The Clarion Call for Inefficiency

February 5, 2013 | Author: admin | Category: Uncategorized | Comments (0)

I was recently informed by a friend, a lawyer, that the true measure of productivity is the number of billable hours a lawyer can generate within a given period. This can be accomplished in at least two ways: (1) a lawyer can have a great deal of work and put in a substantial number of hours necessary to accomplish the requisite tasks and (2) a lawyer can have too little work and pad his hours in order to achieve annual billable hour targets. Would a lawyer stoop to such an egregious possibility? Let’s dispose of that nonsense immediately. Of course not, even if his annual compensation and position in the firm are contingent on it.

There is, however, a third way, and it is that the structure of the law firm and the “normal” way in which legal services are delivered result in the necessity of the expenditure of a large number of billable hours. How does this work? Let’s consider a transaction in which I have experience – mergers and acquisitions. Assume that the transaction is the merger of a privately held corporation with a new subsidiary of a private equity firm.

In this simple transaction there is the possibility of corporate, tax, lending and collateral, accounting, intellectual property, employee benefits and other issues related to the industry in which the corporation operates. The law firm for the privately held corporation will likely not assign a partner to oversee the management of the project but rather the partner who got the call from the client will have that responsibility. Hopefully, that partner has sufficient experience to handle the job, and it’s reasonable to expect that to be the case. However, what does “handle the job” mean? It actually means, in the popular idiom of today, that he is the “project manager”. It does not mean that he has the technical experience or knowledge to perform all of the work required to analyze the transaction, identify the issues, create and communicate solutions and draft and review documents. And he should not be expected to do so – modern transactions can be complex and often require the skills of more than one person. At this point in every transaction, the beginning, almost all law firms are in the same position – that of considering the various structural alternatives for the transaction and how the various duties will be staffed. And it is here that the specter of inefficiency raises its head.

In the typical law firm, there exist lawyers commonly characterized as “associates”. These are usually younger, inexperienced lawyers who are compensated handsomely and must provide services for which they are paid by clients in order to earn their keep. The amounts paid by clients for the efforts of associates are at least equal to the proportionate amounts of their salaries plus their shares of other law firm overhead. So, it must be recognized that, regardless of the lack of experience of these lawyers, they will be utilized in the project even though they may contribute to the project only services which often could be provided by a non-lawyer paid considerably less. In addition, they will be utilized to review existing client documents for certain content, in the process known as “due diligence”, even though they may have little understanding of the information they may discover. They will also be requested to do “research”, the review of applicable law in the circumstances relative to the transaction, and to provide research memoranda – even if the result of the research is “yes” or “no”. These memoranda will be reviewed by the project manager and perhaps other lawyers as well. Now consider the compounding of inefficiency resulting from replicating this service process over the various areas of law and different documents applicable to the project. Can you hear the cash register – ching ching?

This simple example describes only a few of the inefficiencies inherent in the delivery of legal services. There are several structural aspects of the law firm highlighted by this example that drive up the number of hours, and hence the cost, of the services. These include the use of inexperienced but highly paid young lawyers, the time required to perform research and document preparation and the meetings and conversations inherent in managing those activities.

Most law firms are structured and organized to deliver services in this manner, and for those firms to change the way in which they deliver services – and thus to provide services at more reasonable costs to clients – is extremely difficult. If, however, the law firm is structured very differently, with less emphasis on the use of inexperienced personnel, the time expended for the project, and thus its cost, can be considerably less.

I have written elsewhere that the billable hour is the archenemy of efficiency, but in this posting I point out that the billable hour is not the only enemy – the structure of the law firm and the manner in which it staffs projects are contributors as well.

If the measure of lawyer productivity is the number of billable hours generated, and if those hours result from inefficiencies inherent in the structure of the law firm, are the interests of the law firm and the client, who pays the bill, in alignment? Think about it, and while you’re at it, think about alchemy.

[The author of this post is Wynne James]

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