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.