Two Step's Private Company Equity Management Blog

I was at Starbucks the other day, chatting about the unseasonably mild weather with my favorite barista, Mark. Out of pure curiosity, I asked him if the customers seem nicer as the weather improves. After all, who doesn't prefer coming in for a grande ice coffee or Frappucino on a gloriously warm afternoon--as opposed to a hot cup of coffee on a bitterly cold day?

So Mark replied, "Honestly, our customers are just great all the time. It's what makes working here worth it. You kind of get to know them and understand what they're going through."

I might have thought he was just giving me the canned company line, but given that Mark has been at this Starbucks for many years--and cares about every cup of coffee as much as the first one he ever made--it seemed genuine. He went on to tell me that over time, he hears about customers' illnesses, job losses, moves, weddings, new babies and kids going to college. According to Mark, listening to customers tell their stories is all part of a day's work for a Starbucks barista.

As I listened to Mark talk about his fondness for his customers, I couldn't help thinking, "Wow! That's how I feel at Two Step Software, even though our jobs couldn't be more different." I asked him how long he'd been with Starbucks (seems like forever to me) and he told me 14 years. I in turn explained that I'd been at Two Step for 16 years and felt the same way he did about our own customers.

Like my coffeehouse friend, I realized that my sentiment wasn't merely a hackneyed business platitude. We at Two Step are genuinely passionate about putting a smile on people's faces and making their difficult jobs a little bit easier.

I told Mark that as we get to know them over the years and share their ups and downs, the Two Step staff really comes to care about our customers on a personal level. I shared a story about one of our favorites who had been the CIO of a large Boston law firm. Her firm has used Corporate Focus for many years, but she was laid off in the legal downturn of 2008-2009.

This particular customer told us about her job loss this past summer, and that she was looking for a new job in the technology field. About six months later, we were thrilled to hear from her that she had joined a great company in Cambridge, MA. Ironically, this company is not only a customer of Two Step's, but Two Step is also a customer of theirs. They use our software for equity management and reporting, and we use their software for website tracking and reporting.

In my opinion, a job doesn't necessarily feel like "work" if you enjoy the relationships you inevitably build with your customers. And when you consider that we spend 30-40 years of our lives working, that's a very good thing.

At Two Step, we love hearing when our customers are pleased with our solutions--and also when they're not. Every day is an opportunity to overcome a new challenge and deliver the best service we can. It also never hurts to hear a heartfelt "Thanks. You saved the day!", or get a referral from a happy client.

Take it from Mark, the barista: focusing on your customers is simply a good way to do business. It's also the way Two Step Software has been doing things for 16 years--and we have no intention of stopping now.

In the past few weeks, I’ve met two corporate paralegals who have been using our product, Corporate Focus, to track minute book and capitalization information for many years. Because they’re each tracking upwards of 1,000 client companies for their firms, they keep very busy.

We estimate that paralegals like these have tracked more than 1 million stock certificates for privately-held companies in our system over the past decade. But despite the obvious improvements in efficiency that Corporate Focus has made possible, I still have one small pet peeve: The amount of time, energy and client fees that are wasted on stock certificate printing. And in the current environment where legal staffs are smaller and clients are going over outside counsel bills with a fine-tooth comb, every minute counts. 

So when these paralegals told me that each stock certificate they print for a new company uses a "blank" stock certificate form instead of a "pre-printed" stock certificate form, it made me realize that law firms can make small changes that yield big benefits for everyone involved. It may seem like a minor thing—the difference between a stock certificate that just has a border (or standard eagle design) as compared to one that also has pre-printed text and lines. But, when you're the one responsible for printing hundreds or even thousands of certificates each year under the pressure of a deal closing or a FedEx pick up, it matters. Because if the partner or client notices that the numeric text is crooked or misspelled on the certificate for 255,715 shares for which the investor just paid $2.5 million, everything just comes to a screeching halt.

With different printer drivers, assorted printer models, and varying cuts on every printed batch, there is just no way to make every single stock certificate identical. The only way to get it right without wasting precious time is by printing to a blank stock certificate form. With a blank form, there is no need to coordinate names and numeric text with pre-printed lines, because you print the lines and text simultaneously with the stockholder information.

As one paralegal told me, when you've completed your 25-to-1 reverse stock split in Corporate Focus and all the numbers come out right, you don't want to spend extra hours printing the 200-300 stock certificates that now need to be re-issued. She also told me that at their firm, they no longer adopt a specific form of stock certificate in the by-laws or minutes when they are forming a new company. That means that if they need to change the form to a new style for cost or efficiency reasons, there is no extra legal action required that creates unnecessary legal work or fees. Talk about great client focus.

Now, if you think this is just minutiae that lawyers and paralegals obsess about in their spare time, imagine the next time you have to mark down a legal bill because it took two hours to print 26 common stock certificates (making you late for dinner and behind on your more important legal work). Wouldn't the client have been much happier if they'd been billed merely 20 minutes to "just print a few certificates," as they see it?

Then, take another look at the difference between the "border only" certificates, the "blank eagle" certificates, and the dreaded "pre-printed" forms of the same. These are all available from any stock certificate printer (such as Goes Lithograph or Corpex). It's just a matter of choosing how efficient and productive you want to be—for yourself, and for your clients.

I'm a big fan of Paul Lippe's legal column for The Am Law Daily called “Welcome to the Future” and have been reading it regularly for the past six months or so. I noticed that the final paragraph of his recent interview with David Baca, chairman of the Seattle-based law firm Davis Wright Tremaine, summarized so much of the buzz that has been going around lately on the potential for real change, death of the billable hour, and profits per partner as a metric—which have all been frequent topics of Paul's, as well as so many other "oracles" of the legal market. (For disclosure purposes, DWT has been a customer of Two Step Software for the past 5 years.)

In Lippe's February 17, 2009 column, “Welcome to the Future: A View from the Left Coast,” Baca offers the following insights:

"There is no question in my mind that technology will upend the legal industry. Clients aren't going to keep paying for information they can get for free online. They will pay for judgment, for talent aggregation, for things that increase their profits or peace of mind. But we're going to have to redefine what our "service" is and how we deliver it. As with all industries that technology has upended, some firms will end up doing really well and some will struggle or cease to exist.

Most law firms, including ours, aren't doing as well as they should using technology to create more value for clients. In most cases, we all haven't felt the same sense of urgency that our clients have. Candidly, the dominance of the billable hour model has meant that there has been very little reason for law firms to innovate or to use technology to enhance efficiency. Moreover, the structure and decision making processes in a large partnership makes change hard and slow. The status quo has been pretty good to most of us. And a lot of firms have wasted a lot of money on technology projects that weren't thought through or properly executed, which makes people more skeptical."

I’d like to highlight parts of Baca's statement that speak to the current upheaval in the legal market and what it foretells:

1) Technology will upend the legal industry. This sentiment has been heralded for many years by practitioners and thought leaders alike. To quote Richard Susskind in an earlier interview with Lippe (in which he calls Susskind "the world's pre-eminent legal futurist"): "In 2000, I was urging lawyers to adopt some exciting technologies which would support the way they worked. Now I am saying lawyers must adapt because new technologies that are coming through are 'disruptive.'”

Susskind predicts that lawyers who are unwilling to adapt will "struggle to survive." We've seen it with records and iTunes; we've seen it with newspapers and digital media; and we’re currently watching it unfold in the auto industry. With the powerful impact of technology on efficiency and choice, it's never a question of whether, but only a question of when.
 
2) Clients will pay for judgment and not information they can get free online. Lippe previously mentioned a business model used by Jeff Carr, the General Counsel at FMC Technologies, which breaks legal services into four categories: counseling, advocacy, content, and process. Carr says that firms excel at the first two categories, but that clients end up paying mostly for content and process because they consume so many hours. 

Lippe explains that since many firms have bundled all four categories, they've been able to overcharge for content and process, "failing to apply the kinds of process and technology innovations that are common among their clients." In better days, this may have been acceptable, but as clients become more savvy and cost-conscious in the economic downturn, they will find alternatives in which they’re paying primarily for the high-value components of legal services: counseling and advocacy.

3) Most firms aren't doing well to create value for clients. Marc Chandler, General Counsel of Cisco, may have said it best: "The greatest vulnerability of the legal industry is a failure to drive models based on value and efficiency and to make information more accessible to clients. The good news is that greater efficiency will create more value for clients. The bad news is that higher levels of efficiency by some raise the bar for others in a competitive market.”

4) The billable hour model has given law firms little reason to innovate or to use technology to enhance efficiency. Increasingly, in-house counsel at major clients have been pressuring law firms to accept alternative, value-based billing methods. Other firms are offering new and innovative ways to lower their hourly rates when it makes business sense. The glacial pace of change may have been dealt an asteroidal blow this past December, when the presiding partner at Cravath Swaine & Moore, Evan Chesler, wrote his "Kill the Billable Hour" article for Forbes magazine. From that point forward, the topic reached the front page of every major business publication and got stuck in the frontal lobe of every CEO and General Counsel nationwide.

5) The structure of law firms makes change hard and slow. As Baca explains, there is something about the decision making process of a large partnership that contributes to slow change. Having worked as a vendor to hundreds of law firms over the past 15 years, I can attest to this. However, lawyers are leaving firms in droves in the current economic market, forced to start new firms and specialized boutiques. These new “high-quality” firms will put pressure on larger firms to change as they tear away just enough business to make an impression.

Don’t Miss the Two Step Webinar on March 3rd

Paul Lippe is the founder and CEO of Legal OnRamp (www.legalonramp.com), a legal online community, and will be one of the featured speakers at a free Two Step Software webinar being held on March 3, 2009, entitled: “Productivity, Service, and Partnership: What They Mean to Your Law Firm's Future.” If you’re looking to understand how marketplace change will affect your law firm’s odds of success or even survival, it will be worth your time to attend.

I also encourage you to be a part of the ongoing discussion by checking out Lippe’s “Welcome to the Future” column and joining Legal OnRamp. The future has a way of sneaking up on you if you’re not paying attention. It's happening now, so get on board—or get left behind.

Over the past year, a perfect storm of events has brought legal fees under scrutiny like never before, affecting both law firms with skyrocketing new associate salaries (some reaching $160,000 per year) and clients facing hourly attorney rates as high as $1,000. At the same time, in-house counsel are eyeing their legal fees more closely, looking for flat-fee billing options, better case management tools, and more diligent reporting on legal bills. 

And finally, legal work at law firms has decreased substantially over the past 6-12 months. This is a direct result of the economic downturn, led by declining activity in real estate, lending and corporate transactions. The combination of these factors has contributed to the recent spate of attorney and staff layoffs at law firms across the country.

In a Boston Business Journal (BBJ) article entitled “In-House Counsel Pay Closer Attention to the Bottom Line” (Feb. 15, 2008), Fred Krebs, President of the Association of Corporate Counsel (ACC), said: “In-house counsel are taking note of the rise in hourly rates and associate salaries and are holding their outside firms accountable.” The article points out that according to a survey by ACC and Serengeti Law, “half of the respondents terminated a relationship with outside counsel during the prior year for failing to perform according to client expectations, high costs, and poor work product or results.” 

In a follow-up BBJ piece entitled “In-House Counsels Push Back on Large Legal Bills” (July 18, 2008), a number of attorneys noted that in-house counsel are looking for discounted rates, volume discounts, flat fees, and project pricing. Local firms are getting the message: Gerald Hendrick, the partner-in-charge of the Boston office of Edwards Angell Palmer & Dodge LLP, says that his firm now offers some of these options to its clients.

And just as there appears to be greater scrutiny of legal fees, the market falls out for some of the most lucrative legal work: corporate transactions. As noted in the Oct. 3-9, 2008 issue of Mass High Tech, the number of corporate transactions in 2008 is far down, emphasized by the September arrival of the “financial crisis.” The numbers paint a grim picture: in the first half of 2008, seven New England venture capital funds closed funds totaling $1.6 billion, down from 11 firms that raised $2.8 billion in the same period in 2007, according to Dow Jones VentureSource. 

The Good News

So what’s the silver lining to be found in all of this bad news?  It’s the fact that the current marketplace shakeup gives the best law firms—those that emphasize efficiency, productivity and client service— the opportunity to rise above the fray. Clients are generally willing to pay for high-quality legal advice. But to survive in today’s tough economy, law firms must be able to deliver it in the most efficient manner possible and work to drive every dollar of waste out of their systems. 

The ultimate goal, law firms will eventually realize, is to make clients themselves more productive through self-service and collaborative technologies. Why shouldn’t clients also have access to any client information that the attorney would use? Say, for example, that a law firm’s CFO client wanted to know what percentage of stock ownership an employee had in the company. That CFO would be much happier if he could log in at 8pm on a Wednesday night to get the answer, as opposed to e-mailing his attorney and waiting for a response, which he may not get until Thursday morning (if he was lucky).

Likewise, imagine if an attorney’s access to information was like Google so that all client data could be obtained instantaneously. Instead of racking up billable hours searching for records and making calculations, all of that attorney’s time and energy could be devoted to legal analysis, negotiation, and advice. Thus saving the client significant money and improving their satisfaction.

In both scenarios, the client wins. As clients demand increasingly stellar service and more reasonable fees from their legal counsel, law firms must make productivity a top priority. Without a doubt, those that can rise to the occasion will rise to the top.