Compassion and Change are not Opposing Principles

By now you may have learned that there was a shooting in Pittsburgh last night, and several people were killed and even more were injured.  The shooter was one of the dead.  He was a single, middle-aged IT professional at a large Pittsburgh law firm.  Despite the legal connection, that doesn't normally qualify as newsworthy for this space.  However, Above the Law discovered a troubling online diary by the shooter that detailed, long in advance, his intentions to take his life and to take others with him.  I spent a few moments reading the diary and it was tragic and sad.  I imagine it will be pulled offline at some point, but one doesn't have to read it all to realize this was one very troubled guy sorely in need of professional help. In the diary he discusses the several rounds of layoffs taking place at his law firm.  He appeared to understand the necessity of the first round, but with each subsequent round his temper flared as he was convinced he would unfairly lose his job.  Ironically, he survived all the layoffs and was even recently promoted.  But this didn't deter him from his course.

I've written at length in this space and elsewhere about the need for reform in the legal marketplace.  Whether it's large law firms' colossal inefficiency and feigned client focus, corporate law departments' tendency to complain without taking action, or the large divide between legal vendors' great products and their fumbling and sophomoric execution, there are plenty of teachable moments to choose from.  These issues existed long before the recent global economic downturn, but the challenges are now more acute and finally we're seeing organizations taking long overdue action.  However necessary it might be from a macroeconomic perspective to cull the ranks of underperformers, or outsource tasks or entire functions to lower-cost suppliers, or stop doing business altogether with poor suppliers, there is always a real cost to the man on the street.

Opinion polls may confirm that most Americans feel the automotive and health care systems are in need of an overhaul, and all of us would like to spend less for a doctor visit or a new car, but it has a whole different meaning when someone you know or care about loses his livelihood as a consequence.  In the legal marketplace, demand for legal services is undeniably down and so the logical reaction is to eliminate excess capacity.  This means idle lawyers and staff are let go, in the same way that gas guzzling SUV manufacturing plants were idled and workers sent home during the recent gas price crisis.  This makes sense from a business perspective.  But let's not lose sight of two important considerations:  there's a right way to let people go, if not for their sake then for the organization's reputation; and owners and managers whose incompetence or inattention contributed to poor performance shouldn't get a free pass while others suffer.  Some businesses have increased sensitivity to these optics, while others remain blind.

So without delving into the reasons why, for the purposes of this exercise let's stipulate that the correct course for a business is to lay off a handful of employees.  How should this be accomplished?

Look, I'm not a credentialed and certified human resources professional, whatever that might be.  I've worked with far more over-promoted buffoons in senior HR and personnel roles than those whose contributions demanded respect.  I've sat in board rooms with senior vice presidents leading the corporate HR function who couldn't articulate the company's value proposition, name more than 1 or 2 products, identify a competitor or tell the difference between NPV and NOC.  Yet because layoffs are messy affairs we turn to them to run the show.  Large law firms, who time and again hire middle managers from the corporate sector and give them senior titles and responsibilities, or promote valued employees from functions where they excel to functions they know nothing about, shouldn't be surprised when these duties tax their capabilities.

Years ago a fellow manager and the head of HR conspired to lay off one of my colleagues.  This 18-year veteran, whose primary failing was allying with the wrong political faction, and whose contributions included training all salespeople, including every top performer for the prior 10 years, was given 15 minutes to collect her personal items into a box, with building security hovering conspicuously in the open doorway, and then escorted to her car at midday in full view of the lunchtime crowd.  There was no particular reason to fire her on that day and at that hour, but due to an obvious lack of compassion and perhaps a bit of a mean streak, they chose a timetable and an approach guaranteed to obliterate any sense of dignity left in this loyal employee.  Some years later a new head of HR, smoother on the outside but just as inept, counseled managers to conduct the periodic terminations on their own, then hid in her office as they took place.  When it came time to fire one of her own direct reports, she flew in another subordinate to do the deed!

The point is that the supposed experts don't have a perfect formula.  I've had to terminate or layoff multiple people over the years, and I relied primarily on common sense.  My experience might be helpful.

When a layoff must be conducted, use a scalpel instead of a broom. Too often a layoff results in the loss of good people in one area while known incompetents in another area are unaffected.  Break through the artificial barriers we erect with org charts and identify the poor performers across the board, and let them go first.  This requires a certain business-first attitude that is sadly lacking in many managers, but in the long-run it's better for the business when every layoff shifts the productivity bell curve to the right rather than eliminate high performers due to some misguided sense of fairness.  (The concept of fairness is often misused by managers.)

Performance metrics should be standard across the business and should be compiled long before the layoff. I've been asked to participate in a charade where managers evaluate and rank layoff candidates who have been previously, and sometimes mysteriously, identified.  The task is ostensibly to pick the poor performers but the real intent is to have a paper trail showing proper due diligence, which presumably insulates the organization from charges of unfairness, discrimination or wrongful termination.  The problem is, the easily discoverable paper trail also shows that the managers only evaluated the likely candidates, not all employees.  A little selection bias perhaps?  Also, there is quite often disparity between an excellent performance review conducted some months prior and a sudden and undocumented downturn in productivity.  If the organization has a performance management system, use it!  Measure and track performance on a regular schedule, use a consistent methodology, and don't shy away from capturing tough comments when performance is sub-par.  Law firms are criticized for allowing powerful partners to protect their favorites, using vague performance measurement criteria if at all, but the fact is this behavior is prevalent in the corporate sector as well.  The best way to eliminate favoritism and truly identify poor performers is to implement and adhere to a standard evaluation process.  And use this as the basis for the layoff, not a new, isolated and suspect vetting process two weeks before the termination date.

Don't confuse poor financial performance with poor job performance. Let's be clear:  sometimes -- whether through our own missteps or due to market turmoil -- a reduction in the workforce must take place, even though those affected haven't been poor performers.  It's unprofessional and caustic to an organization's reputation to label financial victims as poor performers.  Call a spade a spade and move on.  There are few stakeholder groups -- clients, the press, alumni, recruits, etc. -- who will harshly judge the organization for declaring that "Demand in our core market sectors has declined to a point where we must reduce excess capacity and unfortunately let some of our valued employees go" rather than the obvious fabrication "While our competitors and clients are suffering we are doing quite well, thank you, but we coincidentally decided to use this time to terminate the many poor performers who have somehow escaped our notice previously."

Layoffs are costly, so expect to spend a few more dollars to do it right. In the long-run, the intention is to save the ongoing payroll and benefits costs of the departed employees, so offsetting that savings with outlandish severance packages isn't sensible.  But neither is conspiring to shave every cent off the severance package to save a few dollars.  I've had to negotiate with fellow managers and HR professionals over half-days of vacation, an extra month of pay for a long-time employee who had the misfortune to be laid off just before a pivotal anniversary date, and whether to pay a package at all when the departed employee was lucky enough to find a new job before all the paperwork was signed!  I'm well aware of the tired HR objection that on an individual basis doing the right thing seems cost-effective, but on an aggregate basis the costs become unwieldy.  But even a cursory read of the many books on viral marketing and customer service reveals that a happy workforce, happy alumni, happy clients, serve as multipliers to the firm's own marketing and sales efforts.  Imagine the low cost of sales when a valued former employee who left with her dignity intact ends up in a new role with influence or even decision authority over the purchase of her former employer's services or products.

It really all comes down to dignity. It's appalling the manner in which good people, otherwise unsullied by a vindictive nature, turn on their former colleagues when it's time to let them go.  I've let people go in person and on the phone, one-on-one and in a group setting, so there's no perfect approach.  Open, honest communication should acknowledge the potential trauma and disruption, while firmly guiding the employee to the inevitable conclusion.  There should be a script to ensure that the key points are covered, but it's okay to go off-script and address unforeseen questions.  However, there's a point at which compassion becomes drama.  I learned of a fellow manager who dissolved into tears as she terminated a long-time employee.  The terminated employee ended up consoling the manager who was too distraught to proceed.  In my view, the wrong person was shown the door that day.

Let's close by addressing directly the circumstances that our Pittsburgh shooter calls to mind, that a terminated employee will become violent.  This is a real dilemma.  Does the organization build all termination procedures around such an extraordinarily unlikely outcome, meaning that security guards are on hand, and terminated employees do a perp walk as they depart?  What impact do such measures have on the departing employees who don't deserve such treatment?  The risk of getting it wrong is potentially high, as evidenced by the occasional anecdote of a disgruntled employee becoming violent in the workplace.  But the earlier point about misguided fairness applies here as well:  conduct a risk assessment of the terminated employees and handle the exit discussions differently with some; everyone doesn't have to be treated in the exact same manner.

This discussion refers to making rational but compassionate choices when conducting the inevitable layoff.  I don't purport to provide legal advice on what approaches are more or less likely to generate an accusation of wrongful termination.  The underlying thesis is that organizations taking the high road, that find ways to marry sound business judgment with compassion for employees and clients, will generate better financial returns and maintain a positive image in the marketplace.

There are plenty of examples of organizations performing poorly in these situations.  If you are involved in planning for a layoff, tack a photo of your kindly grandfather, your beloved mother, and your free-spirited child on the bulletin board.  As you plan each action you're about to take,  consider how you'd explain yourself to them.  Better yet, consider how you'd feel if one of them called you to describe the manner in which they were laid off today.  There are pretty good odds that this conversation will take place at some point... though I can't predict whether you'll be the one making or receiving that call.

Welcome to Law Firm, Inc.

In today's Law.com, American Lawyer reporter Brian Baxter quotes a Bloomberg story discussing the increased level of interest by private equity investors in purchasing large stakes in UK law firms, once such an investment is allowed in 2011.  Savvy readers already know of the UK's Legal Services Act of 2007 which opened the door for private investment in traditional closed law firm partnerships, a process already underway in Australia.  The Magic Circle, the handful of leading UK law firms, feign disinterest.  "Why would we need the money?" asks Wim Dejonghe of Allen & Overy. “Law firms are pretty attractive investments as they have stable cash flows, long track records of business operations and increasingly are much better run,” claims one PE investor. “You would expect them, like any professional services business, to provide a pretty good return.”

Let's put this on the table right now:  I don't believe the practice of law should be equated with a business whose sole purpose, in b-school parlance, is to produce a profit.  The rule of law is more than a theoretical concept and there is a clear and undeniable need for increased access to justice worldwide.  That said, the business operations of law practice can be improved and the profession can pursue both its noble mission to enrich humanity while simultaneously turning a profit.  A handsome profit, I might add.

Let's also acknowledge that large law firms are, by any standard, already very profitable enterprises.  In my many years of coaching salespeople catering to law firms, one challenge we've encountered time and again is partner motivation.  We've written here about law firms' reluctance to drive change unless forced to by the clients.  There's also an innate conservatism which hinders any disruption to the status quo, let alone bold change.  As one salesperson put it, "The partner can't seem to muster up the energy to push for the adoption of my recommendations, probably because he earns $2 million today and the new approach will take him to $2.5 million, but that payoff isn't worth the headache."

Indeed, during a stint at a global law firm I observed to the chairman that eliminating the colossal and unnecessary waste I observed in my first 3 months on the job alone could easily generate a double digit annualized increase in profit margin.  That's an astounding statement, whether or not you back it up with the math, as I did.  Trouble is, most law firm leaders view this statement in terms of discretionary expenses.  And we had these -- including the many tens of thousands of dollars hastily spent by one partner mere weeks before the bi-annual partner conference to create large tapestries of bridges representing each country where the firm had an office (around 35 as I recall), with the implication that partners would see these draped about the Waldorf ballroom and feel more inclined toward cooperation and teamwork.  In another example, a practice chair required all handouts at his monthly meetings to be printed in full color and bound, though not once when I was in attendance did a speaker refer to the materials and most often these were left behind on the table or in the conference room garbage bin.

But there was far larger waste through process inefficiency.  I was asked to provide input into a new conflicts checking system, though the input was limited to suggesting better questions to ask at new matter intake.  A quick chat with the very competent conflicts team revealed that the firm ran the same conflict check on the same clients multiple times every year, year after year, sometimes hundreds of times over the course of several months.  Furthermore, there was no coordination between the conflicts system and the strategic planning process, so the team ran countless conflicts checks for client targets that had already been deemed unsuitable, and the practices continued to pursue client targets that had already been conflicted out.  The firm had no understanding of the cost of this inefficiency, no latitude for the staff to address such issues without partner oversight, and no interest by any partner to wade hip-deep into operational issues such as this.

But it's not just about databases and back-office technology; there is similar inefficiency in the practice as well.  Not so long ago it was a badge of honor for a large law firm to recruit numerous associates, regardless of current market demand, and rotate them around the firm, encouraging them to re-learn items commonly known to other lawyers, and billing clients for this training.  Every firm talks about cross-selling but few have embraced the DNA-altering approach that values -- and compensates -- team or firm performance over individual contributions.  Many firms have launched client teams, but few clients would readily agree that team members know their business at any significant depth, and even fewer would characterize their outside counsel as trusted business advisers.  Fundamentally altering the firm's recruiting strategy?  Establishing true associate training and apprenticeship?  Re-designing compensation systems to drive collaborative behavior?  Which Biglaw partner wants to raise his hand and dive deeply into these issues?  Who wants to look at his colleague and say, "No, you may not unilaterally decide on behalf of all of us that expensive pictures of bridges will foster teamwork,"

It's unlikely that your average private equity investor has the know-how of law firm operations to solve this sort of thing either.  However, any investor accustomed to shepherding his capital will want eyes and ears on the ground, and these challenges -- nay, opportunities -- will quickly come to light.  If a PE firm purchases a significant stake in a large law firm, rest assured that the investor representative they install on the management committee, whether this is a COO, CFO or some derivation, will be able to do the math justifying why process improvement will lead to substantially better returns -- for the investors, for the partners and, oh yes, for the clients.  This isn't rocket science, and cost containment programs based on ROI, investments based on NPV and even formal business process improvement programs like Lean Six Sigma are really not much more than common sense ideas backed up by math and a governance structure which places the good of the firm above the desires of individuals.

Color me crazy (you wouldn't be the first!) but some of us enjoy surveying the paved cow paths, identifying where new approaches can shorten the time from A to B, removing obstacles and impediments that serve no purpose, demonstrating through simple math that speed, quality, profit and client satisfaction are not opposing objectives.  Of course it will be hard.  But the PE investors who truly want to unlock the value embedded in Biglaw will understand the potential return on delving into the tough issues.

At the other end isn't necessarily a "corporate law firm" where partners are senior executives taking paychecks from absentee investors.  Nor does a new and improved law firm have to eliminate all profit-dilutive practices and "fire" longtime clients that no longer generate significant revenues.  However, these will be conscious choices made in the full light of day.  A well-run law firm differentiates between its premium and commodity practices, lowering rates in some and expecting (and realizing!) higher rates in others where true, demonstrable expertise can be quantified.  Pundits say that associates and partners alike have lost the "quality of life" battle and clients are losing the diversity battle, as cost trumps all other concerns.  But imagine a law firm that clearly understands how to derive profits and client satisfaction from lawyers with more flexible schedules, or how to supervise work outsourced to others in order to address client concerns over cost and diversity and quality.

The fun part comes once the first couple of firms are pushed in this direction.  Others will see that it doesn't require a private equity investment, which carries with it an obvious cost, to derive similar returns from process improvement.  The tools are available today, the people who can manage the process, run the numbers and hold the partners' hands are out there already.  Some are in law firms, many are not.  But given the right precedent to show the way, I'm prepared to believe that a strong law firm leader can take on such an initiative without the offsetting dilution of a private equity investment.

This calls to mind the movie Die Harder, in which airport hijackers turn off the runway lights and sever all electronics, keeping incoming flights circling because poor weather prevents the planes from diverting to alternate destinations.  As government officials work to meet the terrorists' demands, the flights circle and circle above, their fuel dropping dangerously low.  When the hero finally destroys the terrorists' escape plane, leaving a trail of burning jet fuel along the runway, the ingenious pilots above use this as a beacon to guide their approach and landing.

Law firm leaders, will you be the first to land?  Will you be following someone else's trail?  Or will you be circling endlessly, awaiting the return of familiar lights and beacons before you take the safe route home?

Lawpalooza - The Summer Tour!

It's been an interesting and busy summer, which is why I haven't had time to post to the blog recently.  The traffic stats nevertheless demonstrate that readership is increasing, as are offline comments and suggested topics.  All commentary is welcome and encouraged. Here are some recent and upcoming events where you can hear me discuss some of my favorite topics:

Bottom Line Marketing: 2009 and Beyond

Webinar, August 11, 2009, 1:00-2:30 PM ET

The dramatic economic downturn has affected law firms and their clients in  equal measure and has rocked the legal market landscape.  One of the results will be a change in how law firms develop new business and interact with clients in the future.  In April, Altman Weil conducted a study of law firm leaders that focused on key areas of transition, including clients and marketing.  This 90-minute webinar will draw on that data, as well as Altman Weil's hands-on experience  to provide practical business development tactics that will generate business for your law firm.

Benchmarking in a Changing Economy

International Legal Technology Associatioon

Panel discussion, August 24, 2009, 10:30 AM ET

With the challenging economy, what was already a competitive market has now become even more competitive and strategic. We look at how the benchmarking concept has changed due to the economy and what we can expect in the future. Additionally, how the firm's financials and financial benchmarking are constantly communicated to the partnerships is changing as well, and we examine some best practices of technological transparency.

The ACC Value Initiative and What It Means to Technologists

International Legal Technology Association

Panel discussion, August 27, 2009, 3:30 PM ET

Our clients are now creating joint and highly-structured initiatives aimed at closing the perceived gap between what legal services cost and the value clients receive from those services. As law firms develop responses to the value initiative, what role can technology play, and what technologies are available that increase leverage, lower cost or increase value?

 Developing a Thriving Practice Group

Webinar recorded July 14, 2009; CD-ROM available for purchase

Practice groups are the key business units of law firms.  Each group has its own market and its own competitors, and each should have a clear, effective road map for developing new business.  Few do.  This 90-minute Altman Weil webinar outlines practical strategies to target high-potential clients, craft the most effective selling strategy and close the deal on profitable new business, even in a challenging economy.

Landing New Business: The ABCs of Making the Sale

Webinar recorded July 21, 2009.  CD-ROM available for purchase

Many marketing efforts fail at the last step – making the sale.  Why? Because of failing to understand and address the prospective client’s needs.  The best marketers in any industry know they need to be responsive to their customers’ desires. And when you can’t put yourself in your prospect’s shoes to understand what they want, you’re guaranteed to fail at landing new business.  It’s crucial that you understand what will turn a business development opportunity into an actual client. The real secret of closing isn’t a magic word… it’s understanding your client’s needs, and addressing those needs.  Client development is critical to your firm’s success, especially in this environment. And it’s something that every attorney should be actively engaged in – rainmaker or not.

Winning the Marketing Biathlon

Regular readers of the Dilbert comics know that marketers are ridiculed, along with the trolls in accounting and incompetent pointy-haired bosses.  The apparent message is that Marketing is an unwelcome distraction from the real work of building quality products that buyers want.  This sentiment is not uncommon in law practice, and the recent economic downturn has accelerated the scrutiny of marketing expenditures by increasingly cost-conscious law firm leaders.  In some cases, the cost of a senior marketer is deemed to be extravagant; in others, senior marketers who are able to participate in the dialog over structural changes in our industry are sought after.  But far too often, lawyers consider Marketing to be something to be delegated to other people.

If it were as simple as hiring a savvy marketer, then the smartest law firm leaders would hire the most credentialed marketers and then go back to practicing law.  Alas, it doesn't work that way.  For starters, Marketing means something different to everyone.

"What I really need from Marketing is someone to bring in another $10 million in revenue. My practice is fine but my compensation suffers because my colleagues aren't able to bring in work like I do."  (NY Midsize firm rainmaker describing why he doesn't rely on Marketing resources in his practice)

"Marketing, to me, is about keeping the trains running on time.  We're always busy so we're not looking for someone to bring in new business, but we need someone to provide administrative support for our own efforts." (Boston Biglaw partner explaining why the firm is spending too much on Marketing)

"Don't use the phrase 'change agent.' Don't even hint about rocking the boat. These guys have it figured out and the last thing they want to hear is that there's a better way of doing things."  (Recruiter seeking candidates for an AmLaw 20 CMO role)

I captured the above quotes from 2006 to early 2009, a time of relative plenty. How have things changed now that the sky is falling?

"We're sitting tight for the moment, assessing our options and closely watching spending. We're still meeting with qualified candidates but we don't expect to hire before year end."  (Philadelphia Biglaw managing partner explaining the long delay in filling his senior marketing role)

"Haven't you been reading the news? The optics of sending anyone to a conference, any conference, don't look good right now."  (DC Biglaw chairman explaining why the firm has banned lawyers and staff from attending business development conferences in 2009)

We apparently have a long way to go before we establish that Marketing, or the continuum of identifying client markets to winning new work to ensuring satisfaction and repeat business, isn't a distraction from the practice of law, it's a fundamental component of any viable enterprise.  Recent events have aptly demonstrated that law firms relying primarily on constant market demand for their services and that do little to generate demand or differentiate from other providers of these services, will suffer more when demand declines.  It has.  And they are.

Done properly, Marketing is about growing the top line.  If Marketing is an expense in your firm -- not deemed to be an expense, but actually is an expense -- then you're not doing it right.  In good times or bad, here are the fundamentals of a good Marketing program:

Identify desirable target markets.  These can be existing clients or new clients.  Targets will reflect clients that have needs tied to what the firm offers, ideally multiple needs across practices and geographies, and these needs will endure.

Generate awareness and leads.  Many law firms look the same and act the same, notwithstanding the protestations about unique cultures.  Similarly, many law firms present the same face to the market.  Don't believe it?  One of my favorite sites is the automatic brochure generator produced by my friends at Fishman Marketing.  Differentiating your firm to buyers is critical, and will become even more important as corporate CFOs, CEOs and procurement officers influence buying decisions.  An important role of Marketing is to turn awareness into opportunities.

Turn opportunities into business.  This is called Sales in the real world.  In law practice, we call it business development.  And this is not a process that can be easily delegated to marketers!  Lawyers should be trained to advance opportunities to a close, by developing an understanding of the potential client's needs and then mapping the firm's services to these needs.  All pitches and proposals are 100% customized, all efforts are tracked, and lawyers are held accountable for their efforts.

Ensure client satisfaction and repeat business.  This can mean implementing policies for timely billing, or alternative fee arrangements, or periodically and systematically surveying clients.  It can mean reducing inefficiencies in law firm operations that increase the client's costs or the firm's overhead.  When trying to improve client satisfaction and secure repeat engagements, there are few areas of a law firm which should escape scrutiny.

Assess performance.  No successful enterprise maintains success for long without a rigorous approach to self-analysis.  We know what new work is lucrative and that we should pursue more by examining the economics of the work we completed.  We improve our chances of winning repeat engagements by taking a good, hard look at what missteps lead to client dissatisfaction.  We know what efforts generate the most visibility and opportunities by studying our expenditures, and subsequently increasing those with a good return and decreasing those with a poor return.  Businesses that embed the notion of a "feedback loop" into their culture are known to be more responsive, more nimble, more adaptable to changing circumstances.

As we enter the home stretch in the latter half of 2009, it's time for law firm leaders to assess whether the current economic downturn is a temporary blip that will be largely behind us come 2010, or whether the playing field has changed for the foreseeable future.  Recent studies have shown that most law firm leaders are in a "wait and see" mode, a not surprising stance since the profession prides itself on precedence rather than breaking new ground.  But there are law firm leaders out there planning for a different future.  They are preparing their team for a new game, with new rules, some yet unwritten.  Some feel it's a sprint, to some it's a marathon.  Perhaps it's a biathlon or even a decathlon.  We need to continue doing what we excel at, but also add some new skills.  The effort that won the medal last year isn't nearly enough to win this year.

Rio Tinto Outsourcing Legal Work - What Does It Mean?

Last week the traditional media and blogosphere were abuzz with the news of rigged elections in Iran, and the resultant uprising.  In the legal marketplace, we had a similar level of buzz over the announcement that global mining giant Rio Tinto has agreed to outsource a substantial portion of its legal work to an Indian legal services company, leading to an expected 20% savings on the outsourced legal costs. Why such a furor?  Simply because the work being outsourced isn't the widely proclaimed mundane work of staff accountants, secretaries, mail room clerks and marketers, this is real legal work, the work of highly trained lawyers, that is being taken from top global law firms and moved to a heretofore unknown company with salaried lawyers!  "What is the world coming to?!" is undoubtedly the cry in BigLaw law firm boardrooms everywhere.  What, indeed.

Let's consider the traditional legal work pyramid.  As traditionally described, the top of the pyramid consists of strategic legal work, work that literally decides the fate of the client's organization, the so-called "bet the company" work.  When clients have this level of need, price is not the highest consideration or, at times, not a consideration at all.

This is followed by work that is important to the client but not mission critical.  There is both more of this sort of work and more providers who can perform the work.

And then there is commodity work.  This is often described as repetitive, routine, mundane work that doesn't require a high level of skill, but competency and efficiency are important.  The classic depiction is that insurance defense falls into this category.

Not surprisingly, few lawyers are able to objectively assess where their work product falls on the pyramid.  If we were to ask lawyers to categorize their work and then present the results graphically, the result would not be an upside down pyramid -- it would be more like a bowling ball resting on the head of a pin!  The commodity work is always performed by "other lawyers in other firms."

Many law firms, particularly the largest and most prestigious, think of themselves as "best of breed" in all categories, which suggests that for all legal work their clients can expect to pay premium prices. The fallacy in that assumption is that there are many components of a deal or of a major litigation that are routine and mundane and that don't necessarily require the services of a top partner at a leading firm who attended the most prestigious schools. Since the law firms themselves have failed to make any substantial differentiation in the legal services they deliver, the clients are forced to make these choices. The Rio Tinto outsourcing deal reflects one client determining that routine contract review and drafting and basic legal research are tasks that are more commodity than premium, and therefore a lower-cost provider can and should perform these tasks. Undoubtedly Rio Tinto will continue to retain top law firms for the strategic aspects of its deals and litigation, but this division between premium and commodity work will soon be commonplace.

While many view the Rio Tinto announcement as fairly novel in the legal profession, it's an unexceptional and routine business approach in other businesses. We expect to see more clients take this approach and we also expect top law firms to move slowly in response, but those that do embrace this as an opportunity to make some fundamental changes in the delivery of legal services will have a significant and sustainable competitive advantage. The new measure of law firm differentiation is not limited to pedigree and brand, but efficiency and business sense will now become important factors.

Up to now, top law firms have reacted by offering price discounts, or by offering alternate fee arrangements, or by seeking new engagements to make up for "lost revenue" when clients move commodity work elsewhere. The savvier firms will need to learn how to embrace this sort of outsourcing model in their own businesses. The irony of the situation is that law firms are themselves merely outsource providers of legal services to corporations whose main objective is to make and sell products. Once law firm leaders fully realize this, they will look to their own operations and apply business process re-engineering principles to reduce inefficiencies in the delivery of legal services, which can increase quality while decreasing delivery time, eliminate redundant or unnecessary steps, and allow for the use of prior work product rather than viewing each project as unique. As most other industries have learned, improving efficiencies in this manner can actually boost profits even while prices are flat or declining.

There are many pundits who talk about the need for change but don't explain the hows and whys or provide specific and concrete examples. Since the underlying basis for the change afoot is financial, in a future post we'll present a very simplistic financial model of a law firm operating under today's billable hour model and contrast this with one that embraces operational efficiency and alternate fee arrangements. Without question a law firm can not just maintain but improve profitability in this climate. Whether you believe this or not remains to be seen. What is clear is that clients like Rio Tinto have grown impatient waiting for law firms to act first. So don't wait too long. Because in your client's lobby right this moment is a group of entrepreneurs who have thought through in great detail your client's needs, and right now they have his undivided attention.