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New Business Models: Avatar Lawyers Still Too Space Age For Today

You won’t find large office space, power suits, or even lawyers inside the Penn. Ave.-based bureau of the law firm Clearspire. Confused? Not President and CEO Bryce Arrowood, he is confident. According to Arrowood, Clearspire represents the pinnacle of a changing market for legal services.

Clearspire aims to “change the system,” with a new approach to client billing and legal services. At a typical firm, according to Clearspire, partner profits comprise over 30 percent of typical big law balance sheets. Office overhead accounts for another third. Only the final tranche of revenue—one-third of the billable rate—is earmarked for those attorneys’ salaries diligent and dedicated to client work product. Since October, Clearspire has worked to channel more firm profits into direct value for the client.

To accomplish this, Clearspire has a 1:2 ratio of lawyers to business managers—fodder for reflection on how much information technology and business administration, as opposed to actual lawyering, plays into the smooth operation of a law firm.   For those few Of Counsel at Clearspire, there is no dress code or FLEX schedule request forms. Most attorneys already work from home via high-tech software with virtual meeting rooms and virtual representations of each employee. The Washington Post, first to profile the firm, reports:

“One of the first things new hires do on the job is pose for three photos that become their online avatars—one on the phone, one too busy to be interrupted and one available—which allow their colleagues to begin conversations only when appropriate.”

Clearspire is not off track. Dan DiLuccio, a Principal at Altman Weil, is quoted as saying, “The current economic environment may be the tipping point that causes general counsel to finally demand real financial accountability from their law firms or start moving to firms that are more flexible.”

But Clearspire has chosen an extreme response. In the same way the e-book industry is slow to gain market share, the total digitalization and outsourcing of legal services is perhaps too much, too soon. Although Kindle and Nook sales are high, the general population has shown its preference for the feel of a new hard-backed book. Similarly, individuals filing for divorce or corporations facing high-stakes mergers, though dissatisfied with the current cost-to-efficiency ratio, would not attend a meeting with a lawyer in jeans. Or, for that matter, the avatar of a lawyer in jeans.

By founding Clearspire, Arrowood is trying to respond to clients’ growing frustration with high fees in the legal industry, especially for those lower-level employees. “These people are being billed at $400 at least per hour. And the clients are saying, ‘Why am I paying to train this guy?’”

Nevertheless, Clearspire seems predominantly focused on blue-collar lawyering. If firms only reward middle-level legions, who is left to train the first-years? And, what motivation would they then have to earn promotions to partner level—especially when there’s no partnership at all?

There are, of course, many positive aspects of Clearspire’s practice. For example, the idea that law firms, like any business, need administrators. Too many firms skimp on human resources, or consider themselves too boutique to follow a strict and proper budget. A lawyer is only as good as his paralegal. In the same way, a law firm is only as good as its structure. Administrators are the ones who contribute fresh ideas regarding bonuses, employee incentives, and bureaucracy that both attract new employees and retain the old.

Also, Clearspire’s clear priority on information technology systems, is, in fact, critical to success. If your firm’s budget is pressed for funds in today’s economy, it’s important not to skimp on computers, electronic discovery software, or case management programs. Law firms should embrace the technology revolution, or face a fate similar to Howrey’s, which failed because of its inability to evolve.

Finally, Clearspire is committed to flexibility on the part of its offices and employee schedules. Efficiency is achieved differently by different people. So ask your employees what motivates them, and implement changes accordingly. Remember, a system of monetary incentives does not make the best policy.

A step in the right direction doesn’t have to be a giant leap forward. Gradual but substantive changes will demonstrate to clients that your firm is committed to serving them capably and consistently in this new generation of law.

-WB

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For the Future: Sell Your Knowledge and Judgment – Upgrading Your Business Model

With all the talk of the billable hour being a dying anachronism (which is how it’s described by Above the Law’s Jay Shepherd in a recent post), administrators have begun to examine other business models…and with good reason, opines Shepherd, who claims that timesheets focus on selling the wrong commodity: time.  

It’s not your hour the client wants; it’s your ability to use your knowledge and judgment. 

Besides, the billable hour is based on a business model that’s a hundred years old. It was launched at the very beginning of the prohibition era “by a tiny Boston firm called Hale and Dorr”.   

Shepherd contends that the main reason the billable hour model is no longer up to speed is that, in today’s high-paced day and age,  lawyers are not able to put a price tag on the practice of  law.   As a service, the practice of law is simply not quantifiable.

As an example, he points to the effort involved in  his blog writing.  If we operate under the billable hour model and we are assuming that it took him three hours to write the blog, this would mean it should—if the post’s author billed “a comfortable $500 an hour”–be worth $1500 to the reader.  Is it?  He doesn’t think so.   

No. What the client values is how efficiently you can resolve his or her dilemma.  “Because we’re selling the wrong thing, we’re measuring the wrong thing,” he says.  

To further illustrate his point, Shepherd takes us through a couple of other failed business models: the print newspaper and records.  These two industries need to re-evaluate what they’re selling, he thinks.

In re: newspapers, the lengendary New York Times recently came out with a revamped online pricing model which still just “sells people paper and ink”.  People don’t want paper and ink, it seems.  “[T]hey want information, and they want it fast.”   It’s not cost-effective to charge less for a paper that includes a digital version than it costs to just outright buy an all-inclusive digital subscription, he quotes tech-blogger John Gruber as saying.  “This makes no sense,” Gruber notes.  

The same goes for records. From the beginning, customers just wanted to buy music…and this just happened to come packaged in records, first; then in tapes, and then in CD’s.  “Napster and Apple…sold…customers what they wanted…”    Those companies represented the future of music to the customers.

So what will the future of practicing law look like?  What it won’t include is the billable hour, says Shepherd, as, in the process of solving your clients’ problems, you’re in possession of something they don’t have and, for the most part, value highly: the knowledge of law.  And that, you can’t see or sell by the hour. 

“We sell substantive knowledge—the ‘law’—which we learn in law school and for the bar exam and in legal research,” he explaines.

So when lawyers mistakenly think they are selling activity—thus the time sheet, which easily measures this activity– it doesn’t fly.  “We [think we are selling] representation and advocacy and drafting briefs and…wills and doing real-estate closings.  

Instead, of course,  lawyers actually sell their judgment, which is what prevents them from being replaced by the likes of Watson the IBM computer. 

When lawyers are able to focus on what really matters—and this won’t happen until the industry values the knowledge and judgment of their own—only then will they be able to step off the treadmill of billable hours and into the 21st Century and beyond.  Without a doubt, “we will be practicing law differently in the future,” says Shepherd.

For more, go here: http://abovethelaw.com/2011/04/small-firms-big-lawyers-blade-runner-and-the-future-of-law/#more-69138

-EM

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Restructuring Big Law To Make It Viable

By now, everyone in the industry has heard of “The Death of Big Law”, by Larry E. Ribstein.  Ribstein is the MIldred Van Voorhis Jones Chair, Associate Dean for Research, University of Illinois College of Law.  The paper achieved renown not only because, at first blush, it appeared to sound the death knell for the large law firm as we know it, but because his protocol for wiping the slate clean and starting anew struck a chord with many.  Indeed, Ribstein’s outlook, although he claimed it was pessimistic, was more practical than dismal, more bent on reformation than on being rambunctious.   

“The real problem with Big Law is non-viability of its particular mode of delivering legal services,” Ribstein says in the article, which is available on the Social Science Research Network.  In previous papers, he had mentioned how law firms are set up in such a manner that its members are more heavily invested in furthering the reputation of the firm than of tending to its business books…that a firm should be run more like a profitable company.  (In essence, he believes that Big Law firms currently charge clients for the value of their firm’s reputation.)  The author also opines that professional ethics rules–limited liability, non-lawyer ownership and non-competition agreements—impede a firm’s growth.    

What exactly did Ribstein’s analysis predict and, importantly, how will a successful Big Law firm of the future look under the lens of Ribstein’s learned scrutiny? In a nutshell, he wants to wipe the slate clean and start all over.  

“The large law firm’s business model…requires fundamental restructuring,” he says.  Ribstein proposes new models which purport to replace Big Law; new models which might push through regulatory barriers.  

At one point, he theorizes that even these steps might not be enough.  One reason: other forums might vie with lawyers. “In the future,” he says, “the sale of legal expertise may move beyond client advice [solely] by law firms to include completely different types of businesses.”  

Ribstein (pictured here) explains that owning firm-specific property will be a big help in attracting financing.  This will be necessary as clients become more informed and as global competition in the legal services market intensifies.  (In other words, as times get even tougher.)  

In addition to owning intellectual and other property, firms will have to concentrate on selling products, rather than on providing personalized advice. An interesting point that Ribstein brings up has to do with the legal version of what in Corporate America is referred to as the “corporate veil”.  Here, Ribstein concludes that there is an “asymmetry” of information in a lawyer-client relationship and that the value of a large law firm is derived from somehow letting the client in on the mysterious ins-and-outs of law as the client understands it to pertain to his or her needs.   

“It is hard for clients to shop for the most skilled or trustworthy lawyers because, as non-experts, they may not be able to accurately judge” even long after the services are rendered. This results on a reliance on credence and stresses the importance of individual lawyers’ reputations (as well as the firm’s reputation).  “Law firms can help clients by monitoring and screening potentially untrustworthy clients,” the professor says.  Clients will pay extra for a large firm since they know that what Ribstein calls “a cheating firm” pays with its reputation, as well as with lowered fees.   

Although he sees a reason to inject a bit of business into firms’ apparatus, Ribstein is the first to admit that the hierarchal formula won’t work here, as non-experts simply can’t oversee professionals. Neither will high fees for routine matters. He cautions that consumers should never be forced to hire “only those with costly, broad-based…training” when the advice is completely predictable.   

 

With these and other challenges at stake, Ribstein concludes that addressing incentive issues like the need to encourage members to build the firm’s assets, versus just building their own clientele, is a great place to start the restructuring process.  For more on these fascinating and complex opinions, go to: http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=47251                       

                                                                                                  -EM    

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