Commercial Law International

By: Ainsley Brown

This forms part of the Middle Passage Law Series on Law Is Cool.

American International Group, better know by its acronym AIG, it seems these days can rarely catch a break. It just seems negative news follows negative news for this company. This time the negative news for this too big to fail company – deeply wounded by the global credit crunch and later recession – has two of its units being accused of racial discrimination in their lending practices.

It is important to note that AIG has not been found guilty of anything; in fact it wasn’t even accused of any wrong doing.

WHAT?

I know, I know, it seem like I am saying that AIG is involved yet not involved in this case. And yes that is exactly what I am saying.

All of this may seem totally contradictory but let me assure you it is not. What we have here is a classic illustration of legal reality vs. public perception of a company’s brand. In order to be successful companies have to be mindful of the differences between these two concepts and effectively manage their interrelation.

The Department of Justice (DOJ) allegations were never directed at AIG, the parent company, but were instead directed at two of its subsidiaries –AIG Federal Savings Bank (FSB) and Willmington Finance Incorporated (WFI). Both banks were accused of not sufficiently monitoring the activities of mortgage brokers who sold mortgages that they funded. The brokers were, according to the DOJ, offered African-American borrowers less favorably borrowing terms than similarly financially situated whites. The two have agreed to settle the case with the DOJ and have agreed to pay at least $US6.1 million without admitting liability as part of the terms of settlement.

The case broke no new ground as far as banks in the US being accused of racial against minorities, namely African-American and Latino-Americans, in fact similar settlements or even full blown litigation involving other US banks will surely be making the headlines in the near future. The case however did break new legal ground in that for the first time US authorities held a lender directly responsible for the racial discriminatory acts of brokers. As a consequence, from now on banks will have a positive duty to monitor the activities/policies of brokers that they fund, to the best of their ability, in order to ensure that they are not using race to determine borrowing terms. This duty also of course carries with the co-duty to take positive action whenever a bank believes that a broker is using race.

From a strict legal perspective AIG, the parent, hands remain totally clean is this matter. It is important to reiterate that AIG was never accused of anything; the allegations were solely directed at the two subsidiaries. And no this is not a simple matter of splitting hairs, while related all three companies are separate. The legal concept of the corporate veil - the independent legal identity of companies, even if related – is a fundamental one in corporate law. The corporate veil is best understood as a shield that is used to protect all the right that come with incorporation. This is not to say that it can never be lifted/pierced, for it can, but this is only done in rear and specific instances where for example fraud is alleged or where for some reason the directing/controlling mind of a corporation needs to be identified.

However, these allegations go beyond strictures of the corporate veil and this is where public perception of the brand and effective management of that brand become important.  AIG and its army of brand management specialists both know that the general public are often not so discerning as to make the distinction between parent and subsidiary; as far as the public is concerned AIG is AIG.  This is the reason I believe that there was such a quick settlement – the last thing AIG, the parent, needs is a protracted legal battle involving accusations of racial discrimination, albeit involving subsidiaries. This would be a public relations nightmare.

By: Ainsley Brown

The European Union (EU) and Vietnam have now officially stated free trade talks after Karel De Gucht, the EU Trade Commissioner, met with the Vietnamese Prime Minister, Nguyen Tan Dung in Hanoi.

The talks come after the successful conclusion of the 2 year in the making deal signed with South Korea in October of last year. This deal along with the settlement of the long running Banana Wars and the provisional trade deals with Columbia and Peru that are to be finalized at an EU-Latin American summit in May represents a strategic shift  in EU trade policy. In seeking out bilateral talks, the EU is clearly signaling its frustration and it unwillingness to wait for the long protracted and stalled multilateral Doha Round of trade talks in the World Trade Organization (WTO) to be rekindled.

The EU views the fast growing Vietnamese economy as one with consistent and continued growth potential – potential that has to be foster and leveraged to its advantage. Trade between the EU and Vietnam has grown at a rate of 12% from 2004 to 2008 with overall trade being worth €12 billion in 2008.

It will be interesting to see how the EU’s recent decision to continue duties on imports of Vietnamese shoes will affect the tone of the negotiations from the outset?

By: Ainsley Brown

I was sent this video by my cousin Kia and I thought it worthwhile to share it here on Commercial Law International. It is a lecture given by Phillip K. Howard, the author of The Death of Common Sense, and founder of the not-for-profit Common Good. As taken from its website: “Common Good is a non-profit, non-partisan legal reform coalition dedicated to restoring common sense to America. By conducting polls, hosting forums, and engaging with leaders in health care, education, law, business, and public policy from across the country, Common Good is developing practical solutions to restore reliability to our legal system and minimize the impact of legal fear in American life.” The lecture follows this mission statement to a tee and proposes four ways the US legal system can be reformed for the better.

Enjoy!

By: Carsten Lexa

Money helps a lot when it comes to exchanging goods. One buys the goods, pays with cash and takes the goods away. So far, so good. But what if free cash to spend is a rare thing? For example in times like today, when the economy is not doing well and money is scarce?

Today, more and more companies turn to third party networks to contribute and use barter schemes. Of course, bartering is nothing new: It is a medium in which goods or services are directly exchanged for other goods and/or services without a common unit of exchange, e.g. money (according to Wikipedia). Firms routinely arrange exchanges on their own. But cultivating relationships with business partners in such a way, that barter schemes can be discussed and established among each others takes time and presents numerous hurdles. Let´s assume the owner of a restaurant needs printing services with a value of $ 10.000,00. Where can he find a printshop with an owner who is hungry for a $10.000,00 meal?

Formal barter schemes can help. One of the biggest providers for example is Bartercard, the largest exchange network with trades through its network worth more than $ 2 billion and 75.000 members in more than 9 countries. By using such a provider, the restaurant owner in the example above would owe $ 10.000,00 to the exchange network, not the printshop. The provider provides the business partners and makes sure that every member of the network honors the services of the other members. It therefore provides security and accountability, something informal bartering cannot provide in an adequate way.

What are the additional advantages of such barter schemes, other than security and accountability? The biggest advantage is the fact that no money is needed to “pay” for services and goods. Another one is the fact that a member can “buy” services first throught the network and pays later in his own services and goods – sometimes months later, if nobody wants his services or goods earlier. And finally such a scheme can work not only in one country, but – ideally – worldwide, as long as the members accept the scheme.

Even in Germany such barter schemes are tried and – especially among small and midsize compamies – found helpful. But currently, no big exchange networks exist. So, member of traditional business networks try to establish their own barter networks. Reason is that a company owner who knows another company owner through a traditional business network and has done business with him in a traditional way using cash will be more open towards doing barter transactions with this person than with a total stranger.

Is barter the holy grail for companies in recession times? Probably not. But it can be a helpful to do business if cash is scarce. The difficulty is to find the right partner.

For inquiries please contact the author: kontakt@kanzlei-lexa.de

By: Ainsley Brown

2009....Largest Decline Since 1945

Global trade was expected to drop as much as 10% in 2009; instead it fell by 12%. That extra two percent may not seem like much but it represents the largest drop in global commerce since 1945.

This greater than expected drop has lead to renewed calls from Pascal Lamy, the Director General of the World Trade Organization, for the successful conclusion of the Doha Round of trade talks. The drop, according to Mr. Lamy made it an “economic imperative” for these trade talks that began in 2001 to be successfully concluded this year.

The Doha – Developmental – Round of trade talks is primarily aimed at the removal of trade barriers faced by developing nations, specifically those in agriculture. The talks which are not at a virtual stand still have stalled for largely due to disagreements between the developing world, as a general collective and the US, European Union (EU) and other industrialized nations , as another collective, over how deep to cut the agricultural subsidy programs operated by the latter.

Another bone of contention is how within the talks is how far and how deep should developing counties like China and India go in removing  barriers to trade.

By: Ainsley Brown

The stage was for a very interesting court battle in Australia pitting advisor against former client; at stake the fees that the advisor could charge. While the case remains interesting the deep probing spotlight that it promised on investment banking fees alas may not materialize.

JP Morgan Chase, the investment bank is suing its former client Consolidated Minerals (ConMin), an Australian manganese miner, in Australian court for the balance of its advisory fees. The case is being followed very closely in investment banking circles because its risks exposing the normally highly confidential fee structure of one of the industry’s leaders. The case also comes as investment banks have come under greater scrutiny, namely because of what some claim are excessive fees.

It is not that disputes about the fees investment bank’s charge never happen or infrequent – on the contrary, I am sure they arise from time to time – it’s just that they are never this public. In fact the choice of the courts as the forum for dispute resolution is rare indeed, negotiations over the board room being the normal venue. What this tells me is that there has been a total break down in trust, trust being an essential if not the essential ingredient in an adviser-client relationship. When it breaks down, as is the case here, more than bitter feelings might ensue.

The case centers around JP Morgan seeking A$30.8 million representing the balance of it’s A$50 million fee it charged Consolidated Minerals when ConMin was up for sale in 2006. After a 14 month bidding war Palmary Enterprises, led by Ukrainian billionaire Gennadly Bogolyubov came out on top with a A$1.3 billion share cash offer. In 2008 after the new owners took control of ConMin, to their apparent astonishment, received a bill from JP Morgan in the amount of A$50.8 million for services rendered. At issue here wasn’t the bill itself – it was expected – but what was unexpected was its size especially since ConMin was operating under the notion that JP Morgan had agreed to cap its fees at A$7 million after an alleged phone conversation that took place in 2006. Although this was its understanding ConMin went ahead and paid JP Morgan A$20 million dollars in what it believed was full and final settlement for the latter’s services.

This brings us to the current situation, where JP Morgan is seeking to recoup the remaining A$30 million owning to it. In an unsurprising move, given the break down of trust, ConMin counter claimed by accusing JP Morgan of failure to deliver, being misleading and deceptive, reneging on the agreement to cap its fees and double and some times even triple charging for the same services.

Now as it turns out ConMin has now dropped its counterclaim after the lawyers for JP Morgan wrapped up its case. What is more, ConMin has now decided not to call any witness or submit any documents to aid its defense – yes you read correct no witnesses and no documents. This is either a case of arrogance or capitulation.

How so, could it not be the case that ComMin’s lawyers are just confident that JP Morgan’s lawyers have not proven their case?

If that were the case, then why not call for the case to be dismissed and move for summary judgment or have it dismissed as being frivolous and vexatious? Now I am not versed on the Civil Procedure Code of New South Wales but I am sure that they have such provisions in their code. Therefore, I will repeat this is either a bout of arrogance or capitulation.

Now all that remains is for both sides to prepare and submit their final submissions to the judge. What an anti-climax to a case that had the promise of so much.

By: Carsten Lexa

On August 13^th, 2009, I wrote an article here on Commercial Law International about the “secrets” of the US credit card business and about how the existing rules make it hard for customers to pay off their credit card debt. On November 3rd, 2009, I wrote in a the second article about a Goverment proposal regarding new legislation for the credit card business.

Now, coming into effect on February 22, 2010, the Credit CARD Act will apply to credit card contracts between banks and consumers. This Act adresses many of the criticisms consumers have had about credit cards and the high amount of credit card fees charged each year. Interestingly, the Act also applies to contracts made in the past. Let´s have a look at the most interesting new rules.

1. The Act requires card companies to give cardholders 45 days notice of any interest rate increases. In the past, interest rates could be changed within 15 days notice in most cases.

2. The Act gives cardholders the right to cancel their card and pay off their existing balance at the existing interest rate and repayment schedule if they get hit with an interest rate hike. Cardholders also have 3 billing cycles after the rate increase to say no to the new terms.

3. Beginning in February, the interest rate on existing balances can only be raised if a cardholder is more than 60 days late on payment. After a rate increase, if cardholders pay on time for six consecutive months, their interests rates must have returned to the rate it was before the rate increase.

4. The Act also adresses the problem of “payments above the minimum”. In the past, cardholders send in a payment for more than the minimum due – let´s say the minimum was $ 200,00 and they send in $ 300,00 and let´s also assume that they had two balances at different interest rates. The extra amount of $ 100,00, that was send in, would go to the card with the lowest interest rate.

The new law puts an end to that. According to the Credit CARD Act, the additional amount paid will go towards the higher-rated balance.

5. A long time ago, cardholders had 30 days from which to make their next payment. Over time, that grace period was reduced to 25 or even fewer days. The Credit CARD Act states that the grace period will be at least 21 days long from the date the credit card bill is delivered.

6. The Credit CARD Act finally improves the information the cardholder receives regarding the repayment of the balance. Let´s be true about that: Most cardholders have problems calculating the time they need to repay their credit card debt, if only the minimum is paid.

The Act gives cardholders mandatory information regarding repayment: It demands that creditors print on their statements if the debtor makes the minimum payment only (with no further increases in debt) how long it would take to retire the debt and how much the debtor would pay in interest combined. It also requires creditors to print on their statements the payment it would take thecardholder to retire the debt in three years, how much the debtor would pay in interest combined and the difference than if the debtor was to pay only the minimum payment.

This new Credit CARD Act is surely not the answer to everything regarding credit card debt and debt repayment. But it should relieve the US consumers of some of their burdens regarding credit card debt – and every bit helps.

For inquiries please contact the author: kontakt@kanzlei-lexa.de

By: Ainsley Brown

Islamic banking and finance (IBF) is a subject that I have longed to blog about here on Commercial Law International and after much procrastination here is a brief commentary. And by brief I mean brief – don’t get me wrong this is by no means all I have to say about the subject, far from it. I simple wish to make my first foray on the site a brief introduction leaving the details for future posts.

So what is IBF?

Unfortunately there isn’t a plain answer to this question as there is no standard industry or even legal definition. IBF is therefore best understood as a term of art used to describe commercial practices guided by Islamic moral precepts. In fact in an article published in Credit and Banking Litgation Journal entitled: Islamic Banking and Finance: A Goldmine or Fool’s Gold? I defined it as: “in the simplest of terms, it is just like any other form of banking and finance, with additional elements such that it accords with the religious and moral principles of Islam.” This morality dictates the productive use of money for the benefit of the community in a way that is fair, just, and ethical and allows for the sharing of both risks and profits.

In future post I shall get into further detail as to what these moral precepts are and how they function. For now it is important to just know that they are found in the body of Islamic “law” know as the Shari’a. It is also important to note that IBF is not simply a matter of grafting on Islamic concepts on to western legal-business concepts or vis versa – Shari’a compliance often requires much more. It requires an understanding and appreciation of the fundamental differences in philosophy between IBF and conventional banking.

 Even if you do not understand the first thing about IBF it is hard to argue with the market dynamics and its growing presence and importance in global financial markets. Don’t believe me? Well let me just end with and allow you to decide for yourself: globally IBF is estimated to be worth over £800 billion and has a predicted growth rate of between 15-20% annually.

By Charles Wanguhu

Churches are once again taking the lead in ethical investing. A short while ago I wrote about the catholic church pulling out of a fund which was found to have investments in defense, contraception and other companies contrary to the catholic faith. Consequently the Church of England has sold its £3.8 million stake in Vedanta Resources, the mining group accused of mistreating indigenous tribes in India, in protest at the London-listed company’s record on human rights. In carrying out this action the church expressed displeasure in the operations of the company and the unlikelihood of the company changing the way it runs its operations.

However one thing that sticks out in this saga is the time that it took the church to come to the decision to pull out its investment in Vedanta resources. The church had earlier claimed that it remained an investor because it was attempting to persuade Vedanta of the error of its ways.

The latter statement brings to fore the arguments against and for Ethical investments Vis a Vis Shareholder activism. One side of the argument is that by taking the action of divesting form the company the church lost its leverage against the company and ability to make a difference from within the company.

In some schools of though shareholder activism is a more effective way of changing companies operations as internal pressure(read voting rights in meetings) and directors duty to shareholders is a statutory requirement. The duty of a company to its other stakeholders is loosely defined with the exception of criminal actions.

However the flip side to the argument is that continued investment in the company increases the reputational risk of its investors. With the shareholders being intrinsically linked to the companies’ actions, the investor risks being the subject of protests against company actions and in some instances are easier targets than the companies. The reputational risk therefore is sometimes considered a greater factor when determining investments than the more idealistic shareholder activism.

The church of England has a rich history of ethical investing policy and in the case Harries v. Church Commissioners for England, [1991] Ch. 1990; [1992] 1 W.L.R. 1241 members of the church sought to ensure that commissioners handling funds of the church would not only act in financial consideration and would consider their Christian faith even if it involved a risk of financial detriment. While the case was unsuccessful in declarations sought I served to showcase an increased level of fiduciary duty of the trustees of the Church of England’s funds.

So really what is the better option?? Shareholder activism or a primary focus on Ethical investing?

This is a post that recently appeared on Slaw written by my friend Omar Ha-Redeye which I believe would be of some value to my readers. Enjoy.

by Omar Ha-Redeye on February 14th, 2010

On February 9, 2010, David Cruickshank spoke at UWO Law on “The Business of Law: Hot Topics and Emerging Trends in the Legal Profession.”  Cruickshank is a partner at Kerma Partners in New York City, and provides professional advice to law firms and other services.

My notes from his talk follow.

Threats and opportunities in Canadian Legal Market

Canada is still identified as a resource economy, but also innovative in terms of technology exports.  But if you look at the size of the TSX in comparison to other exchanges, it is still focused on resources and commodities.

On the transactional side, there is large consolidation of major companies, such as aluminum and energy.   Many of these transactions are driven from New York, Shanghai, and London.  Realistically, Canadian firms do not drive these transactions.   Although Torys LLP has a New York office, they are still small compared to other firms there.  Those that do set up offices around the world are usually following their clients around the world.

Even though you have purchases and consolidation of Canadian firms, they are being driven by American law firms.  Canadian firms just do not compete in world financial centres.

The opportunity for Canadians is in deleveraging.  Companies are selling others in Canada.  And even though these are being run by New York, Houston, and London firms, they are using some local counsel.   There are opportunities to acquire clients in New York, the U.K. and Shanghai.

Another approach is to identify start-up resource and technology companies, and grow with them.

Opportunities in dispute resolution and litigation

The traditional skill set are harder to acquire, because there are fewer trials available.  It’s not unheard of for a 7^th year associate in New York to be considered for a partnership and have never done a trial except for some pro bono work or junior work on a trial, largely because so many trials settle.  It’s difficult to get a reputation in litigation this way.

Historically litigators could excel by knowing where exactly to find information and specific documents.  But now a paralegal can pull this up with a simple word search in a matter of seconds.  Those memorizing and cataloguing skills are obsolete, and the technology delivers this at a lower cost.  Litigators will have to leverage other skills such as knowledge of procedures and judges.

Large consolidated client organizations are all trying to reduce fees, even before the recession.  They are rejecting increases, and asking for discounts.  Firms have to find ways to do discoveries cheaper.  Firms are now outsourcing to Virginia and India to low cost centers.

Litigation law firms are being divided into the haves and have-nots, those willing to invest large amounts of capital into litigation matters.  And sometimes the have-nots are large 400 lawyer law firms.  The sheer number of documents involved means that some firms cannot deal with large litigation cases.

Law firms are undercapitalized.  The investors are partners, who cannot raise enough money.  They even pay their own payrolls.  This makes law firms somehow weaker than other businesses.

The opportunities to get the skill sets that litigators will need can be found in small organizations, pro bono work, and government settings.  Associates in their 5^th-6^th year of practice in these contexts will have much more skills.

But the most important skill in litigation day in and day out, which is often ignored, is interviewing skills.  Negotiation skills are a close second.  Cross-examinations are rarely used, even for experienced litigators.  Young lawyers rarely recognize the importance of the right skills needed for litigation.  Even in mid-trial, most lawyer s will not have major trials.

Litigation turns on reputation, and writing on speaking are good ways to build that reputation..  The best way to get known in litigation is to write about it, in news magazines, speaking at conferences, and blogs.  You should have an area of expertise to focus on.

Two  Impacts of Technological Changes

Technological changes are impacting law firms in their recruitment.  Potential recruits are asking about the technology that the firm is using.  Some law firms did not provide their lawyers Blackberries, and these firms are now laughed at.  Technology is needed just to keep lawyers happy.

The other area of impact for technology is in litigation, which has become incredibly technological.   Most large firms now have litigation support programs that have an IT person and a lawyer that manages all the documents.

In the U.S., demonstrative aids like videos and accident reconstructions, are allowing for sophisticated trial demonstrations in the court rooms.   Jury selection and the science of making an impression on a jury are becoming crucial for trials.

Holland & Hart in Denver, Colorado put $1.2 million into a studio to create these aids, giving them a competitive advantage in their region, which has turned into a business of selling these aids to other lawyers.  It created a business within a business, paying off their costs.  But making the initial investment was probably a tough sell for the firm.

One of the initiatives that Gowlings undertook in the mid-90s was a technology platform that let a client know the status of any litigation at any time.  During that period, it was a very sophisticated system.  When clients then considered seeking other counsel, they decided to stay with the firm when they realized that they had developed an affinity for the system, and would benefit from it elsewhere.

Firms need to be ahead of passive technology, but also interactive with the client and ahead of embedded technology.  Getting embedded with your client means investing in them, keeping the property in the system that ties them into you, and thereby making it very difficult for them to leave you.

Business analytic software such as Redwood help make better business decisions like how to staff work by looking at billing and lawyer utilization hours.  By analyzing what parts of work are profitable and why, firms can develop strategic decisions by modelling different ways to plan work.  Although it started as a way to make a law firm more profits, but it is not being used more defensive tool to deal with lower RFPs and still be profitable.

Individuals have an enormous advantage, because many senior lawyers are still working on their keyboard skills.  They are more than willing to push it on to junior associates, who should seize the opportunity.  Few firms are even familiar with tools like Microsoft Project.

Partners are getting over 500 e-mails a day, and they are not reading them.  They are inundated by e-mails.  You have to catch people in other ways.  Lawyers will be more valued if the look for direction in person.

Even e-mails have to be structured when dealing with busy partners.   Put the major issue in the first paragraph.  Writing skills and analysis still count, and clarity is needed.

Young lawyers can also benefit greatly from planning tools, learning them and offering them to senior management.

Speed of conversion:  innovative to commodity work

Lawyers are moving between practices of different sizes, and the practices themselves are becoming commoditized for smaller firms.

In the U.S., the rise of white-collar crime has resulted in small firm criminal lawyers joining big firms.

Hedge funds in the U.S. have become a commodity work.  You can gear it up with set forms, and it used to be something only for large firms.  For high-end bankruptcy cases, they become public the day they are filed.  These lawyers are giving away their knowledge immediately, and have to be more innovative in the way they do their work.

Once a lot of lawyers realize they are competing for the same service, it drives prices down.  By making the service more automated, firms can save themselves and their clients money.

A number of small employment law boutiques across the U.S. have linked up to become national law firms.  They have very little real affiliation, but can tell a national employer that they can provide regional advice for a third of the price of large firms.  Their success has come from their ability to organize themselves differently.

The trick for large law firms to stay lucrative is to get in get in on the front end of innovative work, and ditch the commoditized work that will be picked up by smaller firms.  The challenge is how do you reinvent yourself and find your skills in a new way. Nimble lawyers do this all the time, but it is a tough thing to do.

Strategic positioning in the legal market means looking at emerging and growth markets.  Jumping into the emerging markets come with some risks.  They might not take off, and may have little returns.  In preparation for Y2K a number of lawyers branded themselves as Y2K lawyers, but that specific market never really emerged.

If a large firm is on the front edge of a growth curve (usually a year to 18 months), they will usually do very well and can make a lot of money.  At this point the purchase of their services will not realize that a choice of people who will do it for less even exist.  They assume it is innovative, and assume that you will be charging the highest rates, and will pay it.  It’s only after that they realize they can go elsewhere for less.

During the mature stage of the market, the growth has tapered off.  Firms have a regular client who comes back to them again and again.  But this mature phase is getting increasingly slimmer, before turning into the saturated phase.  Other firms come in, and drive the price down based on their ability to commoditize the work.

Clients will say in the saturated phase, we love you for this cutting edge stuff but we’re going to use a boutique firm for forming companies, convert income trusts, and other activities where we’re getting it for a third of the price.

Where large firms want to be dominant is in emerging and growth markets, but it means taking on some risk.  They should get out before saturation.  Young associates should also be asking law firms what practices they are in, and get close to partners involved in emerging and growth markets.

Some of these markets are cyclical.  So although bankruptcy lawyers are a hot commodity right now, in a few years they will be looking for work.  Smart bankruptcy lawyers develop litigation skills to move to those areas of practice during downturns.  M&A work is similarly cyclical.

Four areas of pricing of legal work

The traditional pricing in law is billable hour.  There is some contingency work in Canada, but does not count for any significant percentage of revenue in Canadian law firms.  Economics for law firms are driven by the ability to bill.

Associates tend to cost firms for the first two years, and only make them money after that.   Firms want to make as much billable hours out of associates after two years of practice because that’s where they make the money.  Before that, they’re investing in these individuals.

But the economics different in Canada, since lawyers are a low cost to firms as articling students.  Canadians become more profitable about the 2^nd year of practice.

Law firms used to be able to increase annual with impunity.  The annual rate increased, and the client passively accepted it.  Seniority was another basis for charging more, especially in litigation.

Clients are now pushing back.  They want results and asking for discounts.  Corporate legal departments run by lawyers from inside firms and are seeking value.  They are able to pressure firms based on their knowledge of those firms.

From the perspective of the client, the legal department is a cost center.  Everyone hates them at business meetings, especially when litigation present.  They are under big pressure to cut costs.

One survey demonstrated that 20% of law firm revenue in NYC is under scrutiny.  The Association for Corporate Counsel has a target by the end of 2010 of 25% fixed or alternate fees for corporate work.

Law firms will have to wake up.  The billable hour won’t die, but how much will get paid is a different issue.  How much gets paid affects profitability.

Many years ago, other professional associations like accounting, management consulting, engineers all abandoned hourly rate for budget fees.   Law firms will have to learn to do the same.

The implications for individual lawyers are that clients want value, but with value comes certain amount of risk.  Clients want lower fees, but higher value.  They are saying show us value, don’t show us a million processed documents.  Show us the value that you achieved for us.  The new paradigm is trying to achieve the client’s goal of value, but in some cases still getting a premium for some services.

What are the options?

Firms can consider discounts, but that means firms have to do something internally to adjust their economics, such as cut salaries or move to cheaper office space.  But there are only so many internal controls that can be changed.

Another option is what could be called the ostrich approach.  Firms can try waiting for return of the good times, and continue raising rates annually, with all senior partners billing over a thousand dollars an hour.  But this is a no-go for the short-term and clients are just not accepting it.

A third option is progressive pricing.  Firms negotiate a lower rate, but pay a premium for set successes.  If a settlement is found for under a set amount of dollars, they will receive a predetermined bonus.  In the current economy it’s still going to be rare.

The fourth option is protective pricing, where mainstream work is provided at project prices rather than hourly rates, and new revenue sources get in early in the curve with a low hourly rate that is increased over time.  Clients recognize that they will face these increases over time.

For lawyers this means that there will be more project fees, but law firms are woefully unequipped to provide estimates based on project management skills.  Even when you show them rudimentary project management skills they are resistant due to their billable hour mentality.  They cannot bill planning and managing, but can bill for a document, but this is the very skill they need for profitable practice.

These issues also affect women in law firms, and the statistics related to female retention is abysmal.  There is some hope from the accounting profession, where Deloitte Touche developed a mass career customization that allowed them to custom careers for women.

Instead of thinking of a career as 60 hours a week times a number of years, firms need to look at it as a set of skills and experience that are developed over time.  They can ignore the number of years and allow associates to get to the same place over different times and customize the work that they do.

Instead of basing compensation on time, it should be based on skills.

Skills in managing self and others

Law firms can actually make money on a project basis by properly using technological change, pricing, and proper management.  It’s increasingly important to bring a team approach to law firms.

The key skills that are needed include:

Time management

Staff utilization; use support staff properly, challenge them

Delegation and feedback skills

Supervision skills

Matter leadership; focus on specific issues

Project management skills; will have to get from outside, can’t get it in law

Many law firms don’t even know what a Gantt chart is.  Project management skills will have to be obtained outside of a law firm, and brought into the profession because they simply don’t exist in firms.

These skills are not appropriately taught in law schools, because you need to understand the complexity of the field to properly apply it.  Instead, he focuses on 7-8^th year associates.  At present, many firms are run by stone age tools like issue lists, group lists, and often a magic markers on a wall calendar.

Young lawyers will also have to take ownership by finding a solution, explaining why it is the best one, and explain how it will affect the client.   But these associates have to be diplomatic in how they introduce it, usually by making it useful to one partner.

Law firms can be incredibly resistant to change, the response often quoting the amount of profit made in the past year.  But these firms are profitable in spite of themselves, not because of their effectiveness.

In a law firm the first question is always if anyone else in the industry has already done this.  But even if it hasn’t, that in itself is an opportunity.  In the business world the mentality is exactly the opposite.  The recession will invariable force firms to take on more risks and consider new ideas.