Two Step's Private Company Equity Management Blog

Earlier this year, one of our law firm customers, Andrews Kurth, LLP, came up with the novel idea of adding a fixed-fee "Start-Up Organization Package" to its legal service offerings. According to Alan Bickerstaff, a partner in the firm's technology and emerging companies group, the package provides a comprehensive set of legal services designed for "young entrepreneurs who want to start a new company, typically technology-related." The complete set of services is described at www.andrewskurth.com/startup.

At Two Step, we were pleased to see that some of the services listed in the start-up package relate directly to Corporate Focus - such as tracking entity records, ownership administration, preparation of capitalization tables, and online minute books. In fact, one section of the description notes:

Capitalization Matters

• Entry of all initial capitalization data and corporate records into capitalization tracking software and corporate records database.
• Software provides the capability on an ongoing basis to:
• Track all stock and option issuances and cancellations
• Maintain copies of corporate records and minute books
• Produce a wide variety of capitalization reports
• Provide start-ups access to their capitalization and corporate records via the Internet

The list even mentions direct client access to online corporate records, which seems to be offered by an increasing number of firms today.

Fixed-Fee Package for Start-Ups Offers Capitalization Tracking

If a law firm is to provide such an expansive set of legal services for a fixed fee, they must possess a high degree of confidence in their ability to work efficiently. The key to this confidence is having a centralized, secure platform for managing entity and ownership records, online minute books, and capitalization tables. Such a system ensures not only that all information is accurate and up-to-date, but also that no time is wasted searching for it.

While Andrews Kurth has certainly broken new ground, many other firms are testing the waters in a similar fashion and exploring ways in which they can serve their corporate clients better.

So, is this the dawn of a new trend for law firms serving the emerging company and technology start-up marketplace? It certainly makes sense; after all, this is one of the most important and profitable client segments for any firm, since start-up clients lead to financing, merger and acquisition, and public offering work down the road. As a partner at one of our law firm customers recently said, the broader you cast your net in the start-up sea, the more likely you are to find exciting clients who need high-value transactional work.

Scott Glickson from McGuireWoods, LLP (another client of ours) puts it best: "Corporate Focus streamlines activities so that we create a more favorable impression with the client, which leads to more business, more referrals, and more value all around ... We all have access to the same information, and we can access it at the same time."

As law firms increase their use of productivity tools such as Corporate Focus they are better positioned to offer cost-effective legal services to start-ups that are cash-strapped and trying to prepare for their first round of venture financing. If firms serve them well in the early years, these budding companies are destined to become satisfied clients who will one day require more sophisticated and profitable legal services.

Watch an online demonstration of Corporate Focus if you'd like to learn more about how to make your firm more productive.

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.

When I got a pop-up message from Intuit the other day that they have jumped on the bandwagon and released a read-only version of QuickBooks Online for the iPhone, it got me thinking about cell phones and my new iPhone. It made me realize how pervasive this new productivity tool had become in the nine months since its release. It’s particularly noteworthy, since QuickBooks Online does not yet work with the Apple Safari browser. Although it’s very limited and many will ask was it really worth the effort, I think it’s a great looking view-only application and delivers a minimum amount of information into the palm of your hand. How much is in a bank account? How much do we owe that vendor? How much does this customer owe us today? A balance sheet for Dec.31st? It’s all there.

But I wondered, are they perhaps just trying to get on the “Mac is cool” bandwagon after seeing the recent onslaught of the square guy v. the cool guy in the Apple v. PC television commercials (http://www.apple.com/getamac/ads/) or have they seen the genuine utility for their user base of a “less is more” iPhone approach to online apps (http://www.apple.com/webapps/).

My own mobile, wireless experience has been that of frequently switching to the latest and greatest cell phone (sometimes I admit more than once a year) until I’ve finally settled down … with an iPhone and "it rocks.” At first, a flip phone seamed so cool compared to the original peanut shaped phones. Then, along came the Razr which was so thin, who could resist. Then, I had to debate a Blackberry versus the Treo when they were still head to head in popularity. I chose the Treo700w, since I wanted to remain in the Windows family, but learned to regret the choice.

Then, last summer, one of my neighbors was showing me travel photos on his iPhone, “finger flipping” from one picture to another and the totally useless, but cool looking, world clock for the cities he had traveled to. The user experience was contagious, almost like bubonic plague or methamphetamines. I had to have one.  BUT, I had to worry about the ATT Wireless Edge network. Everyone claimed it would be like going back to 1998 dial-up for web surfing. Well, I decided I’d just limit my browsing to Wifi access, since by 2007 carrying around a cell phone and an iPod on a bike ride or on an airplane seemed so old-fashioned. Two devices? I thought if over one million iPhones had already been sold by Sept. 2007, why not be 1,000,001. Certainly, no one could claim I was the first guy to jump off the bridge.

Six months later, there are over 5 million iPhones in use. In fact, every employee at Two Step Software has been offered an iPhone just so they can experience the direction of new technology (Apple has certainly led on innovation from the original Macintosh to today’s iPod Shuffle - now that’s small). If you’re working at a SaaS model software company on America’s Technology Highway (Route 128), spitting distance from MIT, it’s somewhat obscene to still be carrying around a cell phone, a Palm pilot, an iPod, and a beeper. Get it together!

At the rate that iPhone applications are coming out, it’s becoming the ubiquitous connectivity device for the new business executive, less focused primarily on email and more focused on browsing and other online productivity applications. I use my iPhone for phone calls, emails, text messaging, listening to music, checking the weather, reading NY Times headlines, contact management, scheduling, family photos, my alarm clock, maps and directions, YouTube, secure password management, Salesforce.com, and QuickBooks.

If you too want to be the coolest over 40, Facebook, MySpace, YouTube, Twitter, Blogspot, Gen X, SaaS, on-demand, CFO or CPA and "connect” with those young, hipster 20-something employees slugging down Jolt and cranking out Ajax code, get an iPhone, download a Wagner symphony, and surf the Wall Street Journal Online. They’ll see you rocking out and think you’re watching Sarah Silverman F------ Matt Damon on YouTube (http://www.youtube.com/watch?v=wnVJZkDuVBM).

Now, that’s cool.

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) recently announced the release of its discussion document: Guidance on Monitoring Internal Control Systems. The guidance which is extensive and goes into great depth applies to the internal control objectives over financial reporting, as well as the objectives related to effective operations and compliance.

According to COSO Chairman Larry Rittenberg, Ph.D., "This guidance more fully develops the monitoring component of COSO’s Internal Control - Integrated Framework,” and is appropriate for organizations of any size or structure to improve the quality of their internal controls systems for multiple business purposes, but especially those dealing with the reporting requirements under the U.S. Sarbanes-Oxley Act of 2002, Section 404.”

Of the two documents, the second, Internal Control – Integrated Framework Executive Summary, is an excellent summary of the five interrelated components of effective internal control (of which monitoring is the 5th component.) The five are: control environment; risk assessment; control activities; information and communication; and monitoring. COSO makes the point that while entities of different sizes may implement them in different ways, they are applicable to business of all sizes, large and small. The framework set out by COSO is worth reviewing at least annually by any organization and then choosing how to apply the framework, particularly for those where internal controls are not mandated by SOX.

COSO seeks feedback on the concepts in this discussion document until Oct. 31, 2007; they want to know if they are clearly articulated and if you agree with the conclusions reached. They also want to receive examples of innovative approaches you have taken in monitoring the effectiveness of internal control. They will consider these observations in the development of their final guidance. Accompanying the release of the discussion document is access to a Web-based feedback portal on the COSO Web site at www.coso.org/publications.htm.

The second phase of the monitoring project, scheduled for release after comments are received on this discussion document, will provide examples, case studies, and tools to assist all organizations in implementing effective and efficient monitoring. COSO’s intent is to release an exposure draft of the full implementation guidance later this year and to release the final guidance in the first quarter of 2008.

I encourage you to read both documents and consider how your equity compensation technology fits in with your overall internal controls and compliance objectives.

“Over the years law firm IT has been described as an expense to be managed, an investment, and a competitive advantage. How your firm views technology is important, but how your clients view the use of IT by its law firms is what counts.”  Those are the words of Douglas Caddell, the chief information officer at one of our client firms, Foley & Lardner.