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February 01, 2007

IS IT A BUSINESS?!

Actually, I didn’t think that, in 2007, I’d feel the need to address the issue of whether the practice of law is a business. Not when the gross revenues for 2005 for the 200 largest (by revenue) law firms in the U.S. exceeded $65 billion, in the aggregate, according to the 2006 annual survey conducted by The American Lawyer. Or when, according to that same survey, each of the top (again by gross revenue) 8 law firms reached more than $1 billion in gross revenue, one of whom would’ve ranked #927 on the Fortune 1000 based on its gross revenue – ahead of Kinder Morgan, ExpressJet Holdings, T. Rowe Price, Airtran Holdings, and Dun & Bradstreet, to name a few. I honestly thought that the legal industry had progressed beyond the days when lawyers huffed, puffed, howled, and bayed at the moon that they were “not a business; we’re a profession” or when the managing partner of one office in a national, multi-office law firm told a friend of mine that, “[W]e're not in the business of making money, we're in the business of practicing law." But, some of the post-mortem comments about the failed merger between Dewey Ballantine and Orrick, Herrington & Sutcliffe that I’ve come across have led me to change my mind. For example, in a January 22, 2007 posting on The Wall Street Journal’s Law Blog, Nathan Koppel noted:

Finally, the WSJ today looks at the contrasting leadership styles at the two firms. Dewey is old school, led by chairman Morton Pierce, an attorney first and manager second. Last year, he billed 3,300 hours; in his “spare” time he managed the firm. “Management is not my passion,” he admits. Traditionally, firms have been headed by practicing lawyers. In part, this was a nod to the idea that the law is a profession, not a business. (Emphasis added.)
In a companion article in the WSJ on the same day, Koppel also wrote:
At New York's Cravath, Swaine & Moore LLP, a manager's credibility depends on "your credibility as a practitioner," says firm head Evan Chesler, who spends three-fourths of his time on legal work.

Mr. Chesler says Cravath lawyers believe that the law is a profession – not merely (emphasis added) a business.

Although the highlighted statements were made in the context of law firm management issues, I’m not going to launch into a discussion of the issue of full time managers vs. practicing lawyer/managers in this posting. Instead, I’m going to save that for a future posting after more of the groundwork has been laid for understanding the practice of law as a business.

Let’s take a simple look at this – how are “business” and “profession” typically defined? Does being engaged in a profession mean that one is not engaged in business? In it’s definition of “business,” the Merriam-Webster Online Dictionary includes the following: “a usually commercial or mercantile activity engaged in as a means of livelihood;” “a commercial or sometimes an industrial enterprise” and “dealings or transactions especially of an economic nature.” It includes in its definition of “profession” “a calling requiring specialized knowledge and often long and intensive academic preparation”; “a principal calling, vocation, or employment”; and, “the whole body of persons engaged in a calling.” Taking it a step further, Merriam-Webster’s definition of “calling” lists “the vocation or profession in which one customarily engages”; and, it includes “the work in which a person is regularly employed” in its definition of vocation. Finally, Merriam-Webster lists in its definition of work, “the labor, task, or duty that is one's accustomed means of livelihood.” It looks to me like a profession is a business, but not necessarily vice-versa.

Hmmm. It also seems to me that a common sense conclusion to be drawn from these definitions is that by providing legal advice for a fee one is engaged in a business, albeit one that requires “specialized knowledge and often long and intense academic preparation.” According to Wikipedia, the same can be said for librarianship, accounting, teaching, architecture, medicine, finance, the military, the clergy, nursing, those who work or perform research in the various sciences, or engineering. Wikipedia also notes:

Sociologists have been known to define professionalism as self-defined power elitism or as organized exclusivity along guild lines, much in the sense that George Bernard Shaw characterised all professions as "conspiracies against the laity". Sociological definitions of professionalism involving checklists of perceived or claimed characteristics (altruism, self-governance, esoteric knowledge, special skills, ethical behavior, etc.) became less fashionable in the late 20th century.

One final, simple test for whether the practice of law is a business – just ask a lawyer what he or she does for a living.

Why is it, then, that some lawyers insist on distinguishing between “business” and “profession” and insist that the practice of law is the latter and not the former (or at least primarily is the latter and not merely the former)? Perhaps we should take heed from the “teachings” of Warren Buffett. In The Tao of Warren Buffett (described by the book jacket as being a collection of pithy and inspiring sayings from America’s favorite businessman that reveal his secrets of success), when speaking of Wall Street Mary Buffett and David Clark (borrowing in part, it would seem, from Shaw’s The Doctor’s Dilemma) write:

Every profession is ultimately a conspiracy against the laity. Only when something is made difficult to understand is there a need for experts, who can charge high fees for having figured it all out. The greater the complexity, the greater the need for an expert to help guide you through the complexity. Wall Street is in the business of selling its expertise in picking stocks for you to invest in, and because of this brokers have a vested interest in presenting the investment game as being so complicated that it is beyond understanding for anyone but the most savvy of pros.
I remember seeing this storyline in a movie on television – it’s called “The Wizard of Oz.” When the curtain’s pulled back, there’s just some guy sitting on his stool trying to make you think he’s all powerful. In the case of lawyers, maybe the “Wizard,” by trying to distinguish between the practice of law as a profession as opposed to a business, just is trying to make us believe that the practice of law is something mystical or magical that is beyond comprehension by us laity in Oz and beyond, while at the same time obfuscating the fact that there’s a misalignment between what lawyers want to sell and how they want to sell it and what the buying public wants to buy or how they want to buy it. Cisco General Counsel Mark Chandler described this misalignment well when, in his recent speech at Northwestern School of Law’s 34th Annual Securities Regulation Institute, he said:
From the law firm think perspective, “sales” too often means a one to one relationship with a lawyer who bills by the hour. As a client, I can tell you what I want to buy is access to information, strategy, and negotiation, and, in the case of litigation, to courtroom skill as well.

There’s 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.

Chandler further noted that the legal industry business model is under stress and said:

But if the economic system of the firm is frustrating to associates and even some partners, I can tell you that from the standpoint of a metric driven general counsel, it is more than incomprehensible. It looks like the last vestige of the medieval guild system to survive into the 21st century. (Emphasis added.)

The issue really shouldn’t be whether practicing law is a business or not; clearly, under any common-sense definition, it’s a business. I long have believed that the businesses that deliver the highest value to their customers and create the greatest value for their stakeholders are those businesses whose business model and execution successfully integrate and manage three key elements: strategy; capital; and, operations. As a business, the practice of law should be no different. The issues, then, should be how best to manage the business of practicing law and how to fix a business model that clearly is under stress, as noted by Chandler; and, that’s the direction in which my future postings will go.

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