I love it when I’m right.  I don’t gloat too much, but today will a bit, as part of my Law Firm 2.0 series is proving true:  the eventual demise of the billable hour.

I won’t reiterate all of my thoughts on the subject.  If you are curious, check out my prior postings, but the NY Times recently published an article on how the economy is affecting the concept of the billable hour. 

It’s not surprising, but I was still happy to see the results.

Now the only question is whether or not this will ever affect the accounting industry.  Let’s all cross our fingers.

Every time we make an investment, we blog about it on our Foundry Group site.  Today, I’m especially excited about our latest announcement, as the company is a "bulls eye" in my Law Firm 2.0 thesis. 

You can read all about FirstDocs on the Foundry post, but what I’ll tell you shortly here is that they are a Westwood, MA located legal process automation company that I believe, are poised to change the way law firms and in-house legal department deliver value to their clients.

I’m particularly excited about this opportunity given that the CEO Dan Gaffney reached out to me after having read several of my posts about the inefficiencies in the legal ecosystem.

At the time, Dan thought it would be nice to get to know me, see if I could provide him any customer leads, show me the demo, etc.  Being a venture capitalist, I wasn’t sure if I was getting the softest fundraising sell of all time, or if they didn’t need any money, so I asked.   

Dan said they were all set for money and had customers.  I remember being a little sad, but still excited about what they were doing, so we kept in touch. 

Over the next few months, however, our conversations really intensified and the ideas on how to take their already released product to a completely new level began to take shape.  It was at that time, I began to sell the Foundry Group to Dan in hopes that he’d consider taking some money from us and thus, allowing me to join the board of directors.

I’m happy to say – mission accomplished!  I’m very excited to work with Dan, Luke, Anil, Muthu and the rest of the FirstDocs team.  Hopefully one day I’m writing a Law Firm 2.0 post about the increased efficiencies of lawyers!

Ever since I posted my original rant about the over lawyering and overcharging by certain attorneys in the startup ecosystem, I’ve become synonymous with legal fees apparently.

It isn’t all bad.  Our companies are being charged less, lawyers seem a little more likely to negotiate higher bills when the realize I’ll blog about them if they aren’t reasonable and it appears that we’ll have a new investment to announce shortly related to my Law Firm 2.0 series.  (Keep your fingers crossed).

So I guess that I shouldn’t be surprised how many times the same article was emailed to me this week.  According to Law.com, Legal fees continue to rise despite the current economic times and in one case have exceeded $1200 an hour!!!! (White & Case.  Boo.)

The average law firm raised their rates by 4.3%.  Anyone else out there get a raise that big this year?

I’ll take a stand and say this is ridiculous.  I’ve never met a lawyer worth this much per hour.  I might consider one exception for a certain litigator that I know who is incredibly awesome and so efficient with his time that his hourly rate is somewhat irrelevant, but I only know potentially one person in the thousand lawyers that I’ve worked with. 

Shame on you folks.  It won’t last.  Mark my words.  Viva La Law Firm 2.0…

If you are a regular reader of the this blog, you know that I don’t ascribe to much of the doom and gloom that everyone wants to wallow in.   

This isn’t to say that I have my head in the sand.  I realize that many people are losing their jobs and that companies need to run their businesses extra efficiently, but this isn’t exactly "R.I.P" for the good times, despite anything other venture firms may say.  The sky is not falling and it’s not "game over."  The economy will bounce back. 

Also, if you are a regular reader, it’s possible that you’ve picked up my issues with many law firms’ billing practices.

What do these two topics have in common?  Where there’s a crises, there is always a lawyer willing to make some money on it.  Today’s candidate:  Proskauer Rose. 

I just read that Proskauer has created an "Economic Crisis Response Group" to deal with the uncertainty we face.  I’m not sure who in the marketing department came up with this, but I about fell off my chair laughing.

According to the press release, the group:

- Includes lawyers from different practice groups;

- Who quickly respond to clients affected by the current turmoil; and

- Who monitor, analyze and disseminate information on new developments as they arise.

Uh, isn’t this what ALL law firms do?  In fact, if you weren’t doing this before, what exactly where you doing?  I’m sure that with all specialty groups, they’ve found a way to bump up their hourly rates for this elite group, but maybe this is just marketing gone really wrong.  

Do they get to wear cool super hero uniforms?  If so, I’m down with that. 

Sigh, just more noise being added to the system.  Not exactly what we need right now.

It’s been a while, but continuing on my Law Firm 2.0 series and having discussed ways to more efficiently bill, keep associate retention issues better at bay and how to better deal with legacy cost structures, today’s topic is compensation.

I’ve gotten a ton of comments on my blog and on various other online forums where my articles have either been posted or summarized. Despite this high volume, it pales in comparison to the amount of direct emails that I have gotten. Most of the adverse communications have a variation of the same argument: but other people make more money than I do! Why are you after me?

For a whole bunch of lawyers mad at me, you sure provide a crummy response. Objection, your honor on grounds of relevance.

I’ve never understood why lawyers think they deserve to make the same as other lawyers at other firms or lawyers who practice in different areas of law. “Legal services” are not commodities. Rather, different specialties are valued more and less by society, just as they are in other fields like medicine and investment banking. In fact, even in the legal profession there are outliers, whether they are public defenders, or class-action plaintiff’s lawyers; each of them are on the ends of the respective legal compensation bell curve.

For this reason, I’ve always thought it was silly that folks who want to provide a particular set of services think they should get paid the same as other radically different practice fields. But this is the general attitude that you get inside a large law firm.

For instance, does it make sense that a lawyer working for a cash-constrained startup company on transaction documents between the company and its returning venture backers should make the same hourly rate as a litigator who is engaged in “bet the company” litigation for the same company? No.

And before you say that there are billing differences between types of work in forms of discounts to startups and billing premiums with M&A and IPOs, I would still posit two points: one, that these billing differences aren’t that meaningful and two, that the partners in these different practice areas judge their compensation across all practice groups and have expectations of equality.

It would seem to me that choosing a practice area could include not only the type of work, but also the amount of compensation that the practice would generate. I would have been very happy to give up some compensation in exchange for avoiding litigation and public company work.

The following is a direct quote from a well-known partner at a well-known Silicon Valley Law firm in an email that he sent to me (name redacted as his request). “You can’t run a large firm practice these days on $50K a deal unless you are just cranking them out. The expectations for partners at most major firms are simply too great to permit them to handle VC deals.”

To summarize, my point is that by only looking at cash as what a lawyer’s compensation is, rates are artificially high in some practice areas and those are the fees that are impacting startup companies. Lawyers receive “other” compensation in performing the types of services they want to and hours associated with those services.

One thing to discuss quickly is startup company equity held by the law firm (including directed shares). In the “old” days the shares were allocated to the team members performing the services. Other partners, however, got jealous and now most firms allocate equity across the entire attorney pool, whether directly or through a firm-run investment vehicle.

I have an idea. Why not allocate these equity pools only to lawyers who work on startups? They may charge less, perhaps make less, but like the startup, world would see nice returns when things go well.

All of this, of course is part of the competition for law firms to make as much money as the next firm. I’m always surprised when I find some lawyer at a competent, but not extraordinary law firm charge the same rates as a lawyer at a clearly superior firm.

I’ve heard the argument for years now that partner compensation isn’t just about what the lawyers take home pay is, but metrics like “Profits Per Partner” (PPP) affect attorney retention and hiring. I’ve never really understood if that is true, or is just ego. While in the Silicon Valley, I found this argument more compelling, but out here in Boulder, I see law students taking less salary for better quality of life. My bet is that even in the Silicon Valley, many lawyers would trade some compensation for better quality of life and therefore the PPP statistic isn’t as important as the law firms and magazines hold it out to me. Then again, perhaps this is akin to the U.S. World and News Report law school surveys that have caused a whole bunch of weird behavior on the educational side.

Given my discussions on Law Firm 2.0 and how to make legal services more efficient, I was happy to see someone take a stab at some model financing documents for seed deals. 

I’ve had several people ask me what I think of the Y Combinator documents.  In general, I like them.  I think they are fair and certainly would not be looked poorly upon by a venture capitalist that might fund the company down the road. 

As with any documents, there are going to be some changes to meet one’s particular needs, but I think these are as good as any from a starting point. AND NO, DON’T TAKE THIS RECOMMENDATION AS ME BLESSING THESE DOCUMENTS OR ACTING AS YOUR LAWYER.  (Sorry, I have to say that).

Good work, folks.  Every little bit helps. 

It’s been a bit since I’ve posted a Law Firm 2.0 post.  Most of the reason has been that I’m still getting a ton of inbound calls and emails from lawyers telling me that I’m onto something here and they want to add their two cents to further refine my thinking.  I’ll have several more posts in the not too distant future on what I’m learning. 

However, today is something completely different in the series.  I’m going to take the lawyers’ sides today. 

Lawyers aren’t the only ones to blame on the fee crisis. Clients have responsibilities, too. By proper care and feeding of your lawyer, you will have a much better experience. Trust me, I know.

Here is my proposed Lawyer Bill of Rights that clients should adopt:

1. Make your lawyer your partner. If you don’t want to, you’ve hired the wrong lawyer. That is a “you” problem, not a “them” problem. If you do this, they’ll give you better service and the benefit of the doubt, rather than feeling like a tool in a toolbox;

2. If your lawyers are your partners, treat them like you want to be treated. Have reasonable expectations and realize that they have lives and other clients. Not everything needs to be done today. Give them a heads up when issues arise, not panicked sky is falling phone calls. Nothing will be more appreciated by your lawyer than this. (Okay, maybe paying his / her bills on time);

3. Be transparent with both praise and criticism. Don’t kiss them when they are with you and bash them when they are not;

4. Realize that legal fees are always going to be more than you want them to, but that a great lawyer with a great relationship will add value to the company unlike some other service professionals (cue foreboding music for future “Frustrations” post);

5. Realize that your lawyers are running a business too;

6. Be organized. Run a tight ship. Don’t use your lawyers as secretaries, gophers or copiers. I cannot emphasize enough how much in legal fees you will save by being a good filer;

7. Take your lawyer’s advice. If you don’t want to, again you’ve hired the wrong lawyer. The worst thing a client can do is not follow advice, get in trouble and then have to pay a substantial premium to extricate themselves out of the problem;

8. Get to know your lawyer outside of work. Find out what makes each other “tick” and what common ground you may have. It will make difficult conversations easier if you have mutual understandings and trust; and

9. Realize that change orders cost money. Being an inefficient in communications, emails or bugging your lawyer too much will cost you money. You don’t get to whine about it. If your VC is the problem and they are acting like idiots, than whine to them, not your lawyers. If you don’t want to whine to your VC, then I’m sorry, you are stuck. Again, don’t blame your lawyers.

So this all sounds like touchy feely stuff. How does this save money? Simple. Happy lawyers will work harder, more efficiently, staff with better associates and give you the benefit of the doubt when filling out time sheets for those clients that they honestly like. They might not (want to) admit this, but it’s just normal human nature. Besides, if you treat them right, you have a much better moral high ground for insisting they work hard to minimize costs on your behalf.

I just read a great paper called "Are We Selling Results Or Resumes?" by Professor William Henderson.  In a nutshell, the paper argues that law firms place too high a premium on hiring junior attorneys from top schools and this in turn causes costs for clients that cannot be maintained (the "Cravath" model).  In fact, the paper claims that the theory of top rated law school producing top lawyers is false.

I don’t know if this is true or not, but the paper is persuasive.  There are also some in depth analyses regarding lawyer salaries and ability to move between firms.  One very interesting proposition is that Professor Henderson argues that legal ethics rules should be changed to allow non-lawyers to own equity stakes in law firms.  His hypothesis is that professional managers and business owners will be able to streamline and more effectively change the old law firm regime to a more current and efficient one.  

It’s a long, but great read and I think backs up much of what I’ve been writing about in my Law Firm 2.0 Series.

A special thanks goes to Ryan Howell for turning me onto the article.  Ryan and I have been emailing a bit on the Law Firm 2.0 Series and Ryan definitely has a clue about the issues that I’m writing about.  Thanks Ryan.

If you’ve been following along my series on Law Firm 2.0, you’ve probably noticed that I advocate decreased billings to clients, more efficiencies in some types of transactions as well as finally addressing the associate retention issue. One reaction could be that I advocate a transfer of wealth from law firm partners to their associates and clients. This isn’t the case.

What I advocate is that law firms start running their businesses more efficiently. Partners can retain and / or increase their compensation and clients can pay less. One area to focus on is the legacy cost structures that have been put in place.

Probably the biggest area for improvement is in real estate holdings (see: Brobeck). Why do law firms have large, expensive, fancy offices? Who are they for? They certainly aren’t for the clients, although I can only speak for the corporate side of the legal house.

I took a straw poll of 20 corporate lawyers or so (yes I realize that this is a biased sample, but it is still informative) and asked them “how many times a month do you see you clients face-to-face in your own office?” The vast majority of the answers were “uh, none.” I then asked how many times they “saw clients face-to-face in a conference room at their law firm” and the answers ranged from 0-3 times a month.

Times have changed. This isn’t a face-to-face business anymore. And the very few clients who ever step into their lawyers’ offices – are they more impressed with a fancy building or controlled costs? Lawyers who represent start ups are frequently at the company’s offices for board meetings and the like, so why do firms have to have these massive offices?

And what’s worse is location. Think of how many lawyers are commuting hours a day to get to offices in locations where they don’t want to live. The firms are paying for office space for people who don’t want to be there. What?

Why not go to a more distributed work force with cheaper satellite offices in locations where folks want to work? Why not let folks work from home? Concentrate on having conference rooms in smaller, cheaper offices and go to cubes and or small private offices. Not only would the firms save a ton on real estate costs, but improve morale and help some of the associate retention problem, as folks would not be commuting so much. This is especially true in the Silicon Valley. I realize that each lawyer would need some time at the main office for training purposes, but why is a competent mid-level or senior associate being dragged down to Palo Alto every day to work in an office that they’d rather forget? And we all know that firms have partners and other counsel working out of their homes with local phone numbers, so let’s just be open about it and let everyone do it.

This model works well for investment bankers and consultants, why not lawyers?

Moving away from the real estate considerations, let’s look to perhaps the most inefficiently used resource at law firms today: the legal secretary. Once upon a time, these professionals were used for nearly everything. These weren’t menial tasks, rather things like document production and other high value items. Today, everyone types and many lawyers simply use their assistants to answer phones and calendar items. As email has become pervasive, phone calls have dramatically decreased and calendaring can be done by the lawyer. What about bringing them back into the high value fold and have them perform the closing mechanics of financing deals? Several comments to this series have said if VCs want to save on costs, than VCs should act as closing agent on their deals. (FYI, not going to happen, but nice try). Instead let’s have the secretaries trained to do something they are more than qualified to do. While they are at it, they can also create the transaction binders (or pdfs) of the deal documents. Why are billable folks performing these tasks at all?

There are also other expenses that I believe outweigh their returns to the law firms. Summer associate programs, firm retreats, etc. all are expensive propositions. I believe that some firms have tailored these back to rational levels, but some are still pretending like it is the late 1990’s all over again.

This is just a short list of things an outsider sees. I’m sure there are other areas that are ripe for improvement, but this would be a good start.

In my continuing series of Law Firm 2.0, I have decided to take a crack at creating a completely new law firm model. This definitely falls under the “hard category” for change. Before I launch into actual ideas, let me start by stating my basic assumption on what is wrong with the current model.

Law firms throw money at their internal business problems instead of fixing the root issues and then pass these increased costs onto their clients.

I don’t want to get into a “lawyers make too much money” discussion. It’s not for me to judge. I don’t think lawyers are any greedier than anyone else in the business world. So while I am upset with the state of affairs of legal fees, I’m not going to say that I think there is mal intent from the industry in general.

In my opinion, there are a few core issues that need to be addressed in order of importance:

1. Associate retention and hiring;
2. Outdated cost structures;
3. Practice area compensation parity; and
4. Outsourcing.

I’m sure there are others that I’m completely unaware of, as I was never on the management committee of a law firm, but these are good ones to start with. I’ll write about each one in a separate post.

Of all the costs issues, I think that associate retention and hiring has to be the biggest factor. I’ll admit that I’ve racked my brain on how to “fix” this – and I have some ideas – but I’m not so naïve to think that this is an easy fix. First, let’s take a quick look back into history.

If you remember from my first post, first-year associate salaries have risen approximately 132% over the past ten years. Is this a case of law firm partners feeling generous and handing out large paychecks and making their clients pay for it?

No.

This is the reaction of law firms that were bleeding associates in the late 1990’s and trying to throw money at the problem. As the retention issue continues to be a major problem today, the response is still the same (also my favorite Bob Seger song). The firms attempt to buy loyalty. Couple this with a nuclear arms race of first-year salaries from the biggest of the big firms, and you’ve got yourself a real problem.

I’ve held a belief for a long time that the technology age materially and adversely affected the lives of all lawyers, but especially associates. The advent of email and cell phones increased client expectations on an exponential scale – more than other businesses that don’t deal with multiples of clients. Not only were client expectations in general greater, but the responsibility level of associates skyrocketed, as they now had ways of directly communicating with clients that they did not before. Associates who were once protected from direct client contact were suddenly on the front lines when an email was sent. Their cell phone numbers were given to their clients. This was not only incredibly stressful, but also given the inherent inefficiencies with associates this made for unbelievably long hours. I was one of these associates. Take this with the explosion of start-up company growth, the IPO bubble and the like; the late 1990’s were tough times to be an associate.

So what happened? Simple, associates started leaving. Lawyers were jumping in droves to start-up companies as business development professionals, in-house counsel and other positions. To many, the paycheck just wasn’t worth it. As more associates left, it was an ugly spiral as the remaining associates’ lives were even worse.

So with a definitive move that will be remembered by every lawyer, Gunderson Dettmer led the charge by increasing first-year salaries to $125,000. It was a bold move and one believed to attempt to stem the outflow of associates to their startup clients. From what I have heard, the idea was to show lawyers that they could stay at a law firm and make a great salary. One did not have to leave for the allure of stock options. Other firms matched the Gunderson salaries and salaries at every level followed suit. For a while, the hole in the hull was plugged. While the job still was tough, we at least were making some serious cash.

As with any change, inevitably the “what have you done for me lately” effect sets in. Lawyers match their lifestyle to their salary, housing prices continue to rise in the Silicon Valley and not too long afterwards the money isn’t on top of mind. And the new salaries had to be paid for. Billable hour requirements were increased across the board.

Also and most importantly, with the dramatically increased costs, clients’ attitudes changed. I believe that clients consciously or subconsciously believed that their lawyers were no longer their “partners,” rather they were now a very expensive service provider and given the new hourly billings rates that were in effect, they “owned” their lawyers. “Hell, if I am paying that much per hour I can call my lawyer any time of the day, any day during the week!”

This last point cannot be overstated. This “I own you” versus “you are my partner” attitude has impacted all lawyers, not just associates at firms. In my opinion, it’s a direct result of the increased billings. And what happens when associates are unhappy at work? The law firms throw more money at them, they demand more billable hours and they are “owned even more” by their clients. This is really dangerous cycle. Higher salary = worse work life.

Despite the promise of greater compensation, I see more and more senior associates and junior partners leaving law firms to go in house and make much less. The dream of being a partner at a firm just isn’t what it used to be. When speaking to folks that have left or are contemplating leaving (note: there isn’t a week that goes by that I don’t have at least a half dozen conversations with a disgruntled lawyers looking to leave), their gripes NEVER include compensation. The gripes always about quality of life, client demands, missing their children, lack of transparency in the partnership, long commutes, etc. They aren’t leaving for startup business development job, because few want to hire lawyers these days. They are going in-house and making much, much less money.

So what can a law firm do? How about in a business that charges by the hour, start paying salaries by the hour? Let lawyers determine how much they want to work and how much they want to make. Each lawyer would essentially budget hours that they want to work the following year so that law firms would be able to manage capacity. Clearly there would be an agreed upon variance and other details, but I can’t reconcile how an hourly charging business can continue with the current model.

If you read between the lines, what will eventually happen with my proposal is that associates will figure out what their revenue per dollar charged is. Efficient firms will be able to give a transparent cut to their associates and still provide generous compensation to their partners. Inefficient firms will suffer. Firms will begin to compete on revenue per hour to associates, amount of hours worked, quality and style of practice and quality of life, not meaningless first-year salary statistics that have nothing to do with the long-term contentment of their new hires. There will be other factors in future posts that I believe will also positively impact associate retention issues.

Many smaller fir
ms have essentially adopted parts of this model. I realize that many of the larger firms with fancy offices and large cost structures can’t imagine running a firm this way, but I’ll address ways to change these cost structures in my next post.

(P.S. Check out this Vault report on associate satisfaction and you’ll notice very few of the typical venture lawyer firms)