Managing Legal
In the early 1980’s Fred Bartlit headed litigation at one of Chicago’s premier law firms.
He’d brought in a client whose big case was keeping 8 partners and 30 associates busy for months. Classic leverage (see “Leverage” Part I).
“My partners loved me”, he said.
But — as he recounted in a 2010 speech at the University of Tennessee Law School — he was doing some soul searching about client needs: “I’m no saint … but I started to think about the practice of law”.
Bartlit was concerned that the pursuit of leverage was yielding bloated teams loaded up with less experienced lawyers. He reasoned that lean and experienced teams would get more courtroom wins and better pretrial settlements — at less cost to clients.
Bartlit then went to his partners and recalled for them their firm’s experience in the 1960’s and 1970’s when their 2- and 3-lawyer trial teams went up against much larger New York firms — and won.
Bartlit’s partners’ response: How are we going to make money without leveraging employee-lawyers (associates)?
Specifically, they said, how can billings of 2- or 3-lawyer teams match what we make with associate-to-partner ratios of 3:1 or 4:1 — with each associate billing hourly — and the excess of those hourly billings over their salaries and benefits — or leverage — going straight to the partnership’s bottomline?
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Fred Bartlit left that firm in 1993 to founded his own firm. As of this writing Bartlit Beck Herman Palenchar & Scott has 3.7 partners for each associate — they’ve inverted the prevailing leverage model that multiplies junior lawyers assigned to a case.
Bartlit Beck never bills by the hour. They agree in advance with their client on a value for the legal work undertaken — subject to rewards and penalties based on results.
Bartlit Beck is much in demand as one of the nation’s most sought-after law firms. But few other practices have adopted its business model and stopped chasing leverage.
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Where do law firms’ pursuit of leverage leave their business clients?
It leaves them with uncertainty in setting their budgets because the pursuit of leverage is based on maximizing hourly bills. And it leaves those clients with outright distrust of their own lawyers.
Ben Heineman, general counsel of GE between 1987 and 2005, put it this way in a speech at New York University Law School in October 2016:
“I was always worried with the lawyer inside the big firm that the pressures of the economic model would lead to overstaffing and over billing no matter how careful they were.”
Sung Hui Kim — professor of corporate law at UCLA since 2010, and the first general counsel of Red Bull North America — put it this way in a 2014 blog post:
“My prior experience as general counsel of a corporation (plus my six years of practicing law in a law firm) make me skeptical of the incentives of partners within firms (‘Bill, bill, bill!’).”
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For decades it seemed like every airline magazine I ever saw had a promotion featuring the following aphorism by Chester Karrass: “In business as in life, you don’t get what you deserve, you get what you negotiate.”
Company owners and executives are at a disadvantage if they want to negotiate an alternative to the waste and inexperience that law firms’ pursuit of leverage builds into their business model.
The law firms themselves insist that the pursuit of leverage is legitimate despite its anti-client features. And as Fred Bartlit found, they view it as critical to their earnings. Negotiating an alternative is tough — especially as owners or business executives face off with lawyers on the subject.
You’d think that in-house lawyers would both understand the downsides of leverage for their corporate employers, and that they’d be able to use their purchasing power to reach a better deal. But almost all in-house lawyers started their careers in law firms. With exceptions so rare that they attract headlines when they come up (Microsoft and GlaxoSmithKline are two recent outliers), in-house lawyers as a group accept the pursuit of leverage by the outside lawyers they hire.
This gets us back to the theme of this blog: Business owners and executives need a lawyer to help them design, staff, and negotiate terms with their law and regulatory compliance function. They need a lawyer more loyal to the client side of the lawyer / client table than to the dysfunctional business model of their own profession.