Minding the Law's Business

TURN! TURN! TURN! (TO EVERYTHING THERE IS A SEASON)

My apologies for the lengthy, unexplained time (nearly 2 months) between postings.  Why the time-gap?  Nothing sinister – first, I got married and simply wanted to enjoy uninterrupted time with my beautiful bride and our family; and, second, when I decided to get back to writing, I saw nothing happening currently that captured my interest within that area of the universe where law and business intersect that’s the singular focus of this blog and about which I haven’t written already, often more than once.  I did have an interesting exchange with a former partner of mine who still practices law, in which he told me of a conversation that he had with someone seeking to engage a law firm for a project involving bank security and who’d approached a firm in The American Lawyer Top 200 about the possible engagement.  It seems that the economics of the engagement according to the firm would be:

•    $1,200/hour for the senior lawyer involved;

•    “Only” $265/hour for first year lawyers if any were involved in the project; however, the lowest rate likely to be billed on the project for lawyers who actually would work on the project if the firm were engaged would be $375/hour for 2nd or 3rd year associates; and

•    $2.00 per page for outgoing faxes ("only" $1.00 if it's a local call), plus $0.15/minute for all long distance telephone charges; $50.00 per hour for word processing ("document preparation" the firm apparently calls it); $50.00 per hour for secretarial overtime, plus a meal allowance charge if the matter requires a secretary to work overtime; Westlaw and Lexis-Nexis research at actual charges incurred, less a 15% discount (a bargain for an item that’s akin to charging the client the direct cost of maintaining a law library); and, photocopying charges.

As outrageous as I find those engagement economics to be from a business perspective, I’ve written a number of times already about the relationship between the cost of the services the potential client seeks to have performed for it by the firm and the value the client expects to be delivered to it by the firm, and I just couldn’t make myself write about it again.

In my initial posting, I established the focus of this blog on the intersection point between law and business when I said,

[L]aw firms are businesses and should be managed and operated as such through the use of the same tools, principles, concepts, and financial operating controls as are any other business . . .

I believe that there is no reason why law firms cannot improve their business performance and become an integral part of the value creation process for their clients through the use of common sense (unfortunately, not a trait found often in great quantities throughout the legal profession), some changes in or additions to law school curricula, and the employment of the same tools, principles, concepts, and financial operating controls as are commonly used by other businesses.  I intend to use this blog as a vehicle to share my thoughts, ideas, insights (to the extent that I have any), and (of course) opinions about the business of practicing law and, hopefully, to stimulate a meaningful dialogue about how law firms actually can improve their performance as businesses and become an integral part of their clients’ value creation process.

For the most part, a review of the 50 some-odd postings I’ve published indicates I’ve adhered to that focus so far.

In prior postings, I also have mentioned my admiration for Warren Buffett.  In 1956, Buffett formed an investment partnership for family and friends.  After reminding partners in a letter in January 1969 that, “Price is what you pay, value is what you get,” in a May 29, 1969 letter to his partners, Buffett announced his retirement and his plan to liquidate the holdings of the Buffett Partnership despite the fact that the partnership over it’s life had achieved compounded annual returns of 29.5% vs. 7.4% for the Dow Jones over the same period.  Said Buffett,

The investing environment I discussed at that time (and on which I have commented in various other letters) has generally become more negative and frustrating as time has passed.  Maybe I am merely suffering from a lack of mental flexibility. . . .

I am not attuned to this market environment, and I don’t want to spoil a decent record by trying to play a game I don’t understand just so I can go out a hero.

Buffett obviously returned to investing later – although he still sits out markets with which he feels he is “not attuned.”

As has been captured in song from Pete Seeger to The Byrds, “Turn! Turn! Turn! To everything there is a season.”  And, with the specialized focus that I’ve chosen for this blog, I guess it’s inevitable that from time to time, like Buffett with markets that change and lead him simply not to invest but rather to sit on the sidelines, I’ll experience periods where I find nothing that generates my enthusiasm for writing within the limits of this blog’s focus. Since I’m not into self-promotion, shilling products for sponsors, or gossip about what’s happening in the legal industry – or since “maybe I am merely suffering from a lack of mental flexibility” - when I find nothing happening currently that relates to a law firm’s management and operation as a business through the use of the same tools, principles, concepts, and financial operating controls as other businesses to which I believe I can contribute an additive insight or opinion and not merely repeat myself, I simply won’t publish a posting; instead, I’ll just sit on the sidelines.  That doesn’t mean that I won’t publish postings on this blog again – it simply means I’m “not attuned to this market environment” and I won’t publish until I find something new within this blog’s focus where I believe I can contribute an insight or opinion.  And, for those periods where I am “silent,” as Buffett in 1969 referred his partners to Bill Ruane who was setting up the Sequoia Fund as a place to invest their proceeds from the Buffett Partnership, I suggest that readers of this blog who don’t already do so read Bill Gratsch’s Blawg’s Blog – to me, the best blog focused on the legal industry.

When I’m not writing, I won’t be doing nothing - I’ll be spending my time and energy on change-driven opportunities to use not only specific industry knowledge but also all knowledge in new ways and with unprecedented speed that have been created by the blurring or elimination of the lines between industries and professions where moat-like limited access to knowledge and information and silo-like divisions of knowledge and information once existed.  I believe the advances in technology and communication speed that underlie these opportunities likely will create vulnerabilities for the legal industry in particular and will increase both the speed and the volume of traffic through the “intersection point between law and business.”

So for now, Happy Holidays and au revoir!

OVERCOMING PARADIGM BLINDNESS – PART 2

In an earlier posting a while back, I mentioned “paradigm blindness,” which typically has been described as being the mode of thinking that:

The way we do it is the best because this is the way we've always done it.

In the same posting, I noted,

Paradigm blindness also has been used to describe conduct in a number of settings, including the attitude of seeing the way you work as being “right” and building defenses to protect it instead of recognizing experimental evidence that should guide the way you work or the attitude of refusing to acknowledge experiences, facts and feelings that cannot be explained by old sets of assumptions.

Why do I come back to paradigm blindness today?  Because several recent articles highlight the problem paradigm blindness presents for the legal industry.  Each article touched in some way on the legal industry’s “blog issues du jour” – the use of the billable hour to render bills to clients, associate billable hour requirements, and starting associate salaries.  Unfortunately, each of these issues is not the problem  - they merely are symptomatic of a much deeper and more pervasive illness that afflicts the legal industry.  The industry has not come to grips with the concept of delivered value.  It is a concept about which I’ve written before (for example, in It’s the Delivered Value, Stupid . . . It Ain’t the Time Worked and in Adding Insult to Injury in the Land of Oz) and probably will continue to do so until either I die or get tired of talking to brick walls (more likely the latter).  Most lawyers not only do not understand how to deliver value to clients, they do not understand how to judge value contributed to their own organization.

The most recent round of articles that punched my buttons started with a recent article in the LegalTimes (subscription required), Washington Firms Assess Price of Staying “Top Tier”, which included the following comments about the spate of increases in starting associates salaries:

Earlier this year, New York’s Simpson Thatcher & Bartlett raised starting salaries for first-year associates to $160,000. In the competition to recruit top talent, the tactic was similar to one used by Kenyan marathon runners: a midrace burst to separate elite competitors from the pack of pretenders. . . .

For firms that did raise, some are feeling tension with clients, who, managing partners say, increasingly demand that their work not be done by a less experienced first-year associate with billing rates now hovering around $300.

“A first-year lawyer is an investment by a law firm,” says the D.C. managing partner of a top-50 AmLaw firm outside Washington. “And now there’s growing push back and resentment from clients. I’ve certainly seen an increase in clients saying we don’t want first- and second-years working on our issues.”

Next came The National Law Journal’s article, Firm Reduces Billable Hours for First-Years, which announced the decision by Dallas-based Strasburger & Price to cut the billable hour requirements for 1st hear lawyers “to allow more time for associate training.”  Then came the article in Wednesday’s edition of The New York Times, When $1,000 an Hour is Not Enough, which included the following comments:

Investment banks have received a lot of attention for their big lump-sum fees and year-end bonuses, but the legal profession has also been cashing in on the frenzy of mergers and acquisitions, at rates traditionally set at hundreds of dollars an hour.

For some firms, billable hours are just the beginning. As the boom rolled on, law firms specializing in mergers and acquisitions increasingly engaged in premium billing, charging fees in excess of their total hourly billings. Think of it as a tip for good work. Whether a client pays a premium depends upon its satisfaction with the result, the size and complexity of the transaction, and the nature and length of the attorney-client relationship. . . .

John C. Coates, a professor at Harvard Law School and former Wachtell, Lipton partner, said that setting legal fees for merger advisory work was more art than science.

“How do you quantify the headache, the scrambling, the ingenuity and the innovation that happen in the course of the deal?” Mr. Coates asked.

Victor Lewkow, a partner at Cleary Gottlieb Steen & Hamilton, suggested that innovative legal approaches could be worth far more than the time it took to think them up. “If one brilliant light bulb went off,” he said, “but it took only an hour, there’s no hourly rate that will reflect that value added.”

Clients may become less receptive, however, to this kind of pitch. As partner profits reach record highs and starting salaries for new associates hit $160,000, general counsels are facing — and increasingly complaining about — higher legal bills from outside advisers. A slowdown could make them even more tightfisted.

“How long will it be before corporate clients say, ‘Enough already’?” said Susan Hackett, senior vice president and general counsel of the Association of Corporate Counsel, an in-house lawyers group. . . .

One firm, though, has moved beyond billable hours to the flat fee preferred by bankers: Wachtell, Lipton. A former Wachtell lawyer described a typical bill as follows: “There’s a paragraph stating something like, ‘For legal services rendered in connection with Transaction X,’ then a dot leader, then a number followed by six zeros.” He said he worked on some deals where Wachtell was paid more than the bankers.

Finally was the online article yesterday morning at The National Law Journal, Stanford Offers Legal Thinking Class for Non-Law Students, which reported a new course offering at Stanford University:

The school has launched a course for non-law school students entitled, "Thinking Like a Lawyer," taught by the law school's dean and 11 other law school faculty members.

The experimental course is designed to give graduate students in business, science and humanities a flavor of legal reasoning and an overview of the basic doctrines of law.

"I hope they come away with something of a feel for the way in which lawyers think through a problem," said Stanford Law School Dean Larry Kramer.

Kudos to Stanford – that’s another silo-like division of information and knowledge that is crumbling.  In this knowledge economy, as more and more businesses (including the legal industry) scramble to re-position themselves along the information value chain, many more information and knowledge silos within and between industries must crumble.  But, more important to the legal industry than teaching others how to think like a lawyer, lawyers need to learn how to think like a businessperson.  Most businesses understand they create value in their own organizations when they deliver value to a customer by satisfying the customer’s needs and wants - as defined by the customer – and do so at a cost (monetary or otherwise) that creates a desired net delivered value for the customer.  For law firms, value delivered to a client is not the time spent multiplied by some pre-determined hourly rate – it is the actual access to specific legal information and knowledge, strategy, negotiation skill, and courtroom skill, provided such access is priced so the cost doesn’t negate the benefit.  My experience has been that most lawyers loathe talking about such matters with clients because it takes lawyers out of their comfort zone.  Such a conversation requires a level of understanding of the client’s business and its goals and objectives and how the client expects the desired legal services to contribute value to its business enterprise by delivering real net benefits from the appropriately priced access to the specific legal information and knowledge, strategy, negotiation skill, and courtroom skill.  It requires talking in advance about what are the expected benefits and what are the expected costs.  Instead, it’s easier for most law firms simply to suffer from paradigm blindness and rely on “keeping track” of their lawyers’ (including those newly-graduated) time, multiplying it by pre-determined rates, sending the bill so-computed to the client, and saying if challenged, “The way we do it is the best because this is the way we've always done it.”

In a similar fashion, my experience has been that most lawyers also loathe talking about value creation within their law firm.  It is difficult to develop an understanding of what “value” really means for the firm, as well as the components that lead to that value; to evaluate and discuss without “puffery” one’s contributions to delivering value to the firm’s clients and to assess honestly one’s strengths and weaknesses, as well as those of others - both lawyers and non-lawyers - when discussing contributions to the firm’s value, particularly as it relates directly to compensation; to understand and evaluate the firm’s organizational behavior - what Noel Tichy and Stratford Sherman described as the technique (the mundane, practical strategy-setting, and decision-making), the political (the power relationship among people), and the cultural (corporate management) in their look at Jack Welch’s makeover of GE entitled Control Your Own Destiny of Someone Else Will; and, to communicate in such a fashion consistently and regularly.  Instead, it’s easier and faster to take hold of simple, easily visible metrics – like billable hours worked and gross billings by responsible lawyer - that don’t require a working understanding of the firm’s value and business enterprise portrayed through its financial operations and when challenged about the efficacy of those simple, visible metrics to say, “The way we do it is the best because this is the way we've always done it.”

Are there firms out there that operate differently?  Probably – as suggested by The New York Times artice - but they’re likely a small majority minority.  I’d bet that you could find some in my LawBall top 10 financial operating performance firms for 2006 from the 2007 AmLaw 200:  Wachtell, Lipton, Rosen & Katz; Wiley Rein; Sullivan & Cromwell; Cahill Gordon & Reindel; Irell & Manella; Cravath, Swaine & Moore; Simpson Thacher & Bartlett; Munger, Tolles & Olson; Gibson, Dunn & Crutcher; and, Quinn Emanuel Urquhrt Oliver & Hedges. 

As I have done before, I leave you with the following quote from Rear Admiral Grace Murray Hopper:

I am now going to make you a gift that will stay with you the rest of your life. For the rest of your life, every time you say “We've always done it that way,” my ghost will appear and haunt you for twenty-four hours.

LAW JOB CRISIS, PART 2

Yesterday’s article in the The Wall Street Journal, “Hard Case:  Job Market Wanes for U.S. Lawyers,” (subscription required), which was the subject of my prior posting, has stimulated a lot of writing, if not thought.  One of the most thoughtful, and best written, pieces is by Bill Gratsch at Blawg's Blog entitled "Lawyer Starting Salaries:  Beyond Big Law."  I heartily recommend Bill's posting.

Also, in one of those ironic twists of timing, 2 articles were published at Law.com this morning that touch on salaries and law school debt.  The first, “In Salary Twist, Firm Pays More – and Less,” discusses Duval & Stachenfeld, a small, New York-based firm that starts its 1st year lawyers at $60,000, but for 3rd year lawyers on up moves to match the top paying firms.  The second, “Law School Loans About to Be Lightened for Some,” discusses the College Cost Reduction and Access Act of 2007, which according to the article was passed by Congress on September 7 and aims “to help law students and other graduates with high debt through an income-based loan-repayment plan.”

SUBPRIME CRISIS PALES IN COMPARISON TO THE . . . LAW JOB CRISIS!

The Wall Street Journal delivered the sad news today to the Henny Pennies, Duckey Daddles, Goosey Loosies, and Turkey Lurkies that reside in what I affectionately call “Legalritaville.”  According to its article, “Hard Case:  Job Market Wanes for U.S. Lawyers,” (subscription required), the sky is falling as a result of increasing supply, decreasing demand, and the negative effect of leverage in the form of student loans:  “Graduates who don’t score at the top of their class are struggling to find well-paying jobs to make payments on law-school debts that can exceed $100,000.00.”   Among other things, the article noted:

Many students “simply cannot earn enough income after graduation to support the debt they incur,” wrote Richard Matasar, dean of New York Law School, in 2005, concluding that, “We may be reaching the end of a golden era for law schools.” . . .

Now, debate is intensifying among law-school academics over the integrity of law schools’ marketing campaigns.

Too add insult to injury, “For graduates of elite law schools, prospects have never been better.  Big law firms this year boosted their starting salaries to as high as $160,000.”  Wow – as I’ve noted before, a small number of law school graduates who when they get out of school can deliver little or no value to clients are getting paid as much as $160,000 for their on-the-job training (with clients footing the bill in most cases); while according to the WSJ article, “Yet economic data suggest that prospects have grown bleaker for all but the top students . . .”

How can one fix a crisis of this proportion – one that with a cursory view appears to involve haves and have-nots and questions of marketing integrity and that one day might rival the “subprime mortgage crisis” that appears to posses similar characteristics and might push the latter off the front pages in the minds of lawyers and law students?  Well, the legal industry could turn to Senators Chris Dodd, Dick Durbin, and Charles Schumer for a government bailout since the senators are lawyers and are at the front of the sound-bite posse proposing the use of the public treasury (directly and indirectly) to solve the subprime crisis and in a similar fashion ask them to pursue legislation that would guarantee all law school graduates the job of their choice – as long as the legislation is sought during an election year.  Or, perhaps the industry would be better served to pursue 2 other avenues by developing:

• An education that better prepares law school graduates to contribute to value delivery to a client from day 1.

• A new perspective on finding young legal talent by emulating Billy Beane - the general manager of the Oakland A’s who developed a new perspective on finding baseball talent and was the focus of Moneyball – The Art of Winning an Unfair Game, the great management and sports book by Michael Lewis – by looking for and exploiting market inefficiencies.

My law school education prepared me to “think like a lawyer” and to do legal research – and not much else.  In no way did it prepare me actually to be a lawyer, in the sense of what the demands of the job required.   And it certainly didn’t prepare me to be a contributor to the delivery of value to a client.  That took a lot of “on-the-job” training.  Although it’s been 31 years since I graduated from law school, I believe little, if anything, has changed in that regard.  Some 15 years after I graduated from law school, I went back to school and earned an M.B.A.; so, I’ve had the benefit of experiencing the “case” teaching method employed by both law and business schools.  For my money (and believe me, a lot was spent on both degrees!), the M.B.A. business case method was far superior to that of the law school case method. Why?  Because the M.B.A. business case method was more “real-world” oriented in its approach.  Issues to be addressed (and teaching points to be made) generally were presented in the context of complete systems rather than just as the dissected part under analysis.  Study groups were real teaching tools where teams were required to handle (and teams were graded on) on-going multiple projects simultaneously – which required not only division of labor within projects for a team but also division of projects within a team – and were not simply the “outlining” tool of The Paper Chase.  Finally, and it should come as a surprise to no one, law school graduates generally were – and are - woefully uneducated in the business matters around which most legal issues swirl (but it’s been my experience this deficiency has not prevented any lawyer from aggressively advocating a particular business point on behalf of a client, even to the detriment or embarrassment of the client or the lawyer).  Unless law schools modify their curricula as well as their teaching methods to give law students more real world skills that they readily can use upon graduation, only “Big Law” (a term used by the WSJ’s Law Blog and others typically to refer to the firms in the The American Lawyers’ AmLaw 200) will be able to afford the OJT necessary to make “real” lawyers out of law school graduates (although it may become more costly to the firms if clients increasingly refuse to utilize or pay for young lawyers to work on their matters); and, if “Big Law” continues its long-held recruiting practices, those graduates chosen will come solely from – to employ terms used by today’s WSJ article - the “top of their class” at the “elite law schools.”  This can do nothing but contribute to the increasing pressure that is being brought to bear on legal industry business models, about which I’ve written several times in the past (e.g., Those Cotton Pickin’ Business Models Again and Overcoming Paradigm Blindness).  Which, of course, now leads me to Billy Beane and Moneyball.

I first introduced Moneyball into my blog writings months ago in a posting when I said:

Sometimes it helps to bring a different perspective to something in order to understand it better and to benefit from the mistakes of those who don’t.  In Moneyball, Michael Lewis wrote about a different perspective that has been brought to baseball.  Lewis said that he began his writing with a simple observation:  “Some baseball executives seemed to be much better than others at getting wins out of dollars.” When he finished the book (one about baseball and business that I highly recommend), he had captured how the Oakland A’s in a manner more akin to exploiting inefficiencies in financial markets had set about looking for inefficiencies in baseball and, by using a form of systematic scientific investigation to separate data from perception that was based on long-held individual images and beliefs, developed both a different way to value baseball talent and different metrics or key performance indicators for baseball.  These new metrics took advantage of what behavioral finance scholars have noted in the cognitive psychology part of their discipline – people make errors in the way they think and make decisions.  The A’s found that, just like financial investors, baseball talent investors generalized wildly from their own experience playing the game, were overly influenced by the most recent performance by a player, and were biased toward what they’d seen (or thought they’d seen) with their own eyes.

In some ways, law firm hiring reminds me of the major league baseball hiring practices scoffed at by Beane.  Major league baseball scouts typically drooled over, and paid outrageous bonuses to, high school players (especially pitchers) because of their “potential” and ignored college players, despite the fact that (according to Moneyball) high school pitchers were twice less likely than college pitchers and 4 times less likely than college position players to make it to the majors and the fact that much more information about college players existed.  As Lewis noted, “[H]igh school pitchers were so far away from being who they would be when they grew up that you could imagine them becoming almost anything.”  Or, with respect to position players, scouts tended not to correlate the fact that the most critical number in baseball is 3 – as in 3 outs, after which a team cannot score runs in an inning – and that on-base-percentage is a better indicator than batting average with respect to a player’s likely ability to decrease the likelihood of making the 3rd out.  Beane brought a different perspective to baseball that effectively looked for baseball market inefficiencies.  The issue in law firm hiring isn’t so much where law firms look for young lawyers; it’s more about paraphrasing Lewis’ simple observation and making it a question:  “Is there another way that law firms can get better young lawyers that contribute to value delivery to clients quicker out of the dollars the firms spend?”  When looked at that way, other questions follow, like:  Are there schools that aren’t necessarily the “elite” schools that better prepare their students to be practicing lawyers that contribute to value delivery to clients quicker?  Are there students that aren’t necessarily in the top (fill in the number) % of their class that would be practicing lawyers that contribute to value delivery to clients quicker?  Would it be better for other firms to provide the OJT to the law school graduates and then for your firm to hire them as laterals?

Although developing an education that better prepares law school graduates to contribute to value delivery to clients quicker and/or emulating Billy Beane and his approach of bringing a new perspective to finding talent and to looking for and exploiting market efficiencies might not cure what today’s WSJ article described as the “supply-and-demand imbalance that’s suppressing pay and job growth,” it well might alter the distribution of jobs among recent law school graduates and might curtail the outrageous escalation in beginning lawyer salaries fomented generally by large firms (typically those in AmLaw 200) competing to hire students whose currently demonstrable talent only is that they’re at the “top of their class” at the “elite” law schools.

ADDING INSULT TO INJURY IN THE LAND OF OZ

Just when I thought I’d heard about or had seen every Land of Oz-ian business practice employed by lawyers, I’m proven wrong again.  It seems, as one moves along the lawyers’ yellow-brick road toward Emerald City, lawyers now bill their clients for the time the lawyers spend billing the clients.  According to The Devil’s in the Billing Details, (subscription required) published on line by the National Law Journal, with respect to today’s detailed bills demanded by clients, “Although lawyers in private grumble and knowingly smile about the hassle, most acknowledge that clients are justified in demanding specifics -- consumers expect to know what they're paying for”; but that acknowledgment begrudgingly given also comes with a cost since, as the article continues - “One result: Lawyers end up billing for time spent on billing."   I’ve scratched my brain (not as hard to do these days since there is less hair and far less brain cells than there used to be), and I can’t come up with a single retailer, vendor, supplier, or service provider that sends me a bill for the time they spent preparing and sending me a bill.  Nor have I heard of any, other than law firms, that would.

I was so surprised by this lawyer business practice, I mentioned it to a lawyer-friend of mine.  Although he has modeled his business practices to mirror more closely those of his clients and other business - e.g., he does not pass along separately his overhead costs on top of his fees as he views overhead as his cost of doing business and believes to pass it along will reduce the net value he delivers his clients - he added he thinks many lawyers simply “don’t get it.”  To make his point, he told me a few “stories” about law firm business practices he’d heard recently that are foreign to other business industries and work more to destroy, rather than to deliver, value to law firm clients:

• A firm sent it’s client a bill for $18,000 just for copying internal file documents.

• A firm sent a client a bill for the time spent to review the standard jury instructions by a senior litigator (2.5 hours at a hefty hourly rate) in a case being handled by the firm in the firm’s home jurisdiction.

• A firm agreed to bill no more than a set, fixed fee to handle a matter; but then it was so pleased with the result it got, on it’s own and with no provision in the client agreement permitting it and no discussion with the client about it the firm billed the client not only for the agreed fixed fee but also for a “premium” the law firm felt it “richly” deserved.

I guess nothing should surprise me about legal industry business practices when it comes to billing, especially when you consider some of the other billing or reporting practices identified by a few outsiders who have studied the industry:

• William G. Ross of the Cumberland School of Law, who based on the results of his recently completed 2006 – 2007 survey of attorney billing practices, noted:

• Approximately two-thirds of the respondents to the 2006-07 survey stated they had specific knowledge of bill padding.

• 54.6 percent of the survey respondents admitted the prospect of billing additional time had at least sometimes influenced their decision to do work that they otherwise would not have performed.

• 34.7 percent of the respondents engaged in “double billing”, while only 51.8 of the respondents thought the practice was unethical.

• Harvard Business School Professor Clay Christensen and Scott Anthony, in an interesting 2004  study of eLawForum (a link to the study is in the margin under “Articles of Interest”), summarized:

• . . . But because corporations accept the sole-source market, law firms play a cat-and-mouse game with the billable hour and cost-plus pricing, hoarding productivity gains and saddling clients with both cost and outcome risks.

• With one hand, law firms give discounts on hourly rates to their largest clients. With the other hand, they take back what they have given by raising the base hourly rates to which the discounts are applied and increase the number of hours they bill to do the same work. Law firms are masters of the cat-and-mouse game of the billable hour. As long as they respect the procedures mandated by the law department, law firms can circumvent any attempts at cost reduction by controlling the two key variables—the base rate and the number of hours spent.

• Bill Henderson, a law professor at Indiana University-Bloomington who studies law firms, suspects - according to The Wall Street Journal’s Law Blog posting “Are Law Firms Gaming Their Equity Partners” on May 2, 2007- “many law-firm management committees may be minimizing the reported number of equity partners for the purpose of raising profits per partner in the Am Law 100. He feels that at some firms, the inner circles don’t share the actual (higher) number of equity partners with the rest of the firm’s partnership.”

If you put these stories together, you get an image of the Wizard of Oz standing behind the curtain concocting a detailed bill of professional services rendered and expenses incurred that likely describes the tasks done, the person(s) who did them, the time “spent” doing them, and a rate or rates for the work.  Apparently, these “detailed” bills also may include time “not spent,” tasks that weren’t necessary, discounts given with one hand and taken away with the other, time spent doing tasks not only for you but also for another client or clients (“cloned hours,” I guess), and reimbursement for some overhead costs.  And, just to add insult to injury, some firms apparently now expect clients to pay for the privilege of having this “detailed statement” prepared for and sent to them.  No wonder there is, as Mark Chandler - Cisco’s General Counsel - said at Northwestern School Law’s 34th Annual Securities Law Institute,

[A] fundamental misalignment at work here. Law firms cannot afford to own the business risks of their clients, have a lot of employees to pay and also have to allocate the limited resources of extraordinary star partners. On the other hand, we clients want access to information and counseling and want to pay for value received. Put most bluntly, the most fundamental misalignment of interests is between clients who are driven to manage expenses, and law firms which are compensated by the hour.  (Underlining added for emphasis).

Do firms like those I chose in my LawBall top 10 financial operating performance firms for 2006 from the 2007 AmLaw 200 in Beauty is in the Eye of the Beholder - like Wachtell, Lipton, Rosen & Katz; Wiley Rein; Sullivan & Cromwell; Cahill Gordon & Reindel; Irell & Manella; Cravath, Swaine & Moore; Simpson Thacher & Bartlett; Munger, Tolles & Olson; Gibson, Dunn & Crutcher; and, Quinn Emanuel Urquhrt Oliver & Hedges - engage in such business practices?  I honestly don’t know; but, I do believe those firms’ business models likely are built around creating the highest delivered value for their clients - and so probably are some others.  And, if more lions, tin men, and scarecrows join the likes of Mark Chandler, Mike Dillon - the general counsel of Sun Microsystems Inc. - and others on the client journey down the yellow brick road  and regularly insist on the highest delivered value from their law firms and say, “Pay no attention to that man behind the curtain,” then some of these silly legal industry business practices will have to cease.