Can a law firm ‘own’ a client?

If you were not already aware of it, a train wreck is currently taking place in the Australian legal sector:- the partners of Herbert Smith Freehills (HSF) are suing the departing partner leaving to set-up White & Case’s new Australian venture and nasty details of this divorce are being spread all over the Australian Financial Review on a weekly (sometimes daily) basis.

From yesterday‘s (Monday 3 April 2017) instalment we learnt that the departing partners collectively spent $364,000 on business development activities in the financial year 2016* on such things as:

  • trips to the exclusive Barnbougle golf course in Tasmania,
  • an $800 bottle of wine for a general manager of one of Australia’s leading energy companies (who is most likely hiding out in his/her office ruing the day they ever heard of HSF), and
  • getting in on the next generation, gifts for the births of clients’ babies.

The most interesting part of yesterday’s nugget wasn’t, however, all the unscrupulous details of what the partners at HSF call ‘business development’; but, rather the news that HSF are claiming that as they spent the money on the BD activities, and not the departing partners themselves directly, the client actually ‘belongs’ to the firm – and, therefore, the partners are ‘not allowed’ to take the client with them to White & Case.

Wow, hold on there for a second.

Leaving aside the fact that most of the clients who have been named and shamed for several weeks in one of Australia’s leading business publications and whose wining and dining (literally) has been described in miniature detail in court papers are unlikely to want to go anywhere near either firm for the foreseeable future, with the level of lateral hiring that has taken place in the Australian legal market over the last few years, arguing that because the firm has paid the business development dollars the firm owns the client raises a very interesting and thorny issue for the courts.

The next round in these hostilities is due to take place June 5, but I await the outcome of whether or not a firm can ‘own’ a client with interest. Because if the result goes one way, it may just kill the lateral hiring market overnight.

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*  poor Ms Draper must be wondering what she has done wrong too, having only ‘spent’ $2,865 on business development activities during that period but being pulled to the confession box along with all the other naughty sinners

Deutsche Bank, junior lawyers, being outcome focused, and a voice of reason

A fair amount has been written since Legal Week published its story on 21 March that ‘Deutsche Bank to refuse to pay for trainees and NQ lawyers after panel overhaul‘, which alleged that the Bank had told its panel firms it would no longer pay for trainee and NQ lawyer time on its files. Some of the commentary around this story has been in favour of the Bank’s position, some has questioned the wisdom of the Bank, and the vast majority of it has sat somewhere in the middle*.

With the level of public legal issues the Bank has had in the past few years, it’s little wonder that the Bank would look to reduce its legal fees, and not paying for trainees’ and NQ Lawyers’ time would certainly go some way to achieving that goal.

That’s all well and good, but to my mind if you are outcome orientated – rather than input driven – then the number of years a person has done something really doesn’t bother you – because what you are really paying for is the result. I mean: who is to know who will have that eureka moment?!?

Sure, it may be more likely to happen to a more experienced lawyer. But isn’t it just as likely that a senior lawyer will have their thinking clouded and the answer comes in the form of a fresh eyes approach from a junior lawyer?

And so enter a voice of reason into the debate – in the form of Vodafone Enterprise global general counsel Kerry Phillip, who is quoted in a later Legal Week article on the issue as saying:

“We do not expect to be charged for training time, but not everything a trainee does is training time. Law firms should absorb the cost of training solicitors, but where there is genuine value added to the client – rather than pure learning through shadowing or watching – then it is fair to charge.”

Absolutely spot on Ms Phillip.

But, crucially, this concept can be extended to all lawyers who act on all matters, in that where you genuinely add value to your client’s business/issue, then charge for it and more often than not you’ll be paid for it (without questioning of the bill).

But, where you don’t add value to your client’s business or issue, you cannot charge for it. Or, more accurately, you can: but increasingly you won’t be paid for it.

And just for the record, Ms Phillip goes on to say in that article:

“That said, we generally agree a fixed price for a piece of work. I expect the law firm to put an appropriately experienced and qualified person on that work, but we are paying for an agreed result or output that the firm puts its name to.”

Again, absolutely spot on:- clients are paying for an agreed result or output that your firm puts its name to – and there is a massive, massive, marketing lesson for private practice law firms to get their heads around in that statement.

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* NB: in my experience working tenders, Australia has seen this trend since at least 2010 – if not before.

Do senior BD people have a seat at the top table?

I’ve often wondered if senior business development professionals in law firms truly have a seat at the executive table. People often tell me they do, but my gut has always had this niggling suspicion that maybe they actually don’t.

Well, a review of ‘Aligning Marketing and Business Development Resources for Law Firm Growth‘ – Results from the joint Legal Marketing Association and Bloomberg Law® research study  published overnight my time (Australia) would appear to answer some of these doubts – at least from a US standpoint, as one of the first charts in the report looks at exactly this issue:

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My take on this chart is that most law firms see the role of BD as being the executors/executers of a law firm’s business strategy, but not necessarily the developers of that strategy.

In other words, only about 36% of senior business developers can truly claim to have a seat at the top table.

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How much are internal meeting costing you? – Set a zero-based time budget

If you’re anything like me, then you’re expected to attend way too many internal meetings each day/week. I don’t say this to brag, most of the time I’m not needed and I offer no value being at the meeting. In these situations my presence at the meeting is actually an “opportunity cost”;- I could be far more productive being somewhere else.

If this resonates with you, then you may like a concept I read in a blog by Michael Mankins (‘Collaboration Overload Is a Symptom of a Deeper Organizational Problem’) on Harvard Business Review  yesterday called ‘setting a zero-based time budget‘.

In Mankins’ own words, this involves:

Set a zero-based time budget. One discipline that we have seen work to reduce the number of unnecessary meetings is to create a fixed meeting time bank in which all new meetings are funded out of the current bank. To start, determine the total amount of time currently dedicated to meetings by level in your organization. Then place a ceiling on that total. Now, for every new meeting an executive requests to schedule, ask (or require) him or her to remove some other meeting of equivalent (or greater) time. At the very least, this approach will highlight the total time devoted to meetings in your company. Over time, it may enable your organization to lower the ceiling and liberate countless hours of unproductive time.

Administrative nightmare and probably unworkable in a partnership structure – but I LOVE the idea!

I can but dream…

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Capped fees are lazy pricing

Seth Godin recently wrote:

“Price is the last refuge for the businessperson without the imagination, heart and soul to dig a bit deeper.”

Seth’s quote rings true to me every time I hear a law firm partner suggest a cap fee arrangement to their client.

Capped fees lack imagination. They lack investigation. And because of it, they lack understanding.

Understanding of your client’s priorities, as well as your own.

More damagingly, they encourage apathy.

Because, if I – as the service provider – want to get my maximum value, then I need to work to my cap, and no more. I don’t want to be too good at my task though, because otherwise I won’t get paid for my labours. At the same time, I don’t want to be too bad, because I won’t get paid for my labours then too.

So, cap fees are a lose-lose scenario.

And that is why, capped fees are lazy pricing.

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Are billing software providers perpetuating the life of the billable hour?

I’ve read a lot about #Newlaw since I first came across the term in tweets and blogs by Eric Chin and George Beaton back in late 2013. In all that time, a leading theme of #Newlaw, as opposed to traditional law (or #Oldlaw as my friend John Chisholm likes to call it), is its progressiveness. Here, one of the more progressive Australian-based #Newlaw entities I read about is the old Advent Balance, including this wonderful 2014 post by another good friend – John Grimley.

For those of you who may not be aware, Advent Balance in Australia recently became Lawyers on Demand – and as far as pedigree in #Newlaw goes you’re not going to get much better provenance.

Given all this, can you imagine my surprise when I read the following headline in Lawyers Weekly earlier this month – ‘NewLaw firm implements ‘innovative’ time capture software‘ – to discover the ‘NewLaw’ firm being hailed in this article was none other than Lawyers on Demand!

Leaving aside what “‘innovative’ time capture software” actually means, who would have thought we would see the day when a Newlaw firm like LoD was happy to go to the press with a comment like this:

We now have our team using modern technology to capture time

Really? More importantly, why?

After all, everything I’ve read about the Lawyers on Demand/Advent Balance/Newlaw business model would have put “modern technology to capture time” as bottom on the business critical list.

And yet, not only is the legal press shouting this; but LoD are assisting and supporting in this effort.

Absolutely mad.

Then I got to thinking, who has a vested interest in Newlaw becoming time-based billing…?

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Survey result: Which groups are using AFAs?

Bit of a loaded question this, but if I were to ask you which groups were making the most use of Alternative Fee Arrangements (AFAs) what would your answer be?

If you’re anything like me, when answering a question like this you’d have thought of a commoditised practice or product – say property leasing or conveyancing.

Until yesterday that is, when I came across CounselLink Enterprise Legal Management’s Trends Report: ‘Update on the 6 Key Metrics‘ (published in February 2017).

Insights based on data derived:

…from nearly $26 billion in legal spending,  almost six million invoices, and approximately 1.5 million matters processed through the CounselLink platform…

this report is nothing if not comprehensive. And, interestingly enough, it debunks a lot of myths surrounding the application of AFAs to legal matters – for example, that they cannot be used in litigation or mergers and acquisitions.

AFAs by billing.jpg

That’s right, what this table shows us is that some of the most “complicated, cannot tell you what will happen” work is being serviced on AFAs while other “commoditised” work, not so much.

This chart makes for quite compelling reading. Unfortunately it also tells me that only about 7.5% = on average – of all billable work is done on AFAs (without defining AFAs). Evidence like that is most likely going add to the voice that clients prefer being billed by the hour – which is a shame.

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Before you can kill the billable hour, you first need to get rid of utilisation

A lot has been written about a need to kill the billable hour. Some of it has merit. Lots of it doesn’t. Some of it has been written with the client’s benefit in mind, most of it hasn’t – in the it is written with law firm survival in mind.

Crucially, pretty much all of it is irrelevant.

How can I be allowed to say such a thing?

Because the reality is that under most law firm’s current performance regimes, we actively encourage the survival of the billable hour, even while we advocate for its death.

What do I mean by this?

Well, as I alluded to in my post last week, what consistently surprises me is that while many advocate for the death of the billable hour, with few exceptions most of these advocates fail to look at one of the principal underlying issues that makes its death – overnight or otherwise – near impossible:- utilisation.

‘Utilisation‘ refers to the metric by which we determine how busy fee earners are. In most firms (although not all), to ascertain ‘utilisation’ we look at the annual budget of hours the firm has set the relevant fee earner (typically starting at 1,400 hours and going north) and we measure that against the amount of billable time they have put on their time-sheets (daily, weekly, monthly or annually). From this, we then decide how “busy” that fee earner has been.

But, it’s actually a crock of shit as a metric of measurement.

Why?

Because, it doesn’t tell us how much time the fee earner has worked on the business – e.g., KM time (typical requirement of an additional 40 hours) or pro bono time (maybe another 40+ hours – notice the reoccurring hour theme here?).

It doesn’t even actually tell me how busy the lawyer has been, heard of “desktop discounts” aka “leakage”.

But most important of all, it doesn’t tell me if you made any money at all, much less any profit!

What it does is assumes that you get 100% of your hourly rate paid – but as we have seen the reality is far from the truth insofar as that assumption goes.

So it’s an absolutely rubbish metric in my opinion.

But, and I kid you not when I say this, utilisation will determine the pay rise and bonus of pretty close to every lawyer (and by that I mean partner down) in Australia this year.

So, if we except that utilisation is a rubbish metric: why does it persist?

The answer to that question is, in my opinion, one of the principal reasons why we will never get rid of the billable hour under the current reward and benefit system – because it is perceived as being a fair metric of comparison.

“What”, I hear you cry, “that’s madness!”.

But it’s true. In the modern ‘full service’ law firm, where billable hour rates vary according to the type of work we do, how busy we are is seen as a fairer metric of comparison than the rate we charge or the amount we earn – with the number of hours we work, Goddess of all.

So how ridiculous is all this really?

Well, in most firms as a lawyer working on the billable hour I’ll be better paid (including bonus) with 150% utilisation, 80% realisation and 15% net profit margin, than a lawyer working on fixed fees with 80% utilisation, 150% realisation and 40% net profit margin.

I’ll leave you to decide the madness of that.

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When is a billable hour not a billable hour? – and other billable hour issues!

realisation

When it’s about 48 minutes.

The ‘billable hour’ issue has reared its ugly head once again on LinkedIn in the past few days following [re-]publication of a post by Sue-Ella Prodonovich ‘Don’t Abandon The Hourly Rate Just Yet‘.

I’ll start this post by saying there’s a fair amount that Sue-Ella and I will never see eye to eye on about pricing and the billable hour, but core to my objection with this particular article of hers is the assumption that all ‘billable hours’ equal an ‘hour’, when all the data shows us, including the chart above, that it clearly does not.

Which brings me to the point of this post: what exactly is a ‘billable hour’?

My experience has been that the answer to this question is far more complicated than the question would at first blush suggest. That’s because, in reality, most firms don’t have a ‘billable hour’, they have several.

What do I mean by this?

This: fact, not only do most firms have several billable hour rates within the firm for different practice groups, but they also have several billable hour rates within the same practice group, to be used as the circumstances warrant.

Which is to say, a lawyer in a bog standard average corporate practice in Australia may well have a ‘rack rate’, a ‘discount rate’ (between 5 and 10 per cent, but possibly more) and a ‘do not go below rate’ – unless, that is, management has approved this as a loss leader so the firm can win other work, in which case we gave another rate: a win the work at any cost rate.

All of which is to say, not only is the term ‘billable hour’ rather meaningless; but, cruically, it is anything but fair and transparent.

So far as fairness goes, as I have advocated in the past, the billable hour is typically unfair to loyal paying customers because, more often than not, discounts on the billable hour are given to new clients while loyal clients pay a premium (if not full rack rate).

Don’t believe me, have a look at the 80/20 breakdown of your firm’s client base. I’ll bet you that the majority of your higher earning clients have a higher average billing rate – which, remember, under the billable hour system has little to do with complexity or value.

As I hope you will agree then, the ‘billable hour’ is a fairly meaningless metric, especially of comparison.

Importantly for clients, here are some of the things the billable hour  doesn’t do:

  • denote expertise – you are more likely to have a higher charge-out rate based on the number of years you have been alive on this planet than the number of relevant deals you have worked on;
  • denote value – unless what you are selling is your time;
  • promote speed and efficiencies – unless, that is, you have a penalty clause if you don’t complete within a certain time or a bonus clause if you do;
  • assist with transparency – because in order for transparency to exist you need to know upfront what you are getting and you don’t typically get to know what you have got until after the fact with the billable hour.

But I’ll wrap this post up by letting you in on a little secret: the real reason why, under current performance metrics used in Australian law firms, we will never get rid of the billable hour – and that is utilisation.

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