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June 21, 2007

THOSE COTTON PICKIN’ BUSINESS MODELS AGAIN

In several prior postings, most notably What’s This Garbage About Business Models?, Toward a Brave New Business Model, O Strategy, Where Art Thou?, and One if by Land and Two if by Sea, I’ve written about the competitive pressures bearing on U.S. law firms to cast aside their business models and to develop new ones – in the words of Gary Hamel (whom I’ve quoted a number of times before) to “reconceive existing business models in ways that create new value for customers, rude surprises for competitors, and new wealth for investors.”  From time to time I’ve also quoted from Cisco General Counsel Mark Chandler’s remarks made at the Northwestern School of Law’s 34th Annual Securities Regulation Institute (a link is in the margin under the heading “Articles of Interest”), including his comment that the law firm business model “looks like the last vestige of the medieval guild system to survive into the 21st century.”  Although a number of you may be tired of this clarion call to fix those cotton pickin’ business models again, another voice from the client side of the ledger has been heard from, and I believe his comments are worth repeating here as well.

In “Sun Shines on Select Law Firms” published today at Law.com’s In-House Counsel, Sun Microsystems Inc. General Counsel Michael Dillon has a number of interesting quotes:

The traditional law firm billable-hours model is "disjointed" from business reality, he said. Pressure to bill more hours works at cross-purposes with corporate departments that are "maniacally" trying to cut costs, he said. The race to meet New York associate salary standards "just exacerbates the problem," he said.

"I don't care how bright the associate is, they're not worth what they're paying them, and if I have to absorb that cost, it's not optimal," he said. "I'd rather pay a very seasoned attorney who has more experience."

Where attorneys at large firms used to get work based on their firm's reputation, Dillon said it's easy these days to search the Internet or query colleagues about the experience, manner and background of any attorney.

According to the In-House Counsel article, Sun worked with about 400 different outside law firms 5 years ago.  Sun now has designated 9 firms to handle all its routine work, such as intellectual property advice, sales contracts, licensing and transactions. The article notes that the firms on the list include:

  • San Francisco firms Sedgwick, Detert, Moran & Arnold; Fenwick & West; and Hanson, Bridgett, Marcus, Vlahos & Rudy.
  • National firms Kirkland & Ellis and DLA Piper.
  • Memphis-based Baker, Donelson, Bearman, Caldwell & Berkowitz.
  • Washington, D.C.-based Crowell & Moring and Hogan & Hartson.
  • Denver-based Holme Roberts & Owen.

The article notes as well the company still employs several more firms than those on its "preferred partners" list for specialty work, such as patent prosecution.  Also according to the article, firms not on the list that have represented Sun in major litigation or transactions in the last year included Day Casebeer Madrid & Batchelder; Skadden, Arps, Slate, Meagher & Flom; and Wilson Sonsini Goodrich & Rosati.

Although cost-cutting and organizational motivations played a part in this “paring-down process,” the article notes they apparently weren’t determinative.

Sun's process of selecting its firms was essentially a beauty contest. To prune its patent prosecution firms, for example, the company sent out bid packages outlining its financial and legal needs, and then invited some firms to an online reverse auction where they could anonymously underbid one another to win Sun work. For its "preferred partners" list, the company used bid proposals and interviews.

Cost was not the chief criterion, however, Dillon said. "We don't necessarily take the firms that are the lower price," he said. "[Higher bidders] may have more technical experience that you need."

Yet a willingness to propose creative fee arrangements, such as flat fees, was rewarded, he said. 

"We had some firms who didn't even want to have those discussions" about bids and alternative fees, he said. "I think it's a good litmus test. If they won't, then they're probably the type of firm that we don't need to do business with."

Hmmm.  Some of Dillon’s comments sound eerily similar to Chandler’s, including one where Chandler noted, “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.”

I repeat an admonition I’ve made before: The moat around the legal industry castle that long has existed and has protected it from outside influence and intervention – limited or no access to legal information without the payment of a substantial toll in the form of legal fees billed by the hour - now has a drawbridge across it.  Technology already has improved document production and retention in the legal industry.  It also has made the process of doing legal research faster.  More importantly, technology now enables many to access “the law” who couldn’t before - and they can do so without lawyers. With its ability to change the paradigm surrounding access to and distribution of all types of information, not just legal information, technology likely will fill up the moat with concrete and be an enabler that facilitates “upsetting the apple cart” with respect to legal industry business models.  The legal industry needs to reposition itself within the information value chain in ways that will enable it to compete successfully for the future by being a more valuable player in and contributor to the economic value that can be created by the strategic integration of knowledge.

I closed one of my earlier postings about business models with a quote from William Jennings Bryan who once said, “Destiny is no matter of chance. It is a matter of choice. It is not a thing to be waited for, it is a thing to be achieved.”  Those firms that begin competing for the future today begin the journey toward achieving success tomorrow.  For those firms that wait, no one knows for sure when the time bomb that is their decaying business model in this discontinuous world will explode.

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