Table of Contents
The Traditional Law Firm and Its Problems
Six Hundred Years of Habit
Colleagues or Competitors?
Working for Someone Else.
The Annual Rollercoaster
The Billable Hour
The Client Rebellion
The Internet Revolution
The Rimon Way
The World Is Our Office
Community and Collaboration
Stability and Savings
No Billable-Hour Quotas
Alternative Fee Arrangements
A Simple Formula for Attorney Compensation
Up … or Not
Since its inception in 2008, Rimon, P.C. has repeatedly been recognized for its innovation and excellence by sources like the ABA Journal and Financial Times. Its founders began their careers at a large traditional law firm, at a time when computer technology was developing by leaps and bounds. They saw first-hand that the old law-firm model had serious weaknesses, and the new technology had enormous potential — for disruption, and for improvement.
The traditional law firm, with its seniority-based hierarchy, can trace its structure back to medieval guilds and their system of apprenticeship. A young associate, like an apprentice, may join a traditional firm, and by working hard enough and billing enough hours, he or she eventually rises to the next rank: partnership. Once made partner, after about ten years of practicing law, the attorney reaches the next rank — and is asked to develop business for the first time. Here the guild model shows its weakness: business development is not a refinement of the practice of law; it is a different skill set. Associates make partner due to long hours in the office, not necessarily a strong ability to attract clients.
If the partner successfully transitions to the role of generating business, after many years he or she reaches the highest rank of the guild, and is asked to take on an administrative role. Once again the attorney is thrust into a position that has nothing to do with previous successes or interests.
In this model, seniority dictates practice. The legal profession is among the last clinging to this legacy.
The traditional law firm's offices, like the feudal lord's castle, tend to be large, well appointed, impressive — and expensive to maintain. A law firm often spends about one-third of its revenues to pay for real estate and technology. Spacious offices in desirable locations, hundreds of computers, printers and copiers, and the staff to keep it all operating add up to high overhead. These costs tend to be fixed, while work levels and income may fluctuate.
With all its shortcomings, the large law firm has one key benefit: the ability to work with colleagues and to learn from them. At a large firm, attorneys specializing in many areas of the law can collaborate to bring clients a wide range of expertise.
That, at any rate, is the theory. However, the "up or out" model of the hierarchical law firm introduces competition within the firm that may work against collaboration and do a disservice to attorneys and clients alike. Competition among partners and other lawyers within law firms is rarely spoken of. It is inconsistent with firm messaging about “seamless collaboration” of lawyers across practice groups and offices. But internal competition exists; it is not merely a plot device in legal dramas on television.
For some law firm lawyers — particularly those who are inclined to devote effort, time and resources into building new clientele and business — internal competition may manifest in a frustrating and sometimes painful “business conflict.” This is where a lawyer is prevented from opening an engagement not because it creates an ethical conflict, but because it would, or potentially could, cause a relationship problem or embarrassment for another (more senior, powerful, or favored) lawyer or practice group.
This is, fortunately, not a frequent problem. But for some great lawyers, and especially for the 15% or so who are most actively working to develop new business, the business conflict and other instances of internal competition can be a bitter pill.
Many firms have long-term financial commitments to current and former partners, such as multi-year compensation packages, and retirement programs that are unfunded in whole or in part. Partners who do not directly benefit from these fixed commitments may feel as if the profits from their hard work are diverted to enrich others. Lateral hires may be stymied, as potential new star attorneys (the lifeblood of firms) choose not to subsidize people they do not know and to whom they have no loyalty. And such long-term fixed obligations may threaten a firm's very existence during economic fluctuations.
Traditional law firms typically distribute all their profits at the end or beginning of the year. The result is that every new year brings the possibility of upheaval. Partners with plans to move on have a great incentive to stay quietly until after big payout. This means the firm may have no idea how many of their partners will leave immediately after they pay out, precisely when the firm has taken on large amounts of debt to cover end-of-year expenses.
These firms plan budgets for the coming year without a true picture of the changes in cost and revenue from unpredictable firm departures. The resulting crisis in cash flow has led to the collapse of many firms, large and small.
For partners, especially junior ones, the end of the year handouts must seem like a pure magic show. At many firms, only a few partners in the firm’s leadership truly understand how the money is divvied up, and questions as to how the finances work are not tolerated. The different types of compensation systems vary by firm, but for many partners, they bring the frustration of a mystery.
With the information hidden, rumors can start, pushing partners and associates to the door. Departures fuel more rumors, in a vicious cycle that may threaten a firm's existence.
Traditional law firms pressure their attorneys to meet a pre-set quota of "billable hours" — i.e., attorney time for which clients can be charged money. But this "tradition" is a relatively recent development.
During the nineteenth century and the early part of the twentieth century, lawyers generally billed clients on a variety of different bases: a fixed fee on a per-matter basis; a monthly retainer for all legal work; and contingency fees or a percentage of the value of the transaction. In fact, bar associations throughout the country published legal fee schedules and ruled that it was unethical for lawyers to depart from them.
Hourly timekeeping was first introduced in Boston in 1904 as a management tool to promote lawyer efficiency. In the following decades, this system spread among law firms as an internal time-management practice.
Then, in 1975, the United States Supreme Court, in a series of opinions, found bar associations' mandated fee schedules to be a violation of antitrust laws. Such fee schedules became mere recommendations, and law firms struggled with finding different methods for billing clients. One solution was to use the system of hourly timekeeping, already widespread, as a new basis for billing. And so the billable hour was born.
To improve productivity, law firms began adopting policies requiring attorneys to bill a certain number of minimum hours each year. It seemed like a harmless enough step — until the number of those hours began to rise steadily beginning in the 1980s. Firms raised their hours-billed requirements to maximize the profits of partners. By 2001, large law firms typically asked associates to bill between 1,950 and 2,000 billable hours a year.
The billable hour's appeal as a management tool is also its greatest threat. Treating legal services as a commodity that can be measured in units of time diminishes the importance of both the quality of the work produced and the results achieved. For example, one could not reasonably argue that an hour spent quietly preparing a routine corporate document has the same value as an hour spent closing complex transaction involving many disparate players. Few other industries would thrive if they measured productivity by the time their workers spent without regard to what those workers created. The billable-hour standard invites inefficiency, to say the least.
In recent years, and especially following the 2008 recession, clients — particularly those of significant economic clout — have been looking critically at traditional attorney-client relations. Clearly, the hourly billing process rewards inefficiency and places the risk of the legal engagement on the client, not the law firm. Clients are demanding radical change — hence the advent of the value-billing alternative fee arrangement (“AFA").
In late March 2010, Eversheds LLP, a London “Magic Circle” firm, released the results of a survey it had undertaken of corporate counsel and leaders of major law firms. The ABA Journal summarized Eversheds' report in a few critically instructive paragraphs:
“The legal landscape has changed permanently and more quickly than anyone imagined,” the report says. In the new, post-recession legal market, general counsel has more status and influence in their corporations, fee levels will decline or stay the same, and legal work will become more efficient as tasks are outsourced and technology is used.
In this changed world, law firm structures may be vulnerable. Forty-six percent of managing partners said a reduction and change in premium legal work available would change law firms’ shape and size. The larger firms reported long-term cuts in headcount and leverage, and possible changes to the “up and out" pyramid structure of law firms. Only 30 percent of the partners said they were wedded to the traditional partnership model.
In this new legal world, hourly fees are giving way to value billing that is based on the value of work to the client rather than lawyer hours expended, the report found. Two years ago, only 22 percent of in-house clients and 48 percent of partners surveyed saw value billing as a trend for the future. Now, 86 percent of clients and 88 percent of partners say they often or sometimes use value billing. Among the partners surveyed from the United Kingdom, 79 percent said the hourly rate was almost dead.
Among the most prominent advocates of the AFA in recent years has been Jeffrey W. Carr, Jr. While serving as General Counsel to FMC Technologies, he assumed a leadership role on behalf of private industry, arguing that corporate clients should dictate to outside law firms the terms of any engagement and that virtually every engagement demands “performance-based pay.” During his tenure as corporate counsel, FMC Technologies saw its sales rise but its legal costs go down in step with its increasing use of AFAs.
In a 2010 interview with Law360, Mr. Carr gave advice to outside law firms that is direct, succinct and beyond misinterpretation:
Change and do it now. Learn to focus on delivery of value by reducing your costs to remain profitable as opposed to leveraging the pyramid and focusing only on top line revenue growth. To quote a former U.S. Army chief of Staff, "If you dislike change, you’re going to dislike irrelevance even more.”
Increasingly, clients see AFAs as a tool to ensure efficient delivery of quality legal services at predictable rates, consistent with the current market and with the law firms themselves assuming a degree of the risk in such engagements. And with the demand for legal services significantly lower than the existing supply, clients are in a position to call the shots.
Two hundred years ago, the Industrial Revolution brought down the old guild system by automating skill through technology. The resulting economic changes allowed for more efficient business models and the ability to specialize: those who prefer to administer focus on administration, those who enjoy sales and business development make that their careers, and so forth.
Now we are in the midst of a new revolution. The Internet Age, into which we are still transitioning, allows for even more specialization and freedom. Attorneys no longer need to be tethered to their desk. Cloud computing allows attorneys to work from anywhere, with instant communication and a vast amount of information at their fingertips.
The attorneys who founded Rimon, P.C. recognized the immense potential of internet technology, and seized the opportunity for innovation.
Rimon, P.C. went virtual in March 2008. We have created a new model of a law firm that combines the key strength of the traditional firm with the new flexibility of the Internet Age. Our model includes the elements that more and more clients — and attorneys — are seeking.
Our cloud-based technology means that our attorneys can work from anywhere in the world, with very little equipment — a smart phone can be enough. Email, cellphones and video conferencing allow our clients to communicate directly with our attorneys at any time. Our e-rooms allow attorneys to work together in real time with clients and colleagues. Even support staff can often work remotely, which allows us to attract talented and experienced people who are looking for greater flexibility in their working life.
We realized early on that even in the Internet Age, attorneys are still human. Community and informal interaction are key to a positive work environment, to innovation, and to preservation of the one great strength of a law firm — the ability to work with your colleagues and to learn from them.
As attractive as telecommuting is to overworked attorneys, it can have its downside; we have seen some major corporations adopt and then reject the remote-work option. The problem is that if a firm patches telecommuting onto a traditional culture, without taking into account the policies, culture, and infrastructure that have grown up around the physical office, then the telecommuting attorney can feel isolated — not just from the center of power, but from the everyday interaction, the trading of stories, ideas and client contacts.
To avoid this pitfall, we have carefully shaped our firm’s culture and infrastructure around the cloud concept, with the goal that no Rimon attorney is ever working remotely, not even those who telecommute.
Rimon's partners meet twice a month — some in person our corporate office in San Francisco, some by video or teleconference, according to preference — to discuss deals we are working on, and to brainstorm on ways to better serve our clients. These sessions allow us to bring the expertise of the cross-section of practice areas to every deal, giving our attorneys a more holistic approach to their representations. It also allows our attorneys to know each other personally.
We host attorney retreats three times a year to focus on team-building and cross-servicing. We set up two monthly “speed networking” video calls in which attorneys least likely to have worked together are matched by our proprietary software for a five minute one-on-one video call.
Rimon also has its own internal social networking site, where anyone in the firm can ask questions, share news (both business and personal), celebrate milestones, post photos, and tell corny jokes. It is our virtual water cooler.
And finally, we decided to have small-scale brick-and-mortar offices, placed in strategic areas close to clusters of our attorneys and clients. They serve as bases for our attorneys to meet clients, to meet with each other, and to just hang out.
Personal interaction is key to a collegial work place where attorneys know they can trust the work of their colleagues, and at Rimon we enthusiastically support it. This not only makes our attorneys happier people, it exponentially increases collaboration between attorneys.
Our careful mix of the virtual and the human comes at a very low cost. With a light overhead, the firm is more stable, so attorneys as well as clients benefit from the savings.
Rimon has completely abandoned the billable-hour requirement. As a result, attorneys no longer have an incentive to be inefficient — for example, to do routine work that could be done less expensively by paralegals. Clients see their costs go down, while attorneys are free to focus on what they love (such as business development or counseling), and to keep their work and life in better balance.
With no pressure to bill a certain number of hours, Rimon attorneys have the billing flexibility that clients want. We offer a variety of alternative fee arrangements, including fixed fees, a reduced hourly fee against which a premium fee is paid upon the successful conclusion of an engagement, contingency fee arrangements, capped fees and, yes, hourly fees where our clients feel it appropriate. We avoid any surprises by enabling our clients to log in at any time on our extranet and see exactly what is happening with their matters. We monitor our billing budgets closely and are happy to remit bi-weekly billing summaries.
We communicate with our clients to understand their situation and carefully craft the scope of our work. We also try to reach a mutual understanding of tasks that may be outside the scope of a particular engagement, and how such out-of-scope work might be priced if our client calls upon us to handle it. To arrive at a fair and reasonable price for our services, we also seek to understand how our clients assess the value of the finished product we are to deliver.
We strive to fully comprehend our client’s expectations for our performance —and take every opportunity to exceed those expectations.
- Work Product. The traditional law firm business model pays attorneys based on a black box calculation, factors of which typically include seniority, expectations, and perceived benefit to the firm. The calculation is often speculative, arbitrary, and perceived to be “unfair.” Rimon's solution to this problem is to compensate attorneys based on work they have done — direct value to clients. If they work more, and the clients are happy with the work, they get paid more. As simple as that. This way attorneys know exactly what they are getting and they are motivated by clients’ needs and satisfaction.
- New Business. Under the traditional law firm business model, attorneys are recognized and compensated for bringing business to the firm — but the compensation is not often clearly tied to the value. Attorneys who produce a lot of business rarely keep a majority of what they bring in, while attorneys bringing in less business and doing less work often end up making more money. This unpredictability creates a disincentive to bring in business. Rimon's solution to this problem is to compensate attorneys directly for bringing in clients. Attorneys are not pressured to develop business, but they know that they will receive a large portion of business they develop. This brings our firm in line with modern companies who recognize the value of business development.
As numerous psychological studies have found, hierarchy in itself causes high levels of stress and poor health consequences. Rimon decided to eliminate the hierarchy. Our goal is to make the firm serve the attorneys, so that the attorneys can focus on serving the clients. The firm works hard to give the attorneys all the tools they need to serve their clients. This means helping attorneys collaborate with each other and with clients, giving them administrative and technical support, and helping them with business development and marketing services.
Along with the pyramidal business model, Rimon has rejected the narrow "up or out" path that attorneys at traditional law firms must follow. Rimon attorneys make their own paths. Those who live to work, and those who seek a different work-life balance, can both find a place at Rimon. This flexibility allows us to attract talent at all stages of life and career.