Articles Posted in Cost Control

This past Monday (July 2) Mark A. Cohen wrote the following in Forbes online:

“Law is staging its own version of ‘every kid gets a trophy’ … Every week, all over the globe, the legal industry throws gala dinners to celebrate its ‘innovators,’ ‘visionaries,’ and ‘pioneers.’  These gatherings afford attendees a chance to dress up, schmooze with peers, feel important, and convince themselves that their industry is performing splendidly. Legal providers are hearing ‘Celebration’ while for buyers it’s ‘I can’t get no satisfaction.'”

I met Mark Cohen a couple of months ago at a global conference on legal innovation sponsored by Northwestern University’s Pritzker Law School’s Center for Practice Engagement and Innovation where he is a Distinguished Fellow.

On one hand, he’s what I’d call “a lawyer’s lawyer”, with:

” … An international reputation as a ‘bet-the-company’ civil trial lawyer with stints as a decorated Assistant United States Attorney; BigLaw Partner; National Litigation Boutique Founder and Managing Partner; Federally-appointed Receiver of an international aviation parts business conducting operations on four continents; and outside general counsel to three insurance companies.”

But this “lawyer’s lawyer” also founded and managed two entrepreneurial companies before advising law firms and law departments on improving their services delivery:

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My last post was discouraging:

“Business Leaders Need to Drive Better Legal Pricing and Services Delivery Because Lawyers Won’t or Can’t”.

Discouraging, but proven.

Among law firms:

  • 69% of leaders surveyed said that, “partners resist most change efforts”, and
  • 59% gave this reason: “We are not feeling enough economic pain to motivate significant change.”

And among in-house law departments:

“Altman Weil found that 55% of Chief Legal Officers believe that they do not have enough buying power to negotiate more effectively. Some 51% also say that law firms are resisting discounting. Interestingly, 30% of the CLOs do not want to damage good relationships with external counsel by asking for greater discounts.”

But it’s not all gloom.

Some outlier firms and individuals in the legal industry understand that client companies need to do more with less in managing their legal affairs. And they’ve been taking decisive action to that end.

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The message of this blog, and what I do for my clients, is based on a single guiding conviction:

American businesses large and small pay increasing (never decreasing) legal costs – and miss opportunities to prevent liability before it happens.

Because owners and executives let the legal industry and its business model call the shots on pay, work flows, and personnel. They let law firm and in-house attorneys make decisions in these areas that no general manager would tolerate anywhere else in the business.

Meanwhile, demands of the litigation and regulatory environments proliferate.

It’s not as though no one agrees with this view.

In fact, this view is the staple of lawyers’ conferences (for instance, here, here, and here) and publications (for instance here, here, and here).

The words are the staple … that is.

Any constructive action in response not so much.

On the law firm side, the most recent Altman Weil survey of law firm leaders reported: “In 69% of law firms, partners resist most change efforts”.

69% of law firms.

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Lola v. Skadden, Arps arose from a lawsuit in which a plaintiff demanded massive disclosures of documents of a specified description. This meant that the defendant had to review thousands of documents to respond.

David Lola was a licensed lawyer hired on contract by the law firm Skadden Arps to perform those document reviews.

Later, Mr. Lola sued Skadden Arps for overtime pay. Skadden Arps contended that the relevant statute — the Fair Labor Standards Act — precluded overtime pay because the work consisted of “the practice of law”.

The prestigious Federal Court of Appeals for the Second Circuit refused to throw out the suit:

“The gravamen of [the attorney’s] complaint is that he performed document review under such tight constraints that he exercised no legal judgment whatsoever — he alleges that he used criteria developed by others to simply sort documents into different categories ….

“A fair reading of the complaint in the light most favorable to [the attorney] is that he provided services that a machine could have provided ….”

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The law firm of Milbank, Tweed, Hadley & McCloy recently announced that it was raising the annual salaries of its first year associates to $190,000. Other large law firms are doing the same.

Instead of a business-like, matter-of-fact, decisive refusal to pay lawyer rates for the work of brand-new law graduates who are lawyers in name only — many clients who sign off on the legal bills of law firms participating in this $190,000 move … are feeling upset.

So writes Caroline Spiezo in an article of the above title appearing last week in the journal Corporate Counsel:

Corporate Counsel reached out to a number of in-house leaders following Milbank’s announcement to gauge their reactions. Many opted to remain anonymous, but all displayed strong feelings about this development. Here are their responses, some of which have been lightly edited for clarity and length.

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I’ve long admired the work of Jordan Furlong, a distinguished Canadian lawyer who analyzes and forecasts changes in the legal services market for law firms and legal organizations.

His twitter post yesterday:

“Most invoices from law firms aren’t really ‘bills’ — they’re lists of claims against the client made by any lawyer who could find a way to touch the client’s matter for at least six minutes.”

In my most recent blog I considered the respective entries by PwC (the former Pricewaterhousecoopers) and by Deloitte into the U.S. market for legal services as an initial and expanding “crack” in the “wall” that protects U.S. law firms from Big Four competition.

And because this blog and my law practice focus on securing and maintaining the legal health of client companies — I wrote that I hoped for more and deepening cracks in this pernicious wall.

It turns out that Heather Suttie — a leading Canadian consultant to legal practices both in law firms and in the Big Four outside of the U.S. legal market — had made some timely observations a week before Deloitte’s recent announcement. As an advisor since the early 1990s both to law firms and to Big Five / Big Four accounting firms that have contained law practices she has a depth of perspective about Big Five / Big Four offerings of legal services that few in the U.S. share.

Her thesis: The Big Four enjoy substantial competitive advantages over law firms in delivering legal services to business:

” … Each of the Big Four professional services firms is armed with internationally recognized brands, legions of professionals of numerous descriptions, infrastructure that has been built up for the last 30 years or more, access to significant and sophisticated business tools and systems, and capital resources and financial acumen to run efficiently and effectively.

“The Big Four are also equipped with four big advantages that, in many cases, remain elusive to law firms ….

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After offering legal services for two or three decades elsewhere in the world — the Big Four accounting firms (PwC — the former Pricewaterhousecoopers, Deloitte, EY — the former Ernst & Young, and KPMG) are now taking tangible steps to move into the U.S. legal industry.

Last Wednesday (June 6) Deloitte UK and the San Francisco-headquartered immigration law firm of Berry Appleman & Leiden LLP (BAL) announced an agreement that gives U.S. businesses market access to Deloitte Global’s immigration legal services worldwide — including the U.S. — while adhering to the traditional rules that have insulated U.S. law firms from Big Four competition.

This comes on the heels of PwC’s formation nine months ago of a new law firm called ILC Legal in Washington, D.C. — the first entry into the U.S. legal market by a Big Four firm (see here).

These initial moves by two of the Big Four could signal a tectonic shift in the competitive landscape for legal services in the U.S.

As prominent legal consultant Bruce MacEwan put it after PwC’s announcement last year:

“[The Big Four] have incredible resources in terms of capital, thousands of high-powered professionals, brand equity, and entrée into every Fortune 1000 board room ….

“If the Big Four want to come at Big Law, they can. And they will be pretty successful.”

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In my most recent blog I recounted an interview with BASF Corporation’s General Counsel, Matt Lepore.

In that interview Mr. Lepore described how he went about ditching the arbitrary taxi meter of hourly billing.

And he described how he secured lower costs and client-friendly incentives through alternative fee arrangements.

I invite your attention again to his words — and I emphasize something that Mr. Lepore slipped in at the end of his interview:

“Whether you are Fortune 100, or a small start-up, if you have a legal need that requires outside counsel expertise, and you have some budget assigned to your department, you can use alternative billing. Maybe you won’t define value the same way that BASF, Microsoft, or GSK would, but you certainly don’t need to value the services you need based purely on an attorney’s hourly rate. And, in my view, you will not be getting the most efficient work product if you do.”

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I’ve said many times that the legal industry’s business model is based on the sale of attorneys’ hours: The value of lawyers’ work depends on how much time they take to perform a task. This model benefits law firms’ economics but it’s bad for the client. It results in unnecessarily high charges, overstaffing, and incentives to inefficiency (see here, here, and here — among other posts).

The client company has zero price visibility until the work has already been finished.

And — despite much happy-talk about the “death of the billable hour” and “widespread” adoption of alternative fee arrangements [i.e., some arrangement other than the billable hour] — the billable hour is the legal industry’s standard for pricing its work (see here and here).

So … is it practical for a corporate client to ditch this wasteful practice? If so, what does that look like from the client’s perspective?

Zach Abramowitz of the law company Axiom met with Matt Lepore — BASF Corporation’s general counsel — to talk about this.

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