have to accommodate the pricing changes on their way because as clients look at the way their work is done, efficiency will become a primary measure of value added - efficiently. Law firms must start teaching new skills. Leaders and managers are needed and the skills of leadership and project management. Management of projects include planning, organization, documentation, and management of each task. New skills are needed: Substantive Knowledge is not as important as the need for Skills Knowledge and the ability to manage projects and build a process to manage the most efficient and effective way for insuring the highest legal services to clients. Lawyers must understand that leadership and management skills are very important. Substantive knowledge is important, but other skills are required. Lawyers must understand how to managing projects. Lawyers must be able to manage projects and the people who are working on them. They must have a project plan based on past projects ane plan to insure that they are not recreating the wheel.
Measures: As the clients change their expectations for effectiveness and efficiency, there will be a need to change the way in which partners are evaluated for their contribution to the firm. The questions will be:
● Are they getting the highest return on the rates of their team?
● Is the partner giving discounts that destroy the profitability of the firm?
● Is realization over billing rate more important than volume of fees?
● Is the partner building a team of people who can serve the client?
● Is the partner exporting work to those who can best perform the service?
● Are the partners putting information out to others outside the firm who can better perform the services?
● Are client and practice groups really market-facing?
● Do they really understand the cli-ent's needs and are they responding to these needs?
Changing Compensation: The fact that a lawyer has a high level of business in the volume of dollars does not make that partner the most important to the law firm. The realization on rate is far more important than the volume of dollars. A lawyer with $1 million in fees does not necessarily mean that the partner is earning money for the firm — it may be that it is losing money and profits because its billing rate is too low. The result is that compensation will have to change to other measures for compensation including realization, effectiveness, and efficiency.
What Must Happen?
There must be a re-evaluation of everything in the law firm's business model The old business model of using leverage and effort (hours billed) is not going to work. Clients are smarter. They expect more efficiency in producing legal product. There will fewer and fewer clients who are willing trust their law firms to bill by the hour. They will ask firms to take more risk by going to a fixed fee and incentive fee contract for legal services. Law firms will have to demonstrate that they have a team of people ready to serve the clients' needs for all disciplines available in the law firm. The next steps are for members of the firm who can offer multi- disciplined services through market-facing practice groups to do so. Therefore, there are going to be new measures in new times. The new measures will evaluate what are the key contributions to the future of the firm, which will include the ability to plan and manage projects, lead projects, develop people under them, and adopt a new compensation that awards the following:
● Team building for service to clients;
● Providing team solutions and services to solve client problems;
● The leadership that is market facing and provides market facing solutions to clients in the practice group sphere of influence; and
● A compensation system that awards the above over the volume of dollars of billing.
Seven Steps to Change
Step 1: Create a crisis to make people in the firm see the coming demise of their old business model. Lawyers talk to clients all the time and should understand where such clients are coming from in the change of the business model for law firms. Clients are not interested in paying by the hour but they are more interested in the ability of the law firm to give them a price and a budget for the services offered.
Step 2: Form a core coalition that can create a precedent for dealing with these issues. The core coalition must be able to define the new business model that clients are demanding, and implement the changes, including efficiently handling projects and pricing based upon the client's expectations.
Step 3: Have the core coalition establish a vision of what it is trying to do in the long term. The core coalition must identify and document what needs to happen in the future to solve the client problems and give solutions.
Step 4: Report the short-term successes. The core coalition must set up and implement short-term success in its work to improve the realization on billing rates.
Step 5: Report long-term successes. The core coalition must be able to report success.
Step 6: Provide rewards for the team that succeeds. The law firm must be able to reward the lawyers that hare making things happen. If they are working to improve the realization on billing and train the next generation, they must perform.
Step 7: Set new objectives for a better return on rates for the firm and client assets employed.
The new era is emerging for law firms that will require a critical change in the way in which law firms deliver services and compensation of partners. There are trends that will show what will happen in the new era. There are some models that will help law firms to understand the changes in the profession and these models should be used in evaluating the trends that affect the trends that are affecting the legal profession. Law firms must consider their business model for evaluation and compensation of lawyers to insure they can adapt to the future. There must be change and law firms, with the help of objective third parties, must make the transition.