Please accept my apology for the delay between postings. Over the past several weeks, I’ve experienced the wedding of the eldest daughter of a very close friend, a death in the family, and the college graduation of a son. I just couldn’t get too excited about writing a blog posting.
The juxtaposition of 4 articles over the past few days finally has snapped me out of my writing lethargy. Although the articles may appear to have little, if anything, in common, I believe they are representative of a simple business truism that is central to the success of any business model but that often is over-looked: It’s the delivered value, stupid; and, more importantly with respect to the business of practicing law, it ain’t the time worked.
Let’s look at some of what the 4 articles had to say. First came the news that Akin Gump Strauss Hauer & Feld had been sued for $4.4 billion by ex-fund managers of the Veras funds. The article includes several interesting statements. The article’s author says:
The suit illustrates the risks law firms face as they try to reap the rewards of representing private investment funds, including hedge funds and private equity funds. Such funds generate high legal bills for firms, but they are apt to strike back hard when they feel lawyers have led them astray. (Underlining added for emphasis).
. . . Law firms are more in the line of fire because they play a much bigger role at investment funds than they do for corporate clients.
The article further reports:
Barbash [Barry Barbash, the head of the funds business at Wilkie Farr & Gallagher] said the hectic nature of the hedge fund business creates many stressful and difficult situations for lawyers. Fund managers often call wanting to know right away if they can make a trade or not, leaving the lawyer feeling responsible for the outcome.
"I feel a lot of times like the closer on the mound," said Barbash.
Next came Baker & McKenzie’s press release announcing it had achieved:
[A] 22% increase in per partner profits (PPP) over the previous fiscal year, taking its PPP above the US$1 million level for the first time. The Firm has raised PPP by 63% since adopting a more focused global Firm Strategy three years ago.
The release further notes the firm’s fiscal year 2007 financial performance is the product of its efforts “to implement a firmwide Strategy that better leverages for our clients the extensive global platform we have been steadily growing over the past six decades” and one of its 5 key performance areas on which its strategy is focused is “better managing our talent to ensure consistently high quality of service globally.”
Then came the announcement that Atlanta-based Ford & Harrison had “tossed out billable hour requirements for first-year associates.” According to the The National Law Journal, “The program aims to close the practical-skills gap of law school education and increase value to clients.”
Finally came the article in The Wall Street Journal (subscription required) that notes hourly rates for top lawyers are crossing $1,000 per hour. The article included the following comment:
Considering a major-league baseball player can make the equivalent of $15,000 per hour, “$1,000 for very seasoned lawyers who can solve complex problems doesn't seem to be inappropriate," says Mike Dillon, the general counsel of Sun Microsystems Inc.
Critical to understanding the It’s the Delivered Value, Stupid . . . It Ain’t the Time Worked truism, and how the 4 articles represent that truism, is coming to the realization:
- It is value delivered to the customer that is key.
- Value delivered is the result of total customer value minus total customer price. Total customer value can consist of such elements as product value, services value, personnel value, and image value. Total customer price can consist of such elements as monetary price, time cost, energy cost, and psychic cost.
- The party that determines whether or not value has been delivered to the customer is not the product manufacturer or seller or the service-provider - it is the customer (or “client” in legal industry parlance) who determines whether or not value has been delivered to it. And that determination may change from customer to customer and from product to product or service to service. I’ve touched on this point before in prior postings. In What’s All This Garbage About Business Models?, I quoted from noted corporate strategist Gary Hammel, who described the key link or “bridge” that exists between 2 - core strategy and customer interface - of what Hammel called the 4 major business model components as being:
“Customer benefits” - the particular bundle of benefits actually offered to the customer; the link between Core Strategy and Customer Interface; refer to a “customer-derived definition of the basic needs and wants that are being satisfied.” (Underlining added for emphasis).
I noted In Is It a Business:
[T]here’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. (Underlining added for emphasis).
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. (Underlining added for emphasis).
Again in What’s All This Garbage About Business Models?, I quoted from an interesting 2004 study of eLawForum (a link to the study is in the margin under “Articles of Interest”), conducted by Harvard Business School Professor Clay Christensen and Scott Anthony, who said:
. . . The growth of specialization means that most corporate legal work does not involve complex problem-solving. With the right experience, specialists can easily recognize patterns and apply familiar tools so that they do not need to “reinvent the wheel.” Pattern recognition dramatically increases efficiency. Hourly rates assume everything requires complex problem-solving.
In other words, customer benefits - or perhaps total customer value - are needs and wants as defined by the customer that are being satisfied. Unless you deliver those customer benefits and do so at a price (monetary or otherwise) that creates a desired net delivered value for the customer, you’re going to have serious business “issues.” Many businesses have elements that have higher and lower areas of risk to them that create different value to their customers - and they are priced accordingly. Without commenting here about the merits or non-merits of the Akin Gump lawsuit itself, lawyers representing hedge funds may be closer to the business “action” and may be more integral to the business-decision making process - as such they well may be providing higher total customer value to the customer at greater risk to the law firm, to compensate for which they charge a higher fee. But, like in other businesses, if the customer believes the total customer value it receives isn’t enough or the total customer price it pays is too much, problems will arise. Or, if you hire brand new employees who require on the job training before they can create anything that contributes to total customer value, but you pay them $160,000 per year while they’re being trained, you can’t expect the customer to pay for that on-the-job training. But, if you can solve complex problems for customers, e.g., you can charge large amounts for that total customer value that aren’t necessarily related to the amount of time spent - as long as you don’t drive the total customer price to a point where the net delivered value is too low in the eyes of the customer.
It is understanding this fundamental relationship between total customer value and total customer price that underlies the Professional Asset Capability Matrix that I’ve mentioned in earlier postings. And, it is recognizing more complex problem-solving and the strategic integration of knowledge as higher delivered value services that are key to the legal industry repositioning itself within the information value chain in ways that will enable it to compete successfully for the future.
Why is it that firms 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 performed at such a level I chose them as my LawBall top 10 financial operating performance firms for 2006 from the 2007 AmLaw 200 in Beauty is in the Eye of the Beholder? I doubt that it’s because their business models simply are based on billing the most hours - I bet it’s because those models are built around creating the highest delivered value for their clients. Are Richard Beattie of Simpson Thacher & Bartlett, Stephen Susman of Susman Godfrey, and Benjamin Civiletti of Venable worth $1,000 per hour or more, their reported hourly rate per the WSJ article? I honestly don’t know - only their clients do for sure.
As previously was the case with the prospective K&L Gates/Hughes & Luce merger, this merger is too close to call from a relative financial health or financial direction pre-merger perspective alone. On the one hand, growth from 2005 to 2006 in revenues, profit, asset turnover (revenue per lawyer), and return on assets (ROA or profit per lawyer) all significantly favored LeBoeuf. On the other hand, return on equity (ROE or profit per partner), leverage, and cost per lawyer growth from 2005 to 2006 all favored Dewey; although it certainly looks like Dewey’s improvement in leverage and ROE largely was the result of a decrease in partners from 110 to 92, as its profit and margin both fell in 2006. LeBoeuf’s 2006 margin was better – 37.00% to 32.56% - than LeBoeuf’s, although both firms’ margin fell (LeBoeuf from 38.86% and Dewey’s from 34.27%). Dewey’s 2006 asset turnover ($820,281) actually slightly was higher than LeBoeuf’s ($797,360), as was Dewey’s ROE ($1,445,652 to $1,428,571 for LeBoeuf). With respect to ROA, which as I’ve said before I believe is a better indicator of a firm’s financial health since it is a good measure of the efficiency with which a business allocates its resources and eliminates the potentially distorting effects of financial leverage on operating results, LeBoeuf’s 2006 ROA ($295,031) was higher than Dewey’s 2006 ROA ($267,063). LeBoeuf’s leverage in 2006 was 4.8421, while Dewey’s was 5.4130. Although LeBoeuf’s costs per lawyer grew at a rate (14.28%) in 2006 nearly double Dewey’s cost per lawyer 2006 growth rate (7.64%), LeBoeuf’s actual 2006 cost per lawyer ($502,329) was lower than Dewey’s ($553,213). Again repeating a comment from prior merger postings, this 1-year snapshot is interesting – but I’d like to see the panoramic view (a 5-year comparison) before I reached any significant conclusions about the relative financial health or direction of the 2 firms pre-merger.
