The Death of Information Asymmetry

One concept I discuss in my workshops is "information asymmetry."  It refers to the information gap facing one or both parties in a transaction. Think about online dating profiles and how the information presented is rarely sufficient to make an informed decision -- the "tall, 30-something, athletic type" might turn out to be a frumpy, late middle-aged couch potato!  Or how real estate ads tend to mask deficiencies -- a "fixer-upper!" Or what used car salesmen say, or don't say, to entice you to buy some perpetually disabled lemon.  The internet fundamentally changed how consumers purchase new cars, since we now have ready access to manufacturer pricing information and can comparison shop for similar models and accessory packages across multiple sources. It has also impacted airfares, with transparency creating greater competition for airlines when potential travelers can make informed choices.  Why are we surprised, then, to learn that tools and practices have emerged to aid buyers in the purchase of legal services? Corporate counsel and procurement managers have access to a broad range of tools and best practices to inform their outside counsel selection process.  Law firms accustomed to promoting brand and pedigree as a proxy for quality now face informed buyers who can precisely define what quality means to them and then measure individual law firm providers against that standard.  And not surprisingly, many lawyers have discovered that their rates, their approach to client and matter management, and yes, even the quality of their legal work product, are wanting. Ouch. To be clear, I am not stating that lawyers are discovering that they're poor lawyers - but they may be learning that their clients define quality in different ways, and lawyers must first know and secondly measure their own performance against these quality metrics.

This is still an emerging field.  While some tools have existed for years, many buyers -- in-house counsel and procurement alike -- are still finding their way.  It's as common to find a selection process geared to lower law firm rates as it is to find one engineered to identify the optimal firm for a given engagement based on non-financial matters. It's as common to find a law firm embracing a flexible approach to alternative fees and project management as it is to find one merely offering discounts as the solution to all client concerns.  So it's a learning process for all parties.

So, how can I learn more, you say?  I'm glad you asked!

Attend a webinar

I will be presenting a webinar on this topic shortly, along with veteran sourcing consultant Susan O'Brien, produced by my business partner Integrated Management Services.  We will discuss how law departments and law firms often face similar challenges, namely to demonstrate value to their stakeholders and clients.  Comparing billing rates is a starting point but may not paint the whole picture.  Successful relationships begin with both parties understanding how value is defined and then tracking and measuring the key performance indicators.  And even then the in-house counsel and outside counsel may have different interpretations of the same results, so regular communication is critical.  We'll discuss the challenges in identifying and tracking the right metrics, and we'll share real life experiences from contrasting viewpoints - law firms, law departments, and business units.

The Flip Side of Dashboard Reports: How Clients Perceive What You Measure will be held on Tuesday, 10 September, at 1 PM ET.  To register for the webinar, click here.  Note that there is a fee to attend but if you include promo code ims2013, the fee is waived.

Attend a workshop

I will also be presenting a keynote talk at the upcoming TyMetrix LegalView Forum at the Terranea Resort outside Los Angeles. In the talk I'll connect the dots between the seemingly opposing goals of client satisfaction, law firm profits and work product quality, and we'll demonstrate how alternative fees, project management and process improvement are good for law firms.  There will also be sessions on negotiation skills and the role of data in the decision process.  Then we will embark upon a collaborative exercise to demonstrate how in-house counsel, corporate procurement managers, and partners, marketers, finance and pricing managers from outside law firms can achieve mutually satisfactory outcomes in a negotiation.  This session builds upon the earlier LegalView forums held in New York, Washington, DC, and Chicago. Each of these prior sessions resulted in a white paper, which I strongly encourage you to read (click here, and select each of the prior forums to download the white papers).

Negotiation Strategies for Corporations and Law Firms will be held at Terranea Resort on Monday and Tuesday, 23-24 September. To register for the workshop, click here.

We're all in this together.  Through improved communication and collaboration we'll find that the interests of in-house counsel and outside counsel are more in alignment than might otherwise appear obvious.  Law departments embracing an outside counsel selection and management process informed by data have everything to gain by inviting their trusted law firm partners into the tent.  Law firms that are ahead of the curve gain a strategic advantage by helping their clients make better hiring decisions.  Let's get going.

Timothy B. Corcoran delivers keynote presentations and conducts workshops to help lawyers, in-house counsel and legal service providers profit in a time of great change.  To inquire about his services, contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.

Related consulting experience:

• Advised multiple law departments on the creation and improvement of preferred panel programs 
• Conducted collaborative workshops between in-house counsel and outside counsel on alternative fees and project management
• Conducted collaborative workshops between in-house counsel and business clients, including "factory tours" and understanding the business
• Advised legal software company on market appetite for features/functions and market entry tactics for information solution  
• Multiple speaking engagements related to improving client satisfaction by embracing the "new normal" (see Speaking page for examples)

THE Conference to attend: Pricing, Practice Innovation, Project Management

Join me in Chicago in October at P3 Conference hosted by the Legal Marketing Association.  Regular readers know that a consistent theme in this space is the role of established business practices in a modern law firm. While it may have been possible in the past to operate a law firm as a hobby in between billing hours, and it may have been possible to generate handsome profits without regard to the client's perceived value, and it may have been possible to ignore standard business metrics because the phone always rang, the modern law firm leader and the modern law firm must adapt.  As clients increasingly look to extract cost savings from the legal function and improve the predictability of outside counsel expenses, it's critical for law firms to change with the times:  strategic pricing, alternative fee arrangements, project management, leadership training, cost accounting, return on investment and other micro-economic lessons are necessary components in the modern leader's toolkit.  The Legal Marketing Association has combined these topics into a multi-day conference designed to provide comprehensive education and to provide networking opportunities for those whose daily duties involve these topics.

The P3 Conference will commence on 30 September 2013 and concludes on 2 October.  Registration is limited and filling fast, so don't delay in confirming your attendance.  The registration fee is exceptionally affordable given the depth of the content and the quality of the speakers.  If you're not a member of the Legal Marketing Association, join now and benefit from favorable member rates.  While most LMA members spend their days providing marketing and business development services in or to law firms, many new members are in-house counsel, law firm partners, law firm finance and pricing professionals, technology experts, consultants and providers of products and services to the legal profession.  LMA is unique in that all stakeholders are full members... no "haves" and "have nots" in this association of like-minded professionals!

For insights into the genesis of the conference, directly from the desk of the conference chair and one of the founders of the modern law firm pricing movement, visit Toby Brown's excellent article at the 3 Geeks law blog.  For full details on speakers and topics, visit the LMA P3 conference website.  Click here to register.  And be sure to stay at the fantastic Wit Hotel in Chicago, and join us for a drink at the famed rooftop bar overlooking the Loop.

I look forward to seeing you there!

Timothy B. Corcoran delivers keynote presentations and conducts workshops to help lawyers, in-house counsel and legal service providers profit in a time of great change.  To inquire about his services, contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.

Adapting to the New Normal: Fleeing Pain and Pursuing Happiness

Graphic link: http://www.lazypersonaltraining.com/2012/10/why-does-this-keep-happening-to-me.html#.UaZqfStATe4

A common scenario confronts my law firm clients, prompting them to call me:

"We are increasingly required to adopt alternative fee arrangements for clients who prefer low cost over quality, and we struggle with whether or not to lower our rates and take a loss or just walk away from non-profitable business and focus on clients who value us.  We need help on a case by case basis deciding the right way forward."

Law firm leaders who embrace the assumptions contained in this scenario, or who are leading lawyers sharing these assumptions, are constantly looking for methods to reduce the pain associated with this new normal. Just as professional athletes need to play through chronic pain as the season wears on, many lawyers seek techniques to help them valiantly soldier through the many new obstacles.

I disagree with a number of the assumptions contained in this scenario, but it's no wonder that lawyers who operate under these assumptions struggle to adapt.  So let's tackle this head on:  the changes taking place in the legal profession are good for lawyers and for law firms, so long as we're willing to let go of a few long-standing and outdated assumptions.

Clients always care about quality. But they define quality differently than you do.  In business, financial predictability is critical.  The legal function, whether managed by a chief legal officer, a general counsel or a vice president of finance, is now subject to the same demand for certainty as the rest of the business.  Law firms that embrace predictability and all that this means (including proactively managing expectations when circumstances change), are considered to be higher quality and valued more as trusted advisors than those law firms that distinguish themselves solely on the quality of the work product.  Few matters require the best legal team in the world; every matter requires some measure of predictability.

Revenue is not the same as profit.  Billing hours generates top line revenue.  It's the starting point for all the calculations that lead to firm profits.  But it's not the same.  If I can lower my cost of production and delivery, and lower my organizational overhead, I can generate a higher profit even when revenues are flat or declining.  A matter that bills 250 hours at $450 per hour  generates $112,500 in revenue, which at a 24% margin nets $27,000 in profit.  A matter that bills at a flat rate of $75,000 and generates a 35% return nets a profit of $26,250.  How many matters can you have win if you offer to do the work for $75,000 rather than $112,500?  Or more realistically, how many matters can you win if you offer to do the work for $75,000 rather than refuse to quote any estimate, because "legal matters are inherently unpredictable?"

Alternative Fee Arrangements can be profitable.  Lawyers raised on a billable hour revenue model tend to believe this is the only way, or at least the ideal way, to generate revenues. But as we've seen, there are other ways to generate profits.  The secret to unlocking the value of alternative fee arrangements is this:  only those with experience have enough of a learning curve to find efficiencies in the delivery of a legal service.  The firm down the street that merely lowers rates to win work won't win if the prospective client, or the procurement officer, isn't first convinced of their subject matter expertise.  Knowing your practice gets you in the game.  Offering predictability and efficiency based on that knowledge wins the work and generates profits.  This fundamental truth is the driver of profitability in nearly every other line of business.

Discounts don't provide predictability.  This is a mistake too many clients make.  Because it's hard to create legal budgets, and sometimes even harder to manage to a legal budget, it's easier for a client to just demand a discount or for a law firm to just offer a discount and then operate on an hourly-fee basis.  After all, that discount conveys to the powers-that-be that we've negotiated in good faith and saved money, doesn't it?  But no CFO is fooled by this.  A matter that takes 200 hours at $425 per hour is obviously lower than that same matter billed for 200 hours at $450 per hour... but it's still more than the $75,000 flat fee the experienced firm down the street is offering.  Merely discounting rates without also addressing the cost of delivering legal services will dilute profits every single time.  If you have a process to vet discounts but don't have a corresponding process to address service delivery, you are pouring profits down the drain.

Relationships still matter, but it's important to focus on the right relationships.  We can walk away from clients demanding discounts or alternative fee arrangements.  But to what end?  Assuming buyers are increasingly armed with better information about the value of legal services, then who is our preferred target market -- GCs and CFOs who are so singularly unskilled in their roles that they won't seek to find or measure value?  Clients who are so loyal to us that we can overcharge them again and again?  It's more important to establish and nurture relationships with those clients and prospective clients whose business challenges closely match our capabilities, and whose industry or even geographic footprint closely match our own, allowing us to serve their needs efficiently.  Some buyers seek value (they will pay market rates for legal services from established providers) whereas others merely demand irrational discounts from everyone.  It's critical to determine the tipping point in your practices so you know which relationships to pursue, and which to discard.

Profit is a more informative driver of compensation than revenue alone.  Many firms have a compensation system which rewards fee origination.  The lockstep firms pay increasing amounts for tenure, regardless of contribution.  Both are dumb models, or at least incomplete models.  A key challenge with favoring fee origination is that such models ignore the cost of delivery.  A partner who generates $1.5 million in fees but consumes resources and overhead equivalent to $1.2 million nets $300,000 or a 20% profit margin.  A partner who generates $1 million in fees but consumes resources and overhead equivalent to $600,000 nets $400,000 or a 40% margin.  In many firms, the first partner would be more handsomely rewarded than the second.  It's far more nuanced than this, but directionally you can see the conflict.  It's a similar challenge with a lock step firm -- if you want innovation and efficiency in order to drive greater profits, then reward those who convert experience into efficiency rather than merely reward experience.

While the initial outreach from some of my clients may be a plea for help to avoid the pain of adapting to the new normal, we often find that a good strategy generates plenty of positive rewards for partners and leaders alike.  Instead of pushing partners into painful change that they don't want, we provide a roadmap to pursue a more pleasurable outcome and the partners come along willingly.  In your own firm, do you find yourself lamenting the loss of the old ways moreso than you look forward to tomorrow?  Perhaps you've heard of the man who visited his doctor and cried, "Doc, it hurts when I do this."  The wise doctor simply said, "Stop doing that."  Isn't it time your firm pursued pleasure over pain?

Timothy B. Corcoran delivers keynote presentations and conducts workshops to help lawyers, in-house counsel and legal service providers profit in a time of great change.  To inquire about his services, click here or contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.

Why Pesky Clients Meddle in the Law Firm Business

Think back to the last time you purchased a new vehicle.  Do you recall advising the salesperson, in that gently chiding tone of yours, to be sure not to show you any cars manufactured on a Monday or a Friday?  When the incredulous salesperson asked you why the day of manufacture would possibly matter, do you recall your explanation?

"We all know that assembly line workers are, like everyone else, tired on Monday mornings so quality suffers until the workers regain their rhythm.  And we all know that many assembly line workers start their weekend on Thursday night and come into work on Friday morning tired and hungover, and with everyone else so focused on starting their weekend, quality suffers all day long."

This is, of course, a preposterous notion.  Automobile manufacturers embed so many quality controls and redundancies into the manufacturing operations that they feel quite comfortable issuing a brand promise of high manufacturing quality, regardless of which worker, which shift, which factory, which country, was involved in the assembly of a given vehicle.  Sure, mistakes can happen, but the incidences are statistically remote and any observable pattern of recurring flaws would be dealt with quickly and effectively.

And yet every single day in-house counsel across the globe feel the need to instruct their outside lawyers to not allow first- or second-year associates to work on certain matters, or on all of their matters, in order to protect the integrity, quality and efficiency of the legal work product. What gives them the right to meddle in the production of the legal work?  What factors influence clients to analyze legal bills, highlighting some tasks as unnecessary and accordingly refusing to pay for services rendered?  The answer, quite simply, is the typically insufficient and ineffective law firm brand promise.

Quality isn't a de facto outcome of pedigree

Once, while serving as moderator of a panel of law firm managing partners presenting at an in-house counsel conference, I asked how each law firm demonstrated "quality" to its clients.  One managing partner declared that his approach was to hire the best and the brightest, pay an above-average wage, staff matters to ensure thoroughness and leave no stone unturned in the pursuit of the client's objectives.  An audience member asked the managing partner if he wasn't even a little concerned that clients, the questioner included, weren't willing to pay premium prices for young lawyers to learn their craft.  The managing partner scoffed at the notion, suggesting that if the client wants quality, he should expect to pay for it.  Let's all sit quietly for a moment and let that, shall we say, inelegant response settle in.

Before you judge the managing partner too harshly, understand that nearly every law firm partner felt this way just a few years ago.  Hire quality people, train them at the knee of quality partners, continue the tradition of quality that Smith & Jones has delivered lo these many years, rinse and repeat.  The only oddity was this managing partner's tone deafness in the face of monumental market changes, but his perspective is by no means unique.  The fact is, law school doesn't train lawyers to practice.  (If you aren't prepared to stipulate this point, then you needn't continue reading.)  Furthermore, academic success, as typically measured by the LSAT, law school grades and bar exam performance, have limited utility in predicting a lawyer's ability to understand a client business, have empathy, employ active listening skills, ensure predictability, use project management, deploy resources efficiently, embrace technology, create and adhere to budgets, communicate proactively and be responsive -- the very factors clients use to measure law firm performance.  Simply hiring good people isn't enough, not nearly enough, to demonstrate quality.

Price is a poor proxy for quality

I like wine.  I don't know much about it, but I enjoy a fine red or a chilled white when the occasion arises.  And like many unsophisticated wine buyers, when I'm invited to a dinner party and I need to select a bottle to bring, I migrate to the expensive aisles at my local wine merchant.  After all, I can't arrive at a fancy party with a $25 bottle of wine when a $75 bottle of wine would be far more suitable, right?!  The oenophiles reading this are chuckling.  (Oenophile is the Greek word for wine snob!)  Anyone who knows wine knows that price is a lousy proxy for quality.  There are many excellent wines at affordable prices that, by comparison, make the expensive wines taste like aged vinegar.  Yet this is the same approach many firms take to demonstrate quality:  "We're expensive because we're good; and we're good because we're expensive.  Don't hire that inexpensive middle-market middle America firm, hire us at two times the rate, because you will get two times the quality."

Anyone who has taken a Microeconomics course knows that it's not uncommon for consumers to substitute price for quality, and this perception is often aided by the producers who use subtle -- and not so subtle -- cues to influence buyer behavior.  The classic business school example is Grey Poupon, the mustard, which experienced dramatically improved sales when the manufacturer raised the price and launched an advertising campaign populated with rich people asking one another for Grey Poupon.  This works when buyers are unsophisticated, a.k.a. they lack sufficient information on which to make a more measurable distinction.  Since so many law firms are indistinguishable from one another ("We're big but with a personal touch, global but operate locally, fierce but collegial, diverse but Ivy-league educated...") it's no surprise that firms and clients alike have traditionally gravitated toward high-price as an indicator of quality.  But clients now know better.  With the abundance of metrics available to any in-house counsel, it is easy to distinguish between those firms meeting a client's specific and articulated needs, and those firms failing to do so.  (And if you're an in-house counsel and you don't know what I'm talking about, for crying out loud call me immediately, lest you mistake the pressure from your CEO and CFO as a simple mandate to negotiate hourly rate discounts!)

Quality results from measurable, repeatable, demonstrable processes

Incorporating metrics in the selection and management of outside counsel is exactly why we see the increased presence of the procurement function in many law departments.  A law department can create a dashboard of measurable factors and each outside law firm must fall within acceptable boundaries or be shown the door.  Many partners perceive the market changes as purely a reaction to price -- whether in the form of clients simply demanding lower rates, or in the form of competitors offering predatory pricing to steal clients away.  The reality is, many law firms have created their own dashboards of measurable performance cues, and these form the basis of their pricing and operational strategy.  Law Firm A may be able to provide a service on a fixed fee basis, or within certain boundaries on an hourly basis, by closely scrutinizing the manner in which it delivers its services and still generate a handsome profit while finding efficiencies.  But Law Firm B, which treats all matters as the same regardless of the client's perceived value, can only offer discounts which erodes profitability and does nothing to improve the quality of the work product or the client's perception of value.  And every day the partners of Law Firm B will cry that their competitors are "undercutting the price and winning work that can't possibly be profitable."  The only thing holding back Law Firm B from embracing a more modern business-oriented approach to the practice is the short-sightedness of its leaders and the recalcitrant posture of its partners.

Clients can go too far, but can you blame them?

In a recent workshop, an in-house lawyer explained that she bans first- and second-year associates from all of her company's matters because she fears that any inefficiency will be passed on to her, often in a disguised fashion.  "I'll pay partner rates for their experience, but I won't pay the lower associates rates when the 'rates times too many hours' calculation always works in the law firm's favor."  She went on to say that she also demands her outside counsel provide profitability information so she can "ensure that the law firm is making a fair profit, but too much of a profit, from the work I send them."  Partners, hold on to your chairs, I've got this one.

If Law Firm A in our example above can deliver a quality work product, using the client's own metrics, at a reasonable rate, using the client's own perception of value, then the client has no business meddling in how the law firm produces the work.  Like the auto buyer, the brand promise of quality is built into the many measurable performance attributes.  A client who continues to meddle under these circumstances is misguided.  And, let's be crystal clear,  no matter how idiotic it is for law firm leaders to perpetuate the profitability rankings, and how meaningless profit is as a measure of quality, no client has any business dictating the profit margin a law firm can make.  Any General Counsel who disagrees with me on this point should schedule five minutes with his or her own CEO or CFO and ask how often these business leaders allow their clientele to have direct input into transactional or long-run profit margins.  I get the underlying intent, but clients should focus on the performance metrics that matter, hire law firms that meet these performance criteria, and leave the production and profitability to the law firms to decide and derive.

Timothy B. Corcoran delivers keynote presentations and conducts workshops to help lawyers, in-house counsel and legal service providers profit in a time of great change.  To inquire about his services, click here or contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.

Improving the Certainty of Legal Budgets - a Collaborative Workshop

It's law firm annual retreat season and I've been traversing the country presenting to practice groups and entire firms and preaching the importance of predictability in legal budgets.  As one client wrote to me afterwards, "Thank you for making 'predictability' our new buzzword!"  My perspective is somewhat unique, as I explain how using budgets can improve the quality of the legal work product, improve client satisfaction and generate greater profits for the law firm.  Who wouldn't want to achieve these disparate and elusive outcomes simultaneously?  Well, quite a few, as it turns out.  Many lawyers raised on the billable hour continue to feel that any approach other than maximizing hours is a slippery slope, destined to result in increased risk and lower compensation.  They could not be more wrong, and as regular readers of my articles can attest, I can demonstrate this in terms that even math-challenged lawyers can embrace! There are quite a few tactics and tools to help in the creation and fine-tuning of legal matter budgets.  In fact, I will be participating in a collaborative workshop on Thursday, May 16, in Washington, DC, where groups of in-house counsel and outside counsel, along with colleagues from the law firm marketing and finance departments, will work together on strategies and tactics to develop legal matter budgets.  What information is necessary?  How much information should law departments share to help law firms craft an RFP and a budget?  Who's responsible when something unexpected occurs and the budget no longer reflects the scope of the matter?  And so on.  If you've struggled with these issues or others related to legal matter budgets -- and honestly, who hasn't? -- then join us.  The workshop is produced by TyMetrix, and here's the workshop agenda:

Opening TED-Style Discussion: Emerging Trends in Buying Legal Services—Law firms and corporate law departments will collaboratively examine key elements and challenges that arise when budgeting and forecasting the business of law. The group will discuss what current tools that exist to improve planning and the factors that must be considered, such as average matter durations, total costa, rates, and staffing allocations for matters by timekeeper role, phase, task, and geography.

Workshop Collaboration: Improving the Certainty of Budgeting and Forecasting—Hear and discuss new ways corporate law departments and law firms can improve the certainty of budgeting and forecasting in case study exercise with peers. Groups will examine a real-life legal challenge and develop a proposal that is acceptable to both the firm and the corporation.

Workshop Results & Discussion: Scope, Baseline, Benchmark, Value—Upon conclusion of the group exercise, there will be a collective presentation of the workshop findings mapped to four defined pillars—Scope, Baseline, Benchmark, Value—that provide a blueprint for better budgeting and forecasting for both law firms and corporations.

TyMetrix LegalVIEW^® Forums are peer-to-peer content driven sessions designed to exchange ideas and best practices related to an emerging trend in the buying—and selling—of legal services.

Join me in Washington, DC on May 16 by registering here.  Enrollment is free, but come prepared to roll up your sleeves and contribute.  If you can't make this session, there are two more in the series this year:  July 11 in Chicago ("Sourcing Legal Providers in a Changing Business Environment")and September 26 at Terranea Resort in Rancho Palos Verdes, CA ("Negotiation Strategies for Corporations & Law Firms").

Each session generates best practices in the form of a white paper which is available to all.  Here is the white paper that was produced after the workshop held in February, Establishing Value-Based Pricing and AFAs.  See this synopsis by Dr. Silvia Hodges.

Timothy B. Corcoran delivers keynote presentations and conducts workshops to help lawyers, in-house counsel and legal service providers profit in a time of great change.  To inquire about his services, click here or contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.