Two For You: #1 The Real Value Challenge

Since 2012 ended with three general predictions for 2013, I thought I’d end this short week with two ideas for lawyers, personally. Yes, that means you.

As we enter a new year, we want to be positive, as the last five years have been challenging for all lawyers. I would even suggest that for many lawyers an element of fear has manifested itself from time-to-time. Of course, as stolid advocates for our client’s interests we can’t really show fear. And I think that’s why so few lawyers talk about it.

It’s human nature to be afraid of the unknown. Much of what is the enterprise legal market these days feels like the unknown. Worse yet, it sometimes feels unknowable.

But while it’s natural to sometimes be afraid, it’s essential that you move forward. One way is to (a) look at things honestly and then (b) take steps to do something about what you see.

When we go from the macro legal economy (things are tough, highly competitive), to your own micro economy (what am I doing, where am I going?) here’s one litmus test question to ask yourself:

Do I create more value than I capture?

I think this concept was first outlined by Tim O’Reilly almost four years ago.

This isn’t an exercise that goes out to four decimal points. It’s basically three steps:

1. What do I spend most of my time doing, and what is its value (Create)?

2. What is my fully loaded cost in doing it (Capture)? and

3. Is 1 greater than 2 (the Calculus)?

[NB 1 for extra credit: What does the market signal about me in terms of what others cost who do the same thing? (price and trend.)]

[NB 2 to value-pricing mavens: Yes I have heard about AFAs and no I don’t think charging by the hour is the only way to do things. But for all the time spent and ink spilled on new pricing models, costs are costs, and someone (the client!) pays them somehow. And if you truly think that what you do is unique, and you really have no competition, then I’d say get back to work and stop reading here.]

Let’s see how three hypothetical enterprise lawyers fare when doing the value-capture three-step:

Valiant In-house Counsel

This one is typically easy. If you are doing any legal work that used to be done by outside counsel, you win. For now. The fully loaded cost for many in-house counsel is less than $125 per hour, and some law firms may charge out their messengers for that. But note the words “for now.” If what you do is a lot of rather mechanical drafting of low end contracts or doing various research projects, watch out. You may wake up one morning and find someone (or some thing) out there that does this for $50 per hour. Maybe in a few years for $5 (and works via this website) That’s $5 per deliverable, not per hour, by the way.

Intrepid Law Firm Associate

This one is a bit harder. If you are a newly minted law school graduate, you better be at a firm that emphasizes investing in you now for a pay off some years down the road. Clients don’t want to pay for this. And managing partners don’t like anyone working “off the meter.” If you are a five to seven year associate, good news! Chances are you can and do some of the work that junior, non-equity partners do, but you don’t have to charge $200 per hour more. So be glad now, but stay tuned for tomorrow’s post here, because things will change when they make you partner. Someday…

Stalwart Law Firm Partner

Many partners can pass the create/capture test with room to spare. Interestingly, its often those at both ends of the hourly rate curve. Those newly-minted partners, if they were really really deserving of non-equity knighthood, still charge a lot less than others at their firm (or in the rest of their relevant market). The stars, those partners who ask for and get $750 per hour and more, might do work that’s worth way more than $1,000 per hour. But the mendacious middle is where things get tough. If you are a partner who doesn’t have many (any?) of your own clients, you charge $500+ per hour, and your specialty is a mile deep and an inch wide, hold on. Take a deep breath and a long hard look in the mirror. The good news: you’re not alone. The bad news: you’re not alone; many large law firms have tens if not hundreds of such partners. Once upon a time, they were on the right side of the create/capture ledger. (Mainly because some GCs thought most lawyers were unique and felt that their budgets were fungible. Now it’s the reverse.)

Times have changed, however, and in this era of big data and small analytical tools, it is simply harder to hide. And with no clients, there may be nowhere to run.

Hope for Change, Plan for Better

Let’s end this part one on a upbeat note: 2013 can be a year when many lawyers replace fear with hope, and then hope with a plan. That’s next week, when we learn that even if we create more value than we capture, we can’t stop there.