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Weekly Synopsis (October 20-26, 2012)

October 28, 2012

Another week in the Blogosphere, and many more great posts on the massive and exciting change taking place in the legal industry.  Here are the articles and posts that I found interesting.

Adam Smith, Esq.’s “Growth is Dead: Part 7“:  BigLaw can no longer ignore the emergence of “lower-cost providers”, who in areas like document review, can provide “immensely superior quality”  at 1/3rd of the price.

“As these established companies attempt to define the nature and magnitude of the challenge, they often underestimate it.  Sometimes executives are so focused on their traditional competitors, they don’t even recognize the threat developing from low-cost rivals…Complacency and arrogance produce blind spots that delay a response and leave incumbents vulnerable.”  (Quoting McKinsey (2010) “When companies underestimate low-cost rivals”.)

Sound familiar?  Bruce then discusses the personality traits of lawyers.  Lawyers, as a group, are:

  1. Highly skeptical
  2. Autonomous
  3. Measure high in abstract reasoning
  4. Have high urgency
  5. Measure low in resilience
  6. Are introverts

Not surprisingly, all of these traits serve lawyers well when they are practicing law. These are not the traits, however, that are needed when an industry or company needs to make fundamental shifts to new market forces.  Any managing partner attempting to effectuate change among a group of partners is likely to be met with a great deal of skepticism, arguments why change won’t work, and a preoccupation with other pressing matters, i.e., “not the best way to build long-term consensus.”

Bruce then discusses Peter Drucker’s “five deadly sins” of management:

  1. “Worship of high profit margins and of ‘premium pricing'”:  Which leaves the back door wide open for lower-cost competition.
  2. “Charging ‘what the market will bear'”:  Might as well open the front door, as well.
  3. “Cost-driven pricing”:  Customers do not care about your profit.  Sound pricing strategy requires determining what the market is willing to pay – and what the competition will charge – and design to that price.
  4. “Slaughtering tomorrow’s opportunity for the allure of yesterday”:  Focusing on what worked in the past as opposed to what needs to be done today to succeed.
  5. “Feeding problems and starving opportunities”:  At best, problem-solving is damage containment.  Only opportunities produce results and growth.

Bruce’s takeaway is that four of the five “deadly sins” are “all about price.”  In other words, the market has spoken.  Or, to look at it another way, competitors have emerged and actually are being found by smart clients.  And the result is equal, or superior results, for far less cost.  Even a cursory understanding of Darwin’s principles allows one to deduce what will happen to the outcompeted species…anybody see a Dodo recently?

The Wall Street Journal’s “Law Firm’s Face Fresh Backlash Over Fees“:  You know times are tough when BigLaw is even getting challenged on their “soft costs.”  But while clients were getting nickel-and-dimed, or maybe more accurately, “hundred-and thousanded,” BigLaw were reaping huge profits from soft costs, which became one of the “larger individual areas of revenue” for law firms.  Never mind that this little money grab was unethical:

“Attorney’s aren’t supposed to make a profit from soft costs.  While law firms may pass on ‘reasonable charges,” according to a 1993 opinion by the American Bar Association, ‘the lawyer’s stock in trade is the sale of legal service, not photocopy paper, tuna fish sandwiches, computer time or messenger services.”  

Ah, how quaint.  In 2012, it’s Nobu and limousines.  The author, Jennifer Smith, notes that clients started questioning legal expenses more than a decade ago, a practice that has only gained steam after the “economy tanked.”  Clients should also be wary of demanding and receiving expense concessions, because lawyers are notorious for recouping those “savings” in other ways:

“Some firms are pushing back to try and recapture their expenses.  One tactic is to assign clerical tasks to a paralegal.  These workers, who need not belong to any bar association, can be billed out at around $200 an hour…”  

Trust me, I can almost guarantee this is happening as I see it all the time.

WiredGC’s: “Legal Costs: Here Comes the Sun“:  I think I’m becoming a John Wallbillich groupie. Call me Penn Lane.  Finally a GC who gets it.  In his latest post, John discusses “the genesis and urgency behind legal cost control.”  As he correctly notes, it didn’t just begin with the 2008 Recession.  All the way back in the good ol’ ’90’s:

“CFO’s increasingly wanted forecasts: how you would spend, not just what you would spend in total at the end of the project.  Well before 2000, you would have to show how you knew certain firms were fit for purpose, and demonstrate that their rates were priced fairly as well.  Benchmarking was a CFO (and supply chain) concept long before it entered the GC lexicon.  Indeed, one of the main reasons for the explosive growth of the in-house departments between 1980-2000 was precisely because companies decided to make rather than buy legal services.  Cost and certainty were big selling points GCs used to get authorization and add headcount.”

By bringing the work in-house, companies were able to “take equity partner profits out of the equation.” The new challenge for GCs is to now re-transition some of that  in-house work to the new players emerging in the market.  And listen BigLaw:  “Increasingly, it may not be by law firms, and almost certainly not by law firms structured and operated traditionally”

John ends his post by zooming out:

“Most law firms understand that they aren’t at the center of the corporate legal universe anymore. It took about 200 years for the new view of Nicolaus Copernicus to take hold in astronomy.  Hopefully the legal industry can change just a bit faster than that.”  

I will have to slightly disagree with John on this point.  For most BigLaw firms to avoid the fate of the Dodo, they are going to have to adapt a whole lot faster – and as Adam Smith, Esq. continues to point out – BigLaw is not designed for fast change.

3 Geeks and the Law’s series “The Economics of Law and the Future of Legal KM“:  I have a feeling this series should be here, but I was only able to browse through these posts this week, so am unqualified to summarize them.  Rest assured, I will be reading them next week.

College of Law Practice Management Futures Conference 2012:  The Twittersphere was exploding with a constant stream of informative tweets.  Not happy I was unable to attend. Check out #COLPM.

Whew.  Another full week of great ideas and discourse.  As always, enjoy the rest of your weekend.

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