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Collaboration — on a consistent basis at least — calls for more than good intentions. Real teamwork is promoted — or it’s discouraged — by the way we pay people for their work.   

In her “What Makes Minnesota’s Mayo Clinic Different?”, financial journalist Maggie Mahar interviewed one of its physicians, Dr. Marc Patterson:

“You may have heard that at Mayo, doctors collaborate. But did you know that after their first five years all physicians within a single department are paid the same salary?

” … ‘Most could earn substantially more in private fee-for-service practice’, he adds.

“’It doesn’t matter how much revenue you bring in,’ Patterson explains, ‘or how many procedures you do. We’re all salaried staff—paid equally. This is very good for collegiality and people working together,‘ he adds.

…

Part 2 of this series described the Mayo Clinic’s teamwork approach to medicine. Mayo Clinic insiders describe this use of salaries rather than fee-for-service or other rewards for revenue generation as the foundation of teamwork medicine. Dr. Larry Jameson, executive vice-president of the University of Pennsylvania Health System, in a recent Knowledge@Wharton issue, stated that this use of salary to pay physicians removes, “potentially perverse incentives that are based on volume“.

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In Part 1 I described how the Mayo Clinic simultaneously achieved both the highest clinical standards and robust new efficiencies in its heart surgery department.

In looking to the Mayo Clinic for ideas on how to better manage the work that lawyers do for our businesses, I’d like to look in this Part 2 at one of that organization’s hallmarks:

Teamwork medicine rather than a star-performer focus.

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Warren Buffett has long used the word “moat” to describe a company’s competitive advantage. In his annual letter to Berkshire Hathaway shareholders for 2007, Warren Buffett cited teamwork medicine — as contrasted with individual superstar doctors — as the key to the Mayo Clinic’s appeal to patients:

” … If a business requires a superstar to produce great results, the business itself cannot be deemed great. A medical partnership led by your area’s premier brain surgeon may enjoy outsized and growing earnings, but that tells little about its future. The partnership’s moat will go when the surgeon goes. You can count, though, on the moat of the Mayo Clinic to endure, even though you can’t name its CEO.”

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Last year the Wall Street Journal recounted how — eight years earlier — the Mayo Clinic’s heart surgeons had asked for two more operating rooms to meet skyrocketing demand.

“No” – replied the Mayo Clinic’s CEO — himself a physician.

Not only did he say “No” — CEO Dr. John Noseworthy then asked heart surgeons at what is probably the number one-rated hospital system in the world to redesign every aspect of their work.

For at least 20% in cost cuts.

Clinic-wide, Mayo has reported $900 million in savings over the past five years from such re-engineering projects.

And eight years after that request the Mayo Clinic’s heart surgeons got half of what they’d asked for — just one additional operating room.

Eight years later.

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Meanwhile, over in the business legal sector, aggregate spending never goes down (here and here).

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This last of three posts about a 54-page opinion in which U.S. Bankruptcy Court for the Central District of Illinois Judge Mary Gorman explained her reduction of a nationally prominent law firm’s $1.8 million fee down to $670,000 offers a case study of the billable hour’s perverse incentives.

Today I address a case-study-within-a-case-study — a bill for $270,000 within the $1.8 million total sought by the law firm. Judge Gorman considered the wisdom of a law firm’s decision to pursue multiple litigations that — she believed — offered better odds to the lawyers of getting their hours paid than it offered to the client of getting recovery that would exceed those lawyers’ fees.

Judge Gorman’s case-study-within-a-case-study illustrates a critical drawback to use of the billable hour to price attorneys’ work:

Even when the client loses, the lawyers win. 

Except in the unlikely event that the hourly bill is submitted for approval by someone with the legal sophistication — and firmness — of a reviewer like Judge Gorman, who cuts that $270,000 bill down to $80,748. But I’m getting ahead of the story.

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The 54-page opinion in which U.S. Bankruptcy Court for the Central District of Illinois Judge Mary Gorman explained her reduction of a nationally prominent law firm’s $1.8 million fee down to $670,000 offers a case study of the billable hour’s perverse incentives.

Under “General Mistakes and Carelessness”, the Judge detailed important errors in the Law Firm’s fee statement.

Those errors show two consequences of using the billable hour to price lawyers’ services:

First, the “rack-em-up” focus on maximizing hours billed gives lawyers incentive to — knowingly or not — charge clients more than the work calls for.

Second, in the attempt to maximize those hours billed, attorneys can easily — intentionally or otherwise — obscure from the client’s view who-did-what-for-how-much.

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Four points among several Judge Gorman made here:

1. She called out the Law Firm for charging $234,450.50 for work they’d, “either not included in the billing invoices or … never actually earned”. After specific cuts, the Judge reduced the remainder of the $1.8 million requested by 20%. 

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On July 10, 2018 U.S. Bankruptcy Court for the Central District of Illinois Judge Mary Gorman issued a 54-page opinion explaining why she cut a law firm’s requested total hourly fee of $1.8 million down to an approved total hourly fee of $670,000.

Judge Gorman was responsible to approve or disapprove legal fees charged to the debtor by the debtor’s law firm because those fees are paid out of the bankruptcy estate’s assets.

The judge’s explanation of her drastic fee cut offers a case study in the perverse incentives of the billable hour.

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Notes on format and content:

1. The text in this and the following two posts doesn’t refer to the law firm or its attorneys by name — but to the Law Firm, or to Attorney A, Attorney B, etc. This post’s purpose is to make a point about cost control and management of legal work — not to embarrass anyone.

The Law Firm ranks among the American Lawyer magazine’s “AmLaw200” — the 200 largest U.S. law firms by gross revenue and other key metrics.

2. While I don’t wish to embarrass anyone, I do need to substantiate what I say by reference to objective sources. Therefore the law firm and lawyers named in Judge Gorman’s 54-page opinion can be readily identified in it. Also, I consulted other court filings on the electronic docket (pay wall) for In re: Earl Gaudio & Son, Inc. at Case No. 13-90942.

3. Unlike this blog, Judge Gorman’s opinion did not address the wisdom of pricing lawyers’ services by reference to billable hours versus an alternative fee arrangement. To the contrary, when a lawyer seeks approval of legal fees from a federal court, the billable hour is the standard because that is the conventional model of the legal profession. (I followed this practice myself three years ago after winning a judgment for my client in a civil rights lawsuit — because I had to.)

4. My argument is not that use of the billable hour necessarily leads to excess costs and wasted effort — but that it creates incentives that make those bad outcomes more likely.

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I begin with Judge Gorman’s summary offered at the end of her 54-page opinion — with underlined headings that I’ve provided:

 

Failure to “Focus on this Case as Required”

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With this post I conclude a 4-part analysis of positive alternatives to the status quo in legal services presented by the Big 4 accounting firms to U.S. businesses.

In Part 1 I addressed survey results from law firms in which 69% of responding law firm leaders reported that “partners [in law firms] resist most change efforts”.

The reason? 59% of responding law firm leaders stated that their partners “resist most change efforts” in the way they deliver services to clients, because:

“We are not feeling enough economic pain to motivate more significant change.”

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Businesses — speaking through 55% of chief legal officers surveyed — reported that they don’t negotiate better price and terms of service with their law firms because they:

“Believe that they do not have enough buying power to negotiate more effectively.”

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The fact that law firms report such complacency and that businesses feel stuck which what law firms are giving them prompts a question: Are there any good alternative sources of legal services available to U.S. businesses?

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Earlier this month Lucy Endel Bassli wrote an article entitled: “Big 4 Are Not a Threat. They are a Reality”.

In the post immediately preceding I described Ms. Bassli’s experience and credentials as former Assistant General Counsel of Microsoft and as founder of a new law firm and consultancy focused on innovation in the delivery of legal services. Her views depart from — and are better informed than — conventional wisdom.

Conventionally-minded business lawyers talk a lot about the “threat” that the Big 4 present to traditional law firms. By “threat” they mean future competition.

Ms. Bassli — based on firsthand experience buying and managing the work of law firms and other legal services providers — argues that the Big 4’s offerings for U.S. business are not confined to the future. They’re a present day reality.

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What follows are the first 5 of 10 attributes of Big 4 accounting firms’ offerings in legal services that Ms. Bassli identified:

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To summarize some of the positive alternatives that the Big 4 accounting firms offer U.S. business owners and executives in legal services, I’ve chosen the writings of a trusted guide — Lucy Endel Bassli.

In these writings she’s described how the Big 4 accounting firms offer choices to businesses in the U.S. that might well be more efficient — and for some jobs more highly skilled — than what traditional law firms and traditional in-house departments have to offer.

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When I first heard Ms. Bassli speak on these subjects at academic and legal conferences she was Assistant General Counsel of Microsoft — a business where she practiced in-house for 13 years.

Microsoft is — well — it’s Microsoft. And Ms. Bassli until January of this year was a senior leader of its legal department.

And in addition to being an iconic company, its legal department is a leader in innovation. For instance, a year ago Microsoft’s legal department announced that it was moving 90 percent of its outside counsel work away from hourly fees — toward alternative fee arrangements. This would be up from 55 to 60 percent at the time of the August 2017 announcement.

This at a time when — despite hype about alternative fee arrangements — the vast majority of law firms still bill by the hour.

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Earlier this year Lucy Endel Bassli left Microsoft to found InnoLegal Services, PLLC, with the following outlook:

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For business owners and executives in the U.S. who contend with increasing legal and regulatory demands — there’s good news. Through the Big 4 accounting firms you might find more efficient — and for some jobs more highly skilled — choices for the conduct of your company’s legal affairs.

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Most law firms seem complacent — and many of their business clients seem to feel stuck with what they get from those law firms. Consider:

The 2018 Altman Weil (consultancy to law firms and corporate legal departments) survey of law firm leaders reported:

“In 69% of law firms, partners resist most change efforts“.

Why do those partners “resist most change efforts”?

59% in those law firms answered: “We are not feeling enough economic pain to motivate more significant change.”

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