Profit and Loss

Avid readers of the English legal press may recently have seen a lot of agitation about an international law firm, Dentons, and one of the commonly seen measures of law firm financial performance, PEP (profit per equity partner - in the USA, PPP).

The agitation concerned Dentons' refusal to provide an American legal magazine, American Lawyer, with their PPP figures for all jurisdictions where they operate (this information is public only in some jurisdictions,).  American Lawyer (Am Law) drew some adverse inferences about this refusal, Dentons responded to the effect that Am Law’s articles suggested they could not be trusted with a calculator, and there followed another round of back and forth.  More Am Dram than Am Law, some might say. 

PEP is very interesting and relevant if you are, for the year in question, the statistically average partner, because it represents what you earn that year – even in the same firm, however, other partners’ returns may be greater or lower.  It's also very interesting for the managing partners in the firms concerned because it gives something with which to compare themselves against their rivals, and it provides prurient sources for copy for the legal press. 

What PEP doesn't reveal, in any meaningful way, is how the law firm has really performed in that year, or what its financial health is really like.

It doesn't give a really accurate index of performance for the year because it is so easily distorted by the number of equity partners in the firm – the same overall profit figure produces a much bigger PEP for a firm with tighter equity than one with more equity partners, even if other figures more indicative of the firm’s performance as a unit – such as expressing profit as a percentage of its overall revenue – favour the second firm.  In the wider business world, there may be many more lines on the financial position of a company than its profit to revenue ratio, but a company with a higher percentage of profit to revenue, all else being equal, is regarded as healthier.

The wider business world - there's a thought.   Acres of space is devoted to the analysis of the financial performance of companies, some of it on this year’s profit for sure, but also to their balance sheet.  This leads to my second point about PEP’s limitations as a measure of financial performance – it gives no insight into the firm’s long term financial stability, only how it performed in the given year (and with the weaknesses noted above).

In that wider business world, balance sheets speak loudly.  Providers of long term contracts find their potential clients checking their balance sheets, to satisfy themselves that they will be around long enough to perform.  The law firm world has operated in a different medium for decades.  Historically law firms have not had many long term commitments – few long-term contracts and other than property rental, most other commitments were of the sort that turn up on a Monday and can be fired if the work dries up.  There have been exceptions of course - Dewey Leboeuf being the most startling by stacking up long-term commitments to laterally hired partners.  It's worth noting that in March 2012, they reported their PEP figure for 2011 in excess of £1 million.  By May 2012 they had filed for bankruptcy.  So much for PEP as a measure of their financial health – with the vast majority of each year’s profits paid out to the equity partners, past profit has a limited impact on current financial resilience.

But as the practice of law evolves, the investment needs of law firms are evolving too, and as law firm margins are subjected to pressure from new entrants, different retainer structures, harder-nosed GCs and other factors, firms may find that, like other service providers in other businesses, they have to flex their business models and retain more profit to support their investment and other financial needs for future years. 

There's a role for in-house lawyers in this.  As technology drives increasing intimacy between law firms and key clients, the consequences of law firm failure become more acute.  It will become less simple than paying the work in progress on a file to get it released to a new firm.  So when striking relationships with firms which they see as long term advisers to their employers (as opposed to one-off instructions for short-term deals), they should think about the desired longevity of the relationship and the ability of the law firm to fulfil it. They should look at (or ask for) the law firm's accounts and scrutinise the balance sheet just as much as this year’s profit. 

I started by referring to the UK legal press, and I am going to end by quoting from Legal Week (20 June 2014 – “Dentons vs the legal press: partners react to PEP row”).  The article quotes various leading partners in leading law firms on the use and abuse of PEP.  I was impressed by the reaction of K&L Gates' Peter Kalis - "... We'll know that our industry has matured when the leading industry publications begin asking for balance sheet information and other financial indicia...  Such information gets to the heart of a law firm's financial health, and its public scrutiny can prevent law firm failures." 

Hurrah.  That's a forward thinking statement.  I think the market will also have matured when the provision of financial information by law firms to prospective clients is seen as a normal process of winning work.  That maturity lies in our hands as clients – we should look at our advisers’ financial statements – if we don’t like what you see or, worse still, don’t see anything, then it may be time to change advisers.  Reading about a law firm’s failure is bad enough, without being involved as a client.

There but for the grace of God...

Over the last few weeks we have been able to read the judicial and regulatory consequences of lawyers behaving badly.  Not badly in the sense of running off with client funds, nor badly in the sense of giving negligent advice badly, but losing their sense of professional obligation to the courts in the pursuit of their clients’ (employers’) interests.

The cases I refer to include those of Alastair Brett and Andrew Shaw.  While both acted wrongly, they both had very good reputations before their respective falls from grace.  Just like you and me.  Since they were just like you and me, is it safe to characterise them as bad hats or (as I think) should we look more carefully at their cases to draw our own warning lessons?

The Brett case is perhaps the better known.  The experienced, highly respected Times lawyer was not the only witness in the Leveson Inquiry to have been filleted by Robert Jay QC, but his cross-examination was one of the more painful for on-looking lawyers.  No need to go into the minutiae – we can note that Brett made two mistakes which did for him.  One was in blurring the distinction between his client (the corporation) and the employee of that corporation with whom he was dealing; the other was in failing to take the opportunity to gain, when available to him, some external expert advice – as a consequence of which Brett’s advice to his employer took it, and him, down some unfortunate channels.

For we in-house lawyers, our client will be our employer, but in most cases the employer will be a lifeless corporation, unable to breathe or speak other than through the medium of its employees.  So we have to deal with a natural person whose interests and position may consequently differ from the legal person to whom our client duties lie.  And that is where in-house lawyers must always be careful to ask themselves whether there is a difference and if so what consequences attach. 

In Brett’s case, the unflinching torch beam of hindsight makes it plain that the interests and position of the employee and the corporation were not consistent and a line was crossed – in his case, with the result that the court was misled.  At the time and in the circumstances, I am not so sure the position would have been that clear.  In-house lawyers are forever being told to get close to their clients – not least by the likes of me – to form part of the team, even to avoid using the word “client” (see my last blog - http://jdsofislip.blogspot.co.uk/2013/12/walks-like-duck-quacks-like-duck.html)[1].  Deciding that, in a particular instance, the advice given to an employee is one side, or the other, of this line could be hard enough in a laboratory environment; in the political, busy, nuanced world of a typical in-house lawyer, it is very hard.

In respect of Brett’s other error, that of mistaking the legal position, the nature of the in-house role means that many of us find ourselves having to advise on areas of law that are outside our immediate knowledge.  In many cases the consequences of making an intelligent, but incorrect, assessment of the legal position in such a foreign field will be limited.  But occasionally there is greater danger afoot – in Brett’s case, misunderstanding the law contributed to his misleading the court.  There but for the grace of God…

Andrew Shaw’s case involved not an in-house lawyer, but a private practice lawyer, getting into a tangle over the exercise of the duty of full and frank disclosure required for without notice court hearings (ones of which the other party is unaware). 

My own full and frank disclosure is that I worked with, and for, Andrew Shaw when I was a very junior lawyer.  I knew him to be a bright and innovative lawyer, a tenacious and determined litigator, and highly principled.  I suppose it is possible that this last attribute may have changed in the more than 20 years which have passed since we worked together, but based on what I had seen, he would have been rather low on my list of lawyers most likely to end up in disciplinary trouble. 

The case is a little complex, but the essence of it is that is in representing one client at a without notice hearing, Shaw did not disclose that this first client was being funded by another client, something which ought to have been disclosed.  There was also some unhappily expressed evidence concerning the opponent’s likely whereabouts.  These non-disclosures and some other issues subsequently came to light.  Shaw decided to argue that the facts were consistent with the non-disclosure and that he should not apologise to the court for (inadvertently) misleading it.  The opponent, one Geoffrey Logue, subsequently decided to refer Shaw and his assistant to the Solicitors’ Disciplinary Tribunal.  The SDT found Shaw to have been dishonest on a number of grounds.  After a partly successful appeal[2], the case is still open in certain respects.

Again, the torchbeam of hindsight makes it clear that the non-disclosure at the first hearing was a mistake and that, once this mistake had been identified, the only safe course of action was to confess rather than, as Shaw did, making it worse by trying to argue otherwise.  Lawyers, in-house or private practice, need of course to put forward the interests of their clients (colleagues) with as much vigour as the circumstances require.  But those circumstances always include their status relative to the regulatory position.  And lawyers, when they make mistakes (as we all do), need to be very honest with themselves as these mistakes are identified and weigh up the balance of owning up or carrying on.  Had Shaw been able to analyse his own situation with the detachment he undoubtedly brings to his cases, he would have concluded that owning up would attract a modest sanction for his client.  Carrying on as he did, in a tightening vortex of misplaced hope that somehow the facts did support his tenuous argument, only opened up a far greater potential, career-ending, sanction.  For in-house lawyers, in some cases the choice is between owning up and getting fired, or not owning up and later getting disbarred.  This will be a hard choice where it arises.   But, if you get fired, there are other jobs in your chosen career.  If you get disbarred, there are only other careers. 

While not all lawyers have the same exposure to their duties to the court as litigators, we are all subject to this duty and our other regulatory requirements.  Rightly, these requirements set a high standard of behaviour – one which in complex, fast-moving situations such as those overwhelming Brett and Shaw can sometimes seem hard to achieve.  There but for the grace of God…

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[1] (At least, in that blog, I had the foresight to write, “And there are times when the in-house lawyer must be very conscious of the relationship held with colleagues as a client (in the context of the professional conduct obligations that lawyers have towards those they advise)” – phew!).

[2] http://www.bailii.org/ew/cases/EWHC/Admin/2014/5.html.

Walks like a duck, quacks like a duck

"A general counsel should never talk like a lawyer, or think like one."  I came across a debate on this statement on Twitter a little while back.  One of the more perceptive responses to the Twitter discussion came from UCL’s Professor Richard Moorhead, who queried what would become of a profession “… if being effective in your job is predicated on being something you're not”.  My contribution to the debate was that a general counsel should indeed never talk like a lawyer - but that while a GC should always be ready to think like a lawyer, there would certainly be times when not thinking like a lawyer would be appropriate; and as I have thought about the issue since, I have identified the key to both the thought and the talk pieces as being that they support the legal agenda rather than betray it.  

So, why should a GC – for that matter, any in-house lawyer - never talk like a lawyer?  I don't think any of us take “talking like a lawyer” simply to mean using language like "heretofore", or ‘mutatis mutandis” or any words eiusdem generis.  While using these in a commercial context is guaranteed to provoke references to quills and parchment if not worse, there is a good deal of less obviously legal language which nonetheless divides us from those we advise. 

Private practice lawyers – which most of us in-house types have been – talk of clients all the time.  I don’t see why they shouldn’t, their clients are all individuals or organisations external to the firm and with whom they have a commercial relationship. There’s no reason why the firm couldn’t describe them as a customer.  I think however that in-house lawyers should be much more discriminating in their use of the word "client" – even when qualified as “internal client”.  There are times when the "client" word needs to be used expressly (“attorney-client privilege” being perhaps the most obvious).  And there are times when the in-house lawyer must be very conscious of the relationship held with colleagues as a client (in the context of the professional conduct obligations that lawyers have towards those they advise), even if they do not use this particular c-word expressly.  But outside these circumstances, I try to avoid using the word.  Using it suggests a sense that the in-house lawyer and the business colleague are in a relationship defined by a contract – a supplier – customer relationship.  This sends all the wrong messages and worse, drives unhelpful behaviours (not just on the lawyers’ part).  In an arms’ length, professional services relationship, the adviser goes where the client directs; in a mature in-house environment, the adviser goes where the employer needs them to go, whether that is where the people with whom the lawyer interacts directs them to go there or not. 

I also advocate great care in using the word “business” (granted this is more of an issue for lawyers in commercial organisations although I dare say similar issues are experienced by those in third or public sector organisations).  I am always alarmed to see "business" used to describe a separate organisational grouping from the lawyers (as in "the lawyers need to get closer to the business").  The insidious nature of this usage is that it tends to suggest that the in-house lawyers have a different status from their business colleagues – something that can only undermine their credibility and influence within the organisation.  In short, if the lawyers aren't part of the business, then they've no business being in the organisation.  In-house lawyers should always keep their language consistent and inclusive in this respect, and be ready to challenge those in the rest of the business who do not.

So what of "not thinking like a lawyer"?  As indicated above, I don’t think this is a universally helpful approach.  In fact I'm of the view that the way in which lawyers are taught to think often brings a valuable and distinct perspective to the issues faced by an organisation.  However, where a pure legal thought process disadvantages an organisation is where the legal analysis is not in balance with other perspectives.  Many a successful business strategy is legal and offends no third party’s rights (so is, legally, unobjectionable), but looks illogical (so offends the legal mind).  An example from way back in my past – I worked for a company which issued petrol cards.  if a customer lost a card, my company assumed the risk of fraudulent purchases once they were told of the loss.  So why in the pre-internet age did my company only notify petrol stations once a fortnight of “hot” (lost / stolen) cards (and thereby assume the risk of fraudulent spend in the intervening period)?  This offended my logical legal mind – until it was explained to me that in most fortnightly cycles the cost of mailing out lists of “hot” cards far exceeded the illicit spend.  It was cheaper – and so more effective, to take the occasional hit of fraudulent spend than it was to prevent its occurrence.

My own view on how lawyers should think is that they should always be ready to look at matters through a legal lens.  For a start, no one else will take this perspective, and failing to do so both exposes the organisation to a level of compliance risk which may otherwise go unheeded, and fails to make the most of the style of thinking that lawyers bring to the party.  But by thinking only in this vein, lawyers risk isolating themselves from their colleagues whose thinking patterns take them through different analyses, with as unhelpful an outcome as if they used some of the language decisions I referred to above.  Looking at matters through a business or operational prism best enables lawyers to make their advice resonant, so the skill of being able to put the legal hat to one side when looking at an issue – and then pick it up and wear it again – is one hallmark of an effective lawyer (in-house or private practice).

I’ll conclude with an anecdote from an even earlier point in my career, as a private practice lawyer.  A client (correct usage, this time) turned up for our firm’s advice – he’d just bought a company and needed help with the statutory books.  Evidence of the company purchase wasn’t a carefully negotiated sale and purchase agreement.  It wasn’t even a share transfer form.  It comprised two documents - a purchase order and a receipted invoice for the shares.  Looking at one another in disbelief, the responsible partner and I gently took our client through all the usual concepts of warranties and indemnities, due diligence and the like.  Twelve months on and the casual attention that both our client and the sellers gave to resolving these legal niceties meant that our deal still was not done (even though the client was happily running the acquired business).  Looking at one another in disbelief, the responsible partner and I surveyed the wreckage, took off our lawyers’ thinking caps and put on our businessmen’s hats.  And doing so we thought that perhaps the client was, despite all the lack of formality and the things that would need to be done to perfect his title to the shares, more right than we were.  Sometimes it doesn’t pay to think like a lawyer.

Being a good client

There seems always to be an awful lot of (often awful) discussion about the engagement of external law firms by in-house teams.  Most of it concerns the charging model adopted by law firms.  However, rather than contributing yet another piece on the iniquities and inefficiencies of the hourly rate, the mythology of alternative fee arrangements and what a bad business model all those millionaires in law firms operate, I want to look at some more qualitative aspects of the in-house / out-house relationship.

It’s tempting to look at this relationship as an antithetical one, a power struggle between an in-house team trying to assert dominance over the external lawyers and the external lawyers trying to find multiple ways to retain and grow their relationship with their client - through, over and behind the backs of the in-house team.  Seeing the in-house / external law firm relationship purely in terms of power struggles and fee battles however misses some important points.

One of the most important skills in the general counsel role is that of blending the mix of internal and external resources for the benefit of their organisation.  The business’s experience of using these external lawyers (style of engagement, performance and, yes, cost) all reflect on the GC.  Handle them wisely and it enhances the GC’s standing, but poor experiences will have the opposite effect.  Given the impact that good, bad and indifferent experiences of external lawyers can have on the standing of the in-house team, it’s surprising however how little attention can be focussed on the non-financial aspects of the relationship.

I’m not sure that nearly enough focus is given to the art of giving instructions, in particular,  to the challenge of telling someone outside your organisation everything they need to know about your organisation in order to be able to advise you properly.  It’s sometimes quite hard to bring to mind all of the factors affecting a particular matter which you as the in-house lawyer might take for granted if handling the matter yourself.  But it’s very important to do so - any of these factors has the capacity to make what would otherwise be totally apposite advice useless.  One of the cited benefits of using the same law firms for all or a good proportion of an organisation’s legal needs is that the firm “knows our business”.  There’s some merit in that view, of course, but the reality is that the law firm in question has a number of lawyers who will be familiar with a number of characteristics of the client - there’s no guarantee that lawyers new to the account will absorb these characteristics by some form of institutional osmosis any more than there is a guarantee that a lawyer accustomed to advising the business in one area will understand other areas to the same level.  This latter point was brought home to me a few years ago when I was handling a cross-border group reorganisation.  I asked our go-to employment lawyer to look at HR aspects of the transaction and was somewhat surprised to receive a well-constructed but useless piece of advice; it was predicated on an entirely incorrect set of assumptions about how our business was structured outside the UK (hitherto, his field of engagement with us).  Of course, he was wrong not to have verified these assumptions before he started, but equally if I had spent a bit longer briefing him on the position, we would have been right first time.  As it was, I had to do some hasty scurrying around in order to get the advice directed to the correct facts and to meet our timetable, so I reaped my own whirlwind.  Lesson learned for future application - don’t assume the firm knows all they need to know, no matter how familiar you think they are with your organisation.

On that occasion the error the law firm made was one that could be corrected easily and one for which in some sense I was culpable.  But like most of us I’ve experienced legal advice that was not so easy to put right and for which the law firm was wholly culpable.  The mistake I made the first time I encountered a law firm providing poor advice was to set out a well-reasoned, proportionate and measured statement of what we felt had gone wrong.  As a communication its contents were unobjectionable, but I had failed to appreciate that by putting it in writing, I had engaged the firm’s formal complaints handling procedure, as our relationship partner explained in pained tones, and as a result, I had inadvertently limited his freedom of action in addressing our concerns.  Again we were able to retrieve the situation, but I had made the situation more difficult than it needed to have been.  I have been fortunate to have experienced few problems with law firms since, but my approach since has always been to speak off the record first so that the person I am dealing with has maximum flexibility in putting matters right.  All organisations err from time to time, a mark of a good organisation is how it put things right, and I have found that indicating I know this produces much better results than taking a more aggressive approach.  Another lesson learned - law firms make mistakes, it’s not just generous but it’s wise to give them the widest flexibility to fix them.

Taking account of the individual situation of lawyers in law firms can also be applied for positive reasons, and to lawyers at all levels in the firm.  An example of this occurred when I was working on a cross-border acquisition; I was told by the lead partner that they would have the due diligence report on our target on my desk by 9 a.m. on Monday morning.  While I was impatient to read it, I knew both that I did not really need to see it until later in the week, and that the consequence of getting it to me by that time would mean a weekend in the office for some of the firm’s junior lawyers.  So I said I wouldn’t read it until Tuesday, whenever they sent it (a little white lie), and that I wanted the team to have a break over the weekend.  The juniors duly got their break, and knowing they had done so was all the payback I required.  As it happened, the deal changed shape a month later, meaning that those same juniors had to out in some heavy and late hours for me - something they were highly motivated to do because of the break I’d cut them previously.  Lesson learned - law firms are made up of human beings and a little thought for their welfare can reap dividends.

None of these examples is earth-shattering, but they all underpin the point that relationships with external lawyers aren’t all about the bill.  Relationships with the internal team aren’t conducted on that basis, treating the external law firm in such a narrow way limits their contribution and, in the end, only serves to undermine the general counsel.

When enough's enough

It's not our fault, it's the way we're trained.  Or at least it's tempting to see it that way.  The typical training process for a lawyer includes the “beasting”; having their documents savaged by a partner and rewritten several times until they are free from blemish, even blemishes invented by the partner for the purpose.  We are trained to leave no stone unturned, to produce articles of impeccable craftsmanship.  There are sound reasons for this approach to training, of course.  Not the least of these is that when the hapless trainees graduate to advising on mission-critical matters, it is essential to have acquired the sort of rigorous approach which will save them from making mission-critical mistakes.  The obvious downside of this approach to training is that it leads the trained lawyer to a Pavlovian instinct to take a kitchen-sink approach to all matters, irrespective of their importance.  Even if this instinct is resisted it still gnaws away in the back of their minds.  

I often have conversations with (mostly junior) in-house lawyers about the difficulties they face with workloads, turnaround times and the like.  Developing these conversations further, at the heart of their issue is a real quandary in knowing how much time to spend on a matter - or at least in feeling confident in spending less time on the issue than they might if they were back as a trainee.  They don't need me to tell them that a photocopier lease doesn't merit as much time as a £100m contract (so I don't tell them that!).  But having the courage to give the photocopier lease merely the five minute flick it merits is hard - what if they overlook something, what will their boss / the business think?  In these conversations I end up sharing one or both of a couple of perspectives.  

The first perspective is that law is more like chess than it is like maths.  In maths there is only one right answer, and if your answer isn't that answer, your answer isn’t nearly right, it’s wrong.  In chess there is no such single truth, the requirement is to be more right than your opponent - "sufficiently right".  In law, "sufficiently right” means being as right as the situation demands.  Most business decisions are not made as a result of analysing every piece of information to the point where they are totally right.  Instead they are made with only a partial knowledge of the facts.  Businessmen guess, as if they didn't guess they'd never act in time.  Businessmen likewise expect their lawyers to form judgments on less than a complete view of the facts, and to give that judgment without rehearsing each of the nuances, factors and assumptions which underpin it.  They just expect them to be close enough and then to move on to the next thing.   

The other perspective I share is the observation that most organisations in the UK don't have in-house lawyers, and most of the time they don't go to outside lawyers either.  Whisper this e'er so quiet lest the idea catches on, but therefore most of the entities in the UK conduct most of their activities without legal advice, and yet the sun still rises in the East each morning.  So an in-house lawyer spending half an hour with an average contract will spot the main issues it contains and thereby place their employer in a better position than these heretical organisations that do not use lawyers.  Taking this approach, a sort of "up from nil" (what extra value can I give my employer by spending 30 minutes on this?) rather than "down from 100" (what dare I leave out?) approach, gives the new in-house lawyer a more accommodating reference point for their work, and one closer to the way their business colleagues work.  Most businesses would rather have their lawyers do ten things a day sufficiently right instead of five things completely right.

A little while back I was impressed to listen to a savvy, well-known and well-respected senior lawyer explain that he was once asked to look after a construction project.  The file was dauntingly thick. and concerned a project visible from his office window.  Reasoning that if work was taking place there was no problem requiring his contribution, he decided not to open the threatening file unless he saw work at a standstill.  Work never stopped and any issues were resolved on site.  The file remained unopened and our lawyer focused his time on other issues where his attention would make a difference.  That might be an extreme example, but it very probably echoed the CEO's approach to the project and it does bear out the point that life can go on without lawyers.

All in-house lawyers will, of course, be deeply thorough when the occasion demands; what makes a good one is giving less critical matters less critical attention in order to free up their time and energy for those occasions.  They know when enough is enough.  And in the hope that I've put my view across, I'll deem that enough from me.