Sell outcomes, not hours

Three unspoken rules that explain how Wachtell gets away with sloppy time entries

Last week, an excerpt of Wachtell’s legal bills to Twitter made the rounds on social media. The bills were revealed as part of Elon Musk’s lawsuit against the firm. According to Reuters:

Lawyers for Musk’s X Corp, which owns Twitter, in a lawsuit filed in San Francisco Superior Court last week took aim at 275-lawyer Wachtell. The firm last summer sued Musk in Delaware on Twitter's behalf in a bid to compel him to go through with his then-pending offer to buy the social media company for $44 billion.

For its work, Wachtell collected $90 million in legal fees from Twitter shortly before the company changed hands in October – and Musk’s lawyers are crying foul.

Unlike the time entry descriptions created by most law firm lawyers, the Wachtell time entries were incredibly vague. Take a look for yourself:

The billing doc spread throughout the legal community, and the reaction was visceral. For good reason. These time entries broke all the rules about time entries. They described very little about what type of work was actually done.

How did Wachtell get away with this? Isn’t the rule that when it comes to time entries, you always have to include detailed narratives around every piece of work you do? Not just a few words here and there.

One possible explanation

When I saw this all happen I immediately thought: Unspoken Rule. In the legal profession, whenever there’s some surprising exception to the general rule, there’s always some related unspoken rule(s) at play. I thought about it over the weekend, and actually came up with three of them.

Before I get into it, I’ve got a few disclaimers. First, some of these rules are likely obvious to some of you. They might not be to a young lawyer or law student, but they might be to industry veterans. Second, I don’t have any conclusive proof or insider knowledge of any of what I’m about to say—it’s all speculation. If you’re someone with firsthand knowledge or context, please let me know in the comments or by DMing me.

1 - Client willingness to pay depends on the size of the underlying matter, not hours worked

Most firms don’t work on the types of matters Wachtell focuses on. The vast majority of legal work, even what’s handled by Biglaw, is relatively small and routine. So the lawyers working on those matters experience lots of competition and price pressure / pushback from clients.

Wachtell on the other hand, focuses only on extremely high stakes matters. So their legal fee, while much larger than those from other firms, pale in comparison to what the client could lose if the matter is mishandled. When $44 billion is at stake, paying $90 million to the best law firm to represent you is a drop in the bucket.

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I first realized this when I was a junior associate working on one particular high stakes matter involving billions of dollars. Nobody at the client (really) scrutinized the bills. We had a huge team of juniors who, like me, were block billing with descriptions similar to Wachtell’s in the example above. That was the first time I began to suspect that legal fees are viewed in relation to the controversy amount. And if that amount is 10+ figures, nobody cares about your time entries.

Yet this truth is rarely discussed openly. Some lawyers do figure it out eventually. But many don’t, because they earnestly follow rules that seniors teach them early on—ie. “always make sure your time entries are detailed.” Then they find out someone who breaks the rule can get away with it.

2 - Maximizing revenue in the short run can weaken a firm’s pricing power in the long run

Part of the reason why companies go to Wachtell for certain types of high stakes matters is because they are viewed as simply the best in this practice area. This perception was not created overnight and requires years, and decades of focus. For example, Wachtell has always been highly selective about the matters it takes. Here’s an excerpt from a 1993 deep dive on the firm:

Wachtell has adhered to its founders' ideal of refusing to perform routine legal chores. It does not regularly produce 'green goods' such as stock registration statements and loan agreements, and it focuses on 'a limited number of interesting and difficult specialities … Wachtell is always "special counsel". It deals with unusual problems and boardroom situations, such as suits against directors. The client's CEO is involved. Such cases have high visibility.

Could Wachtell generate more revenue by doing lots of other types of work? Sure. Maybe the firm could roll out an expansion plan, opening offices throughout the U.S. and internationally. It certainly has the ability to recruit aggressively from other firms and pay handsomely to lure laterals away.

But doing that would destroy the firm’s brand. It would likely dilute its focus, and over time, Wachtell would lose its mystique. Maybe it would be forced to adjust its hiring standards, and give in to client pushback on fees—especially on relatively routine matters. Then, when the occasional $44 billion case comes along, Wachtell would not be able to command the fees that it otherwise would.

Real world examples of how Wachtell is perceived

This is exactly why I believe Wachtell has always been selective about what kind of matters it handles. Focusing on “life or death” corporate cases that have high boardroom visibility gives the firm enormous pricing power.

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That lets it pay its lawyers far more than other Biglaw firms which keeps hiring standards high. It’s a flywheel that reinforces itself over years and decades.

3 - Performance related pay will always look absurd to those who receive guaranteed pay

The final unspoken rule involves risk and accountability—and is arguably the most important one out of all of them. The biggest rap against legal fees is that they’re often tied to cost—hours worked—not outcomes. Law firms are in the business of selling hours. Wachtell, on the other hand, does things differently.

According to observers, the “success fee” in controversy in the Musk-Wachtell lawsuit is something it commonly negotiates for with clients. According to Reuters:

“Wachtell’s business model has long been based on results,” said William Henderson, a professor at Indiana University Maurer School of Law who studies the legal profession, noting that co-founder Marty Lipton was “the original go-to lawyer” for a CEO or board facing a hostile takeover …

The firm “often receives a fee in the range of 60 to 80 percent of the fees paid to investment advisors,” the memo stated. “The total fee amounts in these illustrative matters range from approximately $33mm to $134mm.”

I know there are some quirks in this case that make the success fee kind of questionable.

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But I don’t want to focus on that. Instead, I want to focus on the fact that getting an enormous success fee is a common practice for Wachtell. When you tie your impact to outcomes, you can receive rewards that seem absurd in other contexts.

This is certainly true in law. It’s why when lawyers charge a contingency fee, they can make far more money with less work than they would billing by the hour.

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It’s also true outside of the law. In most sales roles, you get paid a percentage on the deals you close. If you don’t close deals, you don’t get paid. This is why sales reps—if they’re good—can earn enormous amounts of money by doing far less work than other employees. They are carrying the risk of non-performance, and are accountable for outcomes.

The system looks super unfair to everyone else who puts in just as many hours—if not more.

But most people don’t get paid on outcomes for work. They get paid on time spent or hours worked. So those who get paid on outcomes get paid generously if they successfully deliver the goods.

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In Wachtell’s case, they successfully forced a buyer to through with an acquisition at above-market-rates that delivered enormous value for existing shareholders.

This is why rainmakers who bring in clients make insane amounts of money without billing very many hours. Their job isn’t to put in hours. It’s to deliver financial outcomes in the form or revenue, to the firm.

At the end of the day, that’s what really matters.

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1. The $90 million fee represents just 0.2% of the $44,000,000,000 matter.

2. You may recall that earlier this year I explained why law firm distribution is deeply tied to the firm’s perception and brand. From This Time Is Different: “That trust comes from the firm’s brand. Which is made up of a collection of individual, personal brands & relationships of the attorneys at the firm. Clients “don’t hire the firm, they hire the lawyer” but if you have a collection of these talented lawyers, the trust starts to rub off on the firm’s overall brand over time. Each of today’s most successful firms started off as a tiny group of superstar lawyers. Eventually the positive traits associated with these lawyers rubbed off on the entire firm.”

3. Like the fact that the Twitter used Wachtell to enrich its old shareholders at the expense of its new owner. I guess that’s what this entire litigation is all about.

4. Just putting a footnote here to let you know that I’m aware that contingency fees are sometimes not completely aligned with client outcomes. I can get into a deeper discussion about that some other time, if you’re interested.

5. If you’re an executive and you’re frustrated by your people punching a clock and not taking accountability for outcomes, I would challenge you to examine whether you’re providing sufficient economic incentives for them to deliver.