At one time, the legal industry was about long-term relationships. A law firm would help form a company. The close relationship between the lawyer and the company meant that the company consulted the lawyer on big decisions. Often, the lawyer became a member of the company’s board of directors. As the years rolled forward, a lawyer from the firm might take the general counsel position in the company and manage the day-to-day relationship between the company and the firm performing the services. The general counsel position would be handed down to the next former partner and so on, almost as an inheritance. The relationships between law firms and companies lasted for decades. In some instances, these relationships (absent lawyers sitting on the company’s board and automatically going from the law firm to general counsel role) still exist.
For many very good reasons, we decided along the way that some of these relationships had become too cozy. The law firm was no longer clearly an independent legal advisor and the law firm partner responsible for the engagement might have too much at risk to give his client advice that the client might not like. Relationships between law firms and clients became less cozy.
The billable hour also intruded, creating a growing level of distrust between law firms and clients. Clients believed law firm partners were out to grow their books of business, bill as many hours as possible, and benefit personally from whatever they could get from clients. Law firm partners came to think of clients as opportunists, going for the best pricing they could get on each legal matter and willing to drop one law firm for the next at the drop of a hat. Both sides viewed their relationships as ephemeral and were not willing to invest in something that probably had a short life span.
In the past decade, the pendulum has swung back a bit, but not much. Projects reducing the number of firms a client uses have resulted in clients spending more time per firm with fewer firms. At the extreme, a few clients have moved to sole-source arrangements. However, the majority of clients have maintained working relationships with many firms and those relationships are more fragile than in the past. Indeed, BTI Consulting recently reported that last year 59% of large clients had replaced one of their two primary law firms for delivering mediocre service. In addition to being unusually high, that statistic demonstrates how easily clients will drop law firms rather than work to repair relationships. The practice of law has become focused on the near-term not the long-term.
It is easy to think the legal profession is unique, but once again we find out that isn’t so. In a recent Commentary article published in McKinsey & Company’s Insights & Publications title “Our gambling culture,” Laurence Fink states, “[w]e’ve created a gambling culture in which we tune out everything except the most immediate outcomes.” For this immediacy, he uses the popular name “short-termism.” Fink describes how short-termism grips our politicians, our tax policies, investment analysts, and CEOs. We pay a hefty price for short-termism, and the price is not achieving long-term goals.
Lawyers are Short-Termers
This short-termism, the focus on gambling for compensation this year and ignoring future years, plays itself out in the legal industry. If you are in a law department your department’s rhythm matches that of the company. Public companies in the United States are on a quarter-to-quarter march. Even if they do not want to be on that march, the financial analysts herd them in that direction. At the public companies where I worked, we had a budget built by quarter. We would do a forecast covering each of the next four quarters. At the end of a quarter, we would update the forecast for the next three quarters and add a forecast for an additional quarter. We would compare actual performance to budget for the current quarter. In other words, each quarter was a major financial event and our time horizon was one year.
We seldom did multi-year forecasts and our budgets never stretched beyond a year. Now, there are some very good reasons for skipping the pleasure of multi-year forecasting. The best reason is that we had no real basis for those forecasts. They became “add” forecasts. You probably know them. Take the current year, add whatever percent growth you think is appropriate, and you have the forecast for the next year. With that approach, you can forecast out as many years as you want, but beware. All of your forecasts will be wrong. The exercise is not worth the time.
The result for law departments is even worse. As service providers, what law departments spend is highly dependent on what the rest of the organization does. If the organization can’t clearly forecast what it will do, the law department will be challenged to forecast its workload, which derives from what the organization does. At the end of the day, everyone goes back to focusing on the next four quarters.
If you are in a law firm, you know that the cycle is one fiscal year. At the end of that year, the firm pays out the partner compensation in excess of draws received and you start the game over again. A partner’s last draw, as many partners are fond of saying, severs his or her connection to the firm. It is very difficult to have a longer time horizon when the business model is based on a one-year cycle.
Lawyers focus on the money, so when thinking about the near-term and the long-term, our attention goes to the money. There are other ways to think about money, though. For a company, lowering risk, raising quality, and increasing competitiveness – when done together – decrease costs. For law firms, helping clients decrease risk, increase quality, and improve competitiveness – when done together – improve relationships, which decreases the costs of acquiring new clients and increases the likelihood that the client will use the firm more often. In other words, long-term thinking among lawyers can address those money concerns.
Shifting to Long-Term Thinking
All of these lawyers face the problem that a one-year perspective has definite downsides in law. We can start with the laws themselves. Most laws don’t spring from the legislature overnight (we reserve that privilege for laws drafted in response to some calamity, which usually turn out to be very poor laws). It takes laws time to percolate through the legislative layers. At any given moment, there are thousands of potential laws making their journey from sponsor to death or passage. We have tools to track these potential laws, but most lawyers ignore them because most will fade away. Why waste your time on something that won’t happen?
From the in-house lawyer perspective, not knowing what laws could affect your business in one or two years can create real problems. Your business teams are developing processes, business models, and making investments based on how they want to run the business. If you jump in at the last moment (“oh, by the way, a new law was passed that changes everything”) you will feel the fury of those teame. In-house lawyers need early warning systems. We want to know that tornado weather is coming and the likelihood that our business lies in the path of destruction. As a general counsel, I typically would get several alerts from law firms about one to two months after laws took effect. Those alerts summarized the new laws and provided interesting advice – well, I assume they did. I usually threw them out because as a business we had to learn about the laws, adapt our business models, and put new processes in place months earlier. The alerts reminded me of something we had done months earlier. Still, we did not have the lead times we wanted.
In the United States we have the common law system. Every day, courts decideg cases that could affect business models. Again, I would get those helpful alerts from law firms one or two months later (the really good firms sent them out within a week of the decision). I used to call these alerts “reminders of devastation,” as in “hey, just wanted to remind you that last week court X devastated your business plan.” I could then open my door and welcome the fury of business partners who wanted to know why they hadn’t heard about the risk months before the court decision.
Short-termism among lawyers means thinking reactively. Rather than looking at trends, considering how changing societal moods, legislative activity, and case law might evolve to present business risks, we wait until the tornado strikes and then swoop in to clean up after the devastation. While profitable in certain respects, we all pay a huge price for this after-the-fact viewpoint.
Partnering with Technologists
I am not suggesting we invest in crystal balls and re-frame our businesses as law and fortune telling shops. I also am not in favor of sitting back on our heels and waiting for life to unfold. The practice of law must evolve from a reactive profession to a proactive profession. As lawyers, we must find ways to channel our energy into reducing risk, increasing quality, and helping our clients achieve their goals, not ours. Clients value not having to deal with crises. Yet, it is hard to find legal teams focusing on clients and industries in ways that will help clients avoid crises. We are starting to make some inroads with tools such as predictive analytics, but we have a long way to go.
We have major technologies bubbling up around us, including nanotechnology, artificial intelligence, robots, and 3D printing. All of these technologies will have major impacts on our clients. Few lawyers, however, are spending time working out how to mitigate the risks these technologies pose to our business models. For our clients, it would be much better to shape the future than to have the future thrust upon them.
Technologists are filling the void left by lawyers hanging back. They are developing programs to pick up the analytic slack. The coders use algorithms to determine what will happen next. These tools are useful as adjuncts to people, but they have not evolved to the point where they can or should replace people. The problem, however, is that lawyers are not jumping into the fray, learning the tools, and using them combined with the lawyers’ knowledge to help clients. Lawyers are simply ceding the game to technologists.
Think technology isn’t filling the gap? One major financial institution has spent over $36 billion on legal bills since the beginning of the financial crisis. So, in part to bring down those costs, it is rolling out software that will monitor various data streams to predict rogue employees – before they go rogue. Software can monitor all types of behaviors. For example, the financial institution will watch everything from trading patterns to whether the employee skips compliance classes. We have software that can mine emails after the fact to find communications relevant to a lawsuit, but we also can watch communications before the behavior happens to determine where the problem will arise. Identify where the problem will arise, take action to prevent it, and you can cut your legal bills (and fines) substantially. But, the technology solution will raise new issues, just as looking at behavior in other areas has raised issues when it comes to employee actions. Lawyers should consider these issues and undoubtedly are at the financial institution implementing the software. But what about other companies? If the technology is available to do the monitoring and predicting, your company doesn’t implement the technology, and something happens causing a large loss at a company do you have a potential fiduciary breach issue?
Leaving the world to technologists is the most problematic form of short-termism facing the legal profession. Technology has a tremendous amount to offer law, as it does in other fields. But uncontrolled technology has the potential to do much damage, as it does in other fields. Technology is not a panacea for solving social ills, any more than ignoring technology will be a panacea for avoiding future ills. At this pivotal moment, when technology use in the legal industry is still in its infancy, law departments and law firms should be learning how to work together, join with other parties, and support the growth and development of technology that will benefit all of the participants. This is the time to for us to get past short-termism and take the long view.