With the Corona pandemic raging through the world, our healthcare systems are stressed beyond their limits. It is heartbreaking to see the reports from the doctors and nurses fighting at the front line. In an attempt to dampen the outbreak, our governments have halted most of public life. We are all ordered to stay at home and many businesses have been forced to close. As of yet, no one knows how long this will last. One day however we will be able to claim victory over the virus. The war against the Corona virus is a war we are guaranteed to win. We just do not know at what cost of human lives. While fighting the pandemic, another MUCH LARGER crisis has been brewing. We are descending into the worst and most severe economic crisis in the history of mankind. Our TGO Consulting Research Team has been monitoring economic indicators from around the world on a 24/7 basis for the past weeks. The outlook is getting darker by the hour. Here are two graphs to help you see what we are seeing: The graph above shows the PMI (Purchase Managers Index) between 2007 and today. It shows the impact of the 2008 credit crisis. The graph clearly shows by comparison what extreme and steep drop we are seeing right now. The graph below shows the effect on global trade. Exports from the US have dropped to the lowest level in history. No need to point out that for China the data are similar. The global economy is grinding to a halt. This has never ever happened before. No amount of rescue packages from governments and central banks will be enough to prevent the damage. The US rescue package is now already worth around 10% of GDP. The blow to output and to tax revenues could also be larger. At least a few economies are likely to find themselves with debt loads well in excess of 150% of GDP. Readers beware, we will be in the most severe economic recession ever. This is going to be really really bad. Fiddle while Rome burns When Rome burned, emperor Nero allegedly played his violin. While this obviously cannot be true, the attitude and mood in the legal industry somewhat reminds me of this image. Our researchers have contacted a number of elite law firms across jurisdictions and almost invariably managing partners claim that their firm is still doing great. Despite the crisis and working from home, they claim to see no substantial dip in billable hours. Observing legal media across multiple jurisdiction seems to support this image. Obviously there is some editorial content around the virus and having to work from home, but for the most part it remains business as usual: great M&A deals and successful lateral hires. On LinkedIn, law firms across Europe still celebrate their rankings in Chambers. While the economy burns, law firms keep playing the violin... It is time for a very loud wake-up call Last week I promised to help you prepare for the economic effects. Over the weekend I have urged you to put in place wartime leadership for your firm. It is high time for law firms to come to grips with reality and to prepare for a MASSIVE economic crisis unlike anything you have seen before. Therefor it is important to move beyond your daily Corona Virus Legal Updates and focus on what is to come. (By the way, do you have any idea how many -almost identical- Corona Updates the average client is receiving just from law firms?) First things first: cash-flow! Like any other business, law firms need cash to pay for their monthly costs. We call this Operating Expenditure (opex). Your opex consists of Direct Costs (the red rectangle), these are the salaries and bonuses of the fee-earners (partners not included) and the Indirect Cost (the yellow rectangle) as illustrated below. Characteristic for law firms is that opex are fixed, it does not vary according to production. Law firms need the roughly same amount of cash every month to meet their financial obligations. In order to meet these obligations, you need at least an equal amount of money coming in from clients paying their invoices. The first thing you need to do right now is to make a cash-flow analysis and projection. In order to do that you need to make an inventory of: a) Invoices that are still outstanding and likely to be paid. b) Billable hours produced, but not yet invoiced to the clients. c) Ongoing matters and the future billable hours still expected (realistically) d) Realistic pipeline of new mandates e) Your firm's financial obligations per month (projected) Based on this inventory you have a pretty clear picture on how much money might still be coming in. Now you have to factor in at what point in time this money realistically will be received, bearing in mind that clients will extend their payment term and some clients might not be able to pay at all. The cash-flow analysis might be your most important indicator to monitor. You need to keep on top of this and do a new analysis based on the most recent data every week. Second: your bottom line Profit is an opinion; cash is a fact. That is why we emphasize cash-flow before profit margin. However, for law firms profit margin equals partner compensation and this is always a super sensitive topic. We know the economic slump will depress demand and slow client payments, but don’t know when it will kick in, how bad it will get, or how long it will last. Once partners will start to realize, just how bad things might be, they will start to feel anxiety about their income. Within a matter of weeks/days from now law firm leaders will be under pressure from partners to take all necessary measures to protect the income of the partners. At the time of the 2008 financial crisis cutting costs was pretty easy and law firms turned to their usual playbook: they made some staff redundant, skipped planned investments, scaled down on marketing, tried to renegotiate occupancy and other costs, reduced recruitment and raised the quality bar for lawyers, firing those who did not meet the new threshold. Reducing the number of equity partners at the same time, most law firms managed to limit the damage to partner income. Some firms even ended up with higher PEP during the crisis than before. The problem now is that it following the same playbook once again will not have the same effect. We did it all a decade ago, today there is far less left to cut. There might be a big elephant in the room The average profit margin for law firms is around 35%, while some elite law firms are around 50%. This means that between 50 and 35% of all revenue is allocated as compensation for the partners. Reducing that number would have more impact on the available cash position than any other measure. Discussing the possibility of temporary reducing partner payments to help the firm through harsh times has until now been considered a taboo as it could open Pandora’s box. We have written an entire book on this topic: Death of a Law Firm (2015). Partner compensation is a complicated multi-faceted topic that goes way beyond what can be covered in this article. So for now it seems wise for law firms to remain on the side of caution and reduce monthly payments to partners. This would be preferable to a capital-call at a later stage. It seems only fair that also partners show that they are prepared to bear part of the burden. Just dismissing some associates and staff and negotiate a lower rent does not look good. When the whole economy is collapsing, we will all be better off if we share the impact. We should all behave like decent people and not put our individual interests before those of others. We are here to help TGO Consulting is there to help you navigate the crisis. We are currently writing a book on this topic that will be finished by end April. This book will be made available for free to all our clients. We will also continue to publish weekly articles on topics that are most relevant to you right now. Our experience with law firms in China gives us a two month head start in knowing what best to do. There will however remain many important unknowns and things can change really fast. This is where our unparalleled creativity has proven to be extremely valuable. We have a proven track-record to find effective solutions faster and better than anyone else. In the meantime, our TGO Consulting Research Team keeps to monitor the state of the economy literally 24/7 to ensure that our approach always remains fact-based. Please do not hesitate to contact us to find out how we could help your firm navigate these challenging times.

No need to highlight that we are experiencing unprecedented circumstances right now. Not only are we facing a potentially life-threatening virus that is sweeping across the world causing an ever-increasing number of people to die before their time. We are also drawn into a mammoth economic crisis. We have seen economic crisis before, but never in history did we have to restart the global economy after it had come to a complete standstill. Mankind is facing a historic challenge. Our societies, our economies, our businesses and all individual people around the world are facing an imminent existential threat. The primary focus is on the medical situation, trying to prevent as many unnecessary deaths as possible. Whole populations are locked-up and afraid. The optimism that this will soon be over, will at some point fade away. People will start to realize that they might lose loved ones, their jobs, their homes, their businesses. This is a wartime situation. So, it is clear that for the foreseeable future it will not be business as usual. It is worrying to see that a number of law firms assumes that once ‘working from home’ is properly organized the firm will find a new normal. It is also worrying to see that there are a number of law firms that see the Corona virus as a marketing opportunity. Clients literally get inundated by Corona information bulletins and with emails ensuring them that even working from home, their law firms will remain available. Some law firms are already contemplating laying off associates and staff and others are sobbing that M&A transactions are cancelled. All these actions are reflexes that can be associated with the urge to get back to ‘business as usual’ as soon as possible. This will not happen. As every law firm partner knows, the managing partner is often not the de facto leader of the firm. Earlier I have published an article outlining that there are ‘4 Types of Managing Partners’ (see graph). The inconvenient truth is that not every managing partner is a leader and that a ‘peace-time managing partner’ may not be suitable as a ‘war-time managing partner’. As we are entering into turbulent uncharted waters, law firms will need leadership that has the ability to lead and unite. Law firms need leadership that is capable to find new and creative solutions and reinvent the law firm at an unprecedented pace. Law firms need leadership that is capable of taking decisions in times of great uncertainty. Law firms need leadership that can keep the partnership together but is not a puppet or a figure of compromise. Law firms need wartime leadership. Being strategy consultants to the world’s elite law firms, we know law firm leaders pretty well. It is our estimate that about 50% of all present managing partners would not be suited as wartime managing partners. That number is not at all surprising. Why would you need a wartime leader if there is no war? But now the situation has changed, for some firms the leadership and governance structure need to change.

The Spanish flu pandemic of 1918, the deadliest in history, infected an estimated 500 million people worldwide—about one-third of the planet’s population—and killed an estimated 20 million to 50 million people. It struck as World War 1 had just come to an end and it was followed by the post WW1 Recession (Aug 1918 –March 1919) and the Depression of 1920-21 (Jan 1920 –July 1921). This dark era was immediately followed by the ‘Roaring Twenties’, a period of great economic, technical and cultural prosperity. As the Corona virus rages through the world, we are forced to drastically change our lifestyle and the way we work. Social distancing is the new norm. No more handshakes and maintaining an interpersonal distance of 2 meters. Bars, restaurants, cinemas, museums and more have been closed. Airlines are grounded, borders are closed, and tourism is forbidden. Supply chains are disrupted, forcing factories to close. Financial markets are in turmoil as share prices continue to drop at unprecedented rates. On top of that we have Saudi Arabia and Russia engaged in a price war making oil drop below $30 a barrel. In an attempt to mitigate the devastating effects of the pandemic and the financial crisis, governments announce new measures, legislation and rescue packages on a daily and sometimes hourly basis. What should law firms do? The first thing to do is not to panic! Historic data shows that the impact of a recession on the business of law has always been very limited. After the 2008 financial crisis, revenue showed a little dip, but has steadily been growing ever since. There is a 99% certainty that all business law firms will survive. This cannot be said of any other industry. Even if the partners have to take a 10% pay cut, we will still be able to pay the mortgage for the second home. So, don’t panic over the business, focus on your health and the health of your associates and staff instead. In response, many law firms have turned to partial measures, including voluntary and rotating remote policies, to stem transmission and protect their talent. But simply reducing the number of attorneys and staff in an office isn’t enough according to infectious disease experts. So, work from home! Working from home. Most law firms already had an existing possibility for their lawyers to work remote. However occasional working from home or from a hotel room is very different from structurally working from home over a prolonged period of time. This time it is not only the lawyers, but also staff and secretaries that have to work remote. Where all lawyers will have an office laptop, most staff and secretaries will not. Also access to broadband internet might not be equally available for everyone. It goes without saying that everyone working from home introduces new substantial cyber security risks. Some of these are already actively being exploited. So be vigilant. After you have these basics covered it is time to focus on workflow and communication. It is important to understand that working remote incidentally, is very different from doing it structurally for a long period of time. An office provides workers with a structured workday, a social network, short and informal communication, the possibility to easily brainstorm or bounce ideas. Working from an office will make it easier to separate work from private life. Working from home could not be more different. Today many homes will be far from quiet as the whole family will be at home. Depending on their age, personality and number children will distract and demand attention. It could also be tempting to constantly check the news or do some domestic work. Being ‘locked up’ for a prolonged period of time with your family might create tensions. These will come on top of the anxiety and stress over the virus and the health of friends and relatives. In order to create a virtual law firm where everyone works from home, we suggest the leadership of the firm to create structure and create a sense of belonging. Our experience with Chinese law firms over the past two months has learned that it is important for the leadership to be visible. A tool that works particularly well is to record a short daily video message for everyone. For individual partners and their teams, we suggest to have 3 conference calls every day: one early in the morning, one at lunchtime and one at the end of the day. This creates structure and gives a sense of purpose and belonging. We would suggest to include the secretaries in the early morning call to give them an idea of what will be expected. Creating structure and a good workflow have proven to be very important. Some staff like facilities and catering will not be able to work at all and might be sent home. Please don’t forget these colleagues. If you need help and advice how to create structure and create a sense of belonging, please let us know. We will help you - also if you are not our client - at no charge. Please do not hesitate to reach out. Consider stop putting your clients’ interests first. There probably is not a single business law firm on the planet that has not released by now an avalanche of Corona Bulletins. It is the same knee-jerk reaction as with Brexit and GDPR. The thing is that Corona is not a marketing opportunity. It is not even a legal issue. We are facing a major existential crisis. People and companies and even economies are fighting for their lives. There will be no outcome where one party wins, and the other party loses. What we need right now are creative solutions that will spread the burden and the pain. Lawyers are primed to look after the best interests of one party: the client. A lawyer is not supposed to take the interest of other parties into account. If we only keep focusing on our clients’ interests, we might accidentally help destroy the economy along the way. This is the time for law firms to rise. In the economy everything is interconnected and interdependent. Never in history has there been a situation where the entire global economy has come to a (near) standstill. This is not the time to litigate on the execution of a contract. This is not the time to terminate a lease if payments are not made in time. This is not the time to hold someone responsible for the damage caused by the effect of the virus. (in the US already, lawsuits have been filed against cruise companies and even against the state of China) This the time to put the common interest before the interest of the individual. This will require a different mindset from lawyers. We will have to start cooperating with other disciplines and experts and to find new, creative and fair solutions that will create the best possible conditions for as many companies as possible to navigate through these harsh times. We need Swarm Intelligence to get through the darkness or the night and find our way from dusk to dawn. If we do not act selfish but care for each other (also in a business sense) we might get a new ‘Roaring Twenties’ once all this will be behind us. The coming weeks Your Friday Insight will be focusing on topics that will help law firms navigate the crisis. Next week we will look into how to prepare for the economic effects

Oscar Wilde, the famous Irish poet and playwright (1854-1900), is credited with the quote “The cynic knows the price of everything and the value of nothing.” This article is not about Oscar Wilde, nor is it about cynics. It is to bust the myth that buying is a rational process. It is a common misconception that given a choice, people and companies will go for the cheapest option. Typically not. When talking with law firms, we frequently can feel the frustration that the only thing clients seem to care about is price. Countless are the experiences of partners having to jump through many hoops of procurement, having to provide all sorts of information with no clear purpose, only to be told at the end of the process that some other law firms had a cheaper offer. The process of panel selection can be extremely disheartening and frustrating. For a company only 1% of all costs is legal costs We have many conversations with CEOs, CFO’s and GCs. Do you know what percentage of the total cost of a big international company would be legal costs? Obviously, it varies between sectors and companies, but typically it would hover around 1% of total costs. How happy do you think the board would be if the GC could reduce this 1% to 0,95%? In all honesty, they wouldn’t care. Nor would the shareholders. In reality it would be very unusual for a GC to be under pressure from the board to negotiate lower rates with the law firms. GCs however are constantly under pressure to reduce headcount, as this is a metric that CFOs and shareholders monitor. As is shown in the TGO Value Matrix© there is a direct relationship between the value perception and the return on investment. Companies do not mind spending money on lawyers as long as it helps them make a profit or prevent a loss. That is why companies are prepared to pay 10 million to the lawyers that help them to close the deal. In a 40 billion takeover, 10 million is not a big deal. The client would not be more happy if the legal cost was 9 million or unhappy if it was 11 million. It is simply part of the investment to get the M&A done and increase shareholder value. However, as we all know, the same GC who did not care about one million more or less during the M&A could be on the phone for 15 minutes complaining about a €5000 invoice for a simple employment matter. It is about the lawyer’s contribution to the bottom-line. Not about the absolute price. People hardly ever go for the cheapest alternative When at school you were probably taught that capitalism encourages competition and that competition will lead to lower prices. Governments rely on this doctrine when they decide to privatize energy companies, health care, railways and so on. History has learned that competition on the long run does not lead to lower prices. Also, in the legal market, competition between law firms does not lead to lower prices. There are no ‘undersellers’ among business law firms. Ever since the 2008 financial crisis, GCs have tried to get the prices down. Statistics clearly show that despite these efforts, they ended up paying more as there is no real competition on price between firms. In part it is the clients who are to blame. It is deeply rooted in human nature to make irrational decisions as it comes to the things we buy. Have a look at the picture above. As you can see, it shows 6 hammers that vary in price between €4,98 and €31,90. The shape, weight and functionality of all hammers are exactly the same. They will all do the job equally well with no difference whatsoever. Even buying something as basic and simple as a hammer is not a rational process. If it was, there would only be one hammer: the one that costs €4,98, because no one would buy any of the others. This example illustrates on the one hand that competition does not lead to lower prices and on the other hand that most people do not go for the cheapest alternative. This holds true for almost any product or service you could think of. The vast majority does not buy the cheapest car, shirt, pasta and so on. People pay irrationally for brands There is a great example involving a humble cookie. Oreo cookies are popular, cheap and readily available worldwide in supermarkets. The typical price of a package of 14 Oreo cookies is around €1,25. On 18 February 2020 a fashion brand named Supreme launched its own version of the Oreo cookie at a price of €8,00 for a package of 3. That is 3000% more expensive than the normal Oreo. Despite the red color the taste and composition is exactly the same. It is literally the same cookie in a different color. Further to my argument: these Supreme Oreo cookies have since been offered on eBay for prices as high as $4000. Who will now still insist that prices are a rational thing? It is not about price, it’s about value So, what is the big picture? For companies in general the legal costs are insignificant, and it makes little sense to go through great lengths to bring these costs down. Yet it is a fact that companies are complaining about the costs of lawyers. In most cases this has less to do with the absolute costs than it has to do with the value perception. As long as the company has the feeling that the legal costs are contributing to their bottom-line, there is rarely any complaint. This changes if legal is just cost and does not contribute to profitability. Even is the most rigorous procurement processes clients do not only look at costs. When crunching the numbers that lead to the TGO Value Matrix© we found a 10% plus or minus deviation depending on the strength and quality of an existing relationship. This means that a law firm which had a very strong existing relationship with the client could be up to 10% more expensive than an average firm with a neutral relationship. A firm without any previous relationship would have to charge 10% in order to be perceived as good value. On top of that we found a second deviation. Law firms with an extremely strong brand reputation (quality, not name recognition) could also charge up to 10% more for the same mandate (compared with an equally experienced and capable law firm with a not so strong brand). This resembles the example with Supreme and the Oreo cookies. Practical follow-up: Our book Data & Dialogue, a relationship redefined (worldwide available on Amazon) contains a lot of valuable information and insights on this topic. TGO Consulting also offers one-day pricing workshops to law firm partners and a workshop on buying legal services for in-house departments. Should you be interested, send an email to Lisa at hakanson@tgo-consulting.com

First published as the feature article of the March 2020 issue of the ACC Docket. The Association of Corporate Counsel is, with more than 47.000 members in over 90 countries, the largest organisation of in-house lawyers in the world. ACC members can read the original article here Understanding the Business Means Understanding How the Company Makes Money Over the past couple of years, the mantra for corporate counsel has been to understand the business. This seems to be a late reaction to the common practice over a decade ago when the legal department was often seen as the “department of no.” In those times, commercial people in a company tried to avoid legal as much as they could, as the project would probably get stranded or considerably slowed down at best. Much has changed since! In general, when lawyers state that they need to understand the business, they refer to the products the company delivers or the sector in which it operates. For lawyers it can be hard — sometimes nearly impossible — to understand the products their company produces. How could a lawyer ever understand complex industries such as the chemical industry, the pharmaceutical industry, or the electronics industry without years of study? Of course, the lawyers working in such highly complex sectors do know the common contracting practices, how to protect intellectual property, and so on. But this does not constitute “understanding the business.” Companies don’t have legal issues; they have a business to run. Understanding the business means that lawyers need to better understand how their company makes money. To be seen as business enablers rather than a box that needs to be ticked, lawyers should assess the complexity of each issue, its contribution to profitability, the potential lost opportunity costs, and the level of expertise needed before starting to work on any matter or request. Moving beyond first in, first out Today most corporate counsel are assigned to a business line, whether it’s a product or a geographical location. In many instances, a lawyer is part of a “product team.” This ensures short lines and good communication between the lawyer and the business. In addition, many corporate legal departments are under constant pressure to reduce headcount, so it is not unusual that the in-house team is swamped with work. Most corporate counsel are in a certain mode: They provide a service at the needed pace. If a question lands on their desk then they just get on with solving it because that is their job. The order of priority is often based on the urgency communicated by the person making the request. Usually the one shouting the loudest or being the peskiest in pursuing answers will be served first. This is because they are very good at painting a picture of how much is riding on getting this matter dealt with yesterday. Polite requests tend to end up at the bottom. This system, however, doesn’t take into account what a legal issue is worth to the business in comparison to all other issues waiting to be handled. This approach also doesn’t consider who would be the best person to handle each issue based on workload and expertise. The following model can help ensure that the issues most contributing to the business can be done first at the right level of competence. This model can also help law departments unlock how to evaluate each issue from the eyes of the business, and at the same time, get the most suited person doing the job, which will potentially release a tremendous amount of value. Assess the complexity of the issue When a need for a legal service arises and lands on the desk of a corporate counsel the first step is to determine if the request can be solved in fewer than 30 minutes. A counsel receiving a phone call from Dominic in the sales department should be able to assess whether it is a relatively simple question which he or she can answer in the next half hour. The reason to do it this way, instead of telling Dominic he must turn straight to a work allocation center or receive a queue number, is that nobody benefits from turning service into a bureaucratic circus. Service to the business is still the first priority. Achieving a 100 percent efficient resource allocation scheme is not a goal in itself; it will just lead to frustrations. An inflexible system fails because of growing disconnect and disconnection. A more complex issue, where it is clear it will take much more than 30 minutes to provide an answer, should be handled differently. For the legal department to truly serve the company in a way that adds the most value, it is crucial to take a look at each matter to first determine the level of priority and the right person to deal with it. Follow these three steps to determine profitability, then the cost of lost opportunity, and, finally, the level of expertise required. Step 1: Determine profitability Issues contributing the most to the bottom line of the company have priority over issues that contribute less. In short, the more profit at stake, the more priority a matter will get. This means a corporate counsel needs to assess the monetary value of a legal matter. This is where understanding the business becomes essential. Understanding the business is usually understood to be about industry sector expertise or knowing what the company produces, how this is priced, and who buys it. However, as stated earlier, understanding the business goes beyond this: It is about understanding business economics, how the company actually makes money, and how any legal issues affect this process. Companies are more concerned with opportunities, cash-flow, and profit than they are with costs. The direct costs of a legal matter are often not the most relevant economical part for the business. On the simplest level, if an issue arises where a litigation might be in the cards, then the calculation should be made as to how this will bring in money — or prevent a loss — taking into account not only the direct legal costs to the business but also the effect in terms of revenue and cash-flow. To illustrate this, imagine the real estate lawyers in the in-house legal department of a company. Two issues land at the same time: the business is asking for an analysis of the risk allocation for a new parking garage and a review of a contract for maintenance of all elevators that will be outsourced to a new maintenance company. If you don’t have the resources to deal with both issues at the same time, which one do you do first? In order to decide, you first must dig a bit deeper. Say that you will discover that the parking garage will be a paid parking garage. This means there is an opportunity for the business. The sooner a money-maker is ready, the better. Of course, there are knock-on effects of every legal issue, but if there is no danger to life or immediate and sizeable penalties for not quickly having the contract for maintenance of elevators in place, then the parking garage issue should get priority. Determining the dollar value and priority of a legal issues is not what lawyers are usually trained to do. Lawyers typically do not think about their work in monetary terms, they aim to deliver a watertight legal solution. But practice makes perfect. Over time, after enough practice, it should be a knee-jerk reaction to see the monetary component of any legal issue. Learning how to quantify it, and applying it routinely, helps to add value to the business. The same thing goes for risks. In many cases, quantifying the risks and translating that value into dollars isn’t especially challenging. Step 2: Determine cost of lost opportunity If you are evaluating the contribution to the bottom line of a legal issue, then this will result in an understanding of how much it is worth to the business. This doesn’t mean, however, that the issue is necessarily a priority. To determine if an issue should be dealt with before other issues so that we can have our corporate counsel working on the right matters in the right order, we need to consider another factor: time. A matter is often perceived as urgent when there is a deadline looming or when colleagues are hindered in their work until the issues is solved. But urgency from the perspective of the business most often comes down to the simple adage “time is money.” Time might often be the most crucial contributor to the bottom line of a company. If your company has made investments in a project or a new product, which is halted, then every day means lost turnover while still carrying the cost of finance. If the delay continues, the chances that a competitor catches up might mean that not only all potential future income tied to the project is lost but also the entire investment. Understanding the monetary impact of time is important. What opportunity will be lost for the business by not dealing with a matter straight away? For a company, the speed to market of a product, service, or endeavor that is set to generate income is often as important — and in digital businesses more important — than perfection or precision. Legal work connected to the creation of an autonomous car might not seem that urgent since the car will hardly be here tomorrow. But if the time to market is three years then issues better be resolved now or the product launch will remain three years away until a competitor has taken the envious position of being the first to enter a market. A decreased speed to market can hurt tremendously in terms of lost opportunity. A legal issue can have a part in delaying the business and corporate counsel should know the cost of delay. Let’s take another example: Let’s say you are a lawyer in the fashion retail business and this week you are faced with dealing with a dispute with a supplier because a significant order had been delivered late. At the same time the business wants you to look at the acquisition of an exclusive licensing agreement to use an entertainment character on your brand’s clothing. It would be tempting to deal with the dispute because lawyers tend to find contentious issues the most pressing. However, the delivery has already been made, and apart from delivering damages or a discount, the dispute will not generate one cent more in turnover. The licensing agreement, on the other hand, does not only present the opportunity to generate revenue, it is also very time sensitive. The market is a fickle thing and being there first can make or break a new endeavor. Not being able to do something is usually the most common impactor on the bottom line. Instead lawyers tend to focus on quantifying the impact of continuing to do something that might have adverse consequences. But even here, the risks are seldom quantified. The penalty for non-compliance is usually well advertised by the law, authorities, or courts. Lawyers view their primary task as avoiding noncompliance. When the General Data Protection Regulation (GDPR) was announced in the European Union, corporate lawyers created task groups and freed up resources to cover the wide spread of relevance the GDPR could potentially have in all lines of business. For most companies at that time, the consequences of not being 100 percent compliant with privacy policies or websites was in fact clear and easy to quantify. The potential fine, if discovered and if enforced (and those were two big ifs in the first year following the implementation of the GDPR), is clearly stated in the directive. The cost to the business of the issues that were not assigned the same resources or priority might have been far greater. Step 3: Determine expertise level required The third step is about “horses for courses,” a British proverb that means different people are suited to different things. Just like outside counsel, in-house counsel have an hourly cost structure. If we appreciate the hourly costs with every action taken, and how we should apply our time to the right tasks, each corporate counsel will drive more value for the organization. But this is not only about the cost of resources, it is about the cost to the business when issues end up on the wrong desk, either because the counsel is overqualified or because she is not experienced enough. The work typically ends up on the desk where the request is first received. The work will get done as quickly and as well as possible without considering if someone else is more suited, has more time, or if other tasks have higher priority. If a senior corporate counsel is busy with matters far below his or her competence level, just because the issue happened to have landed on his or her desk, then it is a waste of resources. If a senior in-house counsel is stuck working on issues that can be done by a junior lawyer simply because the request landed there first, then this is preventing the same counsel from taking on the tasks that few others can do. Maybe those tasks are even being sent needlessly to an outside counsel. This all sounds pretty obvious, but in reality many legal departments will find it hard to implement some form of ticketing system or other centralized work allocation in order to ensure skills are used at the right level and that some are not experiencing work overload while others have little to do. This is because corporate counsel, just like partners in law firms, value autonomy. The idea that someone else would have a say in how their daily work is structured would meet resistance in the initial phase. But ensuring that skills are being used in the right place by implementing some form of procedure is really the only way forward in an increasingly busy department with resource constraints. In-house teams have valuable resources, but they are not always used in the right way and are not always made to feel appreciated. An optimal workflow is key when time is precious. Therefore, the required level of expertise must be a part of any assessment that a corporate counsel or legal department should make regarding every legal issue Unlocking value To sum up and make this three-step model clear, we can compare the legal department to a train station and a legal department’s work to an incoming freight train. The carriages need offloading and the goods further handling. The way work is being handled in many legal departments today is that they start with carriage number one and proceed to carriage number two when ready, and so on. But this makes absolutely no sense if we do not know what is in each carriage and are able to determine the value of it. Having a business-focused guideline when establishing the level of priority among work and the right person to deal with it is not only important from a value creation point of view, it also makes for a happier work environment for today’s hard-pressed corporate counsel. The corporate counsel’s client is the business. Understanding the business is not about knowing your company’s market but how your business makes money. Appreciating the business economics will lead to a more efficient and better utilized legal department that has a more egalitarian workload with people who feel challenged at the proper level. This, in turn, will make the legal department and each corporate counsel more appreciated by the business where it really counts.

There were more than 3100 lateral partner moves among Am Law 200 firms in 2019. That is about 12 partners moving firm every working day. That would be more than one partner every working hour. So, during the time it takes me to write this article there has been at least one lateral partner move among the AML-200 alone. If we would include the 200 biggest law firms from the rest of the world the number would almost be double. Partners being loyal to their firm, clearly has become a thing of the past. The whole lateral hiring circus has become an endless boulevard of broken dreams. We know from data statistics that less than one-in-five lateral hires turns out successful. 80 percent turns out to be a disappointment to the hiring law firm or to the moving partner, and sometimes to both. Obviously, there is two categories of partners that move to another firm. There is the category of talented partners that think they see better potential to grow their practice at the other firm. The other category is the partners that have no future at their present firm and have been kindly requested to leave. This category makes up about half of all lateral moves. The looser from one firm is expected to become a winner at the next firm. For the law firms these huge numbers of lateral movements have become a bit of a curse. Of course, law firms welcome the opportunity to buy market share, revenue and profit by attracting a rainmaker from another firm, but they equally fear losing their own rainmakers to the competition. That is why most law firms have put non-compete clauses in their partnership agreements stipulating that partners owe the firm a percentage of their revenue as a penalty and/or must take a gardening leave. All this is about to change! Thursday 13 February 2020 the Washington D.C. Court of Appeals ruled that law firms have no property interest in hourly billed client matters. This case is about the question if former Howrey partners owe part of the revenue they have made on their Howrey clients after this firm went bankrupt in 2011, to the estate. But the verdict has a far wider reaching relevance: “A law firm does not have a ‘legitimate claim of entitlement’ to hourly-billed client matters because it is the clients who retain the right to control the representation,” Chief Judge Anna Blackburne-Rigsby wrote for the panel. ”A law firm’s belief that it will continue working on such hourly-billed client matters into the future constitutes no more than an ‘abstract need’ or ‘unilateral expectation.’” As a result, former partners have no duty to remit profits they earned at their new firms back to their prior ones, the D.C. court found. This verdict is widely supported by a total of 25 national and international law firms, as well as the ABA, the Association of Professional Responsibility Lawyers and the D.C. Bar Association. Your non-compete will probably not be enforceable There you have it. This court ruling confirms what we all knew already but always tried to ignore. Ultimately it is the client who decides. The client may choose to stick with the partner and follow him/her to the new firm or remain with the old firm and continue with a different partner handling their mandates. The ruling will likely render any provisions in a partnership agreement that could in any way obstruct this freedom of a client, as being void. Firms will not be allowed to send a partner on gardening leave and will not be entitled to part of their future revenue. The more high-level question is if a non-compete preventing a lawyer to continue working for a client would be valid in the first place. Law firms will have to come up with different forms of ‘penalties’ for partners who want to join the competition. This should however not be a problem. Clients should reconsider their position It is not only for the law firms that the huge numbers of lateral partner movements have become a bit of a problem. Also, for law firm clients it is has become a nuisance. Have you ever asked clients how they feel about partners entrusted with their matters moving firm? We have asked this question many times and universally clients tell us that they hate it! It invariably causes problems and costs. Some partners move to firms that are not on the panel. Often the new firm will have a higher rate. What about the other partners and lawyers who are still at the old firm, that have been involved in the client’s matters. A partner’s lateral movement is never ever in the clients’ interest. Here is my point. Why do clients still select law firms in the panel, if they, in about half of the instances, want to work with a particular partner. If the relationship between a client and a partner is so strong that the client will most likely follow the partner if he/she moves to a new firm, why not put this into writing? Engagement letters are invariably made between a client and a law firm. In about half the cases this would be wrong. In these situations, clients engage an individual lawyer, whom they want to work on their matters. If this is the case, this should be put into contact. The engagement then should be between the client and the lawyer, not with the firm. This engagement letter should then have clear provisions governing the situation if this lawyer moves to a new firm. All this is old school thinking Those of you who know me, will be aware that I truly believe in teamwork. I am convinced that both clients and law firms will be better of if the relationship is not limited to one partner. Clients need law firms to make use of ‘swarm intelligence’ to find smart and innovative answers to the clients’ questions. However, the way law firms are organized today, most incentives stimulate one individual partner to monopolize the relationship with a client. Most law firms are aware that this system will cost them money on the long run. There are invariably lots of issues around lateral departures, succession in case of retirement and young partners building up their own practice. For a law firm it would be clever to build many strong relationships between many of its lawyers and the client. This will not only mitigate the risks; it will also make the relationship much stronger. But as long as law firms keep thinking old school, their clients would be better off engaging a specific lawyer instead of a law firm.

September 2015 the United States Environmental Protection Agency (EPA) issued a notice of violation of the Clean Air Act to German automaker Volkswagen Group. We all know what happened next and ‘Dieselgate’ became a lawyer bonanza in its own right. Almost five years down the line the total legal costs (fines, damages, lawyers) for the car manufacturer have already mounted to a staggering 30 billion euros. Last week, on February 14, it was an article in the Financial Times that caught my eye. It read that Volkswagen had failed to reach a settlement with Germany’s largest collective lawsuit. Based on recently implemented class action legislation, the German consumer rights group VZBV (VerbraucherZentrale BundesVerband) had filed a lawsuit on behalf of over 400.000 private individuals seeking damages for the alleged value loss their diesel car had occurred. On 14 February VW had offered 830 million euros in settlement to the plaintiffs, but it had refused to pay an extra 50 million euro to the lawyers representing VZBV on top of that 830 million. Long story short: no settlement because the lawyers demanded 50 million in fees. 50 million in legal fees is a mind-blowing amount. If we would assume a blended rate of 330 it would take 100 lawyers each one-year full time on the matter to amass 50 million in legal fees. A little research on the internet seems to point towards a very small 2 partner law firm located over two small towns far away from the main German business centers. Taking into account the typical blended rates of law firms in that region, 330 euro would already be way above the average. Having only 10 instead of 100 lawyers it would take 10 years full-time for all lawyers to approach 50 million in fees. The diesel scandal only started less than 5 years ago. So, from a time-based compensation perspective 50 million surely remains outrageous. There is of course another way of looking at this. Percentage-wise 50 million would be 6% of the 830 million settlement. To place this into perspective let’s look at investment banks. For the Alibaba IPO the banks charged 1,2% and for Facebook’s IPO this was 1,1%. Obviously, the main sum was bigger, but the percentage is significantly lower than 6%. Even Wachtell Lipton, which is a mythical law firm in its own right and known for not charging by the hour, does not charge anywhere close to 6%. There is no escaping: from whatever perspective you look at this, 50 million in legal fees remains outrageous. It looks like someone it trying to get rich fast. Ambulance chasing on steroids. Let there be no doubt that in this case the individual car owners who signed up to the VZBV class action are totally free to sign away 6% of any compensation they receive to the lawyers. But then they have to pay the lawyers and not Volkswagen on top of the compensation. The way it is represented now is that the claimants do not want to fork out the money to pay their lawyers. No skin in the game Let me introduce you to the concept of having ‘skin in the game’ (explained in more detail in my book ‘Death of a Law Firm’ – chapter 6). To have "skin in the game" is to have incurred personal risk (monetary or otherwise) by being involved in achieving a goal. Someone with skin in the game risks a personal loss. If I invest my own money, I have skin in the game. If I invest someone else’s’ money I do not have skin in the game. A lawyer is someone who, in the end, by definition acts on someone else’s behalf. Although the stakes might be high, it is the client who bears the risk of failure. At most, depending on the fee structure, a lawyer will risk his or her compensation if the outcome is unsuccessful. Lawyers may act like being a high stakes player but in reality, as an individual, they have little to lose. If you as a person have skin in the game and invest a lot of money that you might lose, you are also entitled to big rewards. Things are different if you can only win and not lose. Under such circumstances a more modest and proportionate approach would be appropriate. The lawyers representing the plaintiffs in the VZBV case do not seem to have skin in the game. The worst that could potentially happen is that they did not get paid at all. As long as you have other clients and matters to work on as a firm, that should be a manageable risk. Also, from this perspective there is no rational justification for demanding 50 million in legal fees. The TGO Value Matrix© shows that there is a clear relationship between return on investment for the client and the value perception regarding the costs of legal. In general clients do not mind spending money on lawyers as long as it helps them make profit (or prevent a loss). In situations where lawyers have a significant impact on the client’s bottom line and where the number of experienced lawyers is limited, paying millions in legal fees is not seen as bad value. For example, when two large multinational companies merge with a deal value over 50 billion, paying 50 million in legal fees would not be seen as disproportionate (as historical data shows). But in the VZBV matter, a tiny local law firm representing individual consumers in a 840 million settlement is hardly the same as a global elite law firm representing a multinational in a very complicated 50 billion global cross border merger. The legal industry is not a lottery or a casino. There should always be a reasonable relation between value created for the client and the amount charged. Lawyers who want to bet and potentially make extravagant amounts of money should perhaps try their luck at the Baden-Baden casino.

No Country for Old Men is widely known for being the title of an award-winning film written and directed by Joel and Ethan Coen (the Coen brothers). The film was released in 2007 and has won no less than 76 awards on 109 nominations. The title is taken from the opening line of 20th-century poet William Butler Yeats' poem "Sailing to Byzantium". The lament that can be heard in this poem’s lines, is for no longer belonging to the country of the young. It is also a lament for the way the young neglect the wisdom of the past and, presumably, of the old. As a consultant and as an observer of the legal industry, I frequently encounter situations where the title ‘No Country for Old Men’ springs to mind. Like business in general, the business of law has predominantly been led by senior white males. Although the numbers are slowly decreasing, a substantial chunk of all revenue created in the global legal industry is produced by firms that are managed (board and executive committee) by white men who are 60-plus years of age. Increasingly this is becoming a problem. In their latest issue (February 6, 2020) The Economist published an article ‘What it takes to be a CEO in the 2020s’. This article points in a way at the same issue: the traditional white elderly male is ill equipped to navigate the future. “The nature of the job is being disrupted. In particular, CEOs’ mechanism for exercising control over their vast enterprises is failing, and where and why firms operate is in flux.” Most of the tools and techniques that have worked so well in the past, do not work anymore. Think of “Neutron” Jack Welch, who ran General Electric between 1981 and 2001, opening and shutting plants, buying and selling divisions, and ruthlessly controlling the flow of capital. There is absolutely no room for a Jack Welsh in 2020. New times ask for a new type of leader. If you do what you did, you get what you got About a year ago I attended a large legal market conference in China as one of the keynote speakers. Other speakers included Harvard professor Ashish Nanda and the well-known Richard Susskind. Part of the program was a panel discussion on the future of the Chinese legal industry by the managing partners of China’s top law firms. As the first commercial law firms only emerged in the 1990ties, many of the MPs where also the founders of the firm. Starting literally with nothing some 30 years ago, they undeniably had now achieved tremendous success. These MPs were all impressive and powerful personalities. Their discussion however made me feel sad. Based on their achievements they all strongly believed that their way was the right way, as they had a proven track-record. They completely failed to recognize that what had brought them where they are today, will not bring their firm where it needs to be tomorrow. Like the Chinese law firms, law firms in our part of the world have seen unprecedented growth. No-one being a partner in the year 2000 could imagine, not even in their wildest dreams, how much money a partner in the same firm would be making 20 years down the line. The increase in PEP over the last two decades has outpaced almost any other industry. Like the Chinese MPs, many MPs in Europe and in the US are convinced that their way is the right way. Turning a blind eye to apparent changes in the market and the needs and demands of the younger generation. Even in my own profession I see many retired managing partners setting up shop as law firm consultants. Invariably they try to replicate their ‘successes’ from the past. Almost invariably they fail. They attract business on their former experience or on the reputation their former firm. They don’t see that they were way overdue when they left, and that the world has moved on since. If you do what you did, you get what you got at best. More likely you will be doing worse. “OK Boomer” I doubt if many of you are familiar with the term “OK Boomer”? OK boomer is an internet phrase that went viral in 2019. It is used by young people to write off, usually to a humorous or mildly mocking effect, opinions that are perceived as emblematic of attitudes of baby boomers and older people more generally. These attitudes include a resistance to technological change, inclusivity of marginalized identities, and a belief that the problems of youth are due to their laziness or entitlement. If you have children in the age between 15 and 25, ask them. They will surely be able to explain what it means. The business of law is standing at the dawn of an era of unprecedented changes. While for sure many things will remain the same, what changes will be fundamental. You will need to ask yourself the question who is best positioned to navigate the firm through these unknowns. Is it the person with the most experience and the most impressive track-record, or is it the one with the most open and creative mind? Is it the person who will have no stake in the future he/she is creating, or is it the one who’s own future it concerns? Is it a proponent of the past or a herald of the future? “Hey Jaap, is this not age discrimination?”, I can hear you ask. The answer is: no, it is not. The surprising thing is that it has less to do with age, than it has to do with a state of mind. The problem lies not in being of a certain age. It lies in relying on what worked in the past, instead of being curious for what will work tomorrow. The aforementioned article in this week’s Economist puts it like this: “Mastering the tricky, creative and more collaborative game of allocating intangible capital is essential. A CEO must be able to marshal the data flowing between companies and their counter-parties, redistributing who earns profits and bears risk.” For law firms things are not fundamentally different. Leading a law firm is no longer territory for old men.

This article was first published on Bloomberg Law. You can read it HERE We are at the dawn of the 20-twenties, and although time is a continuum, the turn of a decade is still an occasion that invites to look forward at what we will see happen over the next 10 years. For the legal industry the post-recession period between 2010 and 2020 has largely been driven by fear. Despite the fact that revenue and profits kept growing, law firms were wary of the disruptive effects of technology, competition of new entrants in the market, and were complaining about experiencing pressure on price from clients. Whether or not we are floating toward a new recession, and despite the collapse of the concept of one undivided global trade economy, I am very positive on the future of the legal industry over the years to come. Below are three important changes that I see coming to the business of law and all three provide great opportunities for creating better law firms that are a fabulous place to work and that are able to develop even closer relationships with clients. 1. ‘Value’ Will Be the New Paradigm Over the past decade, the price of legal services has been high on the agenda. Clients tried every trick in the book to get a better deal and law firms have cleverly pushed back. This resulted in countless seminars, articles, and books on pricing of legal services, professional procurement, professional vendor management, alternative fee arrangements, and much more. The result of all these efforts is that prices steadily kept going up, enabling law firms to grow revenue and profitability in a market where demand has remained flat over the decade. This clearly is not sustainable, and clients remain unhappy. So why is it that so many very clever people have not managed so solve this conundrum? The answer is surprisingly simple: because the discussions have focused on the hourly rates and time is not the right measurement method in the first place. Whether or not you perceive a purchase as “good value” has noting to do with price. In other words: low price does not equal great value. It is much more complicated than that. For legal services price is linearly related to time. This assumes the premises that more time also linearly leads to more value. This is pure nonsense. On top of that lies the assumption that each increment of time will create the same amount of value. This is obviously not the case: one hour spent on litigation strategy does not have the same value as one hour listening-in on a multi-caller conference call. The former could have tremendous added value and the latter close to none (who does not continue working on the computer during such calls?) Where there is no relation whatsoever between time and value, data analytics shows that there is a strong and direct relationship between value perception and return on investment. Companies do not mind spending money on lawyers as long as it helps them directly create profit (or prevent a loss). As the value matrix below shows, value also will depend on the number of available lawyers that qualify for the job. In the years to come, both lawyers and clients will gradually embrace value-based pricing, and this will lead to higher client satisfaction, better understanding of the clients’ business, and stronger relationships between clients and outside counsel. 2. ‘Swarm Intelligence’ Will Become Standard At most law firms today, partners are primed to compete with each other for clients and matters. Regardless of the profit distribution system, each partner will need the business. So, if there are two M&A partners, they will both want to land the merger. Over the past decade lawyers have become increasingly specialized and the areas of specialization have become more and more niche. Within a firm, the lawyers are organized in practice groups according to their areas of specialization. So, we have lawyers who compete, organized in silos, and having an increasingly smaller scope. The world in which their clients operate has over the same decade become increasingly complex and connected. Companies face permanently changing political, regulatory, and technological challenges. Many industries and businesses must completely reinvent themselves to survive. This calls for a different kind of advice from their outside counsel. The problems have become too complex to put into one box and are often uncharted territory that goes well beyond the ability of one individual to solve. In order to keep up with the needs of their clients, the law firms need to break down the silos, introduce a more generalist career path for some lawyers and learn to fully tap into the combined knowledge, problem solving creativity, and intelligence of everyone in the firm. We call this “swarm intelligence” and it will become the new normal in law firms. The days of individually competing partners, operating in silos are numbered. Collaboration and teamwork are the way forward. 3. Outsourcing of All or Most Non-Core Activities In order not to risk losing their most successful partners (and attract new talent), law firms must maintain their profitability. Profitability is of course not only dependent on revenue, but equally on costs. A characteristic of law firms is that costs are fixed in the short term and are not influenced by revenue. In other words: producing more revenue does not lead to higher costs (except for bonuses) and making less revenue does not lead to lower costs. Lowering the fixed costs or making costs more flexible will be hugely attractive and will directly have a leveraged impact on profitability. Over the coming years we will see law firms shrink their core group of lawyers to only the best, who have most added value, and are fully occupied most of the time. High-volume, low-value work will be largely outsourced to mid-tier law firms and/or alternative legal service providers. Non-essential lawyers will increasingly be hired through a flexible work pool. When it comes to non-legal staff functions, there also is a strong business case to outsource. Not only will it become increasingly difficult for law firms to attract the non-lawyer top talent they need, not having all staff on very expensive premises will also reduce occupancy and office costs. Just think about the IT department as an example. Professionals with high-level IT skills are in high demand (even Silicon Valley struggles to find the right talent), so what IT professional in his or her right mind would consider working at a law firm an attractive career move? Outsourcing has already started with IT departments, but also other functions such as marketing, human resources, finance, and facilities will follow. The law firm of the future will have a very lean staff and most services outsourced to professional third parties. The decisions carry some risk, but also big rewards.

Two-and-a-half years ago in Silicon Valley, a new and revolutionary law firm concept was presented to the world. Atrium launched June 2017 as a startup-focused law firm that would offer a combination of highly experienced lawyers and clever (yet to be developed) technology. The company would create custom tools that would add speed and transparency to the delivery of legal services. The goal was to kill the “billable hour.” San Francisco’s Atrium offered two fixed-fee legal services: Atrium Counsel, a $500-$1500 monthly subscription that allowed start-ups access to a dedicated experienced lawyer for ongoing legal needs, and Atrium Financing, an end-to-end flat-fee advisory service to start-ups throughout their venture capital fundraising process. As a start-up Alternative Legal Service Provider Atrium was widely lauded for being disruptive and innovative as it combined teams of real lawyers and technologists working in tandem, along with automation of certain processes. After burning $75M Venture Capital, little over two years down the line, on 14 January 2020, Atrium announced that it would lay-off most of its lawyers. Atrium has decided to move away from legal work and to focus on non-legal professional services for startups and founders instead. Atrium Law suddenly is not a law firm anymore. This article is not about ‘Schadenfreude’. It is far more interesting to see why Atrium failed. It turned out that the combination of real lawyers and new technology had not been a lucky one. Building a technology powered law firm from the ground up and at the same time proved to be a hard nut to crack. According to one of Atrium’s founders “lawyers speak a certain language; engineers speak a certain language”. There are countless examples of new law firms that became very successful. Building a successful Legal Tech company is already more challenging. Building then both at the same time seems to be a bridge to far. Partners that are lawyers run their law firm very differently from engineers building a software company. In my opinion the problem with Atrium is more fundamental than just ‘speaking a different language’. For me Atrium and other ‘disruptors’ in the legal market are starting at the wrong end. The business of law is not about technology. When someone seeks advice of a lawyer, they are primarily looking for a human being with whom they can discuss their issue. It is comparable to when you are feeling ill. You want to consult a doctor in person, rather than fill in a questionnaire on a website. Like your doctor, a lawyer will listen to you, read between the lines and try to figure out what it is you want and why. Even very basic and simple legal products such as General Terms & Conditions involve many choices that you would like to discuss with a human professional. Clients want people, not technology. The global legal market is estimated at $800 billion. That may seem like a lot of money but remember that Walmart has an annual turnover of $514.4 billion. The entire global legal market is not even twice the size of Walmart. Still there is a disproportionate amount of excitement about the yet to be unleashed potential of legal technology and the disruptive effect this will have on the sector. So far, like Atrium, this disruption has not materialized. Gartner’s 2019 Artificial Intelligence hype cycle shows that many AI development are at the ‘Peak of Inflated Expectations’ or at ‘Trough of Disillusionment’. The Creation – Production Divide Concept© If you would make an analysis of what a lawyer does, you will find that there are two distinct processes going on. The first is what I call ‘Creation’ this comprises all aspects that are uniquely bound to the personal skills of the lawyer. These skills are based on all the experience the lawyer has gathered, his/her personality, IQ, EQ, creativity and so on. This set of personal skills is why someone prefers to work with a certain lawyer. It is the reason why a client would prefer one M&A lawyer over another (even though their legal knowledge is the same). Creation is a lawyer’s ability to come up with smart solutions. The ability to listen and understand what drives the client. The ability to negotiate, and the ability to say no to the client if needed. Creation is what distinguishes one lawyer from the other. It is the most important aspect of a client-lawyer relationship in any area of the law, on any level. I know employment lawyers who attract clients because they show empathy, have the ability to listen and can propose pragmatic solutions. I equally know top M&A partners who can skillfully steer complex negotiations in the right direction, know best market practice like no other, and have an unparalleled track-record in getting the deal done. All this has nothing to do with legal skill or knowledge of the law. Any academic would probably have as much, if not more, knowledge of the law. Yet I doubt of that academic could get the deal done. The second aspect that comes out of the analysis of the process of what a lawyer does is Production. This encompasses all that is needed to materialize the fruits of Creation. Production (or execution if you may) is things like document review, producing the necessary agreements and getting them signed and distributed. Compared with Creation, Production does not have much added value in the eye of the client. Production also is not what distinguishes one law firm from the other. I once asked a tier-1 Real Estate partner who has a very large high-end RE-transaction practice, if she could deliver the same product and revenue if she had to work with the team of a mid-tier firm that also has regular experience in RE-transactions. After some initial hesitation, the answer was yes. It is not the associates who make the difference as long as they are decent lawyers with experience in the field. Invariably this is where legal tech gurus and legal tech entrepreneurs get it wrong. Today and in the foreseeable future there is and will be no technology that can take the place of a lawyer. The core of what a lawyer is to a client is in the lawyer’s personal skills. ‘Creation’ is by definition a human thing. Much of ‘Production’ however can and will be done or augmented by technology. Despite the fact that this type of software technology is totally applied in the legal arena, it has little or nothing to do with the core of being a lawyer. What this technology can do is speed up the ‘Production’. It will make lawyers more efficient in execution. If one lawyer can get more work done in the same amount of time, we will ultimately need less lawyers. Not because the lawyers are replaced by the machine, but because the same output requires less human involvement. If Atrium would have been set up as a human-centric company, it might have had a chance to succeed. There still is a huge area to win for the first law firm that does not have to rely on the revenue from Production for its profitability.

It is January 2020; a new year and a new decade have started. It is estimated that almost half of all adults has made New Year’s resolutions. Statistically that should also involve about half of my readership. By far, the top three new year's resolutions are: weight loss, exercise, or stop smoking. Other frequent resolutions have to do with better money management and work-life balance. According to Forbes, the statistics on how many people actually follow through and accomplish their New Year’s resolutions are rather grim. Studies have shown that less than 25% of people actually stay committed to their resolutions after just 30 days, and only 8% accomplish them. One year later this whole process starts all over again, perpetual and without result. Why is this relevant or even remotely interesting, you might ask? Well, the fact is that there are striking similarities with lawyers and law firms. It is our day-to-day practice to advise law firms on their strategy. We know out of firsthand experience that the challenge is not to put together a strategy that is relevant and realistic, or to get the strategy through the partner meeting. No, the real challenge is execution. Moving from inspiration and identifying opportunities, to actual day-to-day implementation. Embracing a strategy is easy, putting it into practice is a different story. We all do crave ‘deus-ex-machina’ solutions In the Western world weight loss tops the New Year’s resolution charts. So, it seems that this is what most people want to achieve when they mentally start in January with a clean slate. Yet, a 2017 cover story in the New York Times Magazine, discussed research which found that people rarely lost more than 5 percent of body weight over six months, and much of that weight was gained back within two years. This indicates that most people fail to achieve what they want to achieve even though one year down the line they will try again. The main reason why people fail is that change is hard. It means moving away from routine patterns that you have ingrained in your day-to-day life for many years. There aren’t many things as hard and exhausting as changing a deep-rooted routine that we have developed. This is equally true for those aspiring to lose weight, as it is for a partner at a law firm trying to use better project management to better use the available resources. Will-power and endurance are energy consuming and in limited supply. The legendary boxing champion Muhammad Ali famously said: “Champions are made from something they have deep inside them – a desire, a dream, a vision. They have to have last-minute stamina, they have to be a little faster, they have to have the skill and the will. But the will must be stronger than the skill”. Indeed, the will must be stronger than the skill, but partners at a law firm are under tremendous pressure to perform. Handling this pressure sucks away all energy and none is left for change. That is why we all -lawyers no exception- crave for ‘deus-ex-machina’ solutions: a quick and easy solution from the outside that as by magic will solve the problem and make it disappear. The faster the problem goes away, the sooner I can get back to my trusted routine. No change without ownership It goes without saying that ‘deus-ex-machina’ solutions do not exist. There is no quick magical fix that will instantly improve your practice. Many law firms we consult have rendered a strategy before. The truth is that most of these documents have remained in a drawer because after the strategy was agreed upon, all lawyers returned to their business. Lawyers are busy, remember. They do not have time to waste on internal meetings. They have clients to attend to and business results to deliver. Rationally they buy into the new strategy, practically they don’t and expect management to take care of it. That is why we have an executive committee for, right? Wrong! Just as you cannot get fit by sending your partner to the gym, you cannot delegate the improvement of your practice to the managing partner or the practice head. There will be no change without ownership. Strategy is supposed to be boring When we sit with our clients during the strategy process, there is invariably an atmosphere of excitement, inspiration and hope. You can feel the energy almost literally tingling in the air. When we present and discuss the proposed direction and changes with the partner group, there usually is enthusiasm. On the one hand this obviously is great, on the other hand it can be dangerous. When they come together in a partner meeting, partners usually do not want to discuss all kind of complicated problems. It is much nicer to talk about what the firm will look like in the future and why this is a better world with better clients and better business. Partners, like people in general, prefer to be entertained (hence the success of TED-talks). On occasion I have jokingly said: “Now you are all super excited, but next year you will want a new Jaap Bosman, to entertain you again”. Strategy can be like New Year’s resolutions: the same process all over again and again, year after year, without ever achieving anything significant. The secret of a successful strategy is IMPLEMENTATION. This means that far more time and energy will need to go into lasting and consequent execution and implementation. It is impossible to achieve any material and relevant results unless you keep tirelessly pursuing the same goals for several years. Strategy has very little to do with being creative and inspired. Strategy is supposed to be boring. Once you have a relevant and realistic strategy, you stick to it. You execute it with determination, commitment and (if needed) brute force. It is about focus and execution, infinitely.

This long-read article is also available as a printable PDF by clicking HERE This being my first article of 2020, it might be a good moment to reflect on the past decade and to look forward to the decade ahead. For myself and for TGO Consulting, the past decade has been extremely good and exciting. We have gained a position as one of the leading strategy consultants in the legal sector. We published two books that quickly became influential best sellers. After having been nominated in 2018, we were awarded ‘Best Business Consultant America’ in 2019, a wonderful recognition to conclude the decade. Above all, we have had the privilege to work with some of the best law firms across all parts of the world. The twenty-tens were great, but we are even more excited about the years to come. As we all know, in general people tend to overestimate what will happen in the next few years, but underestimate what will happen in a decade. Based on our insights and experience we have identified five trends that we think will define the coming decade for law firms. Since developments do not happen in perfect isolation, you will learn that these trends are interconnected. As Niels Bohr (1922 Nobel prize for physics) said: “Prediction is very difficult, especially if it's about the future”. Nevertheless, we are convinced that these five trends will significantly change the legal profession between today and 2030. 1. Law firms embrace Cognitive Diversity In the last decade pressure has mounted on law firms to become more diverse and inclusive. There have been countless initiatives to empower women and minorities in law. Although the demand for more diversity is more explicit in the US, also in other parts of the world clients and society in general put pressure on law firms to provide equal opportunities for lawyers who are not the traditional white male with an affluent background. We think this trend will not go away, but it slightly misses the point. As we have outlined in an earlier article, gender or ethnicity are in the end not at the core of what makes diversity a necessity. Sure, gender and ethnicity are important as it comes to equal opportunities and non-discrimination. The most important argument for more diversity has nothing to do with politically correct behavior. Diversity is needed to provide a better product. Today’s law firms are too homogeneous. Most lawyers whether male or female, straight or gay are from the same social and educational background. They share the same believes and tend to approach things from the same perspective, regardless of their gender or the color of their skin. Law firms have become echo-chambers of a shared vision of the world. No explaining needed that this is risky. In the decade to come law firms will need to increase cognitive diversity. As the world around us becomes more complex, law firms need lawyers and other professionals with different backgrounds, different personal skills and above all different believes and visions on society. On 2 January 2020 the infamous Downing Street top-advisor Dominic Cummings published an article in which he argues that the Government should hire more “weirdos and misfits” as well as people that don’t have the traditional Oxford/Cambridge educational background. Although I do not necessarily share Cummings’ vision on politics and on society in general, I do support his views on what it takes to create an excellent and capable team. 2. Making full use of Swarm Intelligence Today law firms are very much organized around individuals, making even integrated law firms barely more than a group of individuals sharing an office and some other resources. Although many law firms will probably argue that for their firm this is not the case, reality is that partners are competing with each other for matters, clients and resources. Furthermore within a law firm there are silos: the practice groups. Each silo has its own resources being primarily the associates, secretaries and paralegals. No need explaining that this commonly leads to poor use of resources and under-utilization of fee-earners, having a direct negative impact on the firm’s bottom line. Some firms have moved to central workload allocation, meaning that there will be a central function coordinating and planning which associates are available end best equipped to work on an aspect of a certain matter. We know from experience that in general there is huge resistance among partners to hand over the monopoly on ‘their’ associates. Resistance based on fear that when they will need the associates themselves the most talented ones will be unavailable, or based on the conviction that associates are one-trick-ponies that can only function in one small area of the law. This individualistic and silo-based organization model comes not only at the price of sub-optimal profitability, it also under-utilizes the intellectual and creative capital of the firm. In the decade before us, law firm clients will face increasingly complex challenges that go well beyond one small area of the law. Helping clients solve these multidisciplinary issues will need not only breaking down the practice group silos to foster cooperation, it will also require tapping into the collective intelligence, experience and creativity of the firm. We call this ‘swarm intelligence’. The firm collectively will be able to find answers and solutions, were no individual partner or lawyer can. 3. Demise of time as a measurement Those of you who have read my recent book ‘Data & Dialogue, a relationship redefined’ will know that I make a strong case for the transition from time-based billing to value-based billing. Although time-based billing is convenient for both law firms and their clients, it is also the primary source for clients’ discontent. Over the past decade buyers of legal services across the world have taken numerous initiatives trying to get better value. All these initiatives have ultimately been focusing on rates multiplied by time and have, as we know now from experience, miserably failed. After one decade of campaigning for better prices, clients have consistently been paying more. As outlined in my book, the problem is not that the over-all size of the legal budget is an issue. Even for large multinationals, with a constant myriad of complex legal issues, the total legal budget will hardly ever exceed 1% of the company’s over-all costs. Companies have no problem spending money on lawyers as long as it helps them create value. Price is not the issue, return on investment is. When you think about it, you will also come to the conclusion that time is an inadequate measurement for value. One hour listening in on a group conference call, does not have the same value as one-hour high level strategic legal advice. Yet, lawyers will charge the same for both hours, which of course is part of the deal, but basically pure nonsense. In the coming decade, the legal sector will gradually move away from time-based billing and value-based billing will be widely adopted. This transition will be fueled by the use of data-analytics and the adoption of legal technology that will augment lawyers and make them more efficient. 4. The legal industry will become data driven In the past decade there has been a disproportional amount of attention for legal technology. Some future scenarios where computers will eventually take over from lawyers are quite dystopian, others are more of a Jetsons like wild imagination. A world in which Artificial Intelligence will turn law firms into paradise. It goes without saying that neither scenario has any real-world relevance. Now most of the dust has settled, it has become clear that (Data & Dialogue, chapter 11) the work that lawyers do should be divided in Creation and Production (the Creation - Production Divide Concept ©), where Creation has great value to the client and Production is execution that has far less market value. The legal industry will continue to implement technology to make Production (execution) more efficient and less time consuming. This is nothing new as such. Law firms, like all other offices have been adopting new technology to enhance efficiency since forever. Remember how monks used to copy books by hand? As legal technology will become mainstream, technical innovation will shift towards data and data analytics. Historically the legal industry does not have a strong track record as it comes to data collection. Just think about your CRM system or your Management Information system. Rubbish in, means rubbish out. Also on an academic level the Faculties of Law have spent not nearly as much time on gathering and labeling data as let’s say their brethren at the Faculties of Medicine. In this new decade the legal sector will heavily invest in data and data analytics. Data will be used to manage the firm and make better use of the available resources. It will be used to improve the relationship with clients, streamline project management, communication and resources both internal and external. Data analysis will also be applied to help predict future events end prevent clients from getting into trouble. Prediction and Prevention will towards the end of the decade become established lines of business for law firms. Just like the medical sector is not only focusing on curing the patient, but equally on preventing the patient from getting ill in the first place. 5. Outsourcing of staff and functions On average about 35-40% of Indirect Costs at a law firm are connected to staff compensation and benefits. On top of that staff is also part of occupancy and office costs. Traditionally this has never been an issue. Most law firms have been relying on doing almost everything inhouse since their inception. Office space on prime locations is getting more and more expensive and at the same time attracting professional non-lawyer talent is getting harder and harder. Just consider IT talent. In today’s market there is a great shortage of talented professionals with high level expertise in areas such as cyber-security, artificial intelligence, data management and cloud computing. These talents are in high demand and typically prefer to work in inspiring innovative and challenging enterprises. Law firms to them are not attractive and are not on their radar. Realistically law firms will end up hiring second or third-tier IT professionals. The same holds true for marketing and business development. Areas that are increasingly becoming strategically important to law firms. The talented professional will not want to be working within a law firm (which would be a career killer). The last couple of years the turn-over-speed of marketing and BD professionals in the legal industry is between 1,5 and 3 years. This is a clear indicator of a mismatch and these figures are about to get worse. In the years to come law firms will increasingly start outsourcing staff functions that have traditionally been done in-house. This trend has already started with IT department, but also other functions such as marketing, human resources, finance and facilities will follow. The law firm of the future will have a very lean staff and most services outsourced to professional third parties. The decisions carry some risk, but also big rewards. Outsourcing will not be limited to non-lawyer staff. Increasingly we will see law firms cooperating with third parties on client matters. Today this is in some cases already happening with discoveries and high volume document review, but it will expand to other areas in the future. A high-end law firm could decide to outsource all low value aspects of a matter to a mid-tier firm, an Alternative Legal Service provider or to one of the Big-Four. Even the lawyers themselves can be partly outsourced. This is also something we can already see happening today as there are several examples of law firms working with a flex-pool of independent lawyers that can be called in on demand. We even know of one law firm that has put all associates in a separate entity that has to pitch for work with the partners. Although we cannot see many other law firms going this extreme, still it can be considered part of a wider movement. Great times ahead for the legal industry Looking in the rearview mirror, in the past decade much energy has been devoted to the alleged impact of legal technology, pricing of legal services, economies of scale (mergers), the emergence of the Alternative Legal Service providers, the Big-Four and some other discussions that were in the core driven by fear. The coming decade will be more entrepreneurial and driven by opportunities. People, not computers, will take center stage. Clients and law firms will cooperate and become far more aligned. Value will become more important than price. Talent will be more important than technology. There are exciting times ahead whit many great opportunities. Together we can make it happen. We have ten years and counting…

In The Lawyer of 18 November 2019 the headline of one of the articles read: “Skadden and Weil will need more than a couple of magic circle hires to fix their succession problems” While the article focused on the upcoming lateral hire spree, the real issue is why neither firm has been able to groom internal successors. This question resonates strongly with what we at TGO Consulting see in our day-to-day practice: The last of the baby boomers who are now towards the end of their career find it really hard to transfer, power, practice, clients and profit to the next generation. Succession will become an issue because there will be no natural successors. Time has been incredibly generous to baby boomers When we work with our clients, we often do a TGO Power Curve© analysis. In order to do that we have developed a clever algorithm that calculates a value for each of the partners based on the size and quality of their practice and their reputation in the market. The result is plotted on a base line, representing the age distribution of the partner group. The graph below represents two different situations. Figure-1 reflects a partnership where revenue and market reputation are concentrated with partners who are now in their late fifties and early sixties (the last of the baby boomers). Figure-2 represents a law firm where the strongest and most successful partners are in their early fifties. As you can see, in Figure B, partners are transferring their practice towards the end of their professional career. Time has been incredibly generous to the baby boomers. The last baby boomers, who are now in their 60-ties have during their professional career been part of a seismic shift in the legal profession. At the time when they became partner, they could not imagine what the legal world would look like 25 years down the line. They also could not imagine, even in their wildest dreams, how much money they would end up making. The legal profession has been professionalized during this quarter century. Law firms became professional businesses, hourly rates exploded, clients became more professional and the world became more legalized. One could say that the baby boomers became rich and successful without too much effort. They just had to tag along with the developments. Santa's little helpers Even though they were riding the wave of the economy, the baby boomers are in a way self-made men and women. They developed their practice along with their clients. Strong partners create weak offspring. Their associates were not trained as potential new partners, but as lawyers who had to be the diligent executors. All the associates were in a way “Santa’s Little Helpers’’, Santa needs them and can not do without, but they will never be the next Santa. Even Santa likes to stay in the limelight of power. The baby boomers are no different, they cling on to power. In a law firm power comes with having a great practice. From the power perspective law firms are a fragile ecosystem. If you want status in the firm, want to be a thought leader and opinion maker, it is more important that you bring in a large amount of revenue, than having a vision. Those who have the most revenue must be the best partners and we should listen to what they say and obey them. So, if revenue is more important than content, it comes as no surprise that I will want to keep as much revenue in my name as I can. If I create new partners who are better than me, I will lose power and become obsolete. The same will happen if I transfer some of my clients and contacts. Some baby boomers cling to power and wealth It is a natural tendency wanting to be loved, admired and relevant. Powerful partners are addicted to standing in the center of attention. They cling on to power. It goes against human nature to step aside and let someone new be the new star. It happens to politicians, to business leaders and captains of industry. It is so hard to let go. That is why the economy and society have been ran by old people for so long. Not because they are better suited for the job, but because they refuse to transfer the power. Why would lawyers be an exception? Once people have power, status and influence, they cling on with all their might. When we work with our clients doing the TGO Power Curve© analysis, we typically also do a risk assessment. In situations that are represented by Figure A, one of the more prominent risks for the firm is the fact that a number of powerful rainmakers will be retiring over the next 3 to 5 years, without there being adequate replacement. Law firms who are in a Figure A situation have neglected to work on developing real home-grown talent. The associates they trained to be “Santa’s Little Helpers” may have become partner, but they generally lack the entrepreneurship and personality to be rainmakers and opinion leaders. Strong partners created weak offspring because it served them well. The retirement of rainmakers is a major risk to the firm, but the risk will only materialize after the baby boomers have left. Why bother? The next generation needs to be stronger, not weaker Obviously, this is a situation that the best and most ambitious law firms would never allow to happen. The most successful of our clients are in a situation that is reflected by Figure B. In these firms the strong partners systematically strive to create offspring that will be the better version of themselves. They know this is needed because the demands of the markets will always go up. Their pride and satisfaction are not in retaining power, but in seeing their protegees become tremendously successful. Such partner will always trust his protegee and will find pride in transferring their practice to the next generation. This type of law firms will be better with each new generation. They will still be the winners in tomorrow’s market. The transition from a Figure A situation to a Figure B situation, is not an easy one. It can be done only when the baby boomers recognize their ‘mistake’ and care more for the firm than for their own position. It is our experience that some exceptional great lawyers and law firms can navigate through such fundamental cultural transformation. Be it potentially at the cost of the weak “middle generation” …

On the 24th of April 1916, the now legendary Antarctic explorer Ernest Shackleton set off from Elephant Island in the James Caird, the lifeboat in best repair, patched up and partially decked over by what meager resources were available, on a rescue mission to South Georgia. On board where six men, while 22 others would stay behind to await being rescued. The sea journey was extremely perilous as the temperatures were freezing cold and the seas around Cape Horn are known for extreme weathers. It would take the exhausted frozen men two weeks of rowing to reach land. When carefully selecting who would be his crew on this dangerous but vital rescue mission and who would wait behind on Elephant Island, Shackleton selected among two others, Thomas Crean and Henry McNish. These two men were troublemakers and Shackleton did not like them, but they were men with the best skills and the most endurance. When it became a matter of life or death, Shackleton decided to rely on two men who were certainly not his friends. A good decision, as we all know eventually every single member of the expedition made it back to England alive. I was reminded of this story when I was having a conversation with a managing partner not so long ago. As most of you will know, for me ‘trust’ is extremely important in a partner group. I regularly ask partner groups if they would trust any of their fellow partners to go to their client without them being present. Typically, I can literally see a shiver go through the partners when I pose that question. Some are convinced that some other partners are of mediocre legal quality and/or are socially awkward. Some others might fear that actually their client might like some of their fellow partners better and they would risk losing that client to that other partner. Whatever the motivation, the answer is almost invariably: “no, I would not trust all of my fellow partners to go to my client, without me being present”. Only a handful of exceptionally great and successful law firms have high levels of unconditional trust between partners. Lack of trust between partners is a problem A fundamental lack of professional trust between partners is typically the consequence of a long history of opportunistic partner promotions. It is still surprisingly rare to objectively evaluate potential new equity partners. Some partner promotions are driven by fear that an associate that is crucial to a certain practice, will leave. Sometimes there is a trade-off: If you support our candidate, we will support yours. Sometimes firms need new partners to help bear the costs of a new and expensive office. Sometimes we appoint a new partner to fill a gap after another partner has left. Whatever the reason, a careful evaluation against objective criteria is not one of them. The inevitable consequence of opportunism is that over time the level of trust among partners will diminish. It will be obvious that lack of -professional- trust is not an optimal situation. As we can clearly witness at this time of year, lack of trust will make partners fight over profit distribution. Lack of trust will hinder joint client development. Lack of trust might even create disputes on what legal templates to use. We have even seen situations where lack of trust made it impossible to put two partners in one practice group (even though their practices were basically comparable). Lack of trust between partners will lead to all sorts of irrational bad behavior and will inevitably lead to loss of business opportunities to the firm. This was the topic of my meeting with the managing partner. We discussed how we could improve trust among the partners of his firm. At some point he asked me if partners should be friends? My answer was unambiguous and clear: “there is no need for partners to be friends in order to create trust”. On the contrary, I would be inclined to advise against partners developing friendships that go beyond being good colleagues. I know this might come as a surprise, so let me explain. Friendships stand in the way of trust Friendship will most certainly blur your judgement. When we are friends, it will become hard to tell the truth as we will fear that uncomfortable conversations will harm our friendship. Friends are supposed to help and support each other, not to criticize or penalize. In my practice I have come across situations were two friends, one the former managing partner and the other his immediate successor became embroiled because the former MP took it as personal criticism when his friend the new MP decided to do things in a different way. This personal argument weighed heavily on both men. Situations between two persons who are friends can become even more complicated when also the spouses get involved. I know of a situation of two lawyers who had become such good friends that they even had dinner parties and went to social events with their spouses. Also, the spouses got along really well. When at some point one of the two became the practice head and came in a situation where the firm decided to throw the other one out, you can image the pressure this lawyer got at home from his spouse for allowing this to happen. Compromising on quality erodes quality and trust Friendships can lead to other partners feeling locked out. Friendships between partners will also make other partners suspicious of favoritism. In general friendship between certain partners will likely erode trust within the partner group. Back to Shackleton. His example shows that friendship is not a requirement for trust. You don’t even have to like a person in order to trust this person. Shackleton choose among his rescue crew two men whom he did not like and who caused him trouble. He trusted them nevertheless with his life and those of the other men because he respected their skills and their character. The same holds true for lawyers: when things really matter, you only trust the best. So, in a partnership don’t breed friendship, breed quality. Stop making compromises as it comes to the quality of the partner group.

Commentators outside the legal industry often criticize the way in which law firms operate and organize their business. Although certain aspects of law firms might come across as archaic or strange from a ‘normal’ business consulting perspective, the business of law is still one of the most profitable business models in existence. In what other industry can you make so much money, while investing so little. Partners at the elite law firms make more money than most captains of industry and more than any elected head of state. From a business perspective it is hard to beat the business of law. Oddly enough also as it comes to the level of obsession over the profitability, the legal industry is a bit of an outlier. One will be hard pressed to point out any other type of privately-owned business, where there is so much ‘transparency’ and comparison on profitability. There is a thriving publishing industry that lives of reporting on law firms’ profit numbers. Not only the famous AML-100/200 in the US, but also for example The Lawyer in the UK and JUVE in Germany publish overviews and rankings based on profit levels. I am not aware of any other industry where non-listed companies voluntarily disclose and compare their figures. One could argue that the legal industry is in a way obsessed with profit. The legal industry seems overly obsessed with profit numbers To a certain extent for any company it is healthy to be focused on profitability. For us at TGO Consulting it is the core of what we do: we focus on helping law firms to be more profitable and have better clients and mandates. At the same time in our practice we are often witness to the destructive power of unhealthy focus on profitability. In many partnerships there are tensions on how the profits are distributed among the partners. So here we have a kind of a contradiction: on the one hand law firms as a firm need to be as profitable as possible, while on the other hand individual partners focus on how the profit is distributed may have averse effects on the profitability of the firm as a whole. One of the advantages of a global practice and working with many different law firms across the world, is that we in detail come across more different profit distribution systems than any law firm leader will ever see or be aware of. The two main categories are ‘collective’ and ‘individual’. The lockstep and equal sharing profit distribution systems are well known examples of the collective system. The individual system is also known as ‘eat-what-you-kill’. On both categories there are numerous variations and also hybrid systems do exist. However, in the ‘collective’ system each partner gets rewarded based on the performance of the firm as a whole, as where in the ‘individual’ system a partner’s remuneration boils down to personal performance. At first sight, one might be inclined to think that the individual system is the most fair system and will be a system that does not create tensions between partners. That might be one of the reasons why this system has been so widely adopted across all parts of the world. Partners who work hard and are successful are rewarded and some others that do not perform do not drag them down. Whereas in theory the individual system might seem ideal, in practice this system creates all sorts of issues. Based on our experience partners in firms which follow an individual based profit distribution system have more discussions on profit distribution than those who employ a collective system. Partners often complain that their compensation is not fair The reason behind this is that in an individual profit distribution system there typically are all sorts of internal compensation systems such as origination credits, or rewards for management positions. In the individual system, there is a clear disadvantage for a partner who cooperates with another partner on a large matter. The cooperating partner will have to ‘pay’ origination credits and while helping out on the other partner’s big mandate will have no opportunity to get out and work on their own book of business. We have come across situations where this type of ‘slave partners’ are only employed to make the strong and originating partner even more rich. The question ‘who owns the client’ is of particular interest to any partner working in an individual profit distribution firm. On top of that comes that in some firms each partner must ‘pay’ a certain percentage of his/her profit to the founder(s) of the firm. Another issue with the individual system is that partners don’t want newly appointed partners to cannibalize on their practice, so each new partner has to find a new niche and a new clientele to build a practice. An individual profit-based system also runs a risk of poor utilization of associates. So, if an individual profit distribution system can create all sorts of fights and tensions, is a collective system any better? The short answer for that is: no. Under any collective profit-sharing system, partners can become hypersensitive to under-performers. The mere thought that while they are working their ass off and have built a great practice, some others are leading a laid-back life, go home at five and still make the same amount of money is unbearable. We experience that in collective systems the firm leadership is under permanent pressure to identify and deal with under-performers. Sharing a collective profit requires an enormous amount of trust. Maybe more than most lawyers are able/prepared to give. In order to prevent partners from under-performing, collective distribution-based firms invariably monitor individual partners. Every partner has to produce a minimum amount of revenue under their own name and has to meet a threshold in billable hours. The surprising thing is that this effectively will create similar tensions as in an individual based system. If I have to produce revenue, I will want the file and the client put in my name. If I have to produce billable hours, I will make sure I meet my threshold, before handing out work to my associates. Like in an individual system, in a collective system it is not a good career move to be a ‘slave partner’ (or a lawyer’s lawyer), as the rainmaker will always feel more important and entitled to more money. A collective system with a black-box might be the best solution Many consultants today are preaching the end of the ‘lock-step’ system, which is one of the collective sharing systems. We are not one of them. Our data clearly shows that firms where partners cooperate and trust each other, have a higher PEP that those who only focus on individual gains. So if cooperation is the most profitable business model, and we do not believe that the lock-step model has become a relic of the past, what would be the best profit sharing system. After having seen and analyzed literally dozens of different profit distribution systems, I have pivoted towards a black-box profit distribution system, based on collective sharing. It might be the only way to stop discussions on who gets what, and the only way to put a halt to individualistic behavior that favors the individual, while it harms the firm. I am aware that I need to elaborate on this point of view, and I will do so in a separate article in the coming weeks.