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CCCA_V7No1_Dept-LawDeptMgmt-FIN_CCCA_V6No4 2/12/13 4:18 PM Page 16 Law Department Management Create the change you want to see In-house counsel need to be pro-active to ensure law firms act more like a business. Their stakeholders are depending on it. By Joe Milstone counsel leaders hang onto their last vestige of insulation from the zealous scrutiny applied to other business functions. For most, it’s easier to delicately attempt to get the tiger to slightly adjust its stripes than disrupt a cozy, long-existing relationship, peaking with corporate counsel including fixed costs for students, associ- or worse — worry about “getting fired for Sclients, I have come to recognize ates, secretaries, offices, chefs, retreats, not using IBM” all the time. that their primary overarching frustra- retired partner draws, costly marketing Law firms, as we know them, have no tion with traditional outside law firms and the like. incentive to change this mindset, meaning is precisely that — they’re “outside.” Then they add on other costs of the they themselves can continue to take the Physically silo-ed in the proverbial actual work, plus the cost for head office path of least resistance: use predominantly ivory tower and metaphorically silo-ed in overhead teams such as HR, operations, hourly-based billing (being strictly time- their own anomalous industry world, tra- technology, finance and marketing; tack based, it’s entirely within the control of ditional firms incorrectly equate their on a healthy profit margin, which has to the firm to achieve) and increase the own heightened profitability “pressures” increase year-by-year to support the ever- overall costs of legal services each year, with the far more real struggles of corpo- increasing number of partners. A team of like Groundhog Day, with little incentive rate counsel to meet increasingly strin- “quants” divides, does some magic calcu- to rationalize non-value-adding costs gent and scrutinized legal budgets. lations based on inventory (i.e., hours) and which are at the core of that pricing. In short, most law firms still run with a — voilà! — variable rates are formulated Consider this — it was recently esti- “top-down” (the top being the firm and to achieve the end revenue figure desired. mated that the average overhead for a the down being the client) trajectory that Notice, however, that none of these cal- large law firm associate in the United is contrary to modern business principles culations factor in anything to do with States (which is probably not too dissimi- and unlike almost any other industry. value or outcome for corporate counsel lar from here) is between $200,000 and Nowhere is the top-down approach clients, clients’ budget situations, macro- $300,000 per year — not including salary. more evident than in the pricing for legal economic forces, the benefits of techno- So essentially corporate counsel clients services. Why do firms bill by the hour? logical and productivity advancements or are expected to collectively pay that for Why do they bill so much? Why do rates anything “outside the four walls” of the their outside counsel before the meter never go down? Why does Bob apply the law firm itself. even starts for the actual work! same rate to take minutes at a meeting as Without being too trite, firms bill how Perhaps the best evidence of the per- he does to defend a hostile takeover and what they do because clients (includ- petuating top-down approach is the un- against my company? ing, by and large, most corporate counsel) contradicted maxim that services should Before addressing these questions, con- let them. Regardless of what the pundits be charged based on the person doing the sider the following: It’s no secret that law may say, the buy-side of the supplier-cus- work rather than the work itself. Imagine ISTOCKPHOTO.COM firm rates operate on a cost-plus basis. tomer equation remains a relatively nerv- a specialized aviation mechanic giving a Basically, firms add up their internal costs, ous and feeble counterforce, as corporate quote to fix the electrical system in the 16 CCCA Canadian Corporate Counsel Association SPRING 2013