Articles Posted in How Lawyers Deliver Their Services to Business

One of this blog’s goals is to help business owners and managers understand why their lawyers act the way they do.

My question in this two-part series: Why don’t more law firms treat the businesses that pay their bills like customers?

In my post a week ago I quoted Forbes’ legal commentator Mark Cohen:

“There is unambiguous evidence of a significant and persistent disconnect between law firms and their clients. Only 25% of corporate legal buyers said they would recommend their ‘go-to’ law firm.”

A business owner or manager might ask: Why can’t law firms treat my business with the same care and attention with which Southwest Airlines, Starbucks, the Cleveland Clinic — or my local dry cleaners — treats me?

Law firms are rarely managed the way that you run your business. To move toward a relationship with them that better serves your interests, it would help to understand how certain perverse incentives in the law firm world work.

The way law firms handle internal issues — like the two addressed below — creates perverse incentives. And those perverse incentives make law firm leadership more responsive to its partners — its owners — than to the organizations who pay their fees.

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In posing the above question last Monday, lawyer and law firm consultant Bruce MacEwen quoted Peter Drucker:

“There is only one valid definition of a business purpose: to create a customer.”

Having consulted to law firms on their business strategies — MacEwen argued that law firms’ “real clients” too often consist of the lawyers who own those firms — and not the organizations who pay those law firms their fees:

“… The firm exists to serve the preferences of its lawyers.”

… 

In asking if a law firm really focuses on your business as its true customer — as its client — let’s start by looking at a high-sophistication, high-consequence professional services organization that truly focuses on its customers — its clients.

I describe the following with my wife’s permission.

His alert reading of a routine blood test prompted my wife’s internist to identify a specific parathyroid disorder.

He suggested three medical centers for the required surgery: The two most prominent university health systems in Chicago — and Tampa General Hospital.

Frequency of the required surgery:

  • For each of the two university health systems — fewer than 10 per month.
  • For Tampa General Hospital / Norman Parathyroid Center — 170 to 180 per month.  

We bought plane tickets for Tampa.

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My most recent post introduced an explanation for the question posed above:

The legal profession is an industry managed by committee. There are no outside boards of directors to step in with an “outside view” when things aren’t working. 

Law firms are run by — and answerable to — no one other than their own lawyers. The law firm alumni who populate in-house counsel departments have never known any other approach — so they’re usually OK with this.

Of course, a corporation’s senior officers can express displeasure with their attorneys inside and outside of the business. But — with good reason — they are wary of stepping in and second-guessing lawyers steeped in legal rules and institutions of which those senior officers have only a modest understanding.

Free of an “outside view” whose forceful application might bring about necessary changes — business attorneys persist in a status quo of mediocre service delivery — as noted in the most recent post:

“There is unambiguous evidence of a significant and persistent disconnect between law firms and their clients. Only 25% of corporate legal buyers said they would recommend their ‘go-to’ law firm.”

But this “outside view” is what empowers human institutions to make painful-but-necessary changes when their outside environment threatens their effectiveness.

Early this year I posted about Andy Grove of Intel:

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On my drive to the office yesterday, I learned that the Chicago Blackhawks had fired Joel Quenneville, their head coach.

Three Stanley Cups, second winningest among 38 head coaches since its 1926 founding, best playoff record in club history. Replaced by 33-year-old Jeremy Colliton — former NHL and AHL star — current head coach of the Rockford IceHogs.

Lots of chatter over the merits. Great move. Terrible move.

But there’s no question about exactly who it was who’d made that decision: Not “Coach Q” himself.

Someone saw a problem with the team’s status quo — and made a decisive move in response.

Last month GE ousted John Flannery as its CEO due to missed profit and cash targets.

And they replaced him with an executive from outside the company — a move not seen at GE for decades — if ever.

As with the Chicago Blackhawks, Mr. Flannery did not oust himself. GE’s board did that.

Someone saw a problem with the company’s status quo — and made a decisive move in response.

When the men and women at the top of an organization see something wrong with the way that it’s coping with external realities — like customer satisfaction or shareholder support — they tend to make decisive moves like the Blackhawks or GE.

Law firms don’t respond that way.  

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This last of three posts about a 54-page opinion in which U.S. Bankruptcy Court for the Central District of Illinois Judge Mary Gorman explained her reduction of a nationally prominent law firm’s $1.8 million fee down to $670,000 offers a case study of the billable hour’s perverse incentives.

Today I address a case-study-within-a-case-study — a bill for $270,000 within the $1.8 million total sought by the law firm. Judge Gorman considered the wisdom of a law firm’s decision to pursue multiple litigations that — she believed — offered better odds to the lawyers of getting their hours paid than it offered to the client of getting recovery that would exceed those lawyers’ fees.

Judge Gorman’s case-study-within-a-case-study illustrates a critical drawback to use of the billable hour to price attorneys’ work:

Even when the client loses, the lawyers win. 

Except in the unlikely event that the hourly bill is submitted for approval by someone with the legal sophistication — and firmness — of a reviewer like Judge Gorman, who cuts that $270,000 bill down to $80,748. But I’m getting ahead of the story.

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The 54-page opinion in which U.S. Bankruptcy Court for the Central District of Illinois Judge Mary Gorman explained her reduction of a nationally prominent law firm’s $1.8 million fee down to $670,000 offers a case study of the billable hour’s perverse incentives.

Under “General Mistakes and Carelessness”, the Judge detailed important errors in the Law Firm’s fee statement.

Those errors show two consequences of using the billable hour to price lawyers’ services:

First, the “rack-em-up” focus on maximizing hours billed gives lawyers incentive to — knowingly or not — charge clients more than the work calls for.

Second, in the attempt to maximize those hours billed, attorneys can easily — intentionally or otherwise — obscure from the client’s view who-did-what-for-how-much.

Four points among several Judge Gorman made here:

1. She called out the Law Firm for charging $234,450.50 for work they’d, “either not included in the billing invoices or … never actually earned”. After specific cuts, the Judge reduced the remainder of the $1.8 million requested by 20%. 

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On July 10, 2018 U.S. Bankruptcy Court for the Central District of Illinois Judge Mary Gorman issued a 54-page opinion explaining why she cut a law firm’s requested total hourly fee of $1.8 million down to an approved total hourly fee of $670,000.

Judge Gorman was responsible to approve or disapprove legal fees charged to the debtor by the debtor’s law firm because those fees are paid out of the bankruptcy estate’s assets.

The judge’s explanation of her drastic fee cut offers a case study in the perverse incentives of the billable hour.

Notes on format and content:

1. The text in this and the following two posts doesn’t refer to the law firm or its attorneys by name — but to the Law Firm, or to Attorney A, Attorney B, etc. This post’s purpose is to make a point about cost control and management of legal work — not to embarrass anyone.

The Law Firm ranks among the American Lawyer magazine’s “AmLaw200” — the 200 largest U.S. law firms by gross revenue and other key metrics.

2. While I don’t wish to embarrass anyone, I do need to substantiate what I say by reference to objective sources. Therefore the law firm and lawyers named in Judge Gorman’s 54-page opinion can be readily identified in it. Also, I consulted other court filings on the electronic docket (pay wall) for In re: Earl Gaudio & Son, Inc. at Case No. 13-90942.

3. Unlike this blog, Judge Gorman’s opinion did not address the wisdom of pricing lawyers’ services by reference to billable hours versus an alternative fee arrangement. To the contrary, when a lawyer seeks approval of legal fees from a federal court, the billable hour is the standard because that is the conventional model of the legal profession. (I followed this practice myself three years ago after winning a judgment for my client in a civil rights lawsuit — because I had to.)

4. My argument is not that use of the billable hour necessarily leads to excess costs and wasted effort — but that it creates incentives that make those bad outcomes more likely.

I begin with Judge Gorman’s summary offered at the end of her 54-page opinion — with underlined headings that I’ve provided:

 

Failure to “Focus on this Case as Required”

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With this post I conclude a 4-part analysis of positive alternatives to the status quo in legal services presented by the Big 4 accounting firms to U.S. businesses.

In Part 1 I addressed survey results from law firms in which 69% of responding law firm leaders reported that “partners [in law firms] resist most change efforts”.

The reason? 59% of responding law firm leaders stated that their partners “resist most change efforts” in the way they deliver services to clients, because:

“We are not feeling enough economic pain to motivate more significant change.”

… 

Businesses — speaking through 55% of chief legal officers surveyed — reported that they don’t negotiate better price and terms of service with their law firms because they:

“Believe that they do not have enough buying power to negotiate more effectively.”

… 

The fact that law firms report such complacency and that businesses feel stuck which what law firms are giving them prompts a question: Are there any good alternative sources of legal services available to U.S. businesses?

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Earlier this month Lucy Endel Bassli wrote an article entitled: “Big 4 Are Not a Threat. They are a Reality”.

In the post immediately preceding I described Ms. Bassli’s experience and credentials as former Assistant General Counsel of Microsoft and as founder of a new law firm and consultancy focused on innovation in the delivery of legal services. Her views depart from — and are better informed than — conventional wisdom.

Conventionally-minded business lawyers talk a lot about the “threat” that the Big 4 present to traditional law firms. By “threat” they mean future competition.

Ms. Bassli — based on firsthand experience buying and managing the work of law firms and other legal services providers — argues that the Big 4’s offerings for U.S. business are not confined to the future. They’re a present day reality.

What follows are the first 5 of 10 attributes of Big 4 accounting firms’ offerings in legal services that Ms. Bassli identified:

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To summarize some of the positive alternatives that the Big 4 accounting firms offer U.S. business owners and executives in legal services, I’ve chosen the writings of a trusted guide — Lucy Endel Bassli.

In these writings she’s described how the Big 4 accounting firms offer choices to businesses in the U.S. that might well be more efficient — and for some jobs more highly skilled — than what traditional law firms and traditional in-house departments have to offer.

When I first heard Ms. Bassli speak on these subjects at academic and legal conferences she was Assistant General Counsel of Microsoft — a business where she practiced in-house for 13 years.

Microsoft is — well — it’s Microsoft. And Ms. Bassli until January of this year was a senior leader of its legal department.

And in addition to being an iconic company, its legal department is a leader in innovation. For instance, a year ago Microsoft’s legal department announced that it was moving 90 percent of its outside counsel work away from hourly fees — toward alternative fee arrangements. This would be up from 55 to 60 percent at the time of the August 2017 announcement.

This at a time when — despite hype about alternative fee arrangements — the vast majority of law firms still bill by the hour.

Earlier this year Lucy Endel Bassli left Microsoft to found InnoLegal Services, PLLC, with the following outlook:

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