For fourteen centuries she had information that everyone wanted. So they traveled from all over the ancient world to seek her guidance. And they paid lots of money for the privilege. Who was she? Pythia, the priestess of Apollo and the oracle of Delphi. Thomas Sakoulas describes how she worked:

Plutarch served as a priest at Delphi, and in his histories he has left many details about the inner workings of the sanctuary. Pythia entered the inner chamber of the temple (Adyton), sat on a tripod and inhaled the light hydrocarbon gasses that escaped from a chasm on the porous earth. After falling into a trance, she muttered words incomprehensible to mere mortals. The priests of the sanctuary then interpreted her oracles in a common language and delivered them to those who had requested them. Even so, the oracles were always open to interpretation and often signified dual and opposing meanings.

`You will go you will return not in the battle you will perish’ was an example of this duality of meaning. The above sentence can be interpreted two different ways depending where the comma can be placed. If a comma is placed after the word `not’ the message is discouraging for him who is about to depart for war. If on the other hand the comma is placed before the word `not’, then the warrior is to return alive.

In an age of uncertainty, access to information was valued, and the ability to interpret critical information was valued even more.  In fact, it led to the creation of a very nice business model:

A booming industry grew up around the Oracle. Temples were built and rebuilt, priests were trained, rituals evolved and sacrifices were performed. Priests interpreted the incoherent utterances of the Pythia. Presents were brought to both placate the deity and in the hope of influencing a positive prophesy. The Delphic temple itself became one of the largest “banks” in the world. Delphi became a center for banking and commerce.

The oracle and priests of Delphi are the spiritual ancestors of modern professionals who guard valuable information closely and share it selectively in exchange for considerable compensation. Lawyers and doctors have for years been the guardians of specialist bodies of knowledge to which lay people have needed access. But what happens when information is free? When your clients and patients have easy access via the Internet to the information for which you previously charged, what does that do to your role and your revenue?

As doctors having discovered, the result is patients who read Internet information and then show up in their doctor’s office with an extensive list of questions. Yes, this does make for more engaged healthcare consumers.  But contrary to physician worries, it need not render doctors obsolete. Why? Because the chief question of most of these patients is how to discern the reliable information from the downright wrong and misleading information. Dr. Kevin Pho reports that Drs Pamela Hartzband and Jerome Groopman wrote recently in the New England Journal of Medicine about the opportunity free information presents:

Information and knowledge do not equal wisdom. … Physicians are in the best position to weigh information and advise patients, drawing on their understanding of available evidence as well as their training and experience. If anything, the wealth of information on the Internet will make such expertise and experience more essential.

In Dr. Pho’s view, doctors can provide real value to their patients by acting as their guides through the freely available Internet information:

Doctors have to get used to the fact they are no longer the sole source of a patient’s health information. Instead, they need to serve more as interpreters of data, and be willing to separate the tangible information from the increasing amount of noise patients find online.

But what about lawyers?  At the end of the day the best business model for doctors and lawyers rests on their ability to provide more than the rudimentary materials available freely on the Internet. It rests on their ability to provide the benefits of their valuable experience and judgment to lay people.  This suggests the need for a more strategic approach to sharing information.  Given how quickly information spreads online, how long can you guard your firm’s information as if you were guarding gold bricks? Granted, if you have the secret recipe for Coca-Cola, guarding it rigorously makes sense.  But as far as much legal and medical information is concerned, its half-life is rather short.  This leads to an interesting question for law firms: do you want to invest energy restricting access to a resource of diminishing value, or do you want to be known as the go to firm that has confidence to provide useful information free of charge online, secure in the knowledge that the firm is always developing specialized experience and judgment for which clients will gladly pay good money? For a profession that is used to charging a premium for all information, this is challenging economic and cultural terrain to navigate. For the firm that finds the right balance between clinging to information until it turns to dust and giving away the shop, this is a marvelous opportunity to attract clients who want to know they are working with lawyers who really are at the top of their game and who have the cutting-edge knowledge, experience and judgment to back it up.

The oracle of Delphi was displaced by radical changes in political and religious power. The oracles in law firms and doctors’ offices are in danger of being displaced by technology.  How will they respond?

[Photo Credit: Bricke Dotnet]

The Financial Times recently published an interesting report entitled, US Innovative Lawyers 2011.  I encourage you to read that report in its entirety soon.  In the meantime, here are some highlights and observations.

According to the report, FT’s researchers received 272 submissions (including from 53 AmLaw 200 firms) and interviewed more than 300 lawyers and clients to identify the most outstanding innovations.  Each submission was scored in terms of (1) originality , (2) the rationale behind the work, and (3) the impact of the work on the client, the industry or on business more broadly.

At the end of the day, which firms made the cut?  FT identified 26 firms in the US as truly innovative:

• Davis Polk & Wardwell
• Skadden, Arps, Slate, Meagher & Flom
• Cleary Gottlieb Steen & Hamilton
• Orrick, Herrington & Sutcliffe
• Latham & Watkins
• Cravath, Swaine & Moore
• Paul Hastings
• Sullivan & Cromwell
• Seyfarth Shaw
• Paul, Weiss, Rifkind, Wharton & Garrison
• Kirkland & Ellis
• Dewey & LeBoeuf // Mayer Brown
• Gibson, Dunn & Crutcher // White & Case
• Cadwalader, Wickersham & Taft
• Akin Gump Strauss Hauer & Feld
• Dechert
• Morrison & Foerster // Wachtell, Lipton, Rosen & Katz
• Simpson Thacher & Bartlett
• Jones Day // Weil, Gotshal & Manges
• Fulbright & Jaworski
• Freshfields Bruckhaus Deringer // Proskauer Rose

What made these firms stand-out?  These firms say they rely on their culture and human capital to innovate.  In particular, they hire smart people who like to find new and better ways of solving problems for clients. One firm pointed to its lockstep compensation model, but since plenty of non-lockstep firms made the grade, that most likely is not the decisive factor. According to the FT report, the factors that distinguished the firms on the list from the others were “their commitment, their ability to adapt and to work together in the best interests of business to unusual and important effect.”

How can law firm knowledge management help?

While I don’t know the extent to which each of these firms relied on their knowledge management resources to foster innovation, the innovations reported suggest that KM can help make a firm and its lawyers more innovative in the following ways:

• Much innovation arises from making small changes to what came before. In legal practice, this means we need to give our lawyers easy access to precedents and practice guides so that they have a solid foundation from which to innovate.
• Innovation can go beyond specific matters to providing online information and advice on a subscription basis.  KM and library services can play an important role here in gathering the data for the client-facing resource.
• Innovation with respect to the business of law can have a huge impact as well.  Seyfarth Shaw’s Lean Six Sigma efforts put the firm on FT’s list.
• KM personnel and practices can help support alternative fee arrangements and project management efforts.
• Jeffrey Carr, Senior Vice President and General Counsel, FMC Technologies, is a well-known advocate of changes in the legal industry.  Among other things, his in-house legal department has created a wiki to share legal advice internally and is developing M&A process maps.  Are you doing anything similar?

As I said at the beginning of this post, it’s worth your time to read the report in its entirety. While the specifics of each legal matter may not resonate for you, focus on how what you do (or should be doing) could help your firm get on that list and stay on that list.  The KM principles we espouse and the information we handle daily  can help bring about the innovation to which our firms should be aspiring.

If Lisa J. Damon has a bridge to sell, I’m buying it.  And, it’s not because I’m all that gullible.  However, over the course of one hour she changed me from an admitted Lean Six Sigma skeptic into a person willing to consider the possibilities of that approach for every law firm. I had previously heard several presentations on the law firm miracle that is Seyfarth Lean Six Sigma, but it was only when Ms. Damon and Seyfarth’s Chief Information Officer, David Hambourger, explained how they and their colleagues are beginning to change the way the lawyers of their firm actually practice law that I began to appreciate the scope of their accomplishment.

First a little background, Six Sigma is a business technique developed by Motorola to quickly identify and fix defects in its manufacturing processes.  Lean is a business technique derived from the Toyota Production System to redesign a manufacturing process to make it more balanced and consistent, thereby removing waste from the system.  (Another way of looking at this is to eliminate anything that does not create value for the end customer.)

At first blush, neither approach to manufacturing would have much obvious application to the work of any lawyer who considers herself or himself to be an artiste. Even in a so-called “law factory,” I’m not sure many would consider lawyers to be in the manufacturing business.   However, Seyfarth’s leadership came to the conclusion that elements of their practice needed to be handled with the same discipline Motorola and Toyota brought to manufacturing.

What drove them to this conclusion? Economics.  As their clients started requesting more alternative fee arrangements, Seyfarth’s leadership correctly concluded that the firm would take a loss unless it could find a way to reduce its own costs of production. So six years ago they began with the following goals:

• improve predictability of fees
• lower client costs
• increase transparency
• allow clients to collaborate
• provide clients with real-time access to fees and the management of a matter

After looking at pure Six Sigma and Lean, and talking to clients who had used these approaches, Seyfarth settled on a modified Lean Six Sigma approach tailored for legal services.  To begin with, they eliminated the jargon, some of the statistical tools and the heavy-duty math. (Ms. Damon acknowledges that the focus on numbers demanded by Six Sigma would have been a major turn-off for every lawyer in the firm who went to law school just to avoid another math class.)  They also built in some strategy, project management and change management.  Along with this, they hired client-facing professional project managers and created a project management office. The other key element is a commitment to continuous, sustained improvement (kaizen) in the quality of the services they deliver.

To make these wholesale changes in the way they practiced law, the lawyers of Seyfarth also had to make wholesale changes in the way they carried out the business of law:

• They replaced their professional development and promotion model with a more dynamic model based on advancement by competency and achievement rather than tenure.
• They replaced their compensation model so that it rewarded results achieved rather than time spent.
  • Seyfarth has a scorecard system based on the ACC value index. They survey clients and then reflect that response in partner compensation.
• They moved from merely automating manual processes to the creative, strategic use of knowledge, expertise and operational information.
• They changed their service model from bill/pay as you go to one with a more strategic focus, with defined outcomes based on client business goals.

Lisa Damon is honest about the work involved in making such extensive changes within her firm.  While they don’t yet have 100% adoption, she says they make a new convert every day. Along the way, they take every opportunity to improve their practice and their business. As the inimitable Ms. Damon put it, “Seyfarth loves to process map. We create process maps for anything that moves within the firm.”  In addition, they approach this in a way that flattens the hierarchy within the firm; everyone with expertise is brought into the effort — whether they are professional project managers, paralegals, secretaries or lawyers.  In the beginning, they create their process maps with paper and pen. Later, they record their process maps using a lawyer-friendly tool called Task Map (an overlay to Visio). Once the process maps are created, they are linked to key knowledge management tools such as case analysis, checklists and samples. Better still, each process map can be tailored to the needs of individual clients or matters.

On the IT and knowledge management side, Dave Hambourger reports that they started by implementing enterprise search.  They also have built extranets that create new business for the firm.  (They are not just inert document repositories).  Another important element is the way they have deployed SharePoint to deliver “memorable value” to clients.  This includes matter management tools and financial dashboards.  The matter management tools show both the percentage of the project completed as well as the percentage of the budget spent. Since the dashboards are visible to the clients, the lawyers of the firm have had to learn the discipline of entering their time daily.

Lisa Damon will be the first to tell you that none of this has been easy or cheap.  However, the sheer joy with which she tells the Seyfarth Success Story suggests that the undertaking has been well worth the effort. At the end of the day, sustaining a success story like this requires top-level business support, careful project selection, project discipline, and a focus on continuous improvement.  Seyfarth shows that it can be done.  Is your firm willing to try?

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If you’d like to learn more about SeyfarthLean, I’d encourage you to read (or listen to) the following:

• Law and Order (iSix Sigma Magazine) — see also the Seyfarth press release on this article
• Lean Six Sigma Tools, courtesy of Seyfarth Shaw’s Lisa Damon (Rees Morrison)
• Making it Lean (ABA Journal)
• Raising the Bar: How Seyfarth Shaw Provides Efficient Delivery of Legal Services Through Lean Six Sigma — and see also the Seyfarth press release on this podcast
• SeyfarthLean: A Commitment to Deliver Quality and Measurable Results (Seyfarth)
• SeyfarthLean Background (Seyfarth)
• Value Practice: Use of Tailored Six Sigma Methodologies at Seyfarth Shaw (ACC)

The history of medicine is filled with all sorts of interesting lessons for lawyers and law firms.  Consider the science of blood transfusions.  According to the Wikipedia article on blood transfusions, the first recorded transfusion allegedly occurred in 1492 when an innovative (or perhaps desperate) physician suggesting reviving a comatose Pope Innocent VIII by giving him the blood of three young boys.  Since this was in the days before the circulatory system and intravenous access had been discovered, the blood was administered through the patient’s mouth.  The pope died, as did the three boys.  In this case, the delivery mechanism proved to be not just ineffective, but fatal.

Fast forward to the late 17th century when Richard Lower performed the first human transfusion in Britain by introducing the blood of a sheep into the arm of one Arthur Coga.  (Mr. Coga was described as “the subject of a harmless form of insanity.”)  According to the Wikipedia article,

Sheep’s blood was used because of speculation about the value of blood exchange between species; it had been suggested that blood from a gentle lamb might quiet the tempestuous spirit of an agitated person and that the shy might be made outgoing by blood from more sociable creatures.

Blood changing personality? This is yet another flawed theory that has proven to be completely false.  Today, not only do we not try cross-species transfusions, but medical science has taught us the dangers of trying to transfuse across blood types:

It was not until 1901, when the Austrian Karl Landsteiner discovered human blood groups, that blood transfusions became safer. Mixing blood from two incompatible individuals can lead to an immune response, and the destruction of red blood cells releases free hemoglobin into the bloodstream, which can have fatal consequences. Karl Landsteiner discovered that when incompatible types are mixed, the red blood cells clump, and that this immunological reaction occurs when the receiver of a blood transfusion has antibodies against the donor blood cells. His work made it possible to determine blood type and allowed a way for blood transfusions to be carried out much more safely. For this discovery he was awarded the Nobel Prize in Physiology and Medicine in 1930, and many other blood groups have been discovered since.

To recap, not only does the delivery mechanism need to work properly, but you also need to be sure that the blood you are transferring matches perfectly with the blood of the recipient.

So what does this have to do with law firms and their clients?  Consider the various types of work product that law firms push at their clients. Legal alerts, current awareness, research memoranda, draft documents, billing statements — the list is endless.  Now, imagine that each is a blood product.  How do law firms ensure that these products match the blood type (or preferences or working style) of their clients?  Do they ask clients beforehand what their preferences are? Or do lawyers imagine that a cross-species transfusion from law firm to client will work better for them than the history of medicine indicates?

Consider also the delivery mechanism — email blasts, law firm websites, extranets or the occasional tweet.  Are clients even paying attention? Wouldn’t it make more sense to deliver these materials in a way that fits neatly with the technology platform and information flow of the client? Clients have figured this out.  That’s why some are demanding that billing information, for example, be delivered via an electronic platform chosen by the client. And yet too many law firms persist in the old-fashioned blast or broadcast method of marketing and client communications.

Sending out an alert memo via email to a client who doesn’t have a reliable system to store, retrieve and share it for later use is as pointless as trying to do a blood transfusion via someone’s mouth.  Imagine how much better it would be if your memo were seamlessly received by and stored in the client’s knowledge base, together with clear contact instructions so that the client could reach you when a related issue arises.  As I wrote in a post entitled Dino, Dodo, Extranet,

We’ve heard in-house counsel express the desire for law firm content without having to hunt for it. They would like it in an environment of their own choosing and design. So instead of providing content access tools like extranets, should law firms be thinking harder about better content delivery tools?

Imagine a virtual umbilical cord stretching from a law firm to its client’s knowledge management system, providing a regular supply of helpful resources? Imagine being an in-house lawyer who doesn’t have to go to a thousand places on the internet to find information, but rather can simply surf a single familiar internal platform? Imagine that in-house lawyer’s delight when they can find easily the information appropriate to the decision at hand, and can identify and follow-up with the lawyer and firm that made the retrieval so pain free? Imagine the impact of these experiences on the relationship between that law firm and its client?

Now that’s the type of transfusion that actually promotes better health for the client and the law firm.

[Photo Credit: CarynNL]

What’s the purpose of your organization? (No, that’s not a trick question.) Deb Lavoy and her colleagues at OpenText believe that answering that question is the first critical step every organization must take.

Putting their money where their mouth is, OpenText hosted on July 11 the first of what promises to be a thought-provoking series of conversations about the purpose-driven organization. The speaker at the event* was Simon Sinek, author of Start with Why. Drawing on examples as diverse as the civil rights movement, Navy SEALS, the Wright brothers, Apple and Disney, he explained that the primary role of a leader is to have a vision of the world as it can be, and then to articulate that purpose with enough clarity and energy so as to inspire others to work towards that purpose.

Granted it’s promotional material, but here’s a synopsis provided by his publishers:

In studying the leaders who’ve had the greatest influence in the world, Simon Sinek discovered that they all think, act, and communicate in the exact same way — and it’s the complete opposite of what everyone else does. Sinek calls this powerful idea The Golden Circle, and it provides a framework upon which organizations can be built, movements can be lead, and people can be inspired. And it all starts with WHY.

Any organization can explain what it does; some can explain how they do it; but very few can clearly articulate why. WHY is not money or profit- those are always results. WHY does your organization exist? WHY does it do the things it does? WHY do customers really buy from one company or another? WHY are people loyal to some leaders, but not others?

Starting with WHY works in big business and small business, in the nonprofit world and in politics. Those who start with WHY never manipulate, they inspire. And the people who follow them don’t do so because they have to; they follow because they want to.

Why does your organization need a well-articulated purpose? Simon Sinek believes that without a clear and compelling purpose, you cannot recruit, retain and inspire the highly motivated people who are so committed to a shared sense of purpose that they will move mountains to achieve it. It’s this willingness to go above and beyond that sets them, and ultimately their organization, apart.

For my readers in the legal industry, don’t assume that this conversation about purpose is only for our clients.  Bruce MacEwen writing at Adam Smith Esq covered some of this territory in Thoughts on IBM’s 100th: Idea or Product, where he attributes IBM’s nimbleness and longevity to its view of itself “not as an organization creating products but as an organization loyal to an idea.”  He then summarizes a list from The Economist of companies that are animated by ideas versus those focused on products:

• IBM:  Package technology for use by business
• Apple:  Package the latest technoology in simple, elegant form and sell it at a premium
• Amazon:  Make it easy for people to buy stuff
• Facebook:  Help people share things with friends easily
• Dell:  Building PCs very very efficiently
• Cisco:  Routers
• Microsoft:  Windows

Taking this dichotomy straight to the door of law firms, he asks: “Are there firms premised on fealty to ideas and firms premised on selling products (practice areas)?” After naming a couple of firms that might be “idea” firms, and one sad example of a “product” firm, he reaches a sobering conclusion:

Alas, I suspect that law firms premised on a widely recognized idea are rare.   Many would insist they are idea-based, but dig under the surface and I bet you’ll find a mutating assemblage of practice areas and geographies without-in most cases-an overarching idea that all the partners could tell you in their sleep motivates the firm.

If he is right about this, how will firms recruit, retain and motivate excellent people? How can firms ensure their own longevity? Is it really just about paying market salaries?  I suspect it has a great deal more to do with the type of culture a firm nurtures, and the quality of the clients and work a firm attracts.

As we continue in this period of economic uncertainty, it’s worth considering whether your law firm, company, business unit, department, school or nonprofit has what it takes for the long haul.  You should start by asking WHY.

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If you’d like to hear more about the importance of knowing your purpose, here’s Simon Sinek’s very popular TED Talk:

www.youtube.com/watch?v=qp0HIF3SfI4

*Disclosure: This event was sponsored by OpenText and free to the public.

[Photo Credit: Godserv]

Imagine Cleopatra as a law librarian.

(Let me give you moment to wrap your mind around that thought.)

Consider the following:

• April 10 – 16, 2011 is National Library Week.
• April 11, 2011 was Equal Pay Day, the day that symbolizes how far into the year women must work on average to earn what men earn.
• The American Association of Law Libraries’ 2009 Biennial Salary Survey makes the following statement:

It should also be noted that the prevailing market rates of compensation for librarians, including those for law librarians as depicted in this report, may reflect a societal undervaluation of the education, knowledge and competencies associated with librarianship. Numerous studies have found an apparent gender-based devaluation of the work of professions and occupations that are predominantly female. Librarianship has been a predominantly female occupation since the late 1800s.

• According to the American Library Association – Allied Professional Association’s Better Salaries and Pay Equity Toolkit:

Although gains have been made over the years in gender equity within librarianship, most library salary surveys still point to higher average salaries for men than for women. [emphasis added]

Now compare what you’ve just read to the following excerpt from Stacy Schiff’s superb new biography of Cleopatra:

Cleopatra … came of age in a country that entertained a singular definition of women’s roles. …Egyptian women enjoyed the right to make their own marriages. Overtime their liberties had increased to levels unprecedented in the ancient world. They inherited equally and held property independently. Married women did not submit to their husband’s control. They enjoyed the right to divorce and to be supported after a divorce. Until the time an ex-wife’s dowry was returned, she was entitled to be lodged in the house of her choice. Her property remained hers; it was not to be squandered by a wastrel husband. The law sided with the wife and children if the husband acted against their interests. … As much as one third of Ptolemaic Egypt may have been in female hands.

When you think of the extensive legal and financial rights women enjoyed in the first century BCE in Egypt, it’s a little shocking to consider how long it took women to win similar rights in this country.  And, even though we’ve made advances, it appears that much remains to be done for women working in the “traditionally female” domain of libraries.  In fact, in light of the pay inequities suffered by women librarians, it’s hard not to wonder if we aren’t backwards in our views of women when compared to ancient Egyptians.

To be honest, I’m not sure that Cleopatra would ever agree to be a 21st century female law librarian. Given her high level of education, political skill and leadership ability, do you think she would have tolerated the inequities?

Why do we?

[Photo Credit: William Arthur Fine Stationery]

If you’re in law firm management, you’ve probably been feeling a bit like Ebeneezer Scrooge staring at an unhappy future as several bloggers** recently painted a relentlessly challenging picture of the law firm of the future.  (In Charles Dickens’ A Chrismas Carol, Scrooge’s deceased partner, Jacob Marley, warns him in a dream that he is headed for a dismal fate if he does not pay attention to the message of the Ghost of Christmas Past, the Ghost of Christmas Present and the Ghost of Christmas Yet to Come.) Over the course of the last week, Toby Brown, Ron Friedmann, Jordan Furlong, Steven Levy, Bruce MacEwen, John Wallbillich and I have written about the growing pressures on law firms to refine their business models and business practices so that they can flourish in the new law firm economy.  Toby Brown describes that new law firm economy as one in which there are three tiers of firms:

• Tier 1 — high stakes matters; 15-20% of the market and declining
• Tier 2 — mid-level stakes; 50-60% of the market and growing
• Tier 3 — nuisance matters; 20-25% of the market and relatively stable

While every lawyer likes to think of their firm as a top-tier firm, chances are that very few firms will actually be able to survive and thrive in Tier 1.  John Wallbillich suggests that about 40 global firms will inhabit that top tier.  The Lawyer.com points to their transatlantic elite “Sweet Sixteen.” Even if we don’t know the exact number of firms in Tier 1, we know that it will be a number that is substantially smaller than the AmLaw 200.  And, we know that getting into and staying in that group will take considerable effort.  These firms will need to attract and keep legal stars.  These firms will need to support those star lawyers with law firm machinery that can deliver excellent services at a defensible price.  In this regard, any firm that aspires to remain in Tier 1 needs honesty and discipline.  Where does the honesty come into play? Each top tier firm has to be brutally honest with itself — understanding its strengths and weaknesses, acknowledging that while it may charge top dollar for its work, not all of its work is necessarily complicated, innovative or high risk.  Some of it is routine, repeatable and could benefit from a more systematic approach.

One way to think about the array of work within a firm is to plot it against John Wallbillich’s Legal Fee Pyramid (PDF).  In a high-stakes matter, the judgment and experience of the senior legal expert on the team may be worth more than $599 per hour (in some firms more than $1000 per hour). But what about the work of less experienced personnel on the due diligence effort? Or the eDiscovery work? Or drafting relatively routine documents? Or planning a closing? For each task or phase of a matter that falls low on the pyramid, a firm must carefully examine the workflow to ensure that it is as streamlined and economical as possible. Done well, this means imposing law factory discipline on those parts of the practice that are most susceptible to client fee pressures. There is no substitute for a clear-eyed honest effort in this undertaking.

Why? Isn’t the whole point of being a Tier 1 firm that you’re free of fee pressure? Not exactly.  Even Tier 1 clients want to prevent runaway legal spending.  And, as I heard at a recent conference, there is growing pressure on Tier 1 firms to curtail spending on litigation matters.  Surely non-litigation matters are not far behind.  In fairness, while the conference participants might grouse about the highest billing rates, they did not dispute the value provided by the most experienced lawyers in Tier 1 firms. Rather, they were focused on ensuring that the work done by the less experienced or less expensive people in the Tier 1 firm was necessary, focused and efficient.

At the end of the day, even Tier 1 firms are not immune from client concerns about legal spending.  Those client concerns may get expressed in a variety of ways such as a request for a discount, an unwillingness to pay for certain “overhead” expenses or a decision to move eDiscovery in-house or off-shore.  Smart Tier 1 firms intent on not only surviving but thriving will undertake a close self-examination to ensure they understand how they work before those client concerns about spending are expressed.  Otherwise, those firms will be looking at involuntary discounts, lower realization rates, and growing competition for the spots on a client’s shrinking legal panel — all of which add up to diminished partner profits.

All of this calls for more disciplined firm management.  Gone are the days when a firm’s one sentence billing statement (i.e., “For services rendered….”) cloaked a variety of work and expenses.  Just as clients are demanding more transparency on the bills, firms should be insisting on more internal transparency.  Until a firm truly knows itself, it will never be able to explain and fully defend its value proposition to its clients.

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** Here are links to various posts on the Law Factory vs Bet the Farm (or Bet the Company) Firm Debate to date:

• Apple Meets the Law Factory
• “Bet the Farm” versus “Law Factory”: Which One Works?
• Fourth in Our Series on Strategy: Tier 1, Tier 2, Tier 3
• Law Factory, Education Factory
• Law Firm Investment Portfolios
• Legal Billing Rates: The Next Wave 2
• Legal  Project Management and the Law Factory
• Tier 1: Know Thyself
• The Law Factory Debate: Another Perspective
• The Stratified Legal Market and its Implications

[Photo Credit: Jake Bouma]

Every good conversation invites participation, and I’ve found it impossible to resist jumping into the very interesting conversation Toby Brown and Ron Friedmann have begun online regarding possible business models for large law firms.  The genesis of the conversation was a session at the 2010 International Legal Technology Association Conference in which Ron Friedmann, Gerard Neiditsch, Jeffrey Rovner and I proposed two extreme law firm business models:  “bet the farm” practices and “law factory” practices.  (You can find our slides, as well as links to some discussion summaries, in  Ron’s blog post regarding the ILTA session.)  While we limited our discussion to the purest form, where a firm focuses on one business model or the other, real life isn’t quite so tidy.  In fact, law firms may reluctantly discover that they need to support examples of both business models simultaneously.  But what’s the best way to handle this? Toby draws inspiration from large banks, while Ron analyzes the example of large hotel chains.  In both cases, they show how it is possible for an organization to offer a variety of services at different price points without damaging that organization’s brand.  In so doing, Ron and Toby challenge a large law firm concern that moving away from marquee (bet the farm, high-touch) legal practices will cause such confusion in the public’s mind that the firm’s brand will suffer.

While both the banking and hotel examples have much to commend them, I have a smaller, more personal example in mind intended to help law firms understand that they may no longer have much choice regarding these business models.  What if law firm leaders were to consider their firm’s practices in the same way any prudent person considers the investments in their retirement savings account? For example, one golden rule of investing is to diversify your investments to achieve the correct balance of growth and protection.  Consequently, it won’t be appropriate for most investors to invest solely in high-risk high-return targets.  Typically, investors are advised to put some portion of their money in fixed income investments or money market accounts.  While these investments may provide lower rates of return, they also tend to preserve the monies invested.

Now what happens if law firms were to treat each practice area as a type of investment.  For example, a mergers & acquisitions practice might be likened to a higher risk investment that provides great returns at the top of the business cycle, but may not perform so well in an economic downturn.  By contrast, a bankruptcy practice theoretically should provide better returns during a downturn, as should any practice (such as project and infrastructure finance) that depends on governmental stimulus funding.  In each legal market, the mix of high-risk and high-security will differ depending on local conditions.  Of course, things become more interesting (and undoubtedly more complicated) when a firm spans many legal markets.  Achieving the correct balance between risk and security across geographic boundaries requires even more insightful investing.

Another way of thinking about various investment opportunities for law firms is to compare “bet the farm” (or “bet the company”) practices with “law factory” practices.  Ron Friedmann has written extensively about these contrasting business models for law practices.  In brief, a bet the farm matter tends to be relatively rare and high risk, where the client is more willing to pay what it takes to get the right result.  In these practices, there may be less fee pressure and fewer opportunities for routinized (and cost-controlled) work.  By contrast, the law factory practice is high volume, low margin.  These practices operate under tremendous fee pressure and, therefore, put a premium on producing work in a reliable, repeatable fashion at a competitive price.  To achieve this goal, they tend to rely heavily on efficient business process, standard form documents, automated document assembly, expertise systems, and lower cost professionals.

Taking the investment portfolio approach suggests that a law firm should seriously consider “hedging” each of its bet the farm practices by investing in some practices that thrive in economic downturns as well as some law factory practices that produce steady results despite fluctuations in the state of the economy.  Given the pricing pressures on these practices (e.g., court or governmental oversight of legal fees or a well-established market that prices legal services efficiently), these hedging practices need special attention from law firm leadership. This means focusing on making these hedging practices super-efficient and properly packaged and priced for the relevant market.  It may mean making additional investment in practice support lawyers, automated processes and the kinds of rigorous business performance standards that we are told apply to the best manufacturing facilities.

While the wisdom of a well-balanced, diversified investment portfolio is self-evident, this approach is not entirely without its challenges.  For example, since the bet the farm practices operate under some different constraints from that of law factory practices, law firm management will have to be careful to calibrate firm support services and infrastructure investments so that they are appropriate for each type of practice.  Further, how do you handle the potential for income disparity and differing levels of respect for the lawyers in each practice?  To be fair these challenges are not entirely new.  Even a firm that focuses entirely on bet the farm work may accord different levels of  compensation and respect to the rainmakers versus the service partners.

While large law firms may be comfortable with the notion of building practices areas that thrive at different points in the business cycle, they may have a tougher time accepting the idea of off-setting their high risk bet the farm practices with some lower risk law factory practices.  Then, they may have an initial struggle as they realize that their traditional bet the farm approach to work will not yield the intended economic results when applied to law factory work.  The resulting self-examination and re-engineering will not be easy, but is critical for success.  Firms that accomplish this may well find that the efficiencies forced on them by the law factory business model have a salutary effect on the parts of their bet the farm practice that are relatively repeatable.

At the end of the day, the key is to focus on a well-balanced array of practices that are designed for optimal results under the business model that governs them.  Unfortunately, although we’ve all heard the advice to diversify and re-balance our portfolios, there will always be those investors who forego diversification and decide to stake their lives on a “sure thing.” Let’s hope your law firm isn’t that type of investor.

[Photo Credit: th.omas]

Efficiencies for Your Bottom Line: Five Steps to Reducing Costs in the Next 6 Months

Panelists:

• Joy Saphia, Huron (Moderator)
• Mary Pape, Director of Global Complex Litigation, Dell
• Gary Nelson, Medtronic
• Ellen Rosenthal, Chief Counsel, Pfizer Legal Alliance
• Lani Miller, Litigation Department, Bank of America

[These are my notes from LegalTech NY 2011.  Since I'm publishing them as soon as possible after the end of a session, they may contain the occasional typographical or grammatical error.  Please excuse those. To the extent I've made any editorial comments, I've shown those in brackets.]

NOTES:

• Dell — they have created a system of online auctions in which tasks are unbundled and put out for bid by outside counsel. This is particularly useful for non-litigation work. (They also use it for class action administrators and eDiscovery service providers.) In addition, it allows Dell departments to have access to a wider range of counsel at better price points than they could negotiate by themselves. The psychology of the auction often encourages service providers to offer better rates.
• Medtronic — they hired Huron to help them create a system for managing costs. They have formed a network of preferred providers that includes the outside counsel with whom they regularly work.
• Pfizer Legal Alliance — Pfizer sets flat ANNUAL fees with 18 preferred law firms. These tend to be firms with multiple high quality practice areas. The Alliance system allows these firms to grow their relationship with Pfizer in a natural way. This Alliance accounts for 75% of Pfizer’s legal work. (They don’t include certain local counsel work.) Each firm receives 1/12 of their annual fee each month, regardless of actual costs. This means that Pfizer lawyers are relieved of the burden of reviewing and approving monthly bills. At the end of the year, there is a bonus process to reward superior performance. The Alliance system includes narrative feedback and opportunities to evaluate the teamwork between client and counsel, as well as the quality of the work product. This is a 360 degree process — Pfizer lawyers rate each of the firms; each firm rates Pfizer and each other to assess quality of work and quality of collaboration. The Pfizer Legal Alliance is jointly governed by Pfizer lawyers and outside counsel.
• Bank of America — is moving from 100s of firms to just 30 to handle defensive litigation. (They haven’t included corporate/transactional work yet.) They also have put in place some alternative fee arrangements with their outside counsel.
• 1st Step to Reducing Costs: Identify who does the work — Who is doing the work? Should it be done internally or externally> Who should be doing the work?
• 2nd Step: Assign (and pay for) external matters based on the value of the work
• 3rd Step: For work sent outside, unbundle tasks and reasssign as appropriate.
• 4th Step: Find the Right Firm — the right law firm staffing leads to the right rates.
• 5th Step: Leverage Your Experience & Data — Use what you’ve learned to negotiate rates an evaluate alternative arrangements such as fixed fees
• Managing Outside Counsel — improper management can lead to unnecessary costs. Dell stays closely involved with their matters — they often attend depositions and hearings. Bank of America has created a database of subject matter experts across the country. These are the outside counsel they rely on. Most of Bank of America’s high volume low risk cases are handled on a fixed fee basis by 13 of the their 30 preferred firms. This caps the costs for the Bank and encourages firms to improve efficiencies.
• Firms Don’t Always Behave Rationally — Pfizer anticipated that their law firms would revise their internal processes immediately to accommodate the new flat fees. Instead, many retained their hourly billing mentality and processes, and then came back to Pfizer when the law firm exceeded its budget. Pfizer said that meeting the budget was the responsibility of the law firm. Further, while Pfizer may recommend use of its preferred providers, it ultimately is the choice of the law firm since hiring excessively expensive service providers will cut into the law firm’s margins.
• Flexible Fixed Fees — Pfizer builds some flexibility into its fixed fee arrangements to take account of fluctuations in case load. If a firm ends up handling more work than expected, the fixed fee will be adjusted accordingly.
• Unbundling Services — Dell has unbundled eDiscovery, document review, research work, appellate work. With respect to research, for example, Dell may give research to a particular subject matter expert even though that expert’s firm is not handling the entire the matter.
• eBilling Data – Initially Medtronic used eBilling as an invoice processing machine. Over time, they have learned to use the eBilling system for data mining. They can now determine law firm staffing efficiency, whether the work is dispersed too widely, etc. This allows Medtronic to have a productive conversation with outside counsel to help improve efficiency and reduce costs.
• How Pfizer Sets Annual Fees — Pfizer uses a combination of a bottoms approach (asking each Pfizer practice group to say what they expect to spend in the following year) plus a top-down approach whereby Pfizer determines at a strategic level which firms it wants to encourage by giving them more work. In addition, they are in regular conversation with their outside counsel.

I had to ask the panel: Given how much time and effort in-house lawyers spend monitoring and arguing about outside counsel bills, why wouldn’t every company’s legal department want to follow the Pfizer approach? After some slightly rueful laughter on the part of the panel (and audience), one panelist said they felt they needed more eBilling data before they would feel confident enough to move to a fixed annual fee system. At this point Ellen Rosenthal of Pfizer interjected and said that while they had some financial data before starting the program, it really began on the strength of a strategic and pragmatic decision on the part of their General Counsel who was convinced that the hourly billing system was not working for Pfizer and that they needed a better way. In other words, the main prerequisite for this is COURAGE.

What’s the proof of the system? After Pfizer and Wyeth merged, the workload of the combined in-house legal department was much larger than that of the Pfizer lawyers pre-merger. Despite this, their legal expenditures have declined by 15%.

Leveraging Technology to Achieve Quality and Competitive Excellence. This session is focused on how lawyers provide “value” to their clients. The presenters are Brad Blickstein (Principal, Blickstein Group, Inc,) and Kimberly Townsan (Senior Manager, Legal Administration, United Technology Corporation).

[These are my notes from LegalTech NY 2011.  Since I'm publishing them as soon as possible after the end of a session, they may contain the occasional typographical or grammatical error.  Please excuse those. To the extent I've made any editorial comments, I've shown those in brackets.]

NOTES:

• Value, Like Beauty is in the Eye of the Beholder — The ONLY beholder that matters is the client. The key for outside counsel is to focus on delivering to the client the outcome desired by the client. Don’t focus on the means of production. The panelists quoted David Cambria of Aon who once said that when you hire a gunslinger, you don’t pay by the bullet.
• ACC Value Challenge — Every firm that is interested in providing value to clients should study the ACC Value Challenge. The panelist recommended the blog post exchange on the ACC website between Seyfarth Shaw and Wolverine.
• Leveraging Data — How can we use data to more effectively price and bill for legal services and manage outside counsel? These are the challenges that clients and their lawyers face. Seyfarth Shaw, as a preferred provider to United Technologies Corporation (UTC), spent considerable partner time and effort to review their matters and accurately price the work they were proposing to provide to UTC. (As part of this effort, they examined and revised their work processes.) UTC believes that each provider needs to determine its own costs and margins and then make a proposal; this is preferable to the client dictating the AFA.
• UTC’s Experience with AFAs — UTC started requiring alternative fee arrangements (AFAs) with intellectual property work, but are now asking for it for more types of matters. At this time, approximately 50% of their matters are priced on an AFA basis. They are trying to reach a balance whereby both UTC and its law firms prosper. Their experience is that firms tend to start the AFA conversation by proposing a price based on a historical average. However, these prices often prove to be unreliable. UTC prefers to set a banded price. This sets a cap on the ultimate price, plus it gives outside counsel an incentive to improve efficiency and thereby improve margins. UTC has coupled these AFAs with detailed arrangements concerning what UTC will or will not pay for and which preferred providers UTC wants their outside counsel to use.
• How Do Clients Evaluate Outside Counsel? — AON has a series of detailed lawyer dashboards that show how outside counsel have performed with respect to a number of criteria determined by AON that cover everything from efficiency to quality of advice received. UTC analyzes several areas of outside counsel performance including the extent to which counsel provide sufficient review and comment time to UTC lawyers, and whether outside counsel treat senior UTC personnel differently than junior UTC personnel.
• Process and Efficiency — How can we leverage technology and process to improve efficiency and get more “bank for the buck”? UTC works with its preferred legal providers to ensure both eBilling by outside counsel and the efficient payment of bills by UTC.
• Knowledge Transfer Inefficiencies and Matter Management — UTC has 270 lawyers in-house posted around the world. These lawyers supervise thousands of matters. UTC implemented matter management in the late 1990s, but it was initially for housing information on legal costs rather than a means for actually managing their various matters. Since then, UTC has been looking for ways to integrate outside counsel in the matter management system (LT Online) rather than making the UTC lawyers work with different extranets provided by every outside firm. UTC tried to minimize “rework,” which involves taking information from outside counsel and reworking it so it can be added it to UTC’s matter management and knowledge repositories. They have 30 US firms that access their matter management system directly. This accounts for about 85% of UTC’s US docket. UTC provides training to their outside counsel to ensure they can use the system efficiently. The system includes staffing information, legal documents, matter updates, etc. The matter management system is not intended to capture all matter information, just critical information about each matter. UTC’s experience is that providing matter management system access to outside counsel has greatly diminished the need to rework data from these lawyers. In Townsan’s view, this is one of the best efficiency enhancers they have.
• How Legal Project Management and Quality Programs Help — applying quality improvement techniques (e.g., lean six sigma) may involve significant investment of time, money and effort on the part of a firm and may not always be absolutely necessary. However, every firm can benefit from creating project plans or doing after action reviews. (Interestingly, very few members of the audience said that their firms did either.) Consider using a battery of tools to cut your costs, and then price matters so that the law firm improves its effective hourly rate (its margin), while reducing the client’s overall expenditure.
• Is the Recent Focus on AFAs a Fad or the New Normal? — In Townsan’s view, the AFAs introduce reliability and predictability into their budgeting process. This keeps the legal department and finance department happy since both of them hate surprises (especially unpleasant financial surprises). Further, during times of corporate belt-tightening, companies remain contractually bound to comply with their AFA arrangements. By contrast, they can always trim the number of hours they are willing to pay for. As a result, she thinks that AFAs are here to stay. Blickstein, on the other hand, is a bit more cynical about this. He believes that once the economic pressure is off, firms (and inside counsel) will revert to the familiarity and relative comfort of hourly billing. He noted that we’ve been talking about the importance for AFAs for decades, but they haven’t yet become the norm. Nonetheless, he observed that any firm that finds ways to provide its work product more efficiently at a thoughtful price will always flourish.