Biglaw, Billable Hours, In-House Counsel, Partner Issues, Partner Profits

Buying In: An Interview with an In-House Insider (Part 4)

What can Biglaw firms learn from their corporate clients about managing and developing human resources? What improvements do in-house lawyers want to see from their outside counsel?

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Over the last three weeks, we have heard from an In-House Insider, an opinionated source of insight into Biglaw-client relations — see here, here, here, and below. As with the three prior installments, the only changes I made to the Insider’s words were those done to protect their identity, and Insider was given the opportunity to revise their points once I added the questions and commentary. Again, I thank Insider for the candid observations and thoughtful opinions on these core issues….

AP: Any serious observer of Biglaw can see that firms continue to struggle adapting associate development to the new state of Biglaw-client relations. What can Biglaw learn from corporate clients like yourself on that front?

IHI: Institutionalize the associate development function. To drive the point home, firm comp committees should require partners to include these matters in their personal goals and development plans and (most importantly) tie compensation to meeting specific, clear and achievable goals to develop human capital. That’s how it works in my company and lots of others. Realize that if you work to benefit the firm while you are there, then you also work to better your own practice and you make more money (the firm and your practice and book are not mutually exclusive concepts and you are still portable, only with a more valuable practice to sell).

With ever-shrinking new associate classes, your margin for error on these matters gets smaller. As for comp systems generally, what is wrong with tying comp for everyone in some degree directly to firm performance in a transparent fashion? Orient associates to the realities and drivers of firm economics and show them the distinction between billing hours and providing value to clients through sharing the function of lawyer statistics and other analytics that measure performance on client matters and the firm as a whole. Everyone should understand the business at a granular level. As an associate, I had to work very hard to find this information out, but I thought it was important to understand the business model so I could tailor my practice to support firm performance.

My company requires every new employee to go through a multi-day orientation about our business and how it works, covering all functional areas, even down to our IT architecture. Sure, when I started at a firm, I went through an enculturation process about when the firm started, how many famous people worked there (and went on to do bigger and better things I might add), etc. But that does not cover the nuts and bolts of firm capabilities and weaknesses, competitors, the platform and how it operates, what it does and who it does it for, and where firm leadership wants to go and the plan for getting there. All lawyers should know and understand the strategy and competitive landscape in depth. All fee earners should be fully engaged developing and innovating the product and process to get ahead of the competition every day. If you don’t do that, you’re finished.

(AP: It is almost shameful to admit, but I doubt most partners know as much about their firm’s business as the Insider and his fellow employees seem to know about their company’s. Most Biglaw lawyers do not really want to think about these issues, and your rank-and-file partner is powerless to influence the firm’s business decisions anyway. But the “enculturation process” that Insider discusses is actually a worthwhile one. I would start with partners, focusing first on new laterals and recently-elevated associates. This group would benefit most from an in-depth look at the firm’s business. And unlike junior and mid-level associates, the attrition rate in that cohort should be lower. But I also agree with Insider that even junior associates would benefit from a more strategic form of orientation, rather than the typical IT training (help-desk numbers, anyone?) and handing over of Westlaw and Lexis passwords (with instructions to use them as sparingly as possible).

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I also wholeheartedly agree that with associate classes continuing to shrink (unless a firm tries out my 3-for-1 associate idea, as pitched in my NY to 50 column), Biglaw’s “margin for error” grows smaller. Of course, it is the shrinking demand from clients like Insider’s company that have forced Biglaw firms to cut incoming associate classes, and while services like JD Match are both allowing and subtly forcing firms to think more carefully about selecting promising entry-level associates, there is still a long way to go for the process to become anything other than a chancy one for firms.

The tying of partner compensation to associate performance issue is a bit stickier, but perhaps a more moderate approach could tie some element of bonus pool money to associate development success at the practice group level. Because most associates (rightfully?) have little loyalty to their firms, or the partners they work for, it would be unfair to penalize an individual partner for an associate who flakes — particularly since most partners have very little direct say in the associates who get hired. Change that latter fact, and penalizing or rewarding partners for associate performance becomes more palatable. If I brought someone specific in to help my practice, and by extension my firm, I should bear some responsibility for that associate’s performance. But if I just get to draw from the “pool” of associates, then I think an evaluation (with resulting influence on compensation) on the practice group level is more appropriate.)

AP: For Biglaw generally, what are the key areas for improvement that your company and other corporate clients want to see?

IHI: If you want your clients to pay the rates you charge for junior lawyers, you need to invest in developing them to the point where they are worth it. If you paid those people less and billed them out at a reasonable rate that made sense to clients, then you would improve the situation for all. The fact that law school cost does not reflect market reality and these folks have such massive debts are issues, but clients should not have to bear that cost. I can’t imagine I am saying anything here that hasn’t been said before, none of this should be a revelation, but if firms committed to act on these things and actually followed through, then in-house folks like me should see results. I don’t; in this area, for the most part, I see a “business as usual” approach.

So in response we look at our legal tasks, unbundle them, and allocate the parts to the most cost effective provider. Do I need a large law firm to perform the labor intensive tasks like due diligence on a massive data room with a bunch of expensive yet inexperienced lawyers? No, that’s not cost effective, and we do not get value from that engagement. So I get an alternative provider to do that work (they are good and getting better at doing this stuff seamlessly) and engage the large firm to provide less labor intensive support for structuring matters, technical areas (to the extent not supported by accountants and other vendors), and drafting and negotiation, which are areas requiring partner/senior lawyer support; those are the tasks that deliver value at high-dollar rates. Sometimes I break up the project in modules and negotiate fee arrangements for each so I don’t have to pay for junior associates running up large amounts on the more labor intensive aspects of a project (the firm bears that risk), or come up with some other mechanism to ensure that my company receives the expected value from the engagement at each step. All of this stuff speaks to the relationship-based contracting approach represented by alternative fee arrangements, where parties allocate the risk of gain and loss rationally in the engagement. None of this stuff is particularly new or novel either, but I think it is a trend. The TyMetrix Real Rate Report got a lot of people thinking even more about these matters; that report has a lot of very interesting takeaways.

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(AP: On the topic of associate rates, I liked the comment last week pointing out that they really are arbitrarily set, and more tied to partner profits (or cost of engagement) than people realize. The cost of hiring Cravath or Davis Polk is not really the partner rate (though partner rates are higher at those firms, many other shops with NYC offices are within striking distance when it comes to partner rates), but the premium cost of all the other timekeepers, associates being the main driver. At the same time, associates are a huge expense for firms, and so part of their rates have to go to cover their overhead. As with all things Biglaw, the more profitable shops benefit the most, as they don’t really have to pay associates too much more than the competition, but command higher rates, thereby seeing more profits from their associates. A virtuous cycle, and clients don’t really mind since they are keeping the elite firms plenty busy.

But what is surprising is that Insider still feels that many of his providers are persisting in a “business as usual” approach. Whether their actions are the cause or effect of clients looking to unbundle legal tasks is up for debate, but it is clear that Insider doesn’t want to throw “easy profit” at Biglaw anymore. The more I think about it, the more I think clients like Insider should really be thinking about the value they are getting from their “preferred provider” deals with certain Biglaw firms, and whether they would benefit from more flexibility to utilize alternative fee arrangements as a means of trying out promising partner-level attorneys from other firms. And I continue to think that one of the biggest challenges when thinking about the “value” question is the lack of transparency on the part of clients in informing their outside counsel what a particular engagement is “worth” to them. I understand that they may be reluctant to share that information out of fear that the Biglaw firm will adjust their staffing and billing accordingly, but that is where trust comes in. Negotiating a 35 percent discount of fees does not build trust; nor does throwing an extra associate on a matter to make sure you milk every dollar out of the budget. “Relationship-based contracting” doesn’t work without trust, and a mutual commitment to making the relationship work. Everyone still has a long way to go on that front.)

AP: Any closing thoughts?

IHI: I am not railing on large law firms here. In fact ,we depend on them, and there are a lot of really good firms out there that do a lot of good work and deliver value. This topic, though, speaks to the sustainability of the current model and the need to adapt to market dynamics. Law firms are growing into large global platforms to serve clients like us that have operations and matters all over the world. Yet at the same time we are disaggregating our matters in search of the right mix of cost-effective services from various legal vendors. Is the current associate model sustainable? I don’t know. As a closing anecdote, a key external counsel relationship for my company recently left, as they were convinced that the law firm model is broken and firm management has no interest in fixing it. They were very well thought of and did very well in their firm. One voice, one view.

(AP: There are days when I sympathize with Insider’s friend, but when I do, I try and remember that the future belongs to attorneys like Insider and myself, who grew up in the old “Biglaw,” survived the Biglaw Black Death, and are trying to make a career-long future in our chosen profession. It will take time, but I have to believe that when clients are represented by the thoughtful and engaged type of in-house counsel that Insider is, there is hope for Biglaw. We may need to recognize that where we deliver value is in a much-narrower band of tasks and advice than we like to currently think, but we can also better price (and profit) from offering our services when clients need, rather than just tolerate, them.

I hope everyone learned as much from Insider’s observations as I did, and I hope to stay in touch with our Insider down the road. Once again, I thank Insider for their service to our profession by offering their insights, and wish them the best for future success and fulfillment. Finally, I continue to extend an open invitation for individuals concerned about making Biglaw’s future a bright one to contact me, and potentially share their thoughts with this audience. You can comment below, or reach me by email….)

Anonymous Partner is a partner at a major law firm. You can reach him by email at atlpartnercolumn@gmail.com.

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