TinkerX

But it made me laugh like mad. Because it’s true in spades for law firms. They want economic growth — increased profits — but fear change the way cats fear…well… me.

Well, that got me to thinking. Always dangerous on a Sunday, when I’m supposed to be resting my chowder. If law firms want profit, and profit implies change, but they hate change… what can that mean? Let us do a little logical dance. What are the ways in which a firm can increase profits? Let’s imagine that the money coming into a law firm is like the flow of water into a tub, and the various methods of increasing profit are like faucets. The four most commonly addressed faucets would be:

• Increase the number of lawyers
• Increase the volume of work each lawyer does
• Decrease costs
• Increase rates

But wait! Two of those methods are actually not valid sources of increased profit on their lonesome. Care to guess which two?

The two faucets that lie

Increase the number of lawyers: This is only going to increase profits if you increase the number of lawyers on a per partner basis. It also won’t work if you don’t assess those areas of the business that are affected by growth/size such as employee/associate churn, insurance, infrastructure costs, health care and other benefits, travel, training, etc. If you make the assumption that the cost-per-attorney to run a 100 lawyer firm is going to be the same as the cost-per-attorney to run a 50 lawyer firm… you’re snoozing at the wheel, my friend. And law firms seem to think that they will reap rewards of scale simply by growing and merging because other industries and companies do so. Nope. Other industries reap rewards of scale because they treat their businesses like businesses and pay attention to every little detail.

You’ve been reading the industry news for the last couple years, yes? All those firms that merged and grew… and then tanked? Weren’t they reaping "rewards of scale?" Didn’t they see the benefits of merging and sharing costs? Or were there all kinds of questions that they hadn’t considered? Yes. There were. As you grow, you change. So when firms try to increase profits-per-partner by simply increasing the number of attorneys on deck, they will often find that more bodies doesn’t mean more money for the owners.  This kind of change requires real management and business discipline to get right. This faucet is tied to costs in many, many ways. So, when you turn this one, you’re also turning a wheel that opens a  drain at the same time.

Increase the volume of work each lawyer does: This can work… for awhile, and up to a point. The problem is, it’s not sustainable. And it’s not healthy for long-term growth. Go read "The Goose that Laid the Golden Egg" if you’re unclear on the concept. Of course you need your lawyers — and all your employees — to work a certain, expected amount of time. But there is a maximum ceiling to this value. And the closer you get to this ceiling, the more crushed your people will feel. So, after awhile, you start trading good-will, productivity, churn, accuracy and other intangibles for profit. Which, eventually, digs into profit. Surly, sloppy, tired lawyers lose clients. And, eventually, you will actually "hit" that ceiling. Whether you think the ceiling is 1,800… 2,000… 2,200 billable hours per year. Someday, you’ll get there. And then this dial on the profit faucet is stuck in the "full open" position and you’re done. Guess what? A faucet that can’t keep turning forever was never really open to begin with. It’s an illusion.

The two faucets that testify

So what are we left with? If adding lawyers — and merging firms counts as adding lawyers — and increasing the volume of work doesn’t really increase profits in the long run, we’ve got two methods of making your firm more profitable. They are:

Decrease costs:Wait! It’s not a faucet! Havens lies!

Yes. I do. It’s not a faucet. But it’s a way of making your drains smaller. And it’s better than a faucet, because it will affect all your faucets for all eternity, regardless of what’s going on.

Decreasing costs is a profit no-brainer. Or it should be… When Ben Franklin said, "A penny saved is a penny earned," he might as well have been talking directly to law firm management. But, somehow, law firms aren’t listening. I am continuously and hilariously amazed by the lack of law firm attention to cost cutting. If a firm has 100 partners, every $100 saved is a buck in the pocket of each partner. Geez. Simple math. Wow, Andy, you’re a real genius. But I’ve seen firms throw hundreds of thousands of dollars away on ridiculous marketing programs, sports tickets, office renovations, recruiting bonanzas, outdated listings, technology boondoggles… all sorts of things that make no sense. All of us "non-professionals" in the industry swap stories at industry conventions about the firms we know that are still using paper for their internal newsletters. Or the firms that use MS Word as their "billing software." Or the firms that are paying $15,000/year for a listing in a "premiere" directory only ever seen by the people who list in it.

And that’s only the dumb stuff. Very few firms are taking advantage of the marvelous cost cutting and operational savings potentials being made available to businesses over the past 20 years. All kinds of things are possible… when you get your head out of the 19th century.

I am, of course, over-generalizing. There are firms that are doing great things by way of cost cutting. They realize that every time they take a dollar off a process, they actually add that dollar to their profit more than once — they add it every time they perform that process. So, to update Ben’s quote: "A penny saved is at least a penny earned."

The problem for corporate law departments in this country, though, is that most of the firms doing this nutty cost cutting stuff are plaintiffs firms. Why? Because they have to. They have one less faucet to mess with…

Increase rates. Yes, Virginia, there is a Santa Claus. It’s a little mathematical formula that goes like this:

Internecine legal system -
External competition +
Privately held firms =
Rate increases in perpetua

Internecine? Yup. Who buys legal work at most corporations? In-house… lawyers. Who makes the rules about how legal work is bought and sold? Bar association… lawyers. Who runs this country? Politicians who were, in their earlier careers, predominantly… lawyers. Who provides the analysis at big consulting firms? Who writes the columns at big trade mags? Who teaches the CLE courses? Who sits on the benches? Who teaches the courses at law schools? It’s the most closed industry on the planet.

Before you tell me that every industry is closed like that, stop. Just stop. They’re not. The medical field is highly closed, but at least their patients aren’t always doctors. And they often have to work with other industries — including the legal field — to get things done. When was the last time a doctor had to review your work as a lawyer? Right. Same for most industries. In marketing, for example, ad agencies work with hundreds of different industries and have to buy services from dozens of sectors. We are constantly improving our processes based on what we learn from the film and print industries, from writers and researchers, from artists and musicians, from delivery services and, in some cases, even from lawyers. Yes, I’ve learned things from lawyers that I’ve put to work in my marketing practice.

The corporate legal industry is incredibly closed and self-involved. Many in-house attorneys start at law firms and vice-versa. There are close friendships that span decades and working relationships that, in other industries, would be questionable from an appropriateness standpoint. If you worked somewhere for 20 years, and had good friends — and family! — in that firm, are you really going to be unbiased when making a decision to continue buying from them when a rate hike comes along?

Moving along to "external competition." There is none. Which is highly unhealthy. There isn’t even much internal competition, because of the neat state-by-state rules that still dominate the industry. How quaint! In this, the 21st century, when many companies are making enormous strides in productivity by "fracturing" their work processes across many different countries, a lawyer in New Jersey still can’t practice law in Connecticut without getting special permission. There are firms that advertise themselves as "national," but they aren’t. They are multi-state or multi-regional. There’s no such thing as a national law firm in the US at this point because the system does not allow for it. You may have lawyers who are licensed to practice in every state, but until you have an office in every state, and the ability to say, "Yes," to any piece of work (after a conflicts check) that matches your profile and walks in the door… you’re a local player with a farm team.

We like competition in America, remember? Capitalist system and all that? I don’t have to explain all those benefits, do I? Good. So we’ll all simply take it on faith that all of the benefits that fall to an industry that has solid competitive pressures are missing from the legal field.

Which brings us to the fact that firms are held privately. Hey there, Mr. Corporate Counsel? What do you know about how your law firm is managed? Anything? Do they adhere to any of the kinds of structures that your publicly traded company is required to? Do they meet any international standards of reporting? Do they conduct training of any kind above and beyond what is required for CLE? Do they still use children to clean the interiors of shell casings?

Clearly I exaggerate. But think about it… What do you know about how your firm is managed beyond the few lines of marketing spew on the "About" page of their website? "We believe in maintaining the highest standards of…" whatever.

Internecine. Non-competitive. Secret. Perfect situation for raising prices again and again and again. Why? Because:

• You can.
• There’s no reason not to
• It’s easier than any of the other "faucets"
• Nobody has taught you the other ways
• There’s no real pressure to change
• It’s fun and builds the ego

I don’t blame individual firms. Much. What are you gonna do? Go out there and charge 15-30% less than your competitors to do the same work? Do the other, harder things and then NOT charge what the market will allow and make even MORE profit? That would be insane!

If you did all the good stuff — lowered costs, became more efficient, lowered associate churn, did great marketing — and increased your profits without raising rates… and could still raise rates and get away with it, you’d be mad not to. I’m not going to sit here on Sunday and preach a gospel of "do it for the children" to entities who are supposed to be making profits for their partners.

But I am going to end this sermon with a grim prophecy for corporate counsel and other purchasers of legal services: until the system changes,  you will not see a major shift in how law firms make money, and, therefore, you will not see law firm rates go down. They will keep going up, at least as fast as inflation, and probably a bit faster (I’ll let you figure out the why of that one). Unless an outside force (and maybe it will come from legal outsourcing), or industry regulation forces a dramatic change, there is simply no impetus for law firms to alter their behavior.

I don’t blame law firms. I don’t blame anyone. It’s not about blame. It’s about the way the faucets work.