Disruption Junction: Why The Legal Services Industry Needs To Wake Up

This piece was written in March 2013.

“THAT BILL SHALL KNOW NO LIMITS.” So went an internal DLA Piper e-mail discovered last week, ironically, in a suit brought by the firm against a former client over an unpaid bill. This is not the first such scandal, but when one of the world’s largest and most powerful firms takes such a flippant tone with respect to bill-padding, one wonders about the extent of the problem. Joshua Kubicki recently summed it up perfectly when he wrote, “[Lawyers are like cops.] You don’t want one until you need one.” The attorney’s primary goal, regardless of practice area, should be delivering value to the client. Especially in the context of the entertainment industry, wherein a new ecosystem has lowered the barrier to entry and resulted in significant flattening, it is incumbent on the current generation of would-be entertainment counsel to prove that the legal services industry is capable of adapting. This disruptive innovation will ultimately yield the best results for all parties.

The current DLA Piper controversy is due in large part to the billable hour. “The billable hour system is the way [most firms] charge clients,” Steven Harper recently wrote in a New York Times Op Ed. “But it serves no one.” No one, he went on to explain, except the firm’s equity partners. According to the NALP, DLA Piper in 2009 replaced its billable hour system with a performance-based system, but retained a “minimum billable hour expectation.” Mr. Harper wrote that in 2011, DLA Piper associates billed an average of 1,831 hours, working an average of 2,462.

That may not sound too bad, but the reality is that the billable hour system hurts attorneys and clients. Attorneys are forced to work nights and weekends to make their hours and clients suffer from the resultant fatigue and sub-par work product. Mr. Harper wrote that previous rebellions against the billable hour system have been short and unsuccessful. ALM Legal Intelligence said that in 2010, post-2008 belt-tightening notwithstanding, fee arrangements other than the billable hour system accounted for only 16% of revenues at the country’s largest firms. Why? There are significant barriers to change, and law firms like Baker & McKenzie, Skadden Arps, Latham & Watkins, Jones Day, Kirkland & Ellis, White & Case, and DLA Piper are insufficiently incentivized to change any more than necessary to meet client demands.

That’s not to say progress hasn’t been made. Legal process outsourcing (LPO) evolved from a $400MM industry in 2010 to a $2.4B industry in 2012 driven largely by client demands for time and cost savings. LPO also offers predictable fee structures (whether in the context of transactional work or litigation) and increased access to specialists. Given LPO’s rapid maturation over the period 2008 to present, and “[g]iven all the change that the legal industry’s traditional service model has [recently gone through],” writes Marianne Purzycki for Hildebrant Institute, “it will be interesting to watch how the LPO industry further evolves.” It will indeed be interesting to see the extent of the DLA Piper client backlash in the wake of the current controversy. But rather than remain reactive, the current generation of attorneys should cull lessons from the above and work proactively to become agents of change. The current state of the independent film industry calls for it.

Production equipment and editing software costs have gone down. Crowd-funding sites have revolutionized independent film finance. The proliferation of digital distribution and exhibition options have driven those costs down. Hybrid offerings, such as Seed&Spark, package funding, distribution, and exhibition options, creating one-stop-shops. But independent film production remains a document-intensive endeavor. A myriad of contracts and forms define all parties’ relationships, covering everything from liability to compensation. How many filmmakers’ business and legal needs are going unmet because production teams can’t afford these services? The entertainment attorney should be the creative artist’s best friend. Here are three ways I think the current generation can make that happen:

(1) Move away from the billable hour system

“Anytime you have a business where people are judged on the amount of hours they bill, there will always be a concern that the focus is on labor and not value,” said David Brill, EVP/GC at American Stock Transfer & Trust Co. “It’s an inherent problem in the business model.”

Look at fixed fee pricing for work that clients are likely to perceive as commodity work. When hourly billing is necessary, avoid artificial inflation. If a task only took five minutes, don’t bill for 0.4 (consider not billing at all). It’s tough enough to land clients in the first place — earn their respect by not nickel-and-diming them.

(2) Remember what’s important

Build relationships with clients based on trust, transparency, and a mutual vision for the creative endeavor(s) to be the subject(s) of the representation. Remember what’s important: helping the artist realize their creative vision as smoothly and successfully as possible. Core competency should be presumed. Developing a deeper understanding of the business and the artist’s ideal creative trajectory will make you more of a partner than a mere member of a professional team.

(3) Communicate your value proposition

Business and legal affairs issues incident to independent film production are complex. The attorney’s job is to enable the artist to focus on their craft by handling these in the background. While there will invariably be (and rightfully so) a degree of interaction between attorney and artist with respect to these issues, there remains a natural bifurcation. Don’t treat that as a smoke screen — demonstrate your command of the matters through your ability to break them down into plain language. The artist shouldn’t need a J.D. to understand you. Clearly communicate what you bring to the table and how you’re regularly delivering value.

The state of the job market for Class of 2012 law graduates doesn’t suggest that many of us will be working on $500m LBO deals at white shoe firms any time soon, so our opportunities to engage in DLA Piper-esque bill-padding may not be as frequent. We can, nonetheless, learn from these unethical practices, proving along the way that the legal industry is capable of mutually beneficial change.

This article also appeared in YFS Magazine.