Gruntled Employees

Hourly billing across the pond

The war on hourly billing is being waged worldwide. Last week we talked about the battle in this country ("The billable beast of burden" and "The fool or the fool who follows him") and in Canada ("No hourly billing, eh?"). Yesterday, London's Financial Times had an article by legal correspondent Michael Peel saying that hourly billing may be on the outs in the UK as well. The article, with the promising title "UK law firms to reform hourly fee system," says that top London law firms are facing increased pressure from clients unhappy with large bills. Peel writes:

Top firms told the Financial Times that they were increasingly offering alternatives to hourly rates and making more use of cost-cutting business practices, such as putting services offshore. Tim Jones, head of the London office of Freshfields Bruckhaus Deringer, said that, although hourly billing still had a “fairly central role in most people’s thinking”, firms were increasingly offering clients deals such as fixed fees or rates tied to the success of transactions.

He said: “I think the big firms are very conscious that the efficiency of working practices is going to be absolutely fundamental in the coming years. We will have to look very carefully at how our terms are structured.”

The "efficiency of working practices," as Freshfields's Jones puts it, is the key point. Hourly billing, as we've said many times, discourages efficiency by rewarding inefficiency.

Peel reports that at Linklaters, another "Magic Circle" firm, a "significant amount" of the work is no longer billed by the hour. Peel does note that British firms have been somewhat slower than their American cousins in considering alternatives to the billable hour. But it's comforting to know that the opponents of hourly billing have allies overseas.

No hourly billing, eh?

The Great Billable Hour Debate of '08 is playing out north of the border, too. Maclean's magazine is the Canadian equivalent of TIME or Newsweek, with nearly three million readers every week. In the current issue, writer John Intini has a terrific article called "Time to stop the clock? A backlash against the billable hour has some firms charging flat fees." John covers the entire issue from the reasoning behind hourly billing to the problems it causes for clients and lawyers. His reporting also uncovered some great lines: When asked how fast law firms are shifting away from hourly billing, Vancouver consultant Richard Stock quips, "Global warming is faster."

I talked to John at length about the subject and whether we'd soon see a tipping point away from hourly billing. John writes:

Experts anticipate that the current economic downturn will lead to further belt-tightening and could force more companies to reassess deals with their lawyers. “The days of just writing cheques are coming to an end,” says Jay Shepherd, whose Boston firm, Shepherd Law Group, banned billable hours last year and doubled its 2006 revenue. “There is no other business that we don’t know the price of something before we buy it. Imagine getting on an airplane and being told they’re going to charge you by the minute. It’s crazy. Nobody would do it.”

Shepherd, who describes the billable hour as “anti-client,” says the savings his six-lawyer outfit provide is the result of team efficiencies, not cut rates. In addition to flat-fee pricing, his firm offers unlimited advice plans: for a fixed price a client can call the office as often as needed without worrying about a big surprise at month’s end. “It’s almost as if we’re in-house lawyers for them,” he says.

[Since I was speaking to a reporter for a Canadian magazine, I said "cheques" instead of "checks." Good of John to notice that over the phone.]

Our discussion turned to the question of timesheets — the same topic we were debating in yesterday's post ("The fool or the fool who follows him?"). To recap, Tom Kane over at Legal Marketing Blog.com called us "foolhardy" in his post "Has Your Firm Tamed That Damn Billable Hour Yet?" because we don't internally track lawyers' hours. Here's that topic covered in the Maclean's article:

Shepherd — who predicts the billable hour will last another decade — doesn’t even track his staff’s hours for internal purposes. This has prompted many competitors to ask how he knows if associates are doing their work? “I manage them,” he says. “That’s my job.” And late nights or weekends holed up at the office don’t impress him. “The firm,” he says, “doesn’t get anything more if it takes longer and the client wants the work done as fast as possible.”

Intini notes — correctly — that it's easier to change the firm culture at a boutique firm than it is at a megafirm. He again quotes Richard Stock, who says that at larger firms, "the business model is entrenched across hundreds, if not thousands of people in the corporation. It’s not an especially nimble ship.”

That's true, but you have to start somewhere. Great article, John!

As for the Tom Kane post, value-billing guru Ron Baker had this response on his VeraSage Institute site. And Columbus lawyer Mike Grodhaus's terrific new blawg, The Alternative Fee Lawyer, wades into the fray in his post, "Timesheets & Alternative Fees." After nicely summarizing the discussions, Mike gives his own take:

What's fascinating to me about this debate is that is not an "apples to apples" comparison. Tom Kane and Jay Shepherd aren't even really talking about the same thing. What Jay Shepherd is talking about is a complete paradigm shift in how lawyers (or any professionals, for that matter) should think about pricing their services.

Not that I'm discounting Tom Kane's mindset. To me, a law firm (like mine) that uses alternative fee arrangements but still uses timesheets internally is still much better than a law firm that bills all its clients by the hour. Indeed, if we ever move the profession to that brave new world without the billable hour, doing it this way will probably be the transitional phase to Shepherd's wholly value-driven approach. But it certainly makes you want to learn more about Shepherd's way of pricing his law firm's services.

Make sure you check out Mike's blog, which now adorns our Blogroll over on the right of your screen. While I still bristle at the term "alternative billing" (which smacks of the seamy, like "alternative lifestyle"; see last year's post, "No-alternative billing"), Mike brings a broad, balanced approach to the conversation. Welcome, Mike!

The fool or the fool who follows him?

In our last episode, "The billable beast of burden," I talked about the recent ABA Journal article that described Shepherd Law Group's successes in banishing the billable hour ("Taming the Billable Beast," February 2008). I also mentioned that there were naysayers about.

Tom Kane is one. He writes Legal Marketing Blog.com, a fine site with a surprisingly generic name for a marketing site. Perhaps "Raising Kane" was taken. (Actually, it turns out it was — see here — by a self-described "recovering lawyer." Huh.) Tom covers the ABA Journal article in his post "Has Your Firm Tamed That Damn Billable Hour Yet?" and commends us and the other two firms for addressing the billable hour problem. (Thanks, Tom.)

But he also takes a shot at something I said in the article, and I feel the need to respond. Here's Tom:

One troubling point mentioned in the article relating to the Shepherd firm. And that is the statement involving CEO Jay Shepherd that “he denies secretly keeping track of hours spent on each case.” If the firm doesn’t do so, IMHO, it is being foolhardy based on the following simple reasoning:

• You can’t make a profit on fixed fees unless you know what your costs are;
• You can’t know what your costs are unless you know how much time (and other dollars) are consumed by the matter; and
• There is no way to know how much time is being spent on matters if you don’t keep track of hours!

Duh!

So, either they are guessing which means they don’t have a clue what their profit margin is either, or the firm has some other means of determining costs that I am unaware of.

"Duh," indeed! Wow. We're being foolhardy to the point of being duhed. (New word; pronounce it "dud." Think of me when you use it. "Hey, Mom! In school today my teacher duhed me.") So I was all set to roll up my sleeves and explain how Tom's "simple reasoning" (IHHO — in his humble opinion) was flawed, when I learned that the Godfather of Value Pricing had already done so.

Ron Baker is the founder of VeraSage Institute, a think tank dedicated to helping professional-service firms rid themselves of archaic billing practices. He is the author of Professional's Guide to Value Pricing, which is the ultimate hornbook on the subject. Having Ron publicly defend your billing practices is like having Martha Stewart compliment your table setting (only without the whole jail thing). Here's Ron in his post "He Who Says 'A' Must Say 'B,'" responding to Tom's "duh":

No, not Duh. There are over 500+ firms worldwide, across all professional knowledge firm sectors, from advertising to CPA firms and law to IT consulting firms, that don’t do timesheets.

This doesn’t mean they don’t know their costs, it’s a question of WHEN do they know their costs. With timesheets, you only know them in arrears. With our methods, you know them BEFORE you do the work.

What good is it to know your costs if the client doesn’t like your price? This is known as price-led costing; Toyota has been using since it was founded in the 1880s, and Toyota does not have a standard cost accounting system (nor do they do timesheets).

In the real world, value drives price, not costs. Price actually drives costs, so it makes sense to know value and price before you spend a nickel on any costs....

I just wanted to set the record straight. If the Shepherd Law Group is smart — and they are  — they will trash timesheets. [Thanks, Ron. Already have. — JS] They are the cancer in the professions; it is just a matter time before they will be buried.

Ron also says that timesheets "keep professionals mired in the mentality they sell time." In another place, Ron has written one of the best arguments against timesheets ever:

So what good is measuring hours logged on a timesheet? Do you think you can measure the value of a Picasso, the deliciousness of a meal prepared by a five-star chef, the splendor of a building designed by an architect, or the acting ability of an actress, by looking at the hours they work? As they say, it’s easier to count the bottles than describe the wine. You remain mired in counting and costing the bottles, while we are interested in the quality, taste and subjective value of the wine.

Knowledge workers aren’t inspired to track every six minutes of their day. No one entered this profession with the objective of logging the most hours. Not only is it the wrong theory of value, it’s also demeaning, demonstrating a lack of trust, treating them like children.

Oh, snap! I really couldn't have said it better myself.

No, we don't track hours spent at Shepherd Law Group, secretly or overtly. Other lawyers often shake their heads knowingly and then ask me how I know whether my associates are working. "Uh," I reply, "with this crazy new thing called management." (They usually shake their heads some more and wander off, muttering.) Our associates work hard because they want to help our clients and they want to do a good job. That's why we call them professionals. Professionals don't need an annual billables goal to make them work hard.

Now I don't want to dis Tom too much; he's written some good things against hourly billing. And he went to my dad's alma mater, the Cross, so he can't be all bad. Still, he may think I'm foolhardy for trashing timesheets, but there will soon be many other "fools" following our lead.

The billable beast of burden

Finally! The writers' strike is over and we can all get back to work. Thank goodness I can now live off my DVD residuals, or whatever. Ahh, the power of the Union. Nothing like sticking it to The Man ... and the makeup person, and the costume person, and the hair stylist, and the gaffer (whatever that is) and the best boy (just what makes him so good?). Shutting down an entire industry for a hundred days and billions of dollars is a small price to pay for a tiny-but-respectable percentage of the revenue generated by webisodes. Because everyone watches webisodes ... right? Ka-ching!

[End of management-biased sarcasm. Actually, I'm just a little cheesed off that "24" has been pushed back to January 2009 because of the writers' strike. For a Gruntled take on "24" from last year, please see "What would Jack Bauer do? Use plain English."]

Since we last spoke, the hourly billing debate has been going full throttle. The current issue of Crain's Chicago Business reports that "only 16% of in-house lawyers say hourly billing is their preferred arrangement." Yet hourly billing remains the dominant way that lawyers bill their corporate clients. Samantha Stainbaum's article, "The end of hourly fees?" quotes Northwestern Law dean David Van Zandt, who offers a possible explanation: "It's difficult for companies to evaluate what they're getting, so they fall back to hourly billing."

That's possible. Still, if five out of six in-house counsel would prefer something other than hourly billing, don't we outside counsel have an obligation to provide it? The February issue of the ABA Journal has a story by David Gialanella called "Taming the Billable Beast." In it, he talks about three law firms who he says are "changing the billable equation last year in hopes of reducing associate and client dissatisfaction."

Two of the firms focused on first-year associates' billing requirements: Dallas's Strasburger & Price, who cut first-year billing requirements from 1,920 hours a year to 1,600; and Atlanta-based Ford & Harrison, who got rid of first-year requirements altogether.

The third firm went even further. (This may sound familiar.) David writes:

Shepherd Law Group in Boston has thrown out the billable hour altogether in favor of flat fees and fixed prices, and it could not have asked for a better result.

In 2007, says CEO Jay Shepherd, the firm “billed exactly 0.0 hours [yet] more than doubled our revenue for all of 2006.” He adds, “It sounds too good to be true. It’s not.”

Now there’s no looking back for Shepherd, whose firm handles labor and employment law. He recently added a sixth attorney, and he denies secretly keeping track of the hours spent on each case.

In their new billing model, Shepherd and the other partners can get together to brainstorm strategies—something that would have required billing for several different attorneys. Most clients would never stand for those sessions if charged by the hour.

It’s easier for a boutique firm to institute a change, but Shepherd cannot argue with results: Research becomes more focused; soon, efficiency improves. For the Shepherd Law Group, at least, eye-popping numbers are to follow.

(Thanks, David.) The point here isn't to trumpet our firm's successes (at least that's not the main point). The point is that clients want a better system, one that puts their interests in line with their lawyers' interests — rather than in conflict with them. And it can be done successfully.

But there are plenty of naysayers.

Next post: The naysayers say "nay." Stay tuned ... (unless there's another writers' strike).

In-house counsel's biggest headache

We spend a fair amount of time whaling on other law firms for things like hourly billing. But when a firm turns out a product that's valuable and useful, we want to make sure the firm gets its due. Ginormous (which should be a word) international law firm Fulbright & Jaworski released its Fourth Annual Litigation Trends Survey Findings last week, containing 52 pages of illuminating and actionable information generated by in-house counsel. Fulbright had an independent research firm survey 253 US corporate counsel and 50 UK in-house lawyers on everything from litigation costs and billing trends to regulatory matters and class actions. And what did in-house counsel report to be their leading legal headache?

(Wait for it ...)

Labor and employment cases.

Surprised? We're not. Oh, sure: securities litigation and patent litigation and class actions get more airtime. But every company has employees. (In a word: duh.) And if you have employees, you have employment issues.

According to the survey, 51% of respondents listed labor and employment matters as one of their greatest litigation concerns. Contracts was next at 41% (and some of those no doubt include things like noncompetes and nondisclosures). Regulatory matters (24%), securities litigation (22%), and intellectual property (also 22%) rounded out the top five of 16 categories (including "other").

Similarly, when asked about pending litigation matters, 43% cited labor and employment cases as among the three most common types. Contracts (34%) was the only other category to crack the litigation Mendoza line (20%).

At a time when many large law firms are scaling back their labor and employment departments, this area continues to keep corporate counsel awake at night. Hmmmm ...

There's a ton more data in the survey, which will likely lead to a few more posts on this site. In the meantime, you can get the survey findings free directly from Fulbright by clicking here. (You have to give up some contact information, but I think it's a fair trade.) You can then check out the detailed data here. Fulbright has a detailed press release and summary here.

Other blogs have also written about the survey. Check out Manpower's Mark Toth's entry here, Carolyn Elefant's post on Legal Blog Watch here, and Holden Oliver's piece in What About Clients? here.

As always, the moral is that lawyers should listen to their clients.

Female lawyers and work-life balance

(Speaking of work-life balance, one-week vacations really take several weeks. The week before you leave, you're running around trying to get stuff done so you can leave. Then there's the vacation itself. Then you come back to the pile of stuff that's accumulated while you were away. Several weeks later, you're back to normal. And there's my explanation for the gap in the posts. Now on with the show ...)

Last Wednesday, The Boston Globe's law-business reporter Sacha Pfeiffer had a great piece breaking down a recent MIT Workplace Center survey on women in the law. Sacha's story is here and you can download the complete report here (PDF). Peter Lattman's indispensable Wall Street Journal Law Blog also posts on the story, drawing some interesting comments.

Highlights from Sacha's story include:

• Of 1,000 associates surveyed, 31% of women had left the law, compared to 18% of men
• 35% of female associates with children had stopped practicing, compared to 15% of father-associates
• 40% of female lawyers have worked part time, compared to nearly no male associates
• Of women who drop off the partnership track, 46% stop practicing completely, versus less than a third of men

One of the most troubling statistics to me was that of the firms asked to participate in the survey — the 100 largest in Massachusetts — only half responded. This strikes me as the ostrich approach to the problem.

We've talked about work-life balance in this space before: see "Lawyers and work-life balance" and "More on billable hours and work-life balance." I believe that the biggest obstacle to lawyers' work-life balance — regardless of gender — is the single-minded devotion law firms have to billable hours. If the only metric for associate performance that matters is total number of hours billed per year, then it's no wonder half of the law firms didn't bother to respond to this important survey.

On the other hand, see what your clients care more about: how many hours your firm billed, or how many female lawyers you have. The answers might surprise you.

No-alternative billing

I hate the term "alternative billing." It has that sneering, look-down-your-nose quality to it, like "alternative lifestyle." Actually, I think lawyers have done a very good job of marginalizing it. I mean, there's hourly billing, and then there's ... what?

The lawyers look away and reply, "Well, there's ... (ahem) ... alternative billing."

"Oh?" the clients ask. "How does that work?"

"Uh, well, there are contingency fees, blended rates, flat fees, fixed fees, retainers. That sort of thing. It's not the traditional way of doing things. Very few of our clients ask for it."

"Oh."

As if there's something wrong with it. As if traditional (hourly) billing came over on the Mayflower. (In fact, it's only two or three lawyer generations old.) And the menu of "alternative" arrangements sounds ominous: a collection of ways to bilk the client.

Actually, 62% of in-house counsel say they're interested in "alternative" billing arrangements, according to the Association of Corporate Counsel's 2006 Managing Outside Counsel survey. This figure is surprisingly high, since most in-house lawyers migrated from large law firms where the almighty billable hour rules. But after working in the real world of business and bottom lines, in-house lawyers are seeing hourly billing for what it is: a way to increase clients' bills.

But in the same survey, corporate counsel report that 90% of their outside lawyers resist the idea of "alternative" billing. (Read more about the survey in Outside counsel ignoring GCs on hourly billing.)

Maybe clients will continue to put up with this. But I doubt it.

Pretty soon, they'll start looking for "alternative" lawyers.

Hating lawyers around the world?

Since my recent post, "Why businesspeople hate lawyers," I've learned that this isn't just a problem for lawyers in the United States. There's an excellent legal-marketing blawg in Brazil called, unsurprisingly, "marketingLEGAL." (Or maybe it is suprising. Only the title is in English; the blog is in Portuguese.) The blog's author is Marco Antonio P. Gonçalves, a legal-marketing specialist in Rio who is coauthoring a book on the subject. Marco Antonio devoted a recent post to translating my thoughts into Portuguese and expanding upon them. Apparently, lawyers in Brazil face similar problems of popularity, and the trifecta of hourly billing, legalese, and legal-not-business advice are at the root of the problem. (I'm guessing his solution to legalese would not be "plain English." Is there such a thing as "plain Portguese"?)

A note on language: I listen to a fair amount of bossa nova (the Gilbertos, Jobim, Getz), but I don't speak any Portuguese. Fortunately, we have Google to translate foreign-language blogs and webpages. That an online service can instantly convert a webpage into another language with reasonable accuracy is very cool. But it does lead to some amusing false notes. It calls the post "Why business-oriented men do not like lawyers," and it labels "hourly billing" as "collection for the moment." You can read the translation of Marco Antonio's post here.

Working our way across South America, I just got an email from Ivan Cavero, who writes the Peruvian blawg PracticaLegal: Sólo Marketing Legal. (Google's intepreters can give it to you in English here.) Ivan is a legal-marketing trailblazer in Peru, and he came across my post via Marco Antonio's blawg. He's working on a similar post for Spanish readers.

A while back, I heard from Jim Belshaw, a strategic consultant in Sydney, Australia, who writes the excellent and thought-provoking blog, Managing the Professional Services Firm. He's got some good thoughts on work-life balance and associate retention.

Some might be concerned that the problems US lawyers (and their clients) face are shared around the world (or at least, I guess, the Southern Hemisphere). But I find it comforting to know that people like Marco Antonio, Ivan, and Jim are adding to the conversation and helping to find solutions to these problems. So: obrigado, gracias, and ta, mate.

Why businesspeople hate lawyers

Oh, they may tell you that they don't. "Hate" is such a strong word, and so forth. But most businesspeople really, really don't like lawyers.

Why?

Three reasons, all of which are related:

1. Billing by the hour
2. Using legalese
3. Giving legal answers instead of business answers

And what do these three things have in common?

They're all examples of lawyers putting themselves first, instead of putting clients first. Hourly billing prices legal services based on the time the lawyer spent, not on the value the client received. What difference does it make to the client whether something took two hours or four hours? Rarely does the client get twice as much value when something takes twice as long (and thus costs twice as much).

Next, lawyers speak and write in legalese to show off that they are, in fact, lawyers. Rather than trying to find the clearest way to communicate with their clients, lawyers fall back on shopworn phrases whose meanings they're not even certain of. "Wherefore, premises considered" — I mean, who really talks like that? Lawyers use legalese the same way doctors and cops use the jargon of their professions — to set them apart from the people they serve. (For more on jargon, see Abandoning jargon "at a high rate of speed.")

Finally, businesspeople ask their lawyers business questions but get legal answers in return. How many of you have asked a lawyer a question about your business only to receive a memorandum on what a statute or regulation or court opinion says. You don't care about the dicta in Smith v. Landingham; you just want your lawyer to solve the problem.

So as we start the new year, lawyers should add to their lists of resolutions three things that put the client first:

1. Price legal services based on the value to the client
2. Use plain English
3. Give clients business answers

For more about putting clients first, read Dan Hull's always-excellent What About Clients? blog. Dan's a lawyer who understands about putting his clients first. His blog's tagline asks the fundamental question: "True service — are we lawyers delivering?" I'm certain that businesspeople don't hate Dan.

Dan started the year off with a terrific list of client-service blogs, which include heavy hitters like Guy Kawaski's How to Change the World and David Maister's Passion, People and Principles. Check out the list here.

Happy New Year!

Amtrak blows whistle on lawyer bills

The Saturday edition of the Wall Street Journal had this fine article by Nathan Koppel and Ashby Jones: "Amtrak's Lesson: Check Legal Bills Closely" (subscription probably required). They report that the federally funded railroad company had audited its legal bills, finding that it had allowed outside law firms to ignore the company's billing guidelines. After spending over $100 million in outside-lawyer fees from 2002 to 2005, it realized it could have spent "substantially" less.

The article has plenty of ammunition for opponents of hourly billing, such as:

• 41% of the fees one firm submitted had "cryptic" descriptions for tasks, such as "Review Amtrak documents." William Ross, a law professor and consultant, noted that while these phrases were common in law-firm bills, they didn't help clients evaluate whether the work was necessary.
• Another firm billed exactly nine hours of a paralegal's time on 10 different occasions in a single month. The auditor thought it unusual that there were no entries for 8.9 or 9.1 hours. Ross suggested that this practice could mean that the times were estimates: "Attorneys often bill exactly the same amount of time, day to day. It's like they are trying to fill a quota."

[I'll pause while you let that last phrase reverberate in your head.]

• Some of the law firms used "block billing," despite the Amtrak billing guidelines' barring the practice. Block billing is when "law firms lump together tasks without itemizing how much time each one took.... [It] can make it tough to gauge whether lawyers spent an appropriate amount of time on each task." Another lawyer, apparently unconnected with Amtrak, defended block billing, saying that it was not necessarily "evidence that you are not providing good legal service."

[That may be true. But it's certainly not evidence that you are providing good legal service.]

• The article also cites the problem of close relationships between the in-house lawyers and the outside law firms, where some of them previously worked. The Amtrak auditor said, "The attitude of the law department was that they shouldn't manage the [outside] law firms, because they were their buddies."

So Amtrak has learned to watch their law-firm bills more carefully. But that is just a stopgap measure for a much bigger problem. Hourly billing does nothing to help a client determine the value of the work that was performed. Just because something took longer doesn't mean it was more valuable to the client. Without hourly billing, in-house counsel won't have to worry about whether their outside counsel "are trying to fill a quota."

Peter Lattman's WSJ Law Blog treatment of this issue is here. Earlier coverage on this topic is here and here.

Outside counsel ignoring GCs on hourly billing

The Association of Corporate Counsel has just released its 2006 Managing Outside Counsel Survey. Martin Daks of the New Jersey Law Journal summarizes some of the key findings. Much will be made of GCs' concerns about compliance issues. But what I find most interesting is in-house lawyers' feelings on hourly billing. Daks writes:

Despite criticisms of the hourly billing format, its use continues to grow. In 2005, 87.1 percent of companies said they used standard or discount hourly rates, compared with 81.2 percent in 2004 and 81 percent in 2003.

While 62 percent of respondents are open to alternative fee arrangements — including fixed, blended hourly rate, contingency and retainer — they say that 90 percent of outside counsel resist the suggestion.

(My emphasis.) Ninety percent? Outside lawyers will tell you that they listen to their clients' concerns, but apparently that doesn't apply to the almighty billable hour. Now tell me if this sounds like a coincidence:

And companies are quicker to fire outside counsel. In 2005, 55.6 percent reported they terminated the relationship with at least some of their firms, up from 50.7 percent in 2004. The most-cited reasons were poor quality of work and results, lack of responsiveness, high fees and personality issues.

I wonder how much of the "lack of responsiveness" had to do with resisting clients' requests for alternative billing.

You can get the ACC's press release here, and you can order the survey here. Compare all this with Ed Poll's post on the popularity of alternative billing in his excellent Law Biz Blog, and the discussion in Carolyn Elefant's always-insightful My Shingle.

The price of backdating options

Peter Lattman's excellent and informative WSJ Law Blog has this item on the cost of internally reviewing past stock-option grants at Marvell Technology. According to a recent SEC filing, the chairman of the special committee charged with reviewing Marvell's options "receives $2,500 a day for his services as such," plus travel and related expenses.

Three thoughts on this:

1. This is just further support for why a company needs a Chief Talent Officer with a "seat at the table." The CTO, reporting to the CEO, would draw enough water to be able to say, "This is wrong. We shouldn't be doing this." Otherwise, these option decisions get made without the right people knowing about them.
2. How does a company like Marvell know it's getting value for its $2,500 per diem? This leads to the same problems that hourly billing causes: it rewards inefficiency and slower work, and it leads inevitably to a surprise bill at the end. A more-entrepreneurial firm might be able to win some option-review business by saying, "Here's what we're going to do for you, and here's what it's going to cost." The price is then based on the value to the client rather than the number of hours (or days) it takes to do the work.
3. Why is it "per diem"? Can't we just say "a day"? Do we think that if it's in Latin it in must be worth more? "Oh, I'd never pay $2,500 a day. But per diem? Sure!" Unless you're an Ancient Roman, Latin is almost never better.

BTW, Peter has gathered everything you could ever want to know about the stock-option saga here.

Are general counsel a "necessary evil"?

GCs have had a tough few days. Hewlett-Packard's GC, Ann Baskins, resigned last week in the middle of the company's "pretexting" scandal. (See last week's post on H-P's conduct.) And in today's Wall Street Journal, Ashby Jones writes about the lack of respect some companies — and outside counsel — have for GCs. Jones quotes an Orrick Herrington partner as saying that other executives often regard GCs "as a necessary evil," and that some outside counsel ignore them. The article points out that because the GC's office generates no revenue, it is frequently viewed "as a mere cost center."

I was surprised by the pie chart accompanying the article that revealed that 26% of GCs report to someone other than the CEO. Even more surprising is the number of Silicon Valley companies that have no general counsel at all.

As outside employment counsel for companies, I've worked closely with many inside counsel. I'm constantly amazed at how many different balls they can juggle at once. Where I only need to know about employment law, they're constantly handling issues from all kinds of practice areas — not an easy task. The best general counsel I know are those who put their company's business goals first, and look for a way to reach them in the context of the law. They work with their outside specialists to solve a particular business problem. They are not just cost centers, or a "necessary evil." A good general counsel can save his or her company from ruin.

Pretexting: a lawyer word for lying

H-P General Counsel Ann Baskins resigned yesterday in the midst of the so-called "pretexting" scandal. She signed a severance deal that lets her keep about $3.7 million in vested stock options, accelerates the vesting of another $1 million in options, and indemnifies her for her legal expenses. She then declined to testify at the Congressional hearings investigating the scandal. Some of Baskins's handwritten notes produced at the hearings suggest that she was aware of the pretexting method of obtaining personal phone records.

"Pretexting" is a method of tricking a person into revealing something by using real information to create the appearance of legitimacy. It is a form of social engineering. It is, plain and simple, lying — better planned and cleverer than garden-variety lying. No thoughtful lawyer or executive could believe for a second that it was acceptable behavior. The ongoing investigations may eventually determine what Baskins and other H-P execs knew about the pretexting. In the meantime, the rest of us can take an important lesson from this:

Employees often hurt their companies, and it is understandable and appropriate to be angry and want to do something about it. (In the H-P scandal, confidential information was leaked to the media.) But you can't let your desire for justice (or payback) cloud your judgment. The end here did not justify the means. Do your investigation, fire who you need to — but do it the right way.

And by the way: "pretext" is really a noun, not a verb. Companies and lawyers have to stop turning things into verbs. There's already a perfectly good verb for this conduct: "lying."

For more good coverage on this story, check out Rob Hyndman's technology-law blog and Dan Hull's What About Clients?