The Business Of Law

No, it’s not a fairy tale.  The story of the lawyer and the entrepreneur is the vision of some forward-thinking administrators at Duke Law School and the University of Colorado School of Law. Both are in the process of launching LLM programs in “entrepreneurial law” as reported in the National Law Journal  (NLJ) and the WSJ’s Law Blog.

The idea is pretty straightforward. An LLM-level program in entrepreneurial law (with courses and clinics focused on entrepreneurship and emerging companies) will ideally give lawyers greater skills to advise start-up businesses—or to become entrepreneurs themselves.

In the NLJ piece, professors at both Duke and Colorado talk about how lawyers are increasingly called upon to advise start ups, and how a knowledge of business in general and entrepreneurship in particular will be helpful to lawyers in giving that advice.  I agree.  But to me, it’s the second part of the equation that is much more interesting—helping lawyers become entrepreneurs themselves.

Now, as regular readers know, I have argued over and over and over again that the legal profession needs to be more entrepreneurial. The fundamental model is in need of a huge overhaul to become much more innovative and customer-centric.  To do that, lawyers need to think more like business people.  Maybe having some courses in entrepreneurship will help. 

The Duke and Colorado programs promise to teach students about employment, organizational behavior and financial strategy.  These are, of course, critically important parts of business, and long overdue topics for law schools to begin covering.  That said, what about the other aspects of entrepreneurship? What about judgment, about knowing how to calculate risk, and when to take it, focusing on customers, and aligning incentives to maximize output and performance?  These are also critical, and they are not typically associated with law school curricula.

Instead, where entrepreneurs look to balance risk and reward, lawyers tend to minimize risk above all else.  Where entrepreneurs seek out innovation and efficiency, lawyers look to perfect the standard operating procedure, all the while billing by the hour.  Where entrepreneurs by their nature look for shortcuts, lawyers always seem to take the long route.  Where good entrepreneurs are maniacally focused on the customer, lawyers tend to be self-absorbed.

The bottom line is that the entrepreneurship programs at Duke and Colorado are a step in the right direction, and they will undoubtedly help lawyers as they advise their increasingly entrepreneurial clientele. But I’m hoping they will also teach lawyers how to be businesspeople in their own right. If they succeed in accomplishing that goal, the lawyer entrepreneur won’t have to be an oxymoron.

As close readers might recall, I have long called for an end to the billable hour model of legal service, arguing instead that contingency fees were a better solution for lawyers, clients and justice.

Well, as Claire Ruckin over at Legal Week reports, it appears that no less an authority than Lord Justice Jackson agrees with me.

Lord Justice Jackson, a widely respected appeals justice in the U.K., was asked to conduct an independent review of the rules governing the costs of civil litigation in the U.K. and to provide recommendations that would lead to greater access to the civil justice system.

Among Lord Justice Jackson’s conclusions are that lawyers in the U.K. be allowed to charge for their services through the use of contingency fees.

This is an important step for the U.K. because contingency fees had previously been prohibited on the grounds that lawyers with a significant final stake in the outcome might lose their ability to give impartial advice.

As a good English lord might say, that’s poppycock.

Contingent fees align the interests of counsel and clients, and they allow lawyers to take on costly and complex cases with little risk to the client. Finally, these fee arrangements promote efficiency because they encourage lawyers to be honest with their clients about the likelihood of success on the merits.

Most importantly, contingent fees are client-centric; something the legal profession could use a whole lot more focus on.

Whereas the billable hour essentially reimburses lawyers for their time, the contingent fee compensates the attorney for the client’s outcome. Lord Justice Jackson is 100 percent right, no matter how radical his proposal might seem to our bewigged brethren.

If there is one constant on the cocktail party circuit, it’s that you will undoubtedly have the same conversations over and over and over again.  The current winner by a long run is the Tiger Woods drama; I’ve heard that one at nearly every party I’ve been to in the last month.  But coming in a distant second is that annual stalwart—the airline horror story.

If you travel often, as I do, you know the story well.  And you’ve probably shared your version: flights delayed, connections missed, nights spent at the airport, etc.  Perhaps one of the best I heard this year was about a friend who was traveling from China on a 14-hour flight with all kinds of books to read, and laptop work lined up, only to be informed that due to electrical difficulties, there was no electricity or lights in the cabin.  Imagine 14 hours sitting bolt upright in the dark (the seat controls were electric and thus not working).

These stories reminded me of a piece I had read right before Christmas in The New York Times.  The article referenced a new set of federal regulations announced by the U.S. Department of Transportation that would impose stiff penalties starting this spring on airlines that keep passengers waiting too long on the tarmac without feeding them or letting them off the plane.  Essentially, airlines that do not provide food and water after two hours or a chance to disembark after three hours will face penalties of $27,500 a passenger.

Heralded by some as a key victory for airline passengers, the new regulations may actually be a step backward that takes the wind out of the sails of the so-called “passengers bill of rights” legislation currently pending in Congress.  That could mean that while the tarmac waiting problem may be resolved, other thorny consumer protection issues will remain.  Put a different way, passenger advocates may have won the battle and lost the war.

Chris Elliot writing over at the Washington Post back in October had a great piece on why the tarmac delay issue may prove to be a pyrrhic victory. He argued:

” In the past few months, a series of headline-grabbing tarmac delays has helped a couple of influential lobbyists convince the media and a few elected officials that tarmac delays are the No. 1 passenger rights problem in America. Worse, they’ve convinced many travelers that tarmac delays are the only important passenger rights issues… I’m willing to bet that my friends in the airline industry, who insist that they oppose the new turn-back law, are quietly pleased that the tarmac lobby has hijacked the passenger rights cause.”

Elliot points out that there are in fact many other passengers’ rights issues, such as truth in advertising, problems with federal preemption and failure to enforce existing consumer laws.

So the good news is that the airlines can not leave you sitting on the tarmac for nine hours without a bag of peanuts or a cold drink.  The bad news is that this “progress” may have come at the expense of thoughtful legislation which would extend basic consumer protection to airline passengers.

That just about guarantees content for your next cocktail party conversation.

D.M. Levine over at AmLaw Daily had a recent blog post titled “Where Do We Go From Here?” The post covered a panel discussion hosted in December by LexisNexis on the future of the legal industry.

As D.M. reports:

The discussion, entitled “Evolution or Revolution: The Future of the Law Firm Business Model,” was moderated by Darryl Cross, vice president of client profitability at LexisNexis, and included panelists from various sides of the legal profession.

The debate was part of LexisNexis’s release of a survey of legal professionals on the future of the legal services industry.

Here are the study’s key findings:

•    71 percent of corporate counsels believe law firms are not doing enough to respond to current financial pressures.

•    57 percent of them believe the billable hour will be replaced by alternative billing arrangements.

•    52 percent of private practice lawyers believe the recession will permanently change the way law is practiced.

One of the panelists summed up the problem thusly: “We’re a profession that, over the last hundred years, has not done anything differently and the only industry that is proud of that.”

Can I get an “Amen”?

As I’ve said here, and here and here, the legal business model is fundamentally changing, and those that respond to those changes will have meaningful strategic advantages.

Which gets us to the question, why is the legal profession so resistant to change? Why are we the only industry that seems to innovate at a snail’s pace?  Here are a couple of possible explanations:

1.     Lawyers like consistency. That’s not a slur, it’s just a fact. Lawyers interpret and apply rules. The more consistent the rules, the more predictable the outcomes, and the easier their jobs are.  There’s nothing wrong with that, and my colleagues who are attorneys will say that there is an important place for consistency and uniformity when it comes to the law.  I agree.  But should that same need for consistency and uniformity apply to the business model?  I think too often we are an industry that does things because “that’s how things are done.”  That attitude is anathema to the entrepreneurial spirit that typically drives innovation and progress.  Bottom line, consistency is important, but thinking outside the proverbial box is the first step toward progress.

2.    Lawyers don’t like risk. Closely related to #1, most lawyers are at some level, in the risk mitigation business.  They minimize risk for their clients and they try to prevent financial harm.  And they should, and they’re right to do so because that’s what they’re being hired to do.  But does that mean that lawyers should be unwilling to take some risk in their business? Of course not.  At Sokolove Law, our contingent-fee business is based on taking risk, with our co-counsel and our clients.  We vet cases and the cases we think have merit, we take to trial with our co-counsel.  We all—our firm, the co-counsel, and the client—have some skin in the game.  It’s one of the reasons our clients come to us.  One of the principal complaints I hear about the traditional legal business model is that win or lose, the lawyers always get paid.  For many in the business community, that’s totally counter to the tried and true idea of shared risk.

3.    Consensus is stifling. One of the topics that came out of the LexisNexis panel discussion is that no one really has the solution to what ails the legal industry, and the fact that there is no consensus seems to be stifling any progress.  That’s totally true. For some reason, the legal industry seems to be convinced that until there is consensus about a new business model, we cannot proceed.  I don’t think there’s much merit to that argument.

There’s a theory in academic circles about “pioneers, imitators, and generics.” While it’s generally used to refer to product R&D, I think it applies to the legal profession as well.

The premise is that the pioneers reinvent the business model through innovation, the imitators perfect the model through trial and error, and the generics go along for the ride, dividing up market share.  The problem with the legal industry is that we have too many generics, and not enough pioneers.   We don’t need consensus to experiment, to try new things, new processes, and new ways of doing business. We need firms that are willing to step out and experiment, to break the mold, to be more responsive to the client’s needs, and to find new and innovative ways of conducting our business.

That’s what we’re trying to do at Sokolove Law.  For thirty years, we’ve been changing how people obtain legal services. Today, we are continuing to pioneer a new business model based on helping our co-counsel do what they do best, while also expanding access to the civil justice system for people who have had no access to it in the past.  If you’re interested in learning more about what we’re trying to do, drop me a note. I’d love to talk about it with you.

Ralph Nader, crusading advocate for consumers, gave a talk recently at the University of Connecticut School of Law in which he blasted the legal profession and law schools for failing to adequately look out for “the administration of justice.”

Nader, who’s advocacy bona fides are without doubt, ripped into the system of legal education for spending too much time: “teaching substantive law, and too little encouraging students to think critically about why the law is what it is.”

Law.com has a nice write up of Nader’s talk here.

While I don’t necessarily agree with Nader’s politics on everything, I think he makes a great point here.  As I’ve written before, I think law schools spend too much time teaching lawyers about the way things are, and the black letter law, instead of talking about the underlying system of justice, and how we promote fairness and equality in society.  In many ways, our law schools are factories churning out widgets well prepared for the legal system as it is today, instead of how it ought to be.

If I can be so bold as to compare, I think our business schools (bias alert, I’ve got an MBA) do a much better job in their curriculum of trying to get young business leaders to think outside the box about the way the economy and business are evolving, rather than rigidly focusing on understanding the status quo.

Our economy and our profession are undergoing significant change.  Nader’s right that we need to rethink not only our business but also the way we prepare young people to enter it.  I’ll have more to say about that going forward. In the meantime, I want to know what you think.  Drop me a note, or leave a comment.

Mr. Ivory Tower Law School should be careful, because Mr. Big Law Firm has come down with a serious case of change, and it’s contagious.

As I’ve written before, the economic recession, an outdated business model, and international pressures are combining into a nasty fever for Big Law.  Gone are the first-year associate salaries that would make a Rockefeller blush, gone are the huge bonuses, gone are the stadium boxes and other perks and privileges.  Ashby Jones over at the WSJ Law Blog last week picked up on the fact that this fever is catchy, and that Big Law  just sneezed all over Big Law School.

Ashby’s piece quotes a recent article on the Conglomerate Blog, by Professor Erik Gerding of the University of New Mexico Law School.

Gerding’s piece focuses on the fact, that for years, Big Law has sustained Big Law School.  Specifically, he notes that the business model for Big Law School is basically, many students all paying high tuition.  That model is contingent, says Gerding, on the promise of high-paying Big Law jobs on the back end to help students pay off the tuition.  Less Big Law jobs and lower Big Law salaries means less Big Law School students.

Ashby goes on to theorize that perhaps this change might result in fewer students, and a more practical education at America’s law schools.  Here’s hoping he’s right, and if I may (though as I’ve said, I’m not a lawyer) offer my own suggestions for some changes:

1.  Focus on practice-oriented education.  At the moment, law schools put a nearly singular focus on bar passage, and rightly so, since that’s a prerequisite for practicing law, but don’t let the law schools fool you.  The reason they focus on bar passage is because that’s a key metric on the outside rankings by organizations like US News, etc.  I’d like to see schools focus more on practical curricula such as trial practice, alternative dispute resolution, and research.

2. Emphasize how to run a successful law firm.  For years, the path for law students has been to leave law school and go practice at a big firm.  As a result, the only thing they teach you in law school about running your own law firm is how not to steal your client’s money.  I’d like to see real classes in the business model of a professional organization.  Let’s teach lawyers how to run a law firm, and how to practice law at the same time.

3. Expand access to law school by offering diversified schedules. Simply put, law schools can be a bit uppity.  They resist the idea of a part-time legal education as not worthy of the profession.  Sure some have great evening programs (see Georgetown Law Center, for example), but those are few and far between, especially when compared to the many and varied flexible programs offered by top business schools. I would like to see us encourage more people to attend law school without sacrificing their current careers, or delaying having a family.  Let’s give young lawyers the same flexibility that we give other graduate students.

4. Lower the cost.  This one goes hand in glove with #3 above, and it’s going to get me in real trouble.  Law school does not need to cost as much as it does.  We need to lower the cost, by cutting out overhead that is wasteful and needless, and we need to expand the loan forgiveness programs that allow students to relieve themselves of debt by giving back to the community.  At one point being a lawyer was thought of as public service.  As the industry changes, we should do more to reward young lawyers who are in the profession for something other than the money.

These are just a few of my thoughts, but if the changes happening to Big Law have indeed infected Big Law School, I want it to come back better, stronger and leaner than ever.

As close readers may remember, back in September I wrote a post calling for an end to the billable hour.  At the time I wrote the following:

The problem with the billable hour is that the lawyers have no skin in the game.  Whether drafting a contract, or litigating a case, lawyers and the law firms that employ them should be compensated based on the quality of their work and the outcomes for their clients.

I also wrote:

Oh change is coming.  At the moment it’s being driven by clients, but it will not be long before the revolution reaches the masses, and people start to demand that law firms and lawyers get paid for outcomes not hours.

Well it seems change may be coming a little faster than I thought.  Two stories last week out of Boston and Dallas highlight lawyers who like me have rejected the idea of a billable hour, and are operating instead on a fixed fee for service model.

In Boston, the erstwhile Lisa van der Pool over at the Boston Business Journal profiles Jay Shepherd of the Shepherd Law Group an employment law firm.  I love the lede of the story:

Shepherd famously doesn’t charge clients by the hour. He’s a prolific blogger — and tweeter. He’s never worked for a big firm. And he thinks that sometimes, as a group, lawyers suck.
I like this guy already!!  Here’s a link to the whole story.

In Dallas, Mark Weintraub of General Counsel Law is helping small- and mid-sized businesses manage legal contracts, mergers and acquisitions, employment issues and more with a “when- you- need-a-lawyer” approach called FlexGC™, a flexible, fractional legal service that cuts costs while delivering senior-level legal expertise. The firm will assess the services offered on a monthly basis and charge clients a fixed fee each month.

The firm’s approach is profiled in a recent story in the Dallas Business Journal.

Kudos to Shepherd and Weintraub.  They seem to have the entrepreneurial spirit that will change the way we deliver legal services in this country.  Godspeed!

Law firms of America, we want to hear from you!!  Seriously, as I’ve written before , at Sokolove Law one of the things we take very seriously is our relationship with each of our co-counsel firms.  With that in mind, from time to time, we survey our partners and other law firms to explore new services and ways we can engage with co-counsel firms.

In the coming weeks, you may receive an email invitation from Isurus Market Research, an independent market research firm.  The email will have a link to an online survey and information about a cash incentive for those who participate.  If for some reason, you don’t get the email, and would like to participate in the survey, you can contact John Cole at Isurus at 617-547-2400 or jcole@isurusmrc.com.   Participation is of course confidential and really appreciated by all of us at Sokolove Law.

Sometimes smaller is better, that might be the lesson of recent developments in the business of law.

For years, the conventional wisdom was that the way to build a legal business and inoculate yourself form the ups and downs of the economy was to have more attorneys with a wide range of specialties scattered over the broadest possible geographical footprint.

But as we watch developments in our industry there is some evidence to suggest that just there are real advantages to being smaller.  To begin with the big firm model is to charge high prices to big prominent clients on complex matters.  That model presents several problems. Let me explain.

At big firms, pricing is based on a billable hour. Hours are billed on a sliding scale from the junior associates to the most senior partners.  That model has been vilified by business clients for years because it creates an incentive to have their legal work done by junior associates and then reviewed only briefly by senior partners.  The result is that the work often takes longer and there are real questions about the risk of error.  In addition, there are concerns that junior associates take more time to do basic work that would take more experienced attorneys less time.  The result, whether you pay $1,000 for the most senior partner, or $500 for the junior associate right out of school doesn’t really matter all that much, because it’s going to take the associate twice as long to do the work.  I’ve talked about the shortcomings of the billable hour before here.

Beyond the billable hour, the big firm infrastructure can often stifle business.   To begin with clients may not want to pay “big firm” rates, making marketing difficult, but beyond that as a practical matter, if a client is small, or is in need of minor legal assistance, the administrative costs of taking on a particular piece of business may not be justified. Think of how hard it can be to get a qualified carpenter to fix a minor repair on your house; many of the best qualified workmen only take “the big jobs”.  Want to replace your roof, or put on an addition, and they’re happy to help, but what if you just want to replace a squeaky door, or replace a piece of crown molding?

Finally, the big firm model does not allow the attorney to build lasting long-term relationships with the client.  Sure the senior partner and the general counsel of the client may have a social relationship, but the bulk of the legal work is done by overworked, multi-tasking, distracted associates focused on delivering their 2500 plus hours per year to qualify for their bonus, or in a down economy simply keep their job.  The incentive is to bill as many hours for as many clients as possible.  Simply put outputs rather than outcomes are the goal, and the firm’s objectives could not be more unaligned with the clients.

I recently came across an article in the Silicon Valley Business Journal three lawyers who left big firms to hang out their own shingle.  According to the article: “At the new firm, all are finding it easier to retain clients and capture others.”

But the article points something else out as well and that is that the lawyers who left the big firms were all confident in their marketing skills and their ability to attract clients, and that’s really the catch.

There’s no question that the smaller firm business model allows for a more client-centric focus, a closer relationship with the clients and their businesses, and even a more lucrative law practice where less revenue is devoted to bloated overhead, but that model only works if you can get clients.

That’s where Sokolove Law can help.  In the personal injury space, we have helped hundreds of firms market themselves and attract new clients, and we’ve overseen thousands of cases where clients were compensated for their injuries without paying the big firm rates.  We’re successful because we know how to market legal services to people who have been injured (after all we are the largest marketer of legal services in the country) and because our co-counsel firms are some of the best, most qualified attorneys within their areas of expertise.

So if you’re a small to medium-sized firm looking to perfect your marketing,please get in touch with me , maybe we can help.

Get the smelling salts, I’m writing a blog post on “process management”. Seriously, I came across an interesting piece over at the Legal Intelligencer by Gina Passarella this week, that talked about the idea that the legal profession could improve its business model by indulging in a little bit of project, and process management.

“Egads” you say…and as Gina points out “process management is the antithesis of the billable hour model”.

But I ask: Does it have to be?

Why couldn’t lawyers price their work, not by the billable hour (whose death knell, I have predicted), and instead look to outcomes. The model is quite simple, instead of being at the whim of the billable hour, lawyers would look at an overall legal project, estimate how difficult the project is, and then provide the client with a cost. If the project can be completed in less time, then the law firm adds to their profit. If it takes longer, then the firm knows that it needs to perfect its method of estimating.

Imagine if you went to your mechanic to have the brakes on your car fixed and you were given two options. First, you could have the master mechanic with thirty years of experience fixing your kind of car. Good news is that it will only take him one hour to fix the problem; bad news is he charges 800 dollars per hour.

Second choice would be the new guy, he’s just out of mechanic’s school, and basically has no idea what he’s doing. He’ll tinker around for about 5 hours before he figures out how to replace the brakes, but the good news is he only charges about 50 dollars per hour. Only other issue is that if you have the new guy do it, are you really sure it was done right (I mean after all we’re talking about brakes here—pretty important). So again your choices come down to:

1. Have it done right in one hour, but pay $800 for it, or
2. Have it done (maybe) right, in five hours, but pay $250

Kind of feels like a Cornelian dilemma to me.

Wouldn’t you rather the mechanic just tell you how much it will cost to fix your brakes? You agree to the price, and if the shop can figure out how to fix the brakes really efficiently, then everybody wins—you get your car back sooner, and the shop has more profit?

I’m no MBA (o.k. I am Babson class of 1996), but it seems to make sense to me.