The Innovators Dilemma in a Billable Hour World

The last several conferences I have been to have been revealing with regard to the challenges that innovators face when trying to sell new products to the legal industry. The vendors all expressed how difficult it is to sell to law firms since decision making is so decentralized and because the logic for investing in new technology that works so well in "normal" businesses does not work in the legal industry. In fact, the logic is BACKWARDS. What do I mean, you ask? Well, if the legal industry is so different in that regard, you might find the root of the problem by asking what makes the legal industry so different from a normal business. Yes, since this is my blog, you can probably guess it is that the legal industry bills by the hour. Normal businesses actually tell you how much their product costs BEFORE you buy it! How does this impact investments in technology and why do you care? Here is the link. . .

In Normal businesses, you and your competitors give the customer a fixed-price. Since there is competition in the marketplace, you use every edge you can to gain cost efficiency so that you can offer your customer a better price than your competition and/or improve your profit margins or market share. Since your price is fixed, your profitability depends on your efficiency and investments in technology that improve your efficiency have a positive return on investment. This puts maximum pressure on companies to innovate and embrace new technologies.

Law Firms, on the other hand, bill you by the hour. The economics of this business model are exactly the opposite of a normal business. In the billable hour world, you make more money when you are inefficient. Since law firms are billing for time (and therefore cannot amortize the cost of R&D over the course of several projects -- eg. like a good template, for example) there is an incentive to reinvent the wheel for each client rather than build on solid foundations that we already know exist. Investments in technology that improve efficiency actually REDUCES revenue in a billable hour firm. The faster we are able to do things, the less money we make (that's really backwards, isn't it?). Technology has a negative return on investment in most firms. So, such investments are only made at the lowest-common-denominator level or when the customers demand it. Have trouble believing it? Well, there is easy math here. Billable hour requirements at the largest firms are at historic highs. With recent charges of billing fraud and padding at large firms, high attrition rates, and sweat-shop work environments, you can count on the fact that the pressures to bill more hours are enormous. With that fact, you can also count on the fact that the associates are not looking for "innovative ways" to make it harder to bill hours (to be more efficient) and partners who are getting rich by eating their young are also not looking for "innovative ways" to reduce their profits at the end of a quarter.

This leaves us with two types of technology providers to the legal industry: 1) Providers who have technologies that the practice of law more efficient, and 2) Providers who make non-legal activities more efficient. Here is what I have discovered about their fate.

1) Providers who have technologies that the practice of law more efficient: These providers fall into two categories:
A) Mass-market products (high consumption)
B) New Innovations

A) The category makes all of the difference in success. Mass-market products that are widely subscribed-to (Lexis and WestLaw are examples of these). They provide tools that actually make the lives of the attorneys who use them easier. The resources they provide actually do make lawyers more efficient and, arguably, reduce billable time. What makes them acceptable is that they are so widely consumed that it effects the competitive market equally (all boats rise with the tide) and these technologies actually serve as the "innovation floor" for the legal industry. In addition, the products are already being consumed . . . the partnership is not being asked to consider a "new" product that would change the way they operate. The firm evolves with the subscription.

B) The New Innovations have the most difficulty. The vendors I have spoken with cite tremendous frustration selling to firms, saying that they have been challenged by partners of firms who ask them "why would I buy your product? If I did I would make less money!". Sadly, it is true. The problem, however, is not the technology. It is a backwards billing model!

2) The true winners in the legal industry have been the products that reduce non-billable time. These new technologies are widely purchased because they are the only technologies that have a positive return on investment. With partners wanting to squeeze every minute out of each hour in order to bill their clients (as well as to get their associates to bill more), they happily purchase products that make non-billable time more efficient. These technologies can include document retrieval systems, or billing software (counting time for you), etc. Next thing you know, innovators might find a way to put a toilet in every lawyers office just to reduce the commute time (non-billable right?). Sadly, many big firm attorneys I know admit that they think about the client on the way to, and during, their bathroom break. It will show up somewhere on their timesheet. . . you can count on it. So, if the next time you get a bill from your law firm you notice that something stinks, You'll know that it's not just the service. . . . . it's, well, "pressure!"

This is just a glimpse of the innovators dilemma in the legal industry. In general, I find it quite backwards that the legal industry has adopted a billing model that promotes inefficiency and where investments in new technologies have a negative ROI. It is no wonder why the legal industry is one of the most stagnant industries in the nation. Hopefully, with the new trend toward fixed-pricing in the profession, we can be rewarded for innovation and provide customers with the service they deserve and a high quality product without reinventing the wheel!

Want More Clients? Get Over Yourself!

We have all seen the problem: Pride, Hubris, Ego, Conceit, Contentment, Smugness. Sometimes lawyers just can't get over themselves. It is as if they would rather be looking in the mirror to make sure every hair is in place than look at the client and ask "how can I serve you?" I am struck by the smug attitudes that some attorneys have with regard to client service, which explains why we are a service industry that is known for TERRIBLE service. Below I will describe a few attitudes that I recently encountered:

"If they are not my client yet, they should come to me. I am not going spend my time to visit them" -- To which I responded "Are you serious?" Am I missing something here? In my view, if you have a prospective customer that is worth having, a good attorney ought to bend over backwards to show them how much they care about the customer's business. You are asking someone to invest several thousands of dollars in you and your firm for something that is about as exciting as a trip to the dentist! The least you can do is invest a little to show that you care. In my view, this attorney's perspective represents a "taking" mentality, which is rather "old school" in my opinion. There are twice as many lawyers as a ratio of non-lawyers today as there were in the 1970's. We are competing for half of the business. If you want to be around in another 10 years, your going to have to learn to "give to get." You are not going to be desired as an attorney because you are smart. . . there are thousands of attorneys just as smart in the high rise right next door to yours. . . . . . . (smart lawyer is now nodding whilst looking out the window at competitive firms in ivory tower next door). . . People don't care how much you know until they know how much you care! In this day and age, smart lawyers are a commodity. . . . lawyers who really know how to serve their clients are a rare breed.

"All of our clients come to us. We don't need to 'market' our services" -- This is a funny one, because I hear this all of the time. Lawyers who utter these words smile with a sense of pride actually thinking that somehow their presence at the firm contributes to this phenomenon! They never bothered to use basic process of elimination or logical deduction (asking "if I were gone would that still be true") in order to figure out that the clients are not coming to the firm for them. This is where I introduce them to the word "branding" and walk them by their own marketing departments that they never knew existed. All dreams and ego being shattered, I refrain from telling them that it is the hard work of thousands of OTHER attorneys who created the referrals that give them their perceived "freedom." Is there a slavery analogy here? The only difference here is that most attorneys still think they did it all themselves! If they only knew what they looked like to the rest of us . . . the ones with their feet on the ground and some sense of reality. Someone should create a support group.

"I dictate my letters to my secretary" -- Really? You dictate your letters? Dictatorships never work! They are costly to your partnership. . . . thousands of dollars paying someone else because you can't get with the times and learn how to use a computer. Even worse, your clients are paying the bill . . . for you to talk into a machine, and then for your secretary's time to interpret your ramblings into complete sentences. I want the economy to be healthy too, but I can think of far better ways to create jobs! Can't you?

"I love the legal work, but I just hate talking to clients" -- I cannot tell you how many lawyers actually feel this way. They love the legal issues and absolutely dread client contact. Did anyone ever tell them when they entered law school that they were going into a SERVICE INDUSTRY?!@(*& NO TIPS FOR YOU! Proving that this is a recipe for disaster is an easy one. Let's say that you go to a fancy restaurant with great food and horrendous service. What will you think about your dining experience? Most customers I talk to have a bad taste in their mouth from the lack of service from their last attorney. At least half had indigestion. It's amazing how poor service can make the food taste bad. What's more amazing is how few attorneys understand just how critical the service element is with regard to client satisfaction.

Did you ever meet someone who was dangerously clueless? So oblivious that they are actually dangerous? Well, in my experience people with the highest egos who think they know everything are just too clueless to know how much they don't know. They are dangerously clueless. I would not go to a doctor if I knew his pride would blind him from a sound diagnosis. Would you? Well, next time you visit doctor ESQ, make sure that you are not being taken on a trip to prideville. YOU ARE THE CUSTOMER. You are in control. Demand excellence in service. Accept nothing less. Communicate your expectations and hold the professionals you work with accountable for serving you the way you deserve to be served. The price of professional ego is TOO HIGH. Don't be afraid to say "NO TIP FOR YOU!"

Dilution By Consensus of the Clueless - The Partnership Dilemma

I was inspired to write this post by an email I got from an attorney overseas who was discussing the challenge of getting agreement on innovative ideas in their partnership. The email sparked a memory of numerous conversations I have had with BigLaw partners who talk about how difficult it is to reach a good decision in a partnership meeting. Everybody wants to have a say in everything, and often the best ideas become so diluted by the end of the discussion that they have lost the very quality that made them good ideas. Most attorneys feel competent to argue their position on just about any topic (even if they have little or no information on the subject matter discussed), and this causes discourse and bad feelings among the partners in the partnership. This begs the question: How can you have a group of happier partners and higher quality decision at the same time? I would like to propose a win-win that we have implemented at Exemplar.

At Exemplar, we recognize that there exists a difference between having an interest in a decision and being self-interested. Every partner in a firm has a self-interest in a decision so long as the decision can be said to affect the partnership in some way. We can rationalize that since all decisions impact us, we should be involved in every decision. You see this all the time, right? Well, if that were allowed to occur in corporate America then the US economy would come to a halt. Law firms should learn a lesson from the most successful corporations that you need to hire great people into positions that match their expertise, and then TRUST them to make competent decisions. Yes, that means you may not have a say in what copy machine gets bought next month, or whether your firm uses a cash or accrual method of accounting. Is that really why you became a lawyer anyways? Below I suggest a better way:

OLD MODEL: Decisions are all made by committee and by consensus. Because lawyers are risk-adverse by nature and a great at scaring the heck out of each other with their nuclear "what if" scenarios (on any idea proposed), law firms get the lowest common denominator of innovation and creativity. By the time consensus is achieved, what you get is a product that still looks and tastes like vanilla (just by a different name). This explains, in part, our industry's failure to innovate at the speed of business. Now, here is the worse part! When the decision goes wrong, who do you blame? Nobody and everyone! Everyone blames each other and nobody takes accountability because they claim they just voted based on their opinion and it is not their fault that most people agreed. It is like a ghost in running the ship. You can't change the direction of the ship if you can't talk to the captain (the captain being the popular vote of whatever contingency showed up for the meeting).

NEW MODEL: At Exemplar, we still have committees and attorneys who are interested in a functional area of the business are encouraged to attend the meetings where decisions are made on those topics. Each committee has a chairperson (the one with the most expertise or substantive knowledge in the area relevant to the committee). In exchange for having input in the decisions, everyone splits up the responsibility of doing "homework" on issues so that everyone is invested in the decision and not just there to pontificate. Everyone has a chance to weigh in, but the ultimate decision is made by a committee chair based in part on the combined input and also on the TRUSTED expertise of the committee chair. After all, why have someone THAT GOOD in your organization and not TRUST them to make quality decisions. Now, you do not face the issue of having decisions get diluted by popular vote of strong personalities. If things go wrong, you have someone who has agreed to take accountability for making good decisions in the organization. What's more, trusting your colleagues sets you free! You do not have to worry about every decision if you trust in the people you work with.

I am always amazed how the largest firms in the nation manage to hire the smartest minds in the industry and yet many attorneys still do not trust each others' competence. This blog, on its face, appears to be about adopting a more corporate-like decision making model for a law firm. What I am hoping that you will see is that a condition precedent to adopting a more efficient and higher quality decision making model is TRUST. Without trust in an organization it will be impossible to make the change I have recommended above. Am I right? If you have an opinion on this topic I would love to hear from you. (I will post the results)

Making Policy: Linking Core Values to Compensation Part-1: Communication

Compensation experts say time and time again that "what you measure and compensate is what you get for behavior" and yet it is amazing how many companies fail to motivate the behaviors they want through their compensation system and then complain that people are not acting the way that they should. Many companies have "core values" that are no more than mere words on a page somewhere deep in an employee manual that never gets read. Even that is far beyond what most law firms have, since I have neither seen or heard of a law firm that touts of having a set of common values (other than vague references to integrity, quality, etc). The true test, of course, is to ask an employee to recite them. Our goal at Exemplar is to find a way to integrate these values into the evaluation and compensation system so that the values really do become common values. What seems to be the age old challenge is that the most important things are perhaps the hardest to measure.

This particular blog is about Communication, which is one of the 8 core values at Exemplar. Why did I start with this one? Because it is less common to have communication as a core value and I also believe it is among the hardest value of them all to measure (and very important). Why? Well, let's start with the fact that most people don't even know what the heck it really means. How do I know this? Well, we put in our job ads that we are seeking people with excellent communication skills. Hundreds upon hundreds of resumes come pouring in with candidates who claim that have such skills. After interviewing them it is clear that most people think "excellent communication" means that they know how to talk and complete a sentence. In fact, I don't think I have ever met a person who thought they did not have great communication skills, yet I also don't think I have ever met a person that did not know a long list of people who have terrible communication skills. This tells me that we all seem to be suffering from a crisis of self-awareness. One thing is for sure: Miscommunication is costly to an organization and often unnecessary, and no organization has ever failed because it over-communicated. Therefore, it seems to be a worthy mission to explore how communication can be measured and rewarded in an organization. Here is where your input comes in. I would love to hear your thoughts on the following questions:

1) Since most people are not self-aware of how well (or poorly) they communicate, the feedback needs to come from the people with whom you work. If the system is to be effective, the feedback itself needs to be constructive. If you were designing this system, how would you collect and deliver the feedback? Should you "rate" a person on a scale based on several adjectives that describe good communicators? Should it be open form to allow for examples and explanation?

2) Firm Yet Flexible: A system for promoting good communication needs to be firm enough to offer guidance on what excellence in communication means within the organization, but also needs to be flexible enough to accommodate various communication styles and cultural norms in communication. Since the people giving the feedback will not be communication experts trained to make evaluations against set standards (some of them will themselves receive poor feedback in their communication review), should everyone be involved in this process?

3) You all know and have worked with someone who was a terrible communicator. How much easier would your life be if that person communicated better? How important do you think good communication is in an organization? If you could find a way to evaluate and promote good communication through an evaluation system, would you do it?

I appreciate your comments and look forward to the discussion. Feel free to post them below or email your thoughts to me and I will either post them with a response or keep them private if you wish: cmarston@exemplarlaw.com

Reengineering A Broken Industry: Contribute to the Best Practices of a Firm Dedicated to Excellence

I always tell people that what we are doing at Exemplar is reengineering the practice of law into the business of law by examining why we do what we do and asking oursleves how we can make it better. Since we have opened, I have been overwhelmed with the supportive responses from attorneys and businesspeople all over the world who have written me personally with their words of support. Because I am dedicated to creating the standard in our industry and best practices that will shape the future of the business of law I am everyday thinking of how, as we shape our policy, we can ensure that we are making deliberate improvements on what has already been done or otherwise create it in the vision of what we think is best. This requires us to take on challenging questions like how to reward the most important qualities in one's performance (often these are the hardest things to measure). Because the readers of this blog seem to be as interested in positive change in our industry as I am, I would like to open the lines of communication between us and start a "conversation." For those of you who are interested in exploring those challenging questions and brainstorming with me on innovative solutions to challenging questions I will create additional blog posts that begin with the words "Creating Policy:" and I welcome you to think with me on how we can be the best we can be here at Exemplar. I will respond to thoughtful posts with good ideas and we can work on a solution together. Since I know that so many of you support Exemplar, I welcome you to be a part of shaping the future of the profession through your intelligent feedback, innovative ideas, and engaging discussions! I will look forward to your comments on my next post.