Happy New Year.  I’m back.

I’ve decided 2010 is the year that I admit my Law Firm 2.0 thesis is wrong.  I blew it.  BigLaw is alive and well – perfectly efficient and constructed – and all of my ramblings were just that.

Yeah…  right.  It’s not April 1.

But I AM pretty pissed off at people not paying their lawyers.  Even if their lawyers are inefficient, frustrating and sometimes comical.  (But still more expensive than hiring Dane Cook or some other C+ list comic to perform at your kid’s Bar Mitzvah).

Why am I mad?  Aren’t I the guy who is constantly picking at the big firms for their business model issues and imploring them to reduce client costs? 

Yes.

But the people refusing to pay their lawyers and / or are always demanding discounts are not helping the situation.  They are only making it worse for themselves and the rest of us.  Here’s the scoop:

I’m hearing from more and more lawyers (and “proud” clients) that their clients are expecting discounts on every bill their lawyers present them.  It ranges from hard and fast rules (e.g.,we’ll pay 80% of your bill and 0-100% of the remainder depending on performance or if we feel like it) to haggling on each individual bill.

And what do the lawyers do?  Well the first step is to protest, but normally, the firm bends and gives into to some form of discount.  (a really interesting blog quoting internal Simpson Thatcher documents about client discounting is a must read)

At the end of the year, the firms figure out their revenue and profit margin and realize that they didn’t make as much as they would like, so what do they do?  They raise their hourly rate.  If they are going to provide discounts, they want a larger base to discount from. 

The outcome of this is that now everyone is paying higher hourly rates and we are all worse off.  In fact, those of us who pay our bills are subsidizing those who don’t during the year. 

Lawyers used to never discount, but accounting firms have ever since I’ve been working with them.  Accounting hourly rates were always known to be exorbitant, but the game was that they’d come and cut you a “good guy” discount, sometimes as much as 50%.  So this game is nothing new.  I fear this is where BigLaw is going. 

Now, I’m not arguing that you should NEVER ask for a discount.  There are plenty of instances where the firm deserves to give back some money due to a host of issues.  I’m just peeved at those who make their Law Firm 2.0 thesis one of simply not paying their bills.  If you have that much issue with your outside counsel’s billing rate, address the situation in a transparent manner or hire new lawyers. 

Because if you don’t, you are only incenting the firms to create a billing eco-system that is even more inscrutable and opaque.  This is ultimately worse for all of us, unless we all collude and adopt the same method of payment.  Which we won’t.  And besides, it’s stupid.

Law Firm 2.0 depends on the clients too.  We must do our part.  Short cuts like this aren’t Law Firm 2.0, rather short sighted window dressing.  Work with your partners to get them more efficient and show them the way if the can’t themselves.

And if not, find a new firm.  There are plenty out there that are starting to get religion.

Welcome to 2010.

Wow.  On September 26th, 60,746 people took the LSAT (the law school entrance exam).  This is the largest single administration in the history of the exam.

Are people not aware what is going on in the legal industry?  These folks are going to be saddled with six-figure debt and then attempt to enter an industry that is shrinking faster than any that I can think of.

Folks, seriously, go get your CS degree.  Or go work at a big-box retailer.  Or be a ski bum.  You at least won’t have the debt.

For a full report, check out Most Strongly Supportive’s post. 

Editors of the ABA Journal today announced they have selected Mendelson’s Musings as one of the top 100 best websites by lawyers, for lawyers.

That’s pretty cool, especially since I don’t focus all of my efforts on the legal profession.  But to quote them:

“Mendelson’s Musings drew our admiration this year when Boulder, Colo., lawyer/venture capitalist Jason Mendelson tackled a weighty project: Law Firm 2.0. Over a 10-month period, Mendelson discussed frustrations with start-up lawyers, re-architecting law firms and what clients need to do to get law firms to implement change.”

Now comes the fun part, as I can be voted best in category.  If you like to vote for me, please go here. 

Thanks to all of you who support my efforts here.

Adam Smith may have written the Wealth of Nations and been a seminal economist underpinning our capitalist thinking, but evidently his name-saked website about law firms doesn’t understand crap about law firm economics. 

Yesterday, The Wall Street Journal printed an Op-Ed about The End of Big Law.  In short, the author argues that we’ve seen the end of the big law firm as we know it.  It’s a must read for anyone interested in the subject.  Any reader of this blog knows that I’ve been predicting this for quite some time as part of my Law Firm 2.0 series. 

Today, however, I read one of the worst rebuttals I’ve ever read.  Adam Smith, Esq. is a website that purports to be experts on the economics of Law Firms.  According to their site, they provide consulting services to Big Law firms, so clearly there is no bias there, right? (sarcasm intended).  You can probably guess that they argue the the End of Big Law is a myth. 

The "rebuttal" (in quotes, because it really doesn’t deserve the description) is that Big Law is just like any other industry hit by the recession.  What they are missing are the massive changes that have taken place in the past decade in the Big Law ecosystem.  I won’t go into detail (if you want detail, read my Law Firm 2.0 series), but how can supposed experts on law firm economics not see that these changes are only being hastened by the recession, not caused by it?  The changes started a long, long time ago.  The recession is just putting the nails in the coffin. 

Secondly, any credibility the author may have is completely destroyed in my mind by two ridiculous assertions:

1. "I have yet to meet a managing partner not exquisitely attuned to the sentiments of their partners and the perceptions of their clients.” You clearly don’t get out much then.  This is absurd.  If this statement was true, one would not see the massive amount of partner transfers between firms and pissed off clients.  I am confident when I say that the majority of clients think exactly the opposite and disagree that law firms are "managing their firms as smartly as they are" (quoted from a previous Adam Smith blog); and

2. "Last time I checked, we were not capital-intensive nor do we have but the most trivial base of fixed assets." This is also laughable.  First, I find it enlightening that the author uses the word "we" when referring to Big Law.  Clearly this is another tip of the cap to bias.  Secondly, law firms are notorious for getting in over their heads with fixed assets.  See: Brobeck and / or my prior posting on this.  And this doesn’t include the multiple of dozens of conversations I’ve had with AmLaw 50 partners agreeing with me that fixed costs are out of control. 

This blog is simply reinforcing what’s broken and wrong in the legal environment.   Me, I’m happy to see articles like this, as it emboldens me as a venture capitalist to exploit and profit from the inefficiencies of the market. 

Lastly, the Adam Smith post accuses the WSJ article of being  "a truly impressive exercise in the abject failure of critical thinking" and likens it to a "tabloid."  I’d call this a case of the pot calling the kettle black, but in this case there is no kettle. 

Back in January, we invested in a company called FirstDocs.  Essentially, it was an investment in the Law Firm 2.0 thesis that I’ve been blogging about. 

I’m pleased to announce that they have renamed, re-branded and re-other things and are now Brightleaf.

Check out their new website and not only will you (hopefully) marvel at the new pretty graphics, but more importantly get a very clear idea of what they are developing just ahead of their public launch, which will be in the next month or so.

I’m really happy with the progress that Dan, Luke, Tom, Muthu and Anil have made and can’t wait until they are live and in public to share with those of you interested. 

Nice job, gents. 

When is a layoff not a layoff?  Simple.  When your firm basically says "you suck – find another career."  But we don’t do layoffs. 

Sounds crazy, but this is exactly what Wilmer Cutler Pickering Hale and Dorr is doing.  But don’t call it layoffs.  They’ve, instead, decided that they have a material amount of folks on payroll who don’t meet their standards.  Maybe they should tell their recruiting department to find another career, as well. 

From Jeff Jeffrey of The Blog of Legal Times:

William Perlstein, co-managing partner of the firm, tells the BLT that some associates and counsel have been told that they won’t have jobs at the firm after this coming fall. Perlstein acknowledges that at least some of the cuts are tied to the economic downturn, though he stresses that the firm isn’t having layoffs.

“There is certainly an economic component in situations where you have someone who is doing OK and who would otherwise be kept. But with less work, and if they’re not making the progress they should, they are being told they should start looking for another position,” Perlstein says. “Nobody is being handed a check and told that they have to leave tomorrow. They’re being told they have a number of months to find other work.”

Perlstein says that the reductions for senior associates and counsel come as a result of a new career advancement program that the firm implemented late last year. Under the new program, associates and counsel are either promoted within specified time frames, or told to “pursue other careers” if they aren’t likely to be recommended for advancement. With promotions scheduled for later this year, Perlstein says that for the first time, the firm is issuing advanced warnings to those unlikely to make the cut.

“This isn’t anything formal. It’s is more of a heads up,” Perlstein says.

As I’ve written before about layoffs, different firms take different approaches.  Some are straight forward and honest about their layoffs, while others try to hide them in stealth.  This strategy by Wilmer, however, is new to me.  Wow. 

While at the NVCA meeting, I had a good discussion with a general counsel of a venture capital firm (name unreleased) who posited that cultures at law firms are dead / dying.

His theory was that 10 years ago, one could hire a law firm not only based on skill, but also culture.  Some firms where aggressive, some more laid back, some more nerdy technicians, etc.  In short, you could find good lawyers with cultures that either were similar to yours, or were needed for a particular matter.

Today, however, his feeling was that law firms have become homogenous.  The last ten years have seen legal fees and legal salaries grow exponentially.  With this, we’ve seen more transition and firm switching with lawyers than we’ve ever seen.  Because of this, firm DNA has been diluted.  Consider it the free agency era in law firms.

Furthermore, the layoffs that are occurring are only speeding up this process.

It’s an interesting theory and one that sounds correct.  I’ve certainly noticed over the years that the unique firm cultures that existed a while ago are disappearing.  Yes, there are still cultures at firms and some of the "old guard" still reflect the attitudes 10 years ago. That being said, I think he has a point.  What do you think?

After the initial explosion of attention generated from my first post about 10 months ago where I took many startup lawyers to task on fees and over lawyering, there has been solid, but declining media attention on my follow up series Law Firm 2.0.

Ironically, the first post was only meant to be a wake-up call, whereas the follow-up articles were the “meat” of the argument. Of course, controversy sells and I am media-experienced enough to know that the original post would probably take most of the headlines.

I’ve spent quite a bit of time thinking about these issues – years in fact. The original rant (as some termed it) was not an emotional reaction, rather something that has been in my head for a long time.

In case you missed it, here were the major posts in the series (the whole series is here):

1. Why Startup Lawyers Frustrate Me – the post that started the series, including the quick follow up to clarify some points and poke fun at some whiny lawyers;
2. Why can’t financings be easier and cheaper? – A look into making financing transactions more efficient;
3. Let’s change billing practices before it is too late – Exploring alternative billing practices and ramifications for keeping the status quo;
4. Re-architecting the Law Firm – Specific recommendations for redesigning the business plans of law firms with specific topics:
   1. Associate Retention and Hiring;
   2. Cost Structures;
   3. Compensation; and
   4. Outsourcing;
5. Lawyer Bill of Rights – What Clients need to do in order to help law firms change;
6. Lawyer Layoffs – What It Means To You; and
7. What might the future of law firms look like? – Some guesses for the future.

So what’s become of all of this? Well, I’ve met a lot of progressive lawyers and do believe that there are many out there who realize the issues and are working hard to change things. Whether or not they have the influence to do so within their large corporate structures is another issue. I’ve also gotten to meet many smaller firms that have created new business models. It will be exciting to watch these firms evolve.

I’ve also been fortunate to garner a ton of comments on specific posts. To me, this is the greatest satisfaction and greatest strength of the series. I think the comments are in many case more persuasive and valuable than my original thoughts. I’d highly encourage fans of the series to go back and read your comments. They really are great.

Furthermore, I’ve been incredibly lucky to meet entrepreneurs who not only share my frustrations, but are creating companies to service Law Firm 2.0. These technologies are incredibly exciting and I hope to see them integrated into the practice soon. Our investment in FirstDocs is representative of technologies that we believe Law Firm 2.0 will use.

And with that, you have Law Firm 2.0. Actually in review, it’s really “Law Firm 1.8” as it needs some work, but I figured after “body slamming” my former colleagues, I owed them more than just criticism, but some real ideas. Hopefully some change will come of it, because if the amount of email that I’ve gotten from entrepreneurs is any indication, there are a lot of negative feelings out there. And it’s not realistic for the clients to force change. They may pay the bills, but it’s too hard for them to organize and put any real pressure on the firms to change. Rather at some point, they’ll just pay someone else and quietly walk away. This I am sure of.

Let’s keep the discussion going. For now, I’m done. I invite any name brand firm that is serious on making real changes to contact me if they’d like to discuss. Let’s see how creative, inventive and full of entrepreneurial spirit these firms can be along the lines of the clients they service.

(P.S. – I’d like to thank some “big company lawyers” who called and emailed with suggestions of how to make things better. There are clearly some folks with their hearts in the right place; it’s just that steering the massive ship into the waters of change will take some very strong captaining. Of course, none of them wanted to go directly on the record, but I thank you folks for all of your encouragement and help with this series).

Today, Wilson Sonsini Goodrich & Rosati announced the release of a new client tool:  The Venture Financing Term Sheet Generator.

I’ve been using beta versions and it’s cool what they’ve come up with.  And to note, their own attorneys are using the tool.  Per their statement:

Our attorneys use a more extensive version of the tool to generate initial drafts of documents for Series A preferred stock financings, including Certificates of Incorporation, Preferred Stock Purchase Agreements, Investor Rights Agreements, Right of First Refusal and Co-sale Agreements, Voting Agreements, corporate approvals, and closing documents.

Anyone who knows my Law Firm 2.0 series knows that I’m a huge fan of technology in the law firm.  Congratulations to WSGR on taking a real positive step. 

In my continuing Law Firm 2.0 series, today I ask the question: So what will the future of the law firm look like, especially if the status quo situation remains?

Here are some predictions.

First, the continued splintering of the relationship between the client and the firm will splinter in ways that will minimize their involvement over time. Lawyers who really want to practice in the traditional start-up ecosystem and function as true outside general counsels may be forced to leave their large firms and create and / or join smaller, boutique firms with radically different cost structures. I think that as clients use their lawyers less they will begin to see legal services as a commodity, a prediction also made by Richard Susskind.

Second, there is an argument that legal services will become all the more compartmentalized. One can imagine separate, smaller firms whereby one or two areas of law are practiced. Maybe there will be firms that just specialize in venture financings, for instance. This was actually an idea that I wrote a small business plan on back in 1999. Even before the recession, I received several calls from senior associates and / or junior partners claiming that they are thinking of breaking off on their own with similar folks at other firms to create start-up boutique firms, so that they can practice their craft without the same billing rate pressures.

Third, costs, compensation transparency and quality of life issues must be addressed, otherwise law firms will continue to throw dollars at associates to get them to put up with the current state of affairs. And in throwing dollars at the problem without fixing the real issues, those costs will be passed onto their clients.

Fourth, outsourcing will occur. Whether it is offshore, or simply somewhere other than the home office, the associated cost reductions with outsourcing can’t be ignored.

Fifth, I think the billable hour will, eventually, for most areas go away. Legal services will start to look like other services with fixed fees. The Washington Post has a great article with the quote “The economic crisis is giving the prosecution a boost in the case of Fixed Fee v. Billable Hours.” Even a presiding partner at Cravath, Evan Chesler argues for the death of the billable hour.

Sixth, technology will drastically change the way that lawyers work. I can’t begin to explain it as eloquently as Richard Susskind, but technology will end some lawyers’ careers while enhancing others. Lawyers had to be drug kicking and screaming into the email and word processing world (and for God’s sake who still uses Word Perfect? Argh) and will now have to adapt to social media and “always-on” connectivity. Furthermore, lawyers who can use technology to enhance their practices will prosper, while others will be replaced by it. I personally think that document automation platforms will be very important in the future and is why we invested in FirstDocs. We saw technology change the way discovery was performed by our successful investment in Stratify.

So what could Law Firm 2.0 look like? Who knows, but here are some early candidates of firms already doing things very differently:

One is Axiom Legal. In a nutshell they’ve used the professional consultant business model (and corresponding cost structure) and employee former big firm lawyers and experienced in-house counsel that charge half the rate. From what I know, all of their lawyers are 8-10 years or more experienced and charge what junior associates charge at some firms. They are venture backed and are hitting the cover off the ball from what I have heard. I wish that I was in the deal.

Second, I received an email from a “large but not particularly well known firm with offices throughout the southeastern United States.” They have a model of having offices in many non-traditional U.S. cities where work can be farmed out. In the words of a lawyer there with a sophisticate, international practice, he said:

“Most of us choose to work in cities where the cost of living is lower.  That means our salaries and draws are lower, but our hourly rates are also lower.  We can out-source work from our higher priced cities, for example, Washington, where I am, by sending labor-intensive work such as document review and due diligence, to talented and motivated lawyers in, for example, Memphis, Tennessee, and Jackson, Mississippi.  Our expectation of billable hours for lawyers at all levels is considerably lower than that of other large law firms.  As a result our lawyers are fresher, happier, and more likely to stay out our firm longer.”

Third, Craig Johnson, former founder of Venture Law Group, has created a new virtual law firm, aptly named Virtual Law Partners. This looks to be a hybrid model between Axiom and a traditional law firm, but is certainly interesting. Their name says it all – forget the expensive real estate plays and hire your lawyers virtually.

I also had the pleasure of recently reconnecting with an old Cooley alum and his partner: Raj Jha and Todd Smithline. They are primarily an IP / Licensing firm, but use a subscription model to bill their clients instead of the well-worn hourly model

Or maybe all of this is wrong, the traditional law firm will adapt and morph and create its own Law Firm 2.0 vision, one far better than invented by a guy who has been outside of firm life for the greater part of a decade (but I doubt it). The one thing that I do know is that there will be change.