Law Firm 2.0 – Let’s change billing practices before it is too late

The last post in my series of Law Firm 2.0 had to deal with specific efficiencies that I think can be gained in the process of doing deals. This all assumed that the current model of the law firm does not change. Today, I tackle the first of several posts dealing with changing the actual way law firms do business.

Of all the comments I made in my original post about “Why Start-up Lawyers Frustrate Me” the one that seemed to strike the biggest chord was:

“Eventually, venture-backed companies are going to have to move away from the traditional law firms that service them these days.”

I really believe that this is the case if things don’t change and it’s not new news. It’s already happened. Most of the companies that I work with have a name brand firm, but also have another outside counsel, part or full-time in-house counsel and a range of other legal providers that they cobble together to create a legal services matrix. No longer is it the case where the full-service firm is providing 100% (or close) of the legal advice to their clients. Maybe this is all part of the plan in divesting away from particular service areas that are less profitable, but it’s much different from 10 years ago where one firm provided “cradle to grave” counsel.

And I’ll tell you, as a VC, it’s frustrating to have several legal providers for one company. I find that the partner showing up for the board meeting doesn’t always have a good grasp of what’s going on company-wide, as the company and its other legal eagles haven’t kept him / her in the loop because they don’t want the meter running. I find many more disconnects, work quality problems and certainly more frustrations at both the board and company level. So while I understand from a cash expenditure view why this is happening, the company is definitely worse off from a service level when the legal function doesn’t fall under one umbrella.

Specialties like small-ticket litigation, employment law, licensing, and IP are more often farmed out to lower cost providers. And instead of one, competent partner at a law firm monitoring everything and really driving value, you have an executive at the company (usually the CFO or COO if there is no GC) trying to manage something they aren’t qualified to do.

Let me make this clear: I would much prefer to have one, good law firm doing all of the work for each of my companies. It’s just no longer financially feasible at many firms.

What to do? The aggregate billings need to come down. I’m going to sound like a Reagan democrat, but raising billing rates in face of losing billable hours of your clients is not a long-term way to be successful.

I think that different legal specialties have different inherent rates that they can charge given perceptions of value (right or wrongly, I make no judgment here). For instance, it may be the case that a top notch litigator is worth more than an employment lawyer based on both quantity of excellent professionals and the view of how much the issues is worth to the entrepreneur. I certainly have my stacking order of what I’m willing to pay for certain services based on my perception of value and my own experience (or lack thereof) in certain areas.

If I’m a law firm, I view this splintering of my client’s loyalty as a massive threat and attempt to grab back territory. Although, ironically, I had one piece of hate mail that said all of these fee problems were “the fault of the VC or start-up that hires the big firm when they should have hired a firm with lower rates.” This came from a partner claiming to be a start-up lawyer from a big law firm. Clearly he doesn’t think of splintering as an issue and is happy to see his clients go elsewhere.

So how does the billing model change? It’s not an easy answer. It might mean certain practice areas subsidizing others; it might mean more discounts; it might mean hourly billable reductions and REAL billable stratifications between practice groups; or it might mean fixed-fee pricing models for certain services. The possibilities are extensive, but realize that in long run, clients are going to use their lawyers as little as possible and that is not a good thing for the firms and frankly not a good thing for our companies or my business either. I realize that this doesn’t fall into the easy category but it’s inevitable. I think a decade ago start-ups saw their law firm as a “partner” whereas today they have several different legal “service providers” in large extent to this splintering. To quote a multi-time entrepreneur in response to my original post:

“I do know this: If I wasn’t paying $500 an hour for the advice, I’d ask for a lot more of it, and I’d count the lawyer as more of a partner in my business than a hideously expensive last resort ‘check’ to keep us from getting nuked when dealing with a big company or a litigious partner.”

I can already read the posts to this blog: “Jason, basically you are advocating a transfer of wealth away from attorneys to your firms.” I’m actually not. As you’ll see in future posts, what I’m going to advocate is law firms get “religion” on margins and it can be a win / win situation. Stay tuned. I’m not so unrealistic to think that firms can just charge less and all will be fine, but from a customer-focused standpoint this must happen at some point. And I think that point is soon.