Even within the same law firm it is difficult, even for partners, to really judge the legal quality of the individual partners. Within the same firm there will always be partners who have never cooperated on a matter. If this is the case, it is not hard to see that for the market it is nearly impossible to asses the quality of a lawyer or a firm. That is why reputation is so important. Building a reputation for your firm will help create an image of the quality of your firm. Even for people who may never have met and who never worked with your firm. On a global scale most people in the industry would accept that Wachtell Lipton is probably the best law firm in the world for Corporate work. The fact that the vast majority of us has never actually worked with Wachtell or even met one of their partners does not really matter. Wachtell Lipton has gained a rock solid stellar reputation. The legal market is rather nontransparent. Even experienced lawyers do not have a complete overview of the other lawyers in their home jurisdiction. Perhaps they would know most of their peers in the same practice area, but outside their own practice area it will already be more difficult. This is also the case with clients. In-house counsel have a limited number of lawyers they know actually well enough to have a fair judgement on their quality. That is why reputation is so important: we build our initial judgement on reputation. Building a reputation There is no escaping: every law firm has a reputation. This could vary from ‘never heard of’ to ‘they are absolutely the best’ and anything in-between. If your firm has a reputation anyway, then it better be the reputation that you want it to be. Surprisingly most law firms are very poor at actively managing their reputation. Building a reputation is not the same as launching a new website, being active on social media or doing some advertising. I don’t know if you have ever visited the website of Wachtell Lipton (http://www.wlrk.com/) but its as outdated and boring as it can get. No market insights, no blogging, hardly any visuals an not even https (so it is marked as ‘insecure’). I do not recall Wachtell has done any advertising either. This is equally the case for firms like Cravath and Sullivan & Cromwell (although they do have https) that are equally boring. So stellar reputations can be build an maintained without any modern marketing. The ‘code of the category’ Building a reputation is a dark art. At TGO Consulting we call this positioning. It is the process of building a brand personality and communicating this to the -relevant- world. The first step, defining a personality, is arguably the most difficult. The problem being that all law firms desperately want to be the same. If we look at the websites of law firms the majority will state that they are very client driven, provide hands on advise, have tons of experience and expertise and deliver incredible service. If everyone is telling this, it is obvious that this won’t get you anywhere. Knowledge of the law, client focus and service are what we call ‘the code of the category’. It’s your entry ticket to being a business law firm as without it no law firm can survive. Stating the ‘code of the category’ as part of your positioning is like an airline claiming that their planes are safe. Off course they are. If they were not, the airline would not be allowed to fly. TGO Consulting Reputation Index Since we operate globally we from time to time get clients in markets where we have not worked before. In order to get a quick assessment of the reputations in different markets, we have developed the TGO Consulting Reputation Index. This is a method that visualizes the reputation of the leading law firms in a specific market. The method takes into account full service firms as well as nice firms. The visual above this article shows what this looks like for Norway, Netherlands and Switzerland. It is important to understand that reputation is not the same as brand recognition. Brand recognition just measures how many relevant people know the name of a firm. It says nothing about the quality perception. On the contrary, law firms with a high brand recognition typically do not get the top score as it comes to reputation. Reputation is also not the same as profitability although there is a stronger connection here than with brand recognition. If you are interested in the Reputation Index for your country, drop us an email and we will send it to you for free. Most countries we have readily available. Start managing your reputation today! So how should you start building a reputation? That is actually a difficult question to answer. For some law firms it is just a matter of be good and tell it. The problem is that for most law firms this would not work. You need a seat at the table to get a seat at the table. Meaning that the most complex and profitable matters that help build a solid track record and reputation are handed out to the firms that are already doing it. So the rest of us should just carefully build a track record as this is maybe the most important factor in building a reputation. For building a relevant track record you will need a strategy. It is important to get focus in the matters that you publicly communicate. If for instance your aim is to build a reputation as the leading firm in sustainable energy, your track record should clearly reflect this. As long as your track record is all over the place, you will never succeed. Once you have clearly defined your goals and have (aggressively) invested in building that track record, it is time to start communicating and walking the talk. Continuing with the ‘energy example’ this could mean, being interviewed, writing articles, speaking at events and so on. The whole world must see you are the energy experts. In communication do not forget to include the legal directories as they are in part instrumental in reaching your goals. Whatever you do, avoid ‘the code of the category’ and don’t start with a new website or a glossy brochure. In case of doubt, talk to us.

If the legal press, software companies, consultants and academics were to believed, all law firms should now heavily invest in new technology. Clever software and artificial intelligence are said to radically change the legal profession. The law firms that do not invest will miss the boat and will spiral down into oblivion. This is what we are lead to believe, but it is not true. Yes, sure, technology can make lawyers work more efficient. And yes, lawyers should keep up with modern office technology. We replaced typewriters with computers decades ago. We stopped dictating memos and most law firms do not use fax machines anymore. Keeping up with technology is nothing new, it is just a matter of common sense. In the business of law it is the people who make a critical difference, not the machines. Interestingly this also applies to technology companies. Microsoft employs a whopping 131.000 staff. Apple employs 123.000, Google has 85.000 and Facebook 25.000. So the very companies that are supposed to be leading the technological revolution still heavily rely on real-world people. Last weekend I was reading an article on how the US, Europe and China are competing for ‘world dominance’ as it comes to developing artificial intelligence. All three are aware of the strategic importance and are investing heavily. So money is not really the issue. The issue is people. US, Europe and China are competing heavily to attract talent. The battle for AI dominance is effectively a battle for human talent. We need talent scouts, not recruiters Despite what everyone is telling you, the business of law will remain a business of people. If we have a detailed look at what lawyers are doing today, we can distinguish between creation and production. Creation is where legal knowledge, strategic insight an creativity are applied. Production is all things needed to further process the creative output. For almost half a century law firms have been charging equal for creation and production. This made them dependent on production for income. For the client creation is ‘priceless’ as this is critical to the outcome. Production is just something that has to be done in an efficient and economic way. Technology is already capable of handling substantial parts of production today and this will only increase in the future. This is why we need to focus on creation to create value for the client. This means that for law firms ‘creation’ will increasingly become the core business. Where ‘in the old days’ a lawyer could get away with just being diligent, making the hours by doing production, we now need lawyers with excellent creation capabilities. Law firms will need to look for a different profile when recruiting. Where in the past we could simply focus on the students with the best grades, we now need to look for things such as creativity, common sense, social skills, business skills and emotional intelligence. Finding these people is more like talent scouting than mass recruiting. We will need ‘recruiters’ who can spot potential and an ability to look beyond the grades. On-boarding is an investment From day one an associate comes with costs attached. We have to pay salaries and have workplace related costs. It is understandable that there is a strong reflex to put the associate to work as soon as possible to make up for the costs. This is what law firms have been doing. We try to create billable hours for the new associate by letting him/her do really simple work. This type of work is just production and has little or no added value to the client. In close cooperation with some of our (TGO Consulting) clients we have developed a radically different approach. Instead of being put straight to work, new associates first go trough an intense training program in which they learn not only basic legal skills like document drafting, but also workload planning, project management, negotiation skills and business skills. They learn how to operate in teams and are pushed to collaboratively find creative legal solutions for real life legal matters. On top of that the partners have committed to take a new associate to every important client meeting. Thus exposing them to client/boardroom dynamics from early on. Returning from the meeting the partner and the associate will discuss what happened during the meeting. These programs have now been running for up to three years. The results show that from year two the associates who were part of the new training program outperform their peers on all significant aspects. In other words: by first investing in training and development, the revenues (and profit) are higher later on. Associates who were part of the training program can bill significantly more than those who were on-boarded the traditional way. Huge measurable ROI Surprisingly when it comes to technology most law firms do not make a business plan that projects potential revenue and profit against the cost of investment. Not only that, most law firms don’t even have a basic idea on how to monetize technology. Yet law firms are investing substantial amounts of money in new technology. How different are things when it comes to people. Associates are invariably seen as costs rather than as investments. This is the more surprising since it is easy to calculate. Making 1,500 billable and collectible hours, an associate will have a mark-up factor between 3.5 and 4.7. The beauty of this is that for people the costs are fixed. Regardless the number of billable hours we have to pay the same salaries and office costs. So additional hours do not come at additional costs. This means that if an associate thanks to better training is able to make 1,550 instead of 1,400 billable and collectible hours a year, the 150 additional hours (150 x applicable rate) are just 100% extra profit. After you have let this sink in for a moment, you will start to see why people are still a great investment.

At TGO Consulting we do a lot of law firms business analysis. Over time we have established an impressive set of reference data that literally covers the globe. We know there are significant differences between jurisdictions as it comes to rates, revenue/profit per lawyer and leverage. Regardless jurisdictions and size of the law firm we regularly come across firms where on average partners make more hours than the associates. From a business perspective we consider this an undesirable situation as it will choke the profitability of the firm. Associates contribute to the profit It might feel counter-intuitive but even though associates are charged at a lower hourly rate than the partners, they do contribute more to the profit. All associates have a fixed costs base. These costs are composed of salaries, office space, support staff, subscriptions, etc. Every additional associate will come with these costs. So these costs will grow proportionally with the number of associates. For every associate there is a client hourly rate. Law firms sell associates with a margin. Depending on the base number of annual billable hours, the mark-up typically varies between 3.4 and 4.7. For example an associate with an all-in cost of 100,000 will make 350,000 in billable hours for the firm. Thus the profit on this associate will be 250,000. Not bad for an 100,000 investment. If the firm has a profit margin of 35% (market average), a partner would have to generate 715,000 to generate the same 250,000 in profit. Let’s assume the firm has a leverage of 3, so 3 associates for each partner, then 3 associates combined would generate 750,000 in profit even if the partner does not to any billable work. When the partner is doing most of the work and the associates are underutilized, their cost will remain the same thus rapidly eroding the profitability. In order to compensate for 3 associates, the partner would have to make an additional 2.2 million in revenue (on top of what the partner would normally be doing). This obviously would not be possible. When partners are making more hours than the associates, this is a clear sign that something is wrong Associates' quality of work It takes 6 years after university to become a fully qualified medical specialist. If that is the amount of time it takes to train a person to unsupervised perform surgery on a patient, why does it apparently take so much longer to train a lawyer? Senior associates should realistically be able to handle most of the matters without compromising quality in any way. Still in the hierarchy of law firms, only partners are supposed to have the required quality and expertise to be responsible. This assumption leads to an absurd situation when a lawyer is promoted partner. Until that day the lawyer needed to be supervised by someone who always knows better and after that day the lawyer is supposed to be all knowing. Sometimes I hear partners complaining about the quality of the associates in the firm. They feel they will spend more time in explaining, supervising and correcting, than if they would do it themselves. If that would be the case, that would be a bad situation and a sure sign of poor management. Law firms need to educate and train associates as a structural part of their business model. If done right, associates should be perfectly capable of doing most of the work. Partners should fill the pipeline The difference between a partner and a senior associate is not so much the knowledge and expertise. In order for an excellent senior associate to become a partner, practice development skills are needed. The main difference is that partners are responsible for bringing in new work. A lawyer who has an academic interest in the law and prefers to just skillfully handle legal matters, should probably not be made partner. Law firms today are very much a business. Partners are responsible for getting new work in. Partners should spend at least 20% of their time on client relations and new business. This is another strong argument why partners should not be making more billable hours than the average of all associates. When working with clients we typically look at the ratio of average billable partner hours to average billable associate hours. This should be done on a firm level and on a practice level. When partners are making more hours than the associates, this is a clear sign that something is wrong. I would recommend to have a look at this ratio in your firm.

Hardly a day goes by in the legal sector without the publication of an article on ‘what clients want’. Literally the past decade thousands of conferences around the world have had panel discussions where ‘General Counsel’ told lawyers what they wanted out of the relationship with law firms. Looking at it from a distance it seems as if General Counsel are at the center of the universe. These General Counsel keep repeating that they want prices to go down and that law firms should make an effort to get to know the clients’ business. When you Google “what general counsel want from outside counsel” you get no less than 33 million results. Diving deeper into these millions search results leads to the same conclusion: clients demand better value and want lawyers to understand the client’s business. So if everyone is saying this, it must be true? Maybe not… Google “what general counsel want from outside counsel” and you get 33 million results. There is no ‘THE client’ When we start zooming in at law firm clients a more fuzzy picture emerges. Clients come in every conceivable shape and form. Some companies have sizable well organized and highly professional legal departments. These are typically the large multi-nationals and the banks. This however is a minority. Many companies that deal with law firms only have a small team of in-house lawyers or sometimes even only one person who then might also be the company secretary. This in reality forms the majority of all business law firm clients. Looking at businesses in general: most companies do not have an in-house legal function. So certainly from this perspective alone it would be false to make general statements on ‘what clients want’. There is no such thing as ‘the client’. Ultimately the client is not the in-house lawyer but the shareholders Another aspect we need to analyze is the role of legal within a company. Businesses are focused on creating products and bringing them to market. The primary process of any business is to create ever increasing shareholder value. Business operate in an ambiguous and competitive world and are invariably under a lot of pressure to deliver. Doing business is ultimately about making money. From this perspective legal is important to help enable and protect, but it is by no means essential to the business. In-house legal staff is support staff, just like facilities, finance, HR and IT. The implication of this is that, although in-house legal might be the primary gateway for the law firm, it is only an intermediary. The ultimate client are the shareholders. So the question ‘what do clients want’ should actually be rephrased as ‘how to help increase shareholder value’. Knowing your clients’ business We at TGO Consulting work with in-house legal teams across the globe on a regular basis. So far, without exception, we got to know in-house attorneys as extremely committed to provide the best possible service to the company that employs them. Every in-house legal team consciously makes a permanent effort to work integrated with ‘the business’. Truth is that in most cases in-house lawyers themselves only marginally understand the business of the company in which they operate. In-house attorneys are lawyers in the first place. They are in general running all day to keep up with request from ‘the business’ and at the same time monitor every relevant legal development. So maybe, when ‘clients’ state that lawyers should understand the client’s business they might just be echoing what their CEO is telling to them. Reducing legal spend will hardly be the first priority for a CFO We want more value Ever since the financial crisis ‘General Counsel’ have been hammering on how they wanted law firms to deliver value at a lower price. Over that same 10 year period of time law firm revenues and profits have kept growing year-by-year. Clients have been paying for this of course. Despite the obligatory on stage statements demanding better value, the overwhelming majority of clients remain very satisfied with the products and service they get form their law firms. Relationships between clients and law firms remain strong and are often personal. In general a law firm must behave very badly before the client leaves. Clients want law firms to solve problems for them. In-house attorneys are often swamped with requests. When they turn to outside counsel they are looking for ‘aspirin’, not for a ‘headache’. As long as outside counsel provides adequate service and solutions, the in-house lawyer will be happy. As long as the price does not contain any nasty surprises, price will not be an important issue. In general companies, depending on geographical location and industry sector, spend between 0.23 and 1% of their total budget on legal. This figure immediately shows that reducing legal spend will hardly be the first priority for a CFO. The relationship is about dialogue, transparency and alignment The emperor’s clothes So there we have it. The whole legal industry is talking about ‘what the client wants’ while THE client does not exist. General Counsel who are supposed to speak on behalf of THE client are not representative for the vast majority of businesses that have little or no in-house legal function. When THE client states that law firms should understand the client’s business, they might merely be reiterating what their leadership has been telling them. After a decade of stressing that prices must go down, clients have steadily been paying more. Maybe this is all about the emperor’s clothes. Maybe there is actually nothing there. Please take note that by no means I am saying that there is no room for improvement in the relationship between law firms and their clients. There are plenty of great opportunities for both parties to improve the relationship and create more value. As I have written before, time based billing is an inadequate measure for value delivered. In the future we might see the industry move away from this. Both external counsel and in-house attorneys need to make an effort to understand the business of the company and the market dynamics that come with it. Law firms and their clients should not communicate on stage but enter into a permanent dialogue. They should speak up as it comes to their goals and expectations. Dialogue, transparency and alignment needs to take place. This will be very much different of each individual lawyer-client relationship. Ultimately the client is not the in-house lawyer but it's company's shareholders.

Last Saturday I spend some time standing at the side of an amateur football field watching young children play. It was a joy to watch as all the players were overwhelmingly enthusiastic and clearly enjoyed every minute of the game. What struck me after a while was that 7 year old’s do not play as a team. They clutter together. All of them (excluding the keeper) chasing the ball and wanting to make that goal. Once one has possession of the ball he will try to keep is as long as possible rather than passing to a team mate who might be better positioned to continue the attack. Apparently at the age of 7 children have no concept of teamwork. With age, boys (or girls for that matter) get rapidly better at team play as it comes to football. When later that same Saturday the 14-15 year old’s were playing, teamwork had considerably improved to a useful level. Surprisingly as it comes to the professional work space, teamwork can remain a colossal struggle even at an adult age. In many organizations adults cooperating in a team behave much like 7 year old’s on a football field. There is no clarity when it comes to everyone’s position and role and responsibilities within the team. Team members clutter together covering only a small part of the field and when it comes to it every individual wants to be the one that scores the goal. In a way team members are competing against each other as much as against the other team. The same holds true to partners at a law firm. If there is any collaboration to start with, teamwork very much remains at the level of 7 year old’s. All running after the same ball. All wanting to score that goal. Last week’s blog on collaboration unexpectedly gained a lot of traction and response. Collaboration seems to touch upon a bare nerve. Many law firms have started to realize that hammering on individual performance and contribution is reaching a dead end. Still individual performance remains so deeply ingrained in the structure of lawyers and law firms, that it might take an extraordinary effort to change. The pressure to measure partner performance At TGO Consulting we advise law firms on partner remuneration and partner performance metrics on a regular basis. Between our clients we have come across all conceivable forms of profit distribution, ranging from rigid full lock-step to some the most extreme forms of ‘eat-what-you-kill’. We have clients that employ origination credits and we have clients that don’t. What we see is that collaboration (let alone teamwork) is always difficult, regardless the systems used. Obviously in eat-what-you-kill a partner will directly benefit from not sharing the client. A reward for origination does not change that, as origination does not reflect the lifetime value of the client nor the effort needed to keep the client over time. One would expect that pure lock-step would stimulate partners to cooperate since every partner will benefit from a rise in revenue or profit. Reality is that the majority of lock-step firms have a significant spread in revenue per partner and this invariably leads to a strong pressure to kick weak partner out of the firm. As a consequence partners still will want to have as much revenue put in their name as possible. No encouragement for collaboration. A matter of trust When we work with law firms we always try to establish the level of trust between the partners. Not in the sense if they would trust their fellow partners with their wallet. We ask whether they would trust each of the other partners to work with their clients. Most of the time the answer to this question ranges between “it depends” and an outright “no”. Shockingly as it might be, many partners do not fully trust the legal knowledge, judgement or personal skills of most of their fellow partners. It goes without saying that this creates another huge hurdle for collaboration. I will elaborate on ‘trust’ in one of my future blogs. Lack of trust is not only limited to fellow partners. Too often we come across partners that complain about the quality of the associates. These partners feel that the associates are not up to their task and start doing most of the work themselves. Partners making a huge number of hours while at the same time the associates are sitting idle is always a bad sign. Not only from a profitability perspective, but also from a teamwork perspective. Missed opportunity to grow revenue Based on the analysis of the financial data of all our clients throughout the world we can clearly see that matters on which more that one practice group have collaborated are in general more profitable than matters handled by one partner (and his/her team) alone. The same holds true for clients. Clients that are served by multiple practice areas in an integrated manner are more profitable than those that deal only with one practice area or deal with two or more practice areas in a non-integrated manner (e.g. the IP department dealing with IP lawyers and HR dealing with employment lawyers). Come to think of it, these findings are not that surprising. Clients are facing a world that is increasingly complex and volatile. Clients need lawyers that can collaborate to solve their problems. Many law firms state on their website that they want to be the trusted adviser to their client. It is hard to figure how a law firm can be a trusted adviser without offering teamwork. Law firms that are in dialogue with their client on how to add value through collaboration are winning more loyal clients and greater profits. By failing to collaborate, law firms are leaving money on the table. Personal financial rewards have been the main driver for partners not to collaborate. The same financial reward might be the driver to start cooperating and deliver more value to the client. It is about time that partners stop behaving like 7 year old’s…

During one of my recent visits to China, I had a meeting with the leadership of the All China Lawyers Association (中华全国律师协会). While discussing various aspects of the professional development of the legal profession in China at some point we addressed the topic of collaboration between lawyers in a firm. It was then that one of the senior Chinese representatives asked me: “Mr. Bosman (潘言博), have you ever seen a cat catch a rat?” “Yes”, I answered, “as a child I have”. “Have you ever seen multiple cats catch a rat?”, he continued. His story was meant to show that like cats lawyers are designed to operate as an individual and not as a team. The analogy with cats is widely popular in lawyer circles. David Maister wrote in his book on managing a professional services firm that "managing lawyers is like herding cats." He was describing how attorneys are often difficult to deal with, impossible to manage, and are terrible at working together for a common goal. As to my Chinese host, I respectfully disagreed with his story of cats and rats. Sticking with Chinese symbolism, I asked him if he would agree that the lion is mightier than the cat and I pointed out that lions, unlike cats, do hunt in groups. This article is however not about metaphors. As appealing as the liking of lawyers to cats might be, it is not true. Lawyers are quite dissimilar from cats and are, unlike the common house cat, not primed to operate solo. Notwithstanding this, in their day to day practice most lawyers work competitive rather than collaborative and this is probably not a smart thing. Competitive environment The business of law is competitive by nature. From law school through partnership, everything is very much individualistic and competitive. Law students are not trained to collaborate, but to compete. Last week I had some meetings at Harvard Law School. Like at other Ivy League universities, only the most talented are admitted and only the very best find their way to the legal top jobs. Being successful as a law student is about being better than the rest. Lawyers are competitive from the onset. When joining a law firm, each lawyer enters into a highly competitive race to partnership. Being a lawyer is about individual performance. It is about making more hours than the lawyer in the next room. This competitive spirit does not magically end once the lawyer becomes a partner. One could argue that being a partner is the non-plus-ultra as it comes to competitiveness. As outlined in one of my earlier blogs, partners are most of the time encouraged to create revenue in their own name. Partners typically are highly possessive when it comes to their clients. Partners operate solo with a small team of trusted associates. Law firms are one of the rare forms of business where the individual is more important than the company. Even Goldman Sachs does not operate in that way. “it's me and my nation against the world and me and my clan against the nation and me and my fam' against the clan. Then me and my brother with no hesitation go against the fam' until they cave in. Now who's left in this deadly equation."(NAS & Damian Marley, Distant relatives - 2010) Towards a collaborative culture I would argue that both law firms and clients would benefit from a more collaborative culture. What if a client is not the client of an individual partner, but a client of the firm. I have written on this topic before. Clients would benefit because they would always have the best lawyer on the job depending on experience, expertise and availability. This even implies that the required skill could change during the course of a matter. Something that requires a business savvy negotiator in the start could require a patient technical lawyer later in the process. Even default discussing the strategy in a particular matter between the partners could positively impact the results. Would you as a patient not prefer your doctor to discuss your case with his colleagues to obtain their insights and opinions? I would personally not put my life in the hands of a medic who does not consult his colleagues. Why then would this be different as it comes to lawyers? Hunting in packs Today pretty much everything in the business of law is geared towards individual performance. I would recommend that we start encouraging teamwork and cooperation. Starting with our associates, collaboration should be rewarded. Young lawyers should be trained and incentivized to work in teams, divide the tasks and discuss different options to take the matter forward. In my opinion also clients could sometimes be actively involved in the team on a day to day basis. Not only the associates, but also partners should be more open to teamwork. Sure, every team need a team leader. So in the end one partner will coordinate the team. This however does not imply that this partner carries out most of the work or has ‘ownership’ of the client. The whole purpose of teamwork is creating the best possible value to the client and help the firms as a whole to be successful. The individual should be subordinate to this higher purpose. Even in Formula-1 racing the driver needs to serve the team. Good cooperation and teamwork between partners is also increasingly one of the key ingredients as it comes to successful business development. Orchestrated and aligned team efforts to attract a new client or a new high profile matter have proven to be more successful than disperse individual efforts. It literally pays off in cash for partners to hunt in packs. It is time for lawyers to shake off that cat stigma.

One of the things many lawyers seem to fear is ‘commoditization’. I often have discussions with lawyers on changes in the market and invariably I then ask if they see commoditization happening in their segment of the market. Depending on their personal practice and geographical location the most common answer is: “yes, I see commoditization, but not in my practice which is highly bespoke” Herein lies a danger as commoditization in the legal world is commonly misunderstood. Lawyers tend to think that commoditized equals ‘bulk’ or ‘extremely simple’. Academics like Richard Susskind have fueled this doctrine, leading lawyers to believe that there is a gradual sliding slope that goes from bespoke/individualized, via standardized, systemized and packaged to commoditized. (Tomorrow's Lawyers - Richard Susskind - Oxford University Press). Being the preachers of the new technology, these gurus proclaim that commoditized legal services will soon be the exclusive domain of computers and Alternative Legal Service Providers. However plausible this theory might sound, it is utter nonsense leading to all kinds of dangerous misconceptions among lawyers. In order to understand the concept of commoditization we need to start with a clear definition: ‘Commoditization of legal services is the situation in which the client for a specific matter can choose between multiple lawyers and multiple law firms who are able to offer the same level of expertise, service and quality’ Please let this definition sink in for a moment. So there is commoditization when from the client’s perspective it does not really matter which lawyer handles the file as long as this lawyer meets all criteria. Commoditization must be seen from the client’s perspective and not from the lawyer’s perspective. Commoditization will lead to a ‘buyers’ market’ as opposed to a ‘sellers’ market’ as is the case with matters where the client really wants or need to work with one particular lawyer or law firm. It is important to understand that commoditization as such has nothing to do with the complexity of the work. It is simply a matter of supply and demand. To illustrate this let’s look at ‘project finance’. In a well developed competitive legal market like in London, many experienced highly qualified lawyers and law firms are capable of doing project finance work. As a result clients are shopping around. This creates a tremendous competition on price and as a result most London law firms struggle to make any money on ‘bread and butter’ project finance work. So in the London market Project Finance work has become a commodity. Clients can choose on any given day between numerous well qualified teams and as a consequence prices have gone down. Most lawyers suffer from commoditization blindness How different would this be in Nigeria. For the same type of project finance work in Nigeria, a client could maybe choose between two firms, if he is lucky. The situation is that Lagos as a legal market is not by far as developed as London and good quality experienced lawyers are hard to find. As a result fees for project finance work in Nigeria will be higher than in London even if the quality of work would not meet the same standards. In the Nigerian market project finance is not a commodity. Nigeria is a sellers’ market. So there we have it. Commoditization must be seen form the clients’ perspective and is basically a matter of supply and demand. It has little to do with the complexity of the matter. Project Finance requires expert knowledge that is outside the expertise of most lawyers. Commoditized also does not exclude that the service is bespoke. That is the reason there is a picture of a barbershop on top of this article. I think no one would dispute that a haircut is as bespoke as things can get, right? Still despite the service being highly bespoke, competition among barbershops is fierce. This is simply because there are simply so many good barbershop (or hairdressers) around. The majority of people are price sensitive as it comes to barbers. (Barber Shops in the US - US Industry Market Research Report, September 2017). Getting a haircut, despite being bespoke, is a commodity. As it comes to commoditization most lawyers are in denial. Lawyers suffer from ‘commoditization blindness’. Many lawyers are happy to believe that commoditization only refers to ‘bulk’ or highly standardized work. This might turn out to be a dangerous misconception. Commoditization might well be one of the most underestimated profit eroding factors for the legal sector. It is important that lawyers start to recognize that commoditization is in the eye of the client and in the end a matter of supply and demand. Could positioning be an antidote? At TGO Consulting we work with clients to mitigate the risks of commoditization. Differentiating your product by delivering better/faster service or anything else that is relevant for the client and is not equally offered by your competitors will help. Also clever positioning and creating a strong brand personality might give a competitive edge as is demonstrated by Apple (NASDAQ: AAPL). Anno 2018 from a technical point of view mobile phones are a commodity. Thanks to their strong and clever brand identity Apple gets away with charging the highest prices in the industry. We help our clients to develop similar strategies in the legal sector. Find out more.

Last weekend, when driving the car, I listened to the radio. There was an item on academic research that had brought to light that due to the medical profession’s specialization doctors were sometimes unable to make the correct diagnosis as some symptoms are missed because they were outside their specialism. The research had particularly focused on a relationship between heart failure and cancer. The fact that certain types of heart failure would increase the risk of cancer had up till now been missed, simply because the two specialisms are too far apart. This reminded me of a conversation I had with an in-house counsel not long ago. He had told me about a meeting in which several lawyers from a number of law firms were involved. Most lawyers were partner at one of the prestige national firms. One lawyer, who was an elderly partner from a mid-size regional firm, should have been out of his depth. In reality however, the in-house counsel told me, it was exactly this lawyer who was crucially able to connect all the dots and had had the most valuable contribution to the meeting. Having two decades of experience in a more general practice gave this partner a clear advantage. This experience seems to resonate with what I am hearing more and more frequently when speaking with in-house teams. Clients are looking for lawyers who have a more holistic view of the law. Clients prefer lawyers who are not just hyper specialist in one niche area of the law. They want their lawyers to be sparring partners who not only understand the client’s business but also are able to see legal issues in a wider context. “If all you have is a hammer, everything looks like a nail” Let’s compare this with home improvement. When you call a carpenter, every solution will be based on the use of wood as where a mason will revert to brick and stone. Both will look at the situation from their own expertise and will suggest solutions that are within their skill set. However when you would have called a contractor, all options would be considered and the best solution for your home would be chosen. “If all you have is a hammer, everything looks like a nail” (Abraham H. Maslow (1962), Toward a Psychology of Being) Over the past decades laws and regulations have increasingly become more complex and detailed. It has become impossible to at the same time be an expert on banking and on privacy despite the fact that both are of a regulatory nature. To cover one area in great depth lawyers have grown into specialists. You only need to look at websites of law firms or at the great number of subsections in the legal directories to get an idea of where the legal market has gone. And here in lies a danger. ‘The second generation of specialists already lacks important basic knowledge’ I would argue that specialization may have gone too far. The first generation of legal specialist lawyers got their initial training from the more generalist lawyers who’s apprentices they were. Despite the fact that they developed into specialist over the years, these lawyers still had had a broad legal training. This is not the case for the second generation of specialists we are seeing today. Today’s generation has been trained by specialists from the day the joined the legal profession. These lawyers may have developed a deep expert knowledge and experience in one small area of the law, but they lack the proper knowledge (and perhaps interest) to see the wider picture. These lawyers will use a ‘hammer’ to solve a problem. The point of this article is not that I do not recognize that legal specialization is unavoidable or that I think it is a bad thing. In an increasingly complex world clients turn to lawyers because they are the specialists, have the experience and know best market practice. The point is that increasingly the specialists lack the general understanding of the law. With each new generation of new specialists being trained by specialist this will get worse. A trend we need to stop. This however might prove to be more complicated than it seems. ‘Will today’s generation of partners be able to train the next generation?’ From an organizational point of view most business law firms have developed into silos. The firm is divided into different practice groups along the lines of legal specializations. More often than not communication between silos is poor. A young lawyer who joins a law firm is assigned to a silo where he or she is educated and trained by a specialist. A perfect recipe for developing a professional ‘tunnel vision’. In one of my previous articles I have explained how for lawyers human skills will become rapidly more important that technical legal skills. Law firms will need to re-engineer the way in which they train their young lawyers. Going through law school has always been very individualistic an competitive. Law firms themselves are also largely individualistic and competitive. Now clients demand that lawyers are able to smoothly cooperate in multidisciplinary teams. We will need to train on teamwork, we will need to train on human skills. On top of that we will need to educate our lawyers on a ‘legal sixth sense’. General legal knowledge and a well-developed ‘legal instinct’. The problem is, in a law firm with only specialists, who is going to do that training?

The other day I had dinner with the General Counsel of a well-known large international company. In the past his company has been the target in a multi-billion cross border acquisition. This M&A in the end failed and the whole process had ended and his company had continued independent. Looking back at this intense and exhausting period, this GC had some very interesting observations. A blinding star lawyer The first observation regarded the lawyers. Mergers and acquisitions of this multi-billion dollar size require the involvement of the world’s elite law firms. Interestingly enough not only some of the most prestigious law firms, but also one of the world’s most celebrated M&A lawyers had been involved. Naturally I was most interested to learn what this GC’s experience has been with this star lawyer. Had he really lived up to his reputation? The answer turned out to be ambiguous and mixed. On the one hand the star lawyer was an excellent negotiator, had a wealth of knowledge on best market practice and was a master in distinguishing between what is trivial and what really matters. He was a fast thinker, but an annoying personality. He actually behaved like a star. He was anything but a team player. He bullied his fellow partners (from the same elite law firm) and treated everyone else - including this GC - with mild contempt. The star lawyer acted with absolute supremacy. This behavior in combination that everyone was aware of his star status in his field of expertise, however turned out to have unwanted side effects. When it came to deciding on certain parts of the strategy towards getting the necessary approval of global regulators, the star lawyer ruled out a strategy proposed by the GC and his team of lawyers. He knew better and everyone should just listen to him and after a brief discussion everyone accepted that the star lawyer probably knew better. Except that he didn’t and the merger ended up being derailed by the regulators. Something that most likely could have been avoided if the strategy proposed by the CG and his lawyers would have been seriously considered. Due to the dominant behavior of the star, there never truly had been an open discussion. ‘Question everything and fear no-one’ Starstruck by Wachtell Another example, not related to the case above: last week on 4 September CVR’s counsel, Herbert Beigel, wrote to U.S. District Judge Richard Sullivan, seeking permission to add claims for breach of contract and breach of the covenant of good faith and fair dealing and to seek punitive damages in an ongoing law suit against elite law firm Wachtell Lipton. The client CVR Energy Inc had in 2012 hired Wachtell to help defend back against a hostile takeover attempt by Carl C. Icahn. The defense failed. CVR, now controlled by Carl Icahn, started suing Wachtell for legal malpractice in the Southern District of New York. CVR alleges Wachtell failed to advise that CVR would face claims by Deutsche Bank AG and The Goldman Sachs Group Inc. for $36 million under the terms of engagement letters with the banks. CVR hired the banks as financial advisers to help fend off the hostile takeover. Reading through the court filings, what struck me was how much CVR had ‘blindly’ relied on Wachtell. Hiring what is allegedly the worlds’ best M&A law firm had, as it seems, obliterated some independent critical thinking at the client side. The client just assumed Wachtell would know best and had failed to critically question some critical proposals and documents. Documents drafted by Wachtell seemed to have been signed without proper questioning (and perhaps even without proper reading). Something CVR now greatly regrets and the reason behind this ongoing law suit. A bossy boss Back to my dinner with the GC. His second observation regarded the dynamics in the boardroom during the time of the merger. The GC had been working closely with his board for well over a decade. He had always been consulted on all strategic business issues, his opinion and expertise were highly valued. He was a trusted adviser in the true sense of the word. A consigliere. Yet in the high pressure situation of a bet-the-farm multi-billion takeover, he noticed the dynamics changed. The CEO and one other board member took the lead and all other board members just sat, listened and accepted everything these two had decided. Whenever one of them tried to raise an objection or even a second thought, they were barked at and disappeared with red faces behind their laptop screen. Strong and bossy leaders tend to kill discussions that do not support their vision and ideas. In the case of legal issues, the GC was listened to and sometimes even his memos were read aloud for the minutes, only to be shoved aside by the dominant males. Obviously the fact that none of the board members had ever been part of a mega takeover might have made them feel insecure. The result being that all checks and balances went through the window. Thus creating potentially dangerous dynamics. ‘Fear is one of the most important drivers of behavior, fear of losing one’s job, fear of being seen as stupid’ Brilliant and destructive at the same time. Every organization needs visionary leadership. Leaders need to take decisions and lead the company. They must dare to be bold and should not fear to go against the stream. At the same time it is critically important that there are good checks and balances in place. Each board member had the obligation to personally contribute and critically question everything until completely satisfied. Each client must also keep a critical mind and independent thinking when working with a lawyer. The lawyer might be the expert and the trusted adviser, but in the end it is client and not the lawyer who is responsible. Lawyers should actively engage in discussions with clients and make sure the client fully understands what is happening. Lawyers have a natural obligation to keep an independent and critical mind. A lawyer should never be overwhelmed by the client, the judge, a star lawyer or a star firm. In this respect I think the (real life) example of the star-lawyer as described above is exceptional, but none less relevant. In our practice we get regularly confronted with partnerships that are being dominated by one or more dominant and opinionated partners. Typically these partners have a large practice and a high revenue. They are smart people and master the art of the word. They often are amicable and short tempered at the same time. It is all the same mechanism: we need strong and dominant people to lead, but if not properly controlled, dominance will become destructive. 'As it comes to challenging the dominant, each of us has to step up to the plate, whether we like it or not.'

The story goes that back in the 1950s a woman approached Picasso in a Paris restaurant and asked him to draw her portrait on a napkin. Picasso politely agreed and taking a charcoal from his pocket made a rapid sketch of the woman and handed back the napkin. It took only a few strokes, yet was unmistakably a Picasso. “It’s perfect!” she gushed. “You managed to capture my essence with only a few strokes. Thank you! How much do I owe you?” “40.000 Francs” the artist replied. The woman was shocked: “How can you ask for so much? It took you 30 seconds to draw this!” “No madame”, Picasso replied, “It took me 40 years” The billable hour This story often springs to mind when discussing pricing of legal services with both lawyers and clients alike. When you start thinking about it, the hourly rate is a poor measurement of the value of legal advice. So why is it used? It may seem like billing by the hour has always been the standard, but it became only widely used after 1975. Throughout the 20th century, legal fees in the U.S. were largely capped by state law and lawyers were using fixed-fee schedules, published by the courts and the ABA, to establish prices. Although Sherman & Sterling started tracking time as early as 1945, the minimum fee structure stuck until it was challenged and struck in 1975 when the U.S. Supreme Court agreed, ruling in Goldfarb v. Virginia State Bar, that the minimum-fee schedules violated federal antitrust law. This paved the way for the adoption of the billable hour. Ever since 1975, the billable hour has been the de-facto standard. The use of time sheets in combination with billing by the hour has brought great riches to the lawyers. By the 1950s lawyers had fallen well behind the pay scales of fellow professionals such as doctors and dentists. After 1975 lawyers not only caught up but outpaced their fellow professionals. Even though today the billable hour is often criticized, it remains the standard for both lawyers and clients. Even today’s Alternative Fee Arrangements are ultimately based on the expected number of hours multiplied by the applicable rates. The value of experience. Even if in most cases both client and the lawyer are happy with billing by the hour, in some cases this method provides unwanted results. I regularly meet lawyers who are leading experts in their field and get called by clients who ask for their opinion on a legal matter. The experienced experts are most of the time able to answer the client’s question straight away. So should they only charge for the 30 minutes? That would hardly reflect the value of their advice. I think in these situations the Picasso example becomes relevant. The hourly rates are based on a certain volume and a mix of valuable time and ordinary production time. It doesn’t work for one-off questions. Let me give you an other example. The other day a company had an investor call upcoming to discuss the quarterly results. About one week prior to the call a large credit is withdrawn by the bank. This would definitely have a negative impact on the investors. The CFO turned to a friend of mine, who is a partner at one of the leading law firms. My friend manages with a few phone calls and a letter to have the bank revise its decision. Within days and well before the investor call, the issue is solved. Now how much should my friend charge? Based on the time sheet this would perhaps have been $20,000. The value for the client is however much higher and this client happily agreed to pay $100,000. In other instances the actual time spend would lead to an amount that would not be justifiable given the economic value to the client. Billing based on time spent is a poor measurement for value but thanks to the fact that its is to a certain extend transparent and easy to work with it remains the most popular pricing option. Efficiency adding a layer of complexity One of the inherent problems of time based billing is that 'gap-time' is equally expensive as expert knowledge or an innovative solution. Clients often do not realize that when they have a 2 hour meeting with their lawyers of which 30 minutes is spend on social chit-chat, the full 120 minutes for all lawyers will be charged. If a lawyer has to travel to another city only to be present at a 30 minute proforma hearing in court, depending on the distance a full day might be charged. This demonstrates again that billing time is a poor measurement for value. In my upcoming book (Data and Dialogue, a relationship redefined) I will elaborate on how some large multinationals have been gathering and analyzing billing data and time sheets in order to identify and eliminate inefficiencies in the relationship with their external counsel. By just rooting out these inefficiencies - both those on law firm side and those on client side - they managed to save on average 25% on legal spend (everything else equal) while maintaining the same quality level. No doubt that in the next few years many other companies will equally start focusing on improving the efficiency of legal services. For law firms this will drastically erode their earning model as by eliminating inefficiencies the number of hours will be reduced. At the same time the adoption of new technology will also reduce the number of lawyer hours needed to complete certain tasks. This will further reduce the amount of time spent on a matter. The hourly billing proves not only to be a poor measurement of value delivered, it also will in several years’ time prove to be an unsustainable business model. Today we are actively working with our clients to make the transition towards new sustainable billing structures that still support adequate law firm profitability. Picasso definitely was on to something. For further reading: Start monetizing those unused hours!

A few weeks ago I wrote a blog post on ‘who owns the client?’ This post has lead to a lot of questions and discussions. There seems to be a clear divide between those who believe the client belongs to the firm and those who believe the relationship is with the partner. This week I will be looking into an issue that is very much related to client relationship: succession. At some point every partner has to leave the partnership. Whether this through sheer high age, reaching the contractual retirement age or by leaving mid-term, every partner leaves at some point. In most cases the firm will want to continue the relationships with the clients after the partner has left. And also from the client’s perspective there should preferably be little or no interruption in relationship and services if a partner leaves. The founder Based on our experience the retirement of a law firm’s founder has a high probability of coming with lots of difficulties. Founders have built the firm and through their efforts the firm has become what it is today. Often their name is – part of – the name of the firm. Founders often consider the firm their personal property and may experience extreme difficulties in letting go. In many cases founders have strong personalities and have gathered mentally weaker partners around them as equally strong minded personalities would have clashed. This unintendedly reinforces the founders idea that the firm will not be able to ‘survive’ without him (yes these are predominantly men). If none of the other partners is deemed good enough to manage the firm (unsupervised), the founder will want to stay. More often than not this eventually ends in a fight where ‘the children have to kill the parent’ (not literally) before they can move on. Succession of a founder is a management issue I think no founder intentionally wants things to end badly. It is best to plan succession 10 years in advance. It all starts by appointing capable partners who are able and prepared to stand up to the leader if needed. There is an inherent juxtaposition: on the one hand two strong headed personalities might clash, on the other hand the weak will never gain respect. The founder should at the age of 60 consciously move to a backseat as it comes to strategy and management. The rainmaker Achieving the status of rainmaker is as high as one can get within a law firm. Rainmakers are seen as more important than practice group leaders or managing partners. Rainmakers are law firm nobility, they have a special status. No-one wants to upset them and their opinion weights in heavily as it comes to strategy and decisions. Knowing this it comes as no surprise that no rainmaker will want to lose this status. Having an optimal and smooth succession in place as it comes to rainmakers is top priority for any law firm. Rainmakers attract a lot of work, have a great reputation in the market and are highly trusted by their clients. Firms certainly don’t want all this to get lost once the rainmaker leaves the firm. Managing a successful succession of a rainmaker requires planning, clever psychology and time. Lot’s of time. It takes time for the successor(s) to prove they are worthy of the client’s trust. It takes time and planning to help the successor build a solid reputation in the market (BD can help with achieving rankings in the legal directories). It takes clever psychology to make the rainmaker open up his/her relationships and accept and introduce successors in matters and to clients. Succession of a rainmaker is mainly psychology. As with ‘the founders’ succession of rainmakers is mainly psychology. It is important to recognize that the fear of losing ones special status as ‘law firm nobility’ and become less and less relevant to end in oblivience, may prevent the partner to transfer his/her practice and successfully introduce the successor(s) to clients and relations. Depending on the profit distribution system also financial motives might be serious a hindrance for succession. The lateral departure The succession of a partner who suddenly leaves for an other firm is the most difficult to plan for. In general it will be the more successful partners leaving as they are in higher demand. The departing partner will also try to transfer his/her book of business to the next firm and might take all or most of his/her team when leaving. This will leave the old firm vulnerable. It makes sense to plan for departures. Actually the only way to mitigate averse effects of lateral partner movement is doing a permanent risk assessment. We regularly map for our clients the relationships their clients have and help them to actively broadening this relationship. This could be done through introducing other partners, encouraging associates to build parallel relationships with the client on their level, having the managing partner visit the client periodically or even having a good contact between secretaries or finance departments. Intertwining of IT systems is also an effective method. It is advisable to try and build multiple relationships in order to become less dependent on one person. So to whom belongs the client? The relationship between a client and a lawyer is peoples business. It is the individual who over many years is able to build trust. It is the individual who makes the relationship. Having said that, many law firms have built a quality reputation that complements or exceeds the reputation of the individual partner. Law firms have operational systems in place that enable the individual lawyer to deliver. Law firms do the talent recruitment and training that provides the partner with a great team. On this basis I would argue that law firms should work on building a firm-relationship with the client. A relationship that will continue to blossom even after the partner has left. Conscious and methodical succession planning has to be an important part of this.

“Will there be a future for small and midsize law firms?”, we are often asked. There seems to be a persistent idea that small and mid-size law firms are in decline and that ultimately only the big law firms will survive. Getting straight to the point: there is no evidence that does support this thesis. So let’s analyze the facts and find out why this rumor is so persistent. Reading the legal press in various countries one could be forgiven to think that there is no future for the small and mid-size law firms. As far as there is public financial reporting available, it shows significant numbers of small and midsize firms that are not doing too well. At the same time big-law keeps reporting increasing revenue and profit. So maybe bifurcation is a fact? Let’s start with looking more closely at the numbers. Taken as a group, mid-size and small law firms are indeed outperformed by big-law. Where in the US market the AML100 on average saw an increase in revenue of 5.5% the AML101-200 firms saw a 0,2% decline in revenue. In Germany numbers 1 -50 grew revenue by 7,2% on average as where number 51-100 realized 5,8% growth. The same trend has also been reported in other major jurisdictions. Some small and mid-size law firms make a lot of money. More in-depth analysis however shows a different image. Looking at the AML200 three smaller law firms make it into the top-10 as to revenue per lawyer: Irrel & Manella (106 lawyers), Korbe & Kim (92 lawyers) and Coate Hall (162 lawyers) find themselves in the same league as Sullivan & Cromwell and Quin Emanuel and with a RPL between $1,680,000 and $1,454,000 just above Skadden and Cravath. Looking at profitability a similar picture arises: some small and mid-size law firms punch well above their weight. Some small and mid-size law firms punch well above their weight. This is very much in line with our experience at TGO Consulting. We know several small and mid-size law firms that are equal or more profitable than some of the national champions. We equally know some big-law firms who are struggling to keep their revenue and profitability. This image holds true in most jurisdictions. Small and mid-size law firms can be tremendously successful and there are no signs that this will change. The only distinguishing factors are alignment and strategy After looking at the market in depth like we do, it becomes apparent that the single most decisive factor for success is strategy and the discipline to stick to it. Those firms that have a clear and relevant strategy consistently outperform the market. That strategy could be focused on any segment of the market and any delivery model as long as there is a market that is big enough and the firm does organize its business model accordingly. Smarter lawyers, better management. So why are big-law firms on average more successful? This has mainly to do with human talent and alignment. Typically big-law has better management. This is because they have a larger talent pool of smart partners and have the financial means to recruit experienced professional staff and the best outside consultants. Besides management and vision the partners in big-law firms are often better aligned. Due to the large number of partners it is almost impossible for an individual partner to meddle with the management of the firm. Partners focus on clients and matters while management manages the firm. Firms who are most in need of help are the hardest to help The opposite is true in many small and mid-size law firms. Few or none of the partners are well equipped for management, there is little or no qualified staff and no money is spend on external assistance. Partners typically are highly opinionated as it comes to management of the firm. Partnership meetings tend to end in no-decision or a compromise. Not all partners share the same vision on where the firm should go. We witness this time after time in our own practice: firms who are most in need of help are the hardest to help. So size does not matter The only things that matter as it comes to profitability are strategy and alignment. This has nothing to do with size. This has to do with the ability to define your unique spot in the market and a route to get there. This is one of the reasons why many modern day boutique law firms have become very successful. The partners who have founded the boutique have a shared vision on what their market is and who their clients are. Staring from scratch they have the possibility to organize the whole business accordingly. They know their price point, focus on one segment and manage their costs. Just look at the success stories and a pattern emerges. What about mergers Mergers of law firms just for the economies of scale are no recipe for success. Like in any other business more that half of law firm mergers turns out not to be successful. Only if both firms are strategically aligned a merger might pool talent or provide access to another market. It is modern day myth that law firms need to merge just to be able to cover future investments in IT. Yes, law firms will need to invest in technology but not to the extend that they cannot bear the cost. And IT investments should be part of a strategy anyway. So before you do anything else, make sure your firm has a viable strategy asap. Read more about our services

Last week on Monday 4 June, New York based Milbank, Tweed, Hadley & McCloy announced that it will increase its associate salaries across the board by $10,000 or $15,000. With a $190K starting pay for those fresh out of law school. What followed was an outcry in the legal media and clients being reportedly unhappy about Milbank associate raise announcement. Also other legal markets have reported steep inclines in associate salaries by the big international firms. JUVE, the German legal weekly, reported competition for talent with some international firms paying up to 130.000 Euro ($153K) for a first-year associate. A development that has left many German law firms worried. War for talent With so many emotional reactions, in this article I will try to put things in the right perspective. As explained in my article from last week, being an excellent lawyer will revolve less and less around legal knowledge. In the future clients will not primarily be looking for knowledge of the law but will increasingly engage lawyers because of their knowledge of ‘best market practice’, their ability to negotiate a good deal, their ability to come up with innovative solutions, and so on. In other words: Human Skills So law firms need to start hiring a different breed of associates in order to be able to meet changing client demands. As law school still focus on legal knowledge, the best grades will no longer automatically reflect the best lawyers. Forward thinking law firms need to try and find those graduates that are smart and possess these extraordinary human skills. With the present system of education this is a bit like looking for a needle in a hay stack. The salaries do not reflect present commercial value, it is an investment. If offering extravagant salaries is needed to attract the most talented, then this is what it takes. No law firm will expect to make a profit or perhaps even break-even. These high salaries must be seen as an investment where return will only come with time. It is reasonable to expect these talented individuals to be above average profitable after five years or so when human skill can be paired with substantial experience. By then these individuals will be in high demand by clients. The financial reality “In-house leaders didn't pull punches in their evaluation of Milbank's big associate raises” according to an article in The American Lawyer. The article describes how clients are saying that they will not accept having to pay for this. In order to understand the magnitude of the pay rise we need to do the math’s: Milbank globally has 531 associates. On average each associate gets a pay rise of $12,500. So the total cost associated with the pay rise is $6,637,500. Milbank’s gross revenue over 2017 was $916,538,000. With a profit margin of 55% total cost are $412,442,100. This means that the total cost effect of the pay rise would be only 1,6%. Even if clients would have to pay for it, this will hardly be noticed. The total cost effect of the pay rise is only 1,6%... The surprising thing is how much attention an investment in human talent gets compared to any other investment. If a law firm the size of Milbank would invest $6,6 million in IT, I doubt if this would draw the same amount of – negative – headlines. Substantial investment in other areas hardly draw any attention and still they have the same effect on costs. The human factor It might be that we relate these salaries primarily to our own income or to the salaries of other professions. A lot of the attention seems focused on the starting salaries that are seen as extravagant. No one coming fresh out of university could be worth so much money. When focusing only on the immediate market value this is probably true. But if the talent that clients are looking for is rare, then the rarity rather than the ratio will establish the market value. It is the same with classic cars as with professional athletes. In my opinion the legal world, including clients, should stop ‘complaining’. In-house attorneys have become very smart and well educated. If an in-house team decides to seek outside counsel they are looking for extraordinary skills to provide the value they are looking for. To provide this value law firms need to invest in human skills. This inevitably starts with attracting rare an extraordinary talent. Rarity has its price. This is an investment by the law firm hoping that in the future this will enable them to serve their clients better. Also other law firms should stop ‘complaining’ in my opinion. As demonstrated in the financial calculation, raising the salaries by 5% will have a limited effect on overall costs. Law firms need to define their strategy and think about what they will have clients to offer in five years’ time. In order to stay competitive investments will be required. From a financial point of view it does not make a difference where this money goes. Just put it to the best possible resource. This might very well be humans.

563 years ago in February of the year 1455 in the German City of Mainz, Johannes Gutenberg produced the first printed version of the Christian Bible. This Gutenberg Bible counts 1282 pages and it is in Latin. Few year later the bible had been translated into living languages like German, French and English. At this point the monopoly on the knowledge of ‘Gods word’, the Roman Catholic Church had had for 1500 years, had ended. Within a few decades everyone could get a copy of the Bible in his own language. Fueled by people like Martin Luther this proved to be a game changer for Christianity. Today a similar process is taking place in the legal world. As long as there are laws, lawyers have had a monopoly on the knowledge of the law. Not because the laws themselves were not accessible, but because of the complexity of regulation. There are just so many laws and so many precedents that only after completing a specialist university degree you gained the basic ability to start making sense of it. Effectively the lawyers held a knowledge monopoly. Besides the knowledge of the law, also the most commonly used contract templates have become readily available for the masses. A Gutenberg moment in law. Today the legal profession is having its own ‘Gutenberg moment’. Thanks to modern day Information Technology everyone can have access to what is legal. Over the past decade or so many, if not all, laws have become digitally available as have the majority of court decisions and legal articles. Expert systems such as Ross and LexisNexis are widely available to help find exactly the relevant and applicable information. Besides the knowledge of the law, also the most commonly used contract templates have become readily available for the masses. Of course the lawyers still have the monopoly on court litigation. But even that monopoly is being eroded. In some countries no lawyer is needed for simple court procedures, there is an increasing tendency to settle disputes through mediation or arbitration and there are several successful experiments with e-courts where no lawyer is needed. Needless to say that most clients of business law firms have legal knowledge. Every in-house lawyer is a lawyer and will not only have full access but also full understanding. Human skills needed Now the monopoly on knowledge has ended or is about to end, why do clients need still turn to a lawyer for help? The answer might surprise you. In an age where technology has democratized the knowledge, the decisive factor will become the human skills. Clients will turn to lawyers because the lawyer knows what is ‘best market practice’. They turn to lawyers because the lawyer is a skilled negotiator. They need lawyers who have great people skills, can read the room and have the empathy to understand what is behind the client’s decision. Clients need lawyers who are able to come up with new, effective and innovative solutions. So if lawyers are rapidly losing the monopoly on legal knowledge and clients are increasingly looking for human skills, why are we sill training young lawyers primarily (or exclusively) on legal skills? At most law firms’ young lawyers are still kept behind their desks and have to do work which has little or no added value to the client. Some clients are aware of this and have started to refuse paying for junior lawyers. At the same time the majority of law firms is still relying on the leveraged hour and do need the revenue form junior lawyers’ hours. Now that the monopoly on knowledge is lost, the legal profession, like the Church of Rome, needs to reform. Bringing back the master-apprentice model It will be clear that the current model will become unsustainable in the near future. Future lawyers will need to excel in ‘human skills’. Law firms should start educating and training accordingly. I would recommend that young lawyers are exposed to important meetings with clients as soon as possible. The only way to develop and hone the human skills is by doing. By exposing young lawyers to the dynamics of real client meetings and discussing what happened and why, they will learn better and faster. This required change in lawyer training should start as early as university. Over the past few years I have had discussions with many renowned law schools arguing that the legal education should urgently be reformed. Today law school is almost exclusively focused on memorizing legal knowledge and not on developing the human skills required to be a good lawyer. So also law schools should spend considerable time on teaching students negotiating skills, original drafting skills, business skills and a general understanding of what business clients are looking for. The present education is still wrongly based on the fiction that the lawyer will only represent a private individuals (laymen) in court. Technology will free up time so lawyers can hone and develop the skills that are most valuable to clients: human skills. Technology to augment lawyers To enable training young lawyers in human skills, we need to find a way to handle the repetitive and boring stuff that is typically done by junior associates today. This is where modern day technology will come to the rescue. Readily available software is – certainly in English – today already perfectly capable of performing due diligence, discovery or mainstream contract work. This software will become available in every jurisdiction over the next few years. In my view technology is not a goal in itself as it comes to lawyers. Now that the monopoly on knowledge is lost, the profession, like the Church of Rome, needs to reform. Technology will free up time so lawyers can hone and develop the skills that are most valuable to clients: human skills.

These days we are working with a number of clients on redefining the way in which the performance of partners is measured. As outlined in one of the previous blogs, typically origination and personal revenue are today still high on the list. Over the last year or so we have had many fundamental discussions on ‘who owns the client’: the partner or the firm? Given the frequency with which this topic arises, I feel it is time for a more fundamental approach. From an historic perspective the relation between a client and a lawyer is a personal one. The lawyer traditionally is a ‘consigliere’ to the client. Over the last decades, when lawyers started to form larger law firms, this has shifted towards a relationship with the firm rather than the individual. For the purpose of this article I will look at the relationship from three different perspectives: The partner perspective From a partner’s perspective it is the partner who ‘owns’ the relationship. This is not only due to the fact that it is the partner who represents the client. There are also strong economic interests at play. Due to the way in which profit is distributed – this could be anything between pure lockstep and extreme ‘eat-what-you-kill’– the partner will want the revenue from the client to be put in his/her name. More revenue will mean more personal income and more status within the firm. As new clients are vital to any firm, origination is typically rewarded. A partner who brings in a new client might be entitled to having all future revenue put on his/her name. Even if other partners are effectively carrying out the work, the original partner will still remain the ‘billing partner’. Alternatively I know of some law firms where partners are entitled to a lifelong percentage of the revenue from a client they once originated. And then there is ‘partner mobility’. If a partner at some point wants to make a lateral move to an other law firm, he/she will need his/her book of business. Without clients following, few if any, law firms will be interested in taking the partner on board in full equity. So from a partner’s perspective it is the partner who owns the client. The law firm perspective Looking at the client relationship from the firm’s perspective, typically the firm would prefer that every client is a client of the firm. Clients are always presented as firm’s clients during pitches and for the purpose of submissions to legal directories. It will be the firms terms & conditions and the firm’s rate card that will apply to the relationship. For every new matter there will be a conflict check within the whole firm. And if a clients demands exclusivity, that will prevent all other partners from taking on matters from the client’s competitors. From the law firm perspective it would also be desirable to encourage ‘cross selling’ by extending the relationship with the client to other partners and other practice areas. Leveraging a good relationship with an existing client is typically much more efficient than hunting for new clients. Introducing new partners and practice areas into the relationship will also help mitigate the risks of succession. With multiple working relations within the firm, the client will be more likely to stay when a partner decides to leave. Vice versa, the firm will be less vulnerable to job rotations at the client. From the law firm perspective every client should be a firm client. The client perspective Interestingly we see most ambiguity at the client side. On paper clients tend to engage with the law firm. During pitches and panel formation the emphasis is on the firm. When reported in the legal business press, it is always the firm who has the mandate. A firm will be appointed to a panel and the client will sign an engagement letter with the firm. Typically a firm-wide fee arrangement will be agreed, binding to all partners in all offices. So on the face of it the client hires the firm. Digging a little deeper things are not so obvious anymore. In some instances the client wants to engage a specific partner and not a specific firm. When the partner switches firm, despite all the administrative discomfort, the client will follow. This will typically apply to partners who handle matters that may have a strategic impact on the client’s business. Oddly enough this will also happen if the client knows only one partner at the firm, despite the type of matters being just commodity. Clients should take control and stipulate what they want... Ultimately I think it should be the client who decides on the nature of the relationship. If the client intends to have access to the knowledge and experience of the firm, both client and firm should spend time and energy to build and maintain that broader relationship. Based on our experience there is much room for improvement, we see all kind of issues arising from poor relationship management. On the other hand, if a client just wants to engage one particular partner for the job, then it might be better to have this explicitly stipulated in the engagement letter and maybe even make provisions for the event that this partner switches halfway to another firm. Given the fact that we are talking lawyers dealing with lawyers, it is actually amazing that this is not yet standard practice.