Do Less Law - Redefining Value in the Delivery of Legal Services

I have the good fortune to be invited to attend the upcoming ILTA annual conference to join my friend Ron Friedmann in conducting an interactive workshop entitled "Do Less Law." This session builds on a growing concept that the maturation of law practice is as much about doing less as it is about doing more with less, a concept that Ron coined in a November 2011 article "To Reduce Legal Spend, Do Less Law" and that he has since expanded on his blog and #DoLessLaw tweets. As regular readers know, I have also addressed this concept regularly here and in my other speeches and articles. Corporate law departments face budget pressure and demand more value from their law firms. Yet many cannot clearly define value. Some in the market equate value with efficiency.  A focus only on efficiency, however, misses many other opportunities to control cost and create value. Doing something efficiently that does not need doing at all still wastes money. What exactly does it mean, however, to do less law? And how big an opportunity is it?

At ILTA 2015, we will have an opportunity to crowdsource the answers. In preparation for the interactive session at ILTA, this post introduces the idea in more detail and seeks feedback.  Below is the taxonomy of Do Less Law options. Whether you think the ideas are terrible or great, we welcome comments or email to help refine it. And, we hope to see many of you at our session on Wednesday, September 2, 2015, at 3:30pm PDT in Las Vegas.  Our goal at the session is to get you and your colleagues discussing these ideas and deciding which are worth pursuing – and how to pursue them.

Do Less Law Taxonomy

1. Do what we now do but better 1.1 Improve Efficiency 1.1.1 Automate 1.1.1.1 Lawyers learn tech to their work faster and more consistently 1.1.1. 2. Market adopts interactive advisory systems (e.g., Neota Logic) or cognitive computing (e.g, IBM Watson) to supplement or replace lawyer work 1. 1. 2. Improve process to eliminate waste 1. 1. 3. Manage work to control effort (legal project management) 1. 2. Reduce Cost 1.2.1. Staff matters with lower cost resources (“alternative staffing”) 1.2. 2. Partner with or use alternative providers (LPO, New Law, doc review companies, or .lower cost firms 1.2.3. Reduce overhead with smaller offices, moving work to low cost centers, and working virtually)

2. Do what we now do but less intensively 2. 1. Scope matters systematically, more specifically, decide explicitly the level of effort warranted 2.1.1. In transactions, decide what risks need papering 2.1. 2. In litigation, use risk analysis (decision trees) to value matters 2. 2. Stick to scope with legal project management (LPM)

3. Do less than we do now by practicing preventive law 3. 1. Improve compliance (or decide consciously the appropriate level of compliance) 3. 2. Identify legal risks in advance and then act to avoid them 3.2.1. Conduct legal health audit and act on findings 3.2.2. Use big data and analytics to find problem 3.2.2.1. Detect prior “bad patterns” to prevent future recurrence 3.2.2. 2. Identify risky behaviors via analyzing email traffic (“big brother”) 3.3. Train corporate employees to comply where cost of non-compliance is too high

4. Re-think how we do what we do now 4. 1. “Settle” sooner 4.1.1. Decide litigation settlement value earlier and stick to it 4.1.2. Decide transaction key terms and stop negotiating when you get them 4.1.3. Decide how thorough a counseling answer is enough – what risks are you willing to live with – boulders or motes of dust? 4.2. Create open source law (this is not the law of open source code) 4.2.1. Pool know-how and re-usable documents across clients (privately or publicly, e.g., Docracy) 4.2.2. Think of this as collective knowledge management (KM) 4. 3. Automate contracts 4.3.1. Use existing technology more and more effectively 4.3.1.1. Analyze and systematize contracts (with, e.g., KM Standards) 4.3.1.2. Build document assembly systems 4.3.1.3. Deploy contract lifecycle management software (e.g., Apttus or Selectica) 4.3.1.4. Use eSigning software 4.3.2. Re-invent contracts 4.3.2.1. Write contracts as software code 4.3.2.2. Write contracts as database records (XML, JSON, or similar) 4.3.2.3. Design and deploy a Blockchain approach 4.4. Re-think litigation 4.4.1. Substitute information governance for eDiscovery 4.4.2. Do risk analysis (e.g., decision trees) to assess individual matters and portfolios 4.4.3. Assess cases early and decide consciously whether to look for boulders, rocks, stones, pebbles, or motes of dust. 4.4.4. Online dispute resolution 4.5. Automate counseling 4.5.1. Collect inquiries systematically (KM) 4.5.2. Develop interactive advisory systems to handle high volume problems 4.5.3. Convert regulations into code

 

Timothy B. Corcoran is the immediate past President of the Legal Marketing Association and an elected Fellow of the College of Law Practice Management. He delivers keynote presentations, conducts workshops, and advises leaders of law firms, in-house legal departments, and legal service providers on how to profit in a time of great change.  To inquire about his services, contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.

Avoiding Laziness in Setting Goals

Goal ConfusionIt seems axiomatic: if you don't know where you're going, how do you know when you've arrived? Yet many law firms fail to define the most fundamental of goals, leaving them prone to variable interpretation, or misinterpretation, on the nature of their fiscal health. Often the failure to define goals or track performance within a law firm is purposeful, lest we offend any partner who might not measure up. It's time to acknowledge two truths: establishing goals and measuring performance can be challenging, but it's critically necessary; and if you're unwilling or unable to tackle performance management, you're not qualified to serve in a firm or practice group leadership role. No business should operate without goals. But ascending to a leadership position doesn't magically confer any special goal-setting ability. As a consequence, many managers who mean well embrace poor practices. Common mistakes include:

No goals -- In a collegial law firm environment where equity shareholders are owners, establishing goals is akin to playing favorites among equals, so management avoids establishing practice group goals and instead relies on broad organizational goals. This approach generates numerous problems. When we don't know which group is generating the most profit, we tend to allocate resources haphazardly and randomly, thereby diluting the investment in high-growth areas and over-loading investment in weak performers. We also perpetuate subsidies of weak groups by strong groups, and while the organizational ledger may not explicitly reflect who's subsidizing whom, everyone generally knows and some are not happy about it. We also fail to take corrective action when a group that could be performing well isn't, because its poor performance is masked within the larger firm results.

Stretch goals -- These are goals that go well beyond the previous high water mark of achievement, without a specific plan for attaining them. Nothing wrong with stretching, of course, and countless athletes have thanked their coaches for pushing them beyond their known limits to achieve superior performance. But simply demanding significantly higher performance without providing additional support or guidance sends a message that prior performance is considered lazy. In fact, this might be lazy management. "Work smarter, not harder," the manager says, as if these words alone will unlock efficiencies. A stretch goal works when there is a corresponding plan in place to break through previous barriers.

Equalized goals -- When management has an unsophisticated understanding of the market and the organization's capabilities, it establishes the same goals across the board. Every group must achieve 5% revenue growth, or every group must cut costs by 10%, or every group must improve profits by 8%. It would be an extraordinarily unlikely occurrence in any multi-line business, and most law firms are quite diverse in their practice offerings, for all units to have the exact same opportunity within a specific fiscal year to achieve similar results. Establishing the same goals for all units is formulaic, and the lazy managers who rely on this approach can literally be replaced by spreadsheets.

 

So that's what not to do. What should we do?

We can only answer this by having a deep understanding of both our internal capabilities and the external business climate. It could very well be folly to establish a revenue growth goal of 20% in a market where the most successful competitor is growing at 8-10%. It could similarly be folly to expect profit improvement of 5% from a group that is top heavy (i.e., over-staffed by partners) and therefore poor leverage and rate pressures are likely to depress earnings. So for each group we must examine the market opportunity and the competitive landscape to establish a baseline, and then we must examine our internal capabilities and practice group characteristics to establish our desired performance relative to this baseline. This approach will very likely produce different goals for different practices, as no two markets share the exact same dynamics.

Each practice group should have its own particular analysis informing the goals, and a narrative explaining the rationale and short- and long-term impact of any investments. Let's walk through a couple very simple examples illustrating the benefits of marrying internal and external analysis to derive informed goals. We'll rely merely on narrative rather than spreadsheets here, for expediency.

Example 1

The IP practice group has a modest revenue CAGR of 8%. However, its 82% realization rate is lower than the 89% firm average, and the group's contribution margin at 21% is lower than the firm's 31% overall profit margin. Through competitive analysis we've determined that one of our key competitors is adding staff and winning new clients at a much higher rate, in part because of lower rates. While we can't discern the competitor's IP group profit margin, we have observed overall firm profits to be up significantly. We've determined that our competitor's low rates aren't "suicide pricing" but in fact reflect an investment in process improvement and project management. Through sources we've learned that they rely increasingly on fixed fees.

We invest in a process improvement and project management initiative, which in its first year will further burden our profit margin, but will bear fruit in year two and beyond. We set a goal to increase our realization rate to 85% by identifying which matter types and/or tasks are subject to the most client scrutiny and prioritizing these areas for improving efficiency. We modestly increase our revenue goal to 9%, reflecting our confidence that our efficiency initiative will stop the attrition of clients and generate new matters. To secure this future, we'll kick off a client satisfaction tour conducted by our CMO and managing partner for our top clients, and launch an end-of-matter satisfaction survey for every closed file. We will hold our contribution margin goal at 21%, reflecting the incremental investment in the above initiatives offset in part by a freeze in hiring -- given our expected efficiencies we believe we're properly staffed. But we don't stop there. We set preliminary 2- and 5-year goals for revenue and profit to reflect the ongoing benefits from this year's investments and we link our practice group leader's bonus to shepherding and achieving these goals.

Example 2

The Litigation practice group has enjoyed superior performance in recent years, subsidizing other groups with its above-average revenue and profit margin, but this is in large part due to a significant matter that is expected to conclude in the first quarter. The 18% year over year revenue for the last two years is certain to decline, and the high staffing levels related to the large matter will depress profits from the current 38% margin until these resources can be redeployed.

The concluding matter is being watched by numerous other players in the market, and a wave of similar litigation is expected in numerous jurisdictions. The lead partner has been asked to speak at an industry conference on the topic, and we've designed an all-out market blitz to capitalize on the notoriety. An integrated campaign of traditional and social media, including a new blog, has commenced, and all partners and most senior associates have a visible role to play. We expect by year end to have enrolled multiple new clients, though the billings won't be sizable until the following year. We've identified numerous other areas of litigation that provide excellent training opportunities for our numerous young associates, and we've made assignments, particularly to matters with alternative fee arrangements in place so the client won't object to additional timekeepers participating. Our utilization will remain high as these associates will be kept busy, but there is minimal incremental revenue associated with this time. We relied heavily on contract attorneys for some of the nuts and bolts of the complex litigation so that cost will disappear almost immediately, with the exception of a few stars we expect to hire full time. The net impact of these efforts results in a revenue goal of 9% over the current year and a profit margin goal of 32%.

Example 3

The Corporate practice group has enjoyed a 11% revenue CAGR in recent years and its healthy 28% profit margin allowed us to recently invest in several key lateral hires. These laterals are expected to import several new clients and present additional cross-sell opportunities beyond the healthy rate at which the Corporate group already collaborates across the firm.

We tend to be very cautious when recruiting laterals, eschewing "elephant hunting" for more strategic and targeted wins. As a result, each of our several lateral recruits has a confirmed revenue base to bring in, and our due diligence up front confirms that we can integrate these practices within the Corporate group to improve margins, as many of our under-utilized resources and existing technology can be deployed immediately to serve the new clients. The external market for the transactional areas in which we excel and which we have recently invested are booming, and while client fee pressure is expected down the road at the moment we are enjoying premium rates for most services. We therefore establish a revenue goal at 22% over the current year, including the lateral business, and an improved profit margin of 32%.

 

These examples are, by nature, simple narratives that overlook a significant amount of underlying complexity. However, the central point is that each practice has different external and internal characteristics that require different approaches and different objectives. Setting goals that are equal across the board would be patently unfair and would muddy the waters when analyzing performance. Setting goals that are unrealistic would be risky, particularly if a short-term dip in performance would significantly impair a partner's individual compensation and lead him or her to depart with a book of clients. And avoiding the establishment of practice-specific goals would likely result in starving the groups most in need of investment. Don't fall into the habits of lazy managers and establish weak goals. Do the work and establish realistic, informed goals. Your organization and your shareholders deserve nothing less.

 

Timothy B. Corcoran is the immediate past President of the Legal Marketing Association and an elected Fellow of the College of Law Practice Management. He delivers keynote presentations, conducts workshops, and advises leaders of law firms, in-house legal departments, and legal service providers on how to profit in a time of great change.  To inquire about his services, contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.

Upcoming Workshops on Process Improvement and Project Management in Chicago and Washington, DC

While many visitors enjoy reading my insights into the changing face of the legal profession, others want more in-depth advice, instruction, and counseling.  Luckily, there's an app for that! In my day job as a management consultant, I work on-site with law firms, law departments, and legal service providers to embed and operationalize new ideas and business improvements into their organizations. To provide a glimpse into some of these ideas, my colleagues with the Legal Lean Sigma Institute, Catherine MacDonagh and Amy Hrehovcik, and I routinely offer open-enrollment workshops where we provide hands-on instruction. Please join us if you can at one of our upcoming events, details below. Process Improvement & Project Management White Belt Certification Course

Today's law firm and law department professionals are faced with continued challenges and opportunities to help maximize efficiencies. In reconnecting legal costs to the value received, we must begin with the voice of the client and then devise and employ strategies that deliver what clients want and competitive advantages for themselves. With process improvement (PI) and project management (PM), there are no tradeoffs – no one loses and everyone wins. This combined Legal Lean Sigma® Process Improvement White Belt Certification course will give you proven, disciplined approaches, tools and skills to take your role (and your firm, group, or department) to a new level of excellence and profitability. It is designed to provide an overview of Lean, Six Sigma and the fundamental drivers of project management and the essential elements of a quality project management initiative.

The workshop instructors have experience providing process improvement and project management courses in academia, training to lawyers in law firms and professional staff and law departments in multiple countries, and have implemented PI projects and LPM pilots within numerous law firms. The instructors also have direct experience managing high-stakes projects in both the corporate sector and in law firms. This certification course is experiential and interactive and requires full participation in order to be effective. Participants will leave with an appreciation for how project management, process improvement, law firm profitability and client satisfaction are inextricably linked. Plus, each attendee is eligible to receive a Certification in Legal Lean Sigma and Legal Project Management from the Legal Lean Sigma® Institute.LLSI

These interactive courses include experiential learning, table work, and discussions. We rely on case studies, examples, and success stories from our client law firms and legal departments to illustrate key learning points and to expose you to Six Sigma, Lean, and the principles of project management in context.  While we offer individual courses in Process Improvement and Project Management, we have found that offering both disciplines together more accurately reflects the realities of today's workplace:  A well-designed project plan can be impaired when impacted by inefficient processes; and the benefits of a well-designed process can be lost when combined with other inefficient processes as part of a larger project. Start with process improvement, start with project management - it almost doesn't matter. Sooner or later, you'll need to address both.

In addition to combining PI and PM, we also combine our own experiences: we have experience inside law firms, inside law departments, and as corporate executives managing the law department and hiring outside counsel. Our programs are practical and based on real-world experience. We balance the necessary academic content with the reality that most practitioners want to do it, not just learn about it.

Sample Process Improvement Agenda

  • Demonstration of a process - Time & Billing simulation
  • Key methodologies: Lean and Six Sigma
  • DMAIC: Define, Measure, Analyze, Improve, Control
  • Define Phase exercise - process mapping
  • Getting Started and Structuring for Success

Sample Project Management Agenda

  • Connecting Project Management and Process Improvement
  • Project Management Fundamentals
  • Getting Started - Project Charter exercise
  • Risk Register
  • Getting Started in your organization

 

Washington, DC

Location: Wiley Rein, 1776 K Street NW, Washington, DC

Date: Thursday, October 2, 2014

Register here

 

Chicago, IL

Produced by The Ark Group

Location: Drinker, Biddle & Reath, 191 North Wacker Drive, Suite 3700, Chicago, IL

Date: Thursday, November 6, 2014

Register here

 

Timothy B. Corcoran is the 2014 President of the Legal Marketing Association and an elected Fellow of the College of Law Practice Management. He delivers keynote presentations, conducts workshops, and advises leaders of law firms, in-house legal departments, and legal service providers on how to profit in a time of great change.  To inquire about his services, contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.

Linking Business Development to Partner Compensation

In recent years, as client fee pressure has increased and client loyalty has decreased, law firms are investing significant time and money in business development programs. Some partners receive training to dust off selling skills that were largely unnecessary during a time of plenty. Other partners receive training, then individualized coaching, then more training, then more coaching, in an often-futile attempt to turn everyone into a capable rainmaker. Mathematically, if every equity and income partner generates just a little bit more, this is far more impactful than demanding even more production from our handful of true rainmakers. Trouble is, this rarely works out as planned. There are logistical, financial and psychological barriers to this plan of turning every partner into a rainmaker, and it's time law firm leaders recognized its ineffectiveness, and instead adopt a more productive approach. It's time to touch the third rail of law firm management: partner compensation. Conventional wisdom suggests that law firm partners are motivated by financial incentives, Partner Compensationand therefore many compensation plans are designed to encourage behavior that generates financial success. Conventional wisdom is often wrong. Many compensation plans overemphasize origination and in so doing fail to recognize the critical contributions of many partners. Furthermore, the plans often fail spectacularly in addressing and rewarding origination. But this is a problem that can be solved.

Different Strokes

The first mistake with most law firm compensation plans is the expectation that partners are, or can become, what baseball enthusiasts call "five-tool players." As noted business development coach Mike O'Horo says, "While there are certainly some superstars who are equally adept at a variety of things, the reality is that most players are exceptional at just a few skills." Compensation plans often fall into this trap by expecting numerous exceptional behaviors such as new matter origination, high leverage, high utilization of billable hours, inbound and outbound cross-selling, mentoring of young lawyers, firm or practice group management, pro bono activities, matter profitability, high billing and collection realization, expense management, marketing and business development activities, and more. In reality, successful teams are composed of players with different and complementary skill sets and a good compensation plan should recognize and reward different contributions. In a well-designed plan, partners are able to maximize compensation by maximizing their particular and unique skill sets.

To be clear, generating new business is challenging in any industry. There's a certain tenacity required to doggedly pursue new opportunities, to network and meet new prospective clients, to understand their business challenges, to devise custom solutions to these challenges, and to overcome objections and negotiate prices to win the business. Done well, it involves significant rejection, and significant time—time that quite obviously cannot be billed or recaptured. So, origination should be a key driver of compensation.

But too many plans stop there. First of all, the partner who excels at networking may lack the deep subject-matter expertise necessary to craft a custom legal solution. He or she may lack the financial acumen necessary to devise a creative fee arrangement that both meets the client's budget and generates profits for the firm. And so begins the arduous negotiating process of determining the relative contribution of other partners who helped advance an opportunity to a close. Treating this as a solo effort fails to acknowledge the contributions of others, and relying on the largesse of partners to divvy up their spoils fairly, or even consistently, is a recipe for unrest. This is why most other businesses provide some sort of team compensation when multiple parties are routinely involved in closing a sale. In fact, many companies willingly "double pay" commissions, or, in law firm parlance, award greater than 100 percent origination credit, when it's demonstrated that doing so nets more wins and higher revenue. Companies, and law firms, that do this poorly incentivize the hoarding of opportunities: "I would likely win more engagements if I collaborated with others, but it's not in my economic self-interest to do so, so I'll act alone."

And let's not overdo origination credit. Too many plans treat origination of a single matter as a perpetual annuity, crowding out any incentive to cross-sell, or for older partners to transition key client relationships to up-and-coming younger partners. Other plans allow partners to stake a claim on all future business from clients they initially generate, whether or not that partner is ever again involved in winning another engagement.

Most businesses recognize that "hunters" are best deployed at hunting, whereas "farming" involves cultivating relationships to yield more results over time. Generating new business from existing clients is far more likely to involve other lawyers, particularly those billing time to a matter. There is a clear link between the quality of the work product and client retention, but the definition of quality has evolved to include the manner in which the legal services are delivered, not merely the outcome, and certainly not merely the cost. A partner could put forth significant effort to win a matter, and then poor communication, poor budgeting and poor project management can impair the client's satisfaction, even when the matter's outcome is favorable. Accordingly, retention is a common factor in corporate compensation plans but is glaringly missing from most law firm partner compensation plans. The short-term thinking that leads law firm leaders to view business in one-year increments, tidying up financials at year-end and distributing profits to shareholders, creates the illusion that financial performance can be effectively measured one matter at a time rather than by measuring a myriad of variables over an extended period.

Retention is a powerful financial driver. Incorporating a retention incentive moves client satisfaction from a subjective aspiration to a concrete goal. A focus on retention solidifies client relationships and insulates the firm from the potential financial devastation caused by lateral departures. Retention incentives recognize multiple contributors, from those who generate the work, to those who deliver the work, to those who manage the relationship. Retention is also a significant factor in measuring profitability. In a typical law firm compensation scheme, a matter that earns premium fees and generates significant hours may produce significant revenue and therefore significant compensation to the originating partners and/or billing timekeepers even as it generates minimal profits. However, a matter that is priced strategically, thereby lowering the cost of sales, that maximizes leverage by pushing the work down to the lowest-cost resource capable of delivering quality work product, that generates high client satisfaction and therefore repeat work across numerous practice areas, and that results in significantly higher profits, might generate minimal financial rewards for the partners involved. Profit cannot be fully measured in the short term, and retention is a key factor in measuring profitability over the long term.

Change Management

A successful compensation plan meets three primary requirements:

  • It furthers the firm's strategic objectives
  • It's easy to understand and therefore helps manage partner expectations
  • It's easy to administer

It's a rare law firm compensation plan that meets these requirements.

In many cases, law firms have no strategic objectives beyond growth, or perhaps profitable growth. There is no stated retention target, or cross-selling target, or a bottom-up financial forecast reflecting the realistic growth trajectory of each practice and sub-practice and the timekeepers associated with each. Vaguely aspiring to "grow the business" year-in and year-out isn't a strategy so much as an aspiration. When law firms delineate specific objectives, the actions required to achieve the objectives become more obvious. And just as importantly, the actions inconsistent with achieving the objectives become more obvious.

A compensation plan that is readily understood and clearly defines which actions will generate what income is much more effective and less distracting than a vague plan that places a premium on origination or billing credit, and then incorporates a mystical subjective analysis to address all other behaviors and outcomes. Despite the many shortcomings of today's plans, there are two primary reasons partners resist change: it may be a terrible plan, but they've grown comfortable with it and change begets uncertainty; and everyone fears that a new formula will lead to decreased compensation.

It is true that new formulas will lead to changed compensation for some. But that partner whose compensation varies significantly from year to year is likely to embrace more certainty, even if the new target is lower than an earlier high point. The partner who dreads networking on the cocktail circuit but does it out of a sense of obligation might serve everyone's needs better if she participated in—and helps win—far more pitches at her colleagues' invitation than trying to drum up a new matter or two on her own. And the rainmakers today will remain the rainmakers tomorrow, and are more adept than most at adjusting their selling parameters to incorporate new compensation measures. And, yes, there may be a partner here or there who's found a way to game the system—hoarding origination credit, minimizing leverage, keeping key clients close to the vest, periodically threatening to leave—who will refuse to change, and for good reason. Under a more effective plan, these behaviors will be recognized for the profit-dilutive actions they are, and a partner adhering to such models will need to accept that doing so comes at a price.

Designing the new compensation scheme is only half the battle. As great a challenge as it is to define a firm's strategic objectives and design incentives that drive and reward behavior consistent with these objectives, it's just as challenging to migrate from where we are today. This is why compensation plan changes need to take place over time, in phases. An abrupt shift, even to a plan that everyone agrees has the potential to be more effective, can be just as disruptive and distracting as a poorly designed plan. Rolling out a new plan has as much to do with strategic planning and financial analysis as it does with organizational psychology. Success comes from staging changes in increments, accompanied by detailed financial analysis and a comprehensive communication plan.

Law firm partners want to be rewarded for their efforts, they want certainty in a time of great unrest. Law firm leaders want profitable growth. Clients want quality legal services at market rates delivered in innovative new ways. We can't afford to wait until all of this takes place and then design new compensation plans. By designing the compensation plans first, we can design the future we want and need.

 

Timothy B. Corcoran is the 2014 President of the Legal Marketing Association and an elected Fellow of the College of Law Practice Management. He delivers keynote presentations, conducts workshops, and advises leaders of law firms, in-house legal departments, and legal service providers on how to profit in a time of great change.  To inquire about his services, contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.

 

A version of this article first appeared in The Legal Intelligencer, an ALM publication, and is reprinted with permission.

The Changing Definition of Value: What Matters Most to In-House Counsel

The rules have changed. Law firm partners worldwide reached professional maturity in a much simpler world: One delivered a quality work product and everything else fell into place. Clients were satisfied, lawyers were engaged in thought-provoking work, associates received good training and generous, albeit hard-earned, revenues and profits ensued. This worked. Until it didn’t.

As with all extraordinary ecosystem disruption, many are reeling, casting about for an anchor in the storm. Partners face seemingly conflicting demands from clients who require quality work product but refuse to pay premium rates. To the clients, however, and particularly to in-house counsel, there is little conflict. The definition of quality has simply been redefined to encompass the manner in which legal services are delivered, and not merely the price or the outcome. And clients are happy to describe what this means to them.

“We’re in the midst of consolidating the panel of counsel that we use. We’ve identified five decision criteria that reflect our values: the firm’s relation- ship to us, including years of service and any customer relationship we have; billing rates for partners and associates; diversity; approach to resourcing and budgeting; and innovation,” reports Anne Sonnen, deputy general counsel and chief administrative officer for BMO Financial Group. Marilyn McClure-Demers, associate vice president and associate general counsel of corporate and intellectual property litigation at Nationwide Insurance, offers a similar robust definition: “Our top metrics are result, diversity and cost- efficiency, but this is closely followed by communication. This refers to timeliness, understanding urgency, managing expectations and helping us avoid surprises with our business management.” James Partridge, formerly chief counsel for outside counsel relations with Ally Financial Inc., and now consultant with Duff & Phelps, continues the theme: “We developed a scorecard to capture the metrics the company values. These include service quality, program delivery, cooperation and teamwork, communication, financial management and price, which is really a component of financial management.” 

To in-house counsel, quality lawyering is merely table stakes. It’s how outside counsel manage the relationship that matters most. “Outside counsel can be insensitive to the amount and frequency of communication that the client needs during the course of a matter,” laments Ted Banks, a partner with Scharf Banks Marmor and formerly chief counsel of global compliance for Kraft Foods. This is echoed by Partridge, who notes how exceptional good communication can be. “One firm impressed us by going well beyond our expectations for normal communication, providing a monthly update on all matters whether we asked for it or not, offering unsolicited insights on litigation techniques, jury pools, judges and the like. This was better than what the majority of our other outside counsel were doing. I liked this approach so much that I worked to turn it into an early case assessment process and asked other outside litigation counsel to adopt the approach.” 

Many in-house counsel report that a well-crafted project plan and an accompanying matter budget are critical to managing expectations with business leaders. Yet, law firms tend to resist such requirements, believing that the ebb and flow of complex matters, and certainly the outcomes, are beyond their control. While this is true to some extent, reports Banks, experienced lawyers can still provide directional guidance based on deep experience: “If you’re using a law firm that holds itself out to be an expert in a certain area of law, you expect them to provide a budget for a matter. What most in-house lawyers are looking for is a budget that gives an order of magnitude. Is this going to take 10 hours or 50 hours or 200 hours?” For law firm partners who fear encroachment from low-priced competitors, budgets based on a nuanced understand- ing of the various decision trees involved in a complex case can clearly differentiate subject matter expertise from those eager to win on price alone.

Of course, price is still quite important, which is why “cost-effective delivery of legal services” is a critical component of the outside counsel selection process used by CIT, a bank holding company, according to Bob Ingato, executive vice president and general counsel. This is defined, in part, by being “creative and flexible in designing and accepting alternative fee arrangements [AFAs] that align our interests and allow for shared success.” 

While some law firm partners may view AFAs as synonymous with “low cost,” in-house counsel, not surprisingly, have a different perspective. Most wish their outside counsel would take the initiative and offer more options. According to McClure-Demers of Nationwide, “By and large we don’t see proactive innovation. We find ourselves encouraging outside counsel to embrace creative value-based billing arrangements and opportunities.” But outside counsel don’t have to blaze this trail on their own. Sonnen avers that the best arrangements are developed collaboratively: “Many of our in-house team, along with outside counsel, have attended the ACC Value Challenge workshops, and as a direct result, we are piloting several different types of AFAs and having better conversations with our counsel about value. Cost is one factor to consider in determining value, but predictability and outcomes are also key.” 

Ingato says CIT isn’t only looking for firms with the lowest hourly rates. Rather, it seeks “competitive rates compared with the efficient delivery of quality legal services.” In-house counsel are increasingly analyzing fee trends and applying bench- marking to identify which tasks can now be performed routinely by multiple providers and which, according to the immutable laws of economics, should there- fore decline in price. Such sophisticated analysis has become much easier in recent years as new tools have emerged. Sonnen reports that at BMO “we’re incorporating a new electronic billing system, TyMetrix, that can provide far more analytics and support for AFAs.” 

And these tools capture more than merely financial metrics. Partridge indicates that “Ally regularly surveys each of its in-house lawyers to collect feedback. It imports the metrics into our Sky Analytics system, and then conducts financial and non-financial benchmarking. When a new matter arises and Ally needs to retain a firm, its lawyers can then query the database to find a firm that meets certain financial and non-financial criteria.” Over time, he reports, “non-financial measures grew to become a significant factor in [outside counsel hiring] decisions.”

According to Banks, solid relationships are based on more than price and out- comes. “If it’s litigation, you win some and you lose some, and most clients understand that. It is when the outside counsel presents an overly rosy assessment of a case, or fails to communicate developments that affect the likely outcome, that the relationship will suffer long-term damage.” The mandate to “learn my business” results from a common frustration by in-house counsel. As Peter McDonough, general counsel of Princeton University, says, “Higher education is different. Period. The lawyers who have made the deep and consistent effort to understand it, including the faculty-centric nature of it, and—very importantly—know how to avoid corporate-speak and truly use the language of a higher education environment without faking it have a huge leg up. Not getting that right is a deal-breaker.” This mind-set is shared by Banks, who pays careful attention to his style of communication now that he sits on the other side of the table: “I try to make sure that what- ever work product is delivered, is delivered in the format that the client wants. Some want to have a personal conversation, some want formal memos, some want results in PowerPoint. Clients generally don’t want highly formalistic structures of communication full of lawyer-speak.”

A key and growing imperative for many businesses is diversity. Many in-house counsel, Sonnen of BMO included, expect their law firms to value diversity as well. “Diversity to BMO is more than a social responsibility; it’s a business case,” she says. “There is a direct link between our diversity profile and our financial performance. Shareholder earnings are enhanced when we employ a diverse work- force, and we expect our key suppliers to reflect and support the same rationale.” At Nationwide, confirms McClure-Demers, diversity is also a critical initiative that matters to everyone, including the CEO. “Our outside counsel voluntarily submit their diversity metrics today, and our chief legal officer reviews this at least quarterly with our CEO to discuss our progress. We’ve implemented a new program recognizing diversity in our outside counsel. We’re a supporter of NAMWOLF [the National Association of Minority & Women Owned Law Firms] and will also be recognizing a NAMWOLF firm in this most important area.”

Firms that get it right will earn more business. McDonough confirms that “if a lawyer in a firm has wonderfully served us, we’ll follow that lawyer. Yet, if that lawyer’s colleagues also served us well, and we appreciated the firm on other levels—such as a real service mind-set, a real understanding of higher education, quality and consistency, pleasant people, etc.—we will try to also keep his or her former colleagues, and maybe even the firm in general, specifically in mind as opportunities develop.” McClure-Demers says Nationwide is eager to recognize outside counsel for outstanding efforts. As she indicates, “One of our outside counsel took the initiative to combine their institutional knowledge of our business, information from matters they were working on for us and insights looming on the horizon, and recommended a two-year litigation strategy to address these issues. The result clearly addressed our needs, but it also helped set new law and helped our industry as a whole. Our business management loved it!” The firm earned not only more legal work, but became more involved in legal strategy.

The legal marketplace is indeed changing, and law firm partners should take heed of the evolving definition of value and what matters most to in-house counsel. For every client seeking a low-cost provider, many others are seeking law firms who understand their business, who communicate frequently, who manage expectations through budgets and project plans, and who acknowledge the importance of a diverse workforce. Law firms getting this right enjoy loyalty and repeat business, the most critical ingredient for long-term profitability. What matters to your clients? What do they value? Don’t guess. Ask them.

This article was first published in ABA Law Practice magazine, Vol. 39, No. 6, November/December 2013, p. 46. Reprinted with permission. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

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.