How Law Firms Get It Wrong

“Show me the incentive and I’ll show you the outcome” is a quote attributed to Charlie Munger, Warren Buffet’s right-hand man.

Last week I made the point that most law firms act like taxis. Ask them to take you to the station and that’s what they’ll do, and it will cost you whatever it says on the meter. But what law firms rarely do is ask why you want to go to the station and, armed with your answer, give you a better or cheaper alternative.

Why do law firms act this way? Surely they are as keen to add value as anyone in business?

There are two main two reasons. Firstly, hourly billing means that the emphasis is always on cash-now, and the hypnotic pull of cash-now relegates “why” questions to the background.

The second reason is that law firms tend to operate through a series of ad hoc interventions. They are hired in to do a specific job: once their part in that job is complete, their involvement with the client ceases until the next job comes along (like a taxi). This means that they often have no insight into (or financial interest in) how their intervention worked out for the customer. For example, if they negotiated a five-year outsourcing agreement for their client, how did that agreement work out in practice?

The knock-on effect of this is that there is no virtuous circle of improvement: the lessons learnt from the preceding engagement are not fed into the next engagement. Equally, when the same client-side problem re-occurs, there is no incentive (in fact, there is a financial disincentive) for law firms to explore and fix the root cause.

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...the hypnotic pull of cash-now relegates “why” questions to the background.