Gordon's post inspired me to share the reaction of my Law, Literature and Business class to Ron Gilson's classic article. "Value Creation by Business Lawyers" might seem an odd syllabus pick, even though Gilson opens with a telling quote from Kurt Vonnegut (see after the jump if you want a reminder). But Gilson's transaction cost engineer is the reigning academic account of what business lawyers actually do, so I figured it was part of the literature of business law.
The students found Gilson's central claim to be pretty self-serving. Business lawyers in his view don't just negotiate in a zero-sum game, but rather create value by reducing transaction costs and enable more deals to be done, at lower cost. My students accepted the transaction-cost-reduction portion of Gilson's argument pretty readily, but remained unconvinced that lawyers are specially suited to play the transaction-cost-engineer role. The grim job market and perennial stories about outsourcing legal services help explain their skepticism, I suspect.
One thing that struck me anew was Gilson's struggle for a language to describe and justify business lawyer's role and fees. "Transaction cost engineer" doesn't exactly roll off the tongue, nor does it do what a metaphor is supposed to do, vividly illustrate a point.
Irate client: $50,000 for negotiating the reps and warranties? Are you serious? For this much I could hire 10 Indian software engineers!
Lawyer (explaining): Well, I'm really a transaction-cost engineer.
Gilson himself ends with the classic pie image: we do more than just divide up the pie, he says, we reduce uncertainty, and that makes more pies, and larger pies. Anyone have a better metaphor for what business lawyers do?
In every big transaction [the professor said], there is a magic moment during which a man has surrendered a treasure, and during which the man who is due to receive it has not yet done so. An alert lawyer will make that moment his own, possessing the treasure for a magic microsecond, taking a little of it, passing it on. If the man who is to receive the treasure is unused to wealth, has an inferiority complex and shapeless feelings of guilt, as most people do, the lawyer can often take as much as half the bundle, and still receive the recipient's blubbering thanks.
K. Vonnegut, God Bless You, Mr. Rosewater 17-18 (1965).
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1. Posted by Vic on October 22, 2008 @ 15:07 | Permalink
I conducted some interviews in connection with my research on regulatory engineering. Perhaps the best metaphor was from sports: quarterbacking the deal. This captures the idea that deal lawyers do more than quibble over reps and warranties -- they manage all of the information, including the information coming in from bankers, accountants, clients, etc.
Another frequent metaphor is that of an airline pilot landing the plane.
2. Posted by Jeff Lipshaw on October 22, 2008 @ 17:42 | Permalink
Having quarterbacked a lot of deals, I like that metaphor a hell of a lot better than transaction cost engineer, which has always struck me as a way of justifying lawyers and not giving up on Coaseian economics, all at the same time.
There ARE places where lawyers reduce transaction costs, say, by mediating between two positions to reach a solution, but there's nothing particularly lawyerly about that. That's a negotiating skill.
My intuition tells me, but I've never taken the time to work this out, that the better picture is of the Prisoner's Dilemma. Both clients would be better off cooperating by throwing all the lawyers out of the room for most of the issues in the deal, hence eliminating the transaction cost of arguing over myriad reps and warranties and other contract niceties that don't make any difference anyway. So imagine a Prisoner's Dilemma matrix with Party A and Party B, and the choice for each is "Lawyer" or "No Lawyer." The payoff for each side choosing "No Lawyer" is a huge reduction in costs (say, 5, 5) compared to both sides choosing "Lawyer" (say, 10, 10)" But both sides keep their lawyers, for fear of the (1, 20) or (20, 1) outcomes in the Lawyer/No Lawyer boxes that are akin to one prisoner confessing but the other one not.
3. Posted by Jeff Lipshaw on October 22, 2008 @ 17:49 | Permalink
BTW, I also think the idea that what LAWYERS do is reduce uncertainty is a lawyer's illusion.
Lawyers provide an alternative model for resolving disputes about the deal that is better than pistols at twenty paces, but the idea that the contract language provides certainty in anything other than trivial cases is what happens when you try to have an economic model supervene on a linguistic exercise.
4. Posted by Jake on October 22, 2008 @ 20:44 | Permalink
Vic's view that good deal lawyers are effective information managers seems dead on. A useful law school education should acclimate its customers to expect that reality when they get out.
5. Posted by David Zaring on October 22, 2008 @ 21:14 | Permalink
Like that prisoners' dilemma metaphor. But it's the World Series, and I live in PhilaPa. Can lawyers be closers?
6. Posted by Usha on October 23, 2008 @ 4:55 | Permalink
I like the quarterback metaphor, too, despite an only superficial understanding of football. Again, hard to see what makes lawyers specially suited to play this role: is it lawyers' training in issue spotting and general knowledge of the regulatory landscape? The best M&A lawyers I knew excelled at translating. They talked to the tax specialists, the environmental specialists, the accountants, and then translated everything back to the client. That sounds a lot like Vic and Jake's idea of lawyer as information manager.
I like the "lawyers dilemma", too. I don't know enough about baseball to know if deal lawyers are closers. Interesting comments, all around.
7. Posted by Timothy on May 23, 2011 @ 22:42 | Permalink
Jeff, of course they reduce uncertainty. To say thats an illusion is just straight up silly. They do tons and tons of fact checking to back up what they're putting out there.
8. Posted by business lawyers Irvine on July 25, 2012 @ 4:17 | Permalink
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