By Trevor Faure
The future starts on Monday morning
How many legal conferences and articles on “The Future of [Something]” or “The [Something] of the Future” can there be? The legal profession may indulge in buzzwords and shiny tech trends because they distract from the hard and relatively dull essentials of performance improvement: human behavior, process, and data. We ruminate on whether the legal profession is heading toward a dystopian future, levitating lawyers, or whatever shiny cyber object is glistening this week because, as James Baldwin put it: “The future is like heaven, everyone exalts it, but no one wants to go there now.” Debate is a popular displacement activity when it delays making pragmatic improvements that are entirely possible and necessary today. Too many lawyers enjoy the navel-gazing at near-future, disruptive phenomena by citing the Wayne Gretzky ice hockey analogy (“Skate to where the puck is going to be, not to where it has been”) rather than risk taking a shot at change now. Such “blue sky” procrastinators should remember that Gretzky also said: “You miss 100 percent of the shots you never take.”
By contrast, those on the ground charged with improving the operations of the legal profession are often stymied by the lack of traction and credibility that nonlawyers face when trying to apply business disciplines (or indeed, any discipline) to the indecipherable art and science of legal practice that we lawyers would like to jealously maintain. Worse still, to some lawyers, Legal Operations are merely the Procurement or Finance departments in disguise or the Business Development function is, well, somebody else’s problem: we don’t stoop to “selling” our craft, and lawyers are impervious to sales schtick anyway, right?
It is in response to this displacement and denial that the overused language of legal “disruption” and “innovation” is set: a well-intentioned resort to inspire and drive performance improvement among the resistant. In reality, though, the key to successful legal transformations is both reassuringly and disappointingly dull.
As proof, one of technology’s greatest recent innovators, Linus Torvald (creator of Linux and the radical open-source approach that forms the basis of Chrome and Android), is reported by The Register (February 15, 2017) thus:
Linus Torvalds believes the technology industry’s celebration of innovation is smug, self-congratulatory, and self-serving … The term of art he used was more blunt: “The innovation the industry talks about so much is [expletive],” he said. “Anybody can innovate. Don’t do this big ‘think different’… screw that. It’s meaningless.” … “All that hype is not where the real work is,” said Torvalds. “The real work is in the details.” … Torvalds said he subscribes to the view that successful projects are 99 per cent perspiration, and one per cent innovation. … Technology plays an obvious role but process is at least as important [emphasis added].
A Smarter approach uses the broadest possible range of proven processes to improve personal, professional, and business performance. This range inevitably spans left-brain thinking (logic, analysis, math, and data) and right-brain thinking (creativity, emotions, diagrams, and pictures). This is modern behavioral economics applied to law; its successes comprise intricate behavioral insights and detailed econometric processes. Soft skills and hard data. Ultimately, the key to success is to do as E.M. Forster profoundly advised: “Only connect!”
The performance improvement methods in Smarter Law were developed during my career as senior counsel, legal director, or general counsel at Apple before and after the Steve Jobs’ comeback, at Dell during its rocket ride from number seven to number one worldwide, at Tyco during the post-Kozlowski scandal turnaround, and at EY during the Lehman collapse litigation. Clearly, necessity was the mother of invention during such high-profile, existential endeavors. As a result, Smarter Law now comprises real-life case studies, data, and outcomes from hundreds of successful transformations and spans individual personal performance, legal departments, law firms, service providers, and the relationships among them all. The pioneering convergence of law firm panels and disaggregation of legal work into different tiers of risk and volume that Smarter introduced in 2007 are now ubiquitous.
Only results make one approach smarter than another. One client reduced its legal department spend to such an extent that it worriedly called me back to investigate why it was now spending so little for its improved service and possibly shortchanging its law firms (it wasn’t). A Magic Circle firm reported that project management had reduced lost fees totaling 15 percent of revenue. We shall see how one client paid its law firm $4.75 million for work that only amounted to $350,000 of billable time and still saved itself $73 million. There are business development techniques that grew the Big Four to more than $30 billion in revenue that effectively cost nothing to implement. Technology solutions with a return on investment of 507 percent. Tender processes in which the client was able to pay law firm bidders more than their proposals and still reduce its spend by 44 percent. On a personal performance level, around nine out of 10 individuals involved in the direct implementation of a Smarter transformation have received a promotion, bonus, award, or some other sought-after advancement. In these transformations, we also honored Thomas Edison’s boast: “I have not failed. I’ve just found 10,000 ways that won’t work.’’ Having found all of those, Smarter Law represents the remaining 1,000 ways that will work.
How The Law Firm-Client Relationship Is Becoming Smarter
New, unprecedented analysis into the performance patterns of the world’s top law firms when objectively tested in a neutral environment of extreme competition provides an unvarnished picture of how the quality of law firm services relates to the cost charged for these services. It doesn’t.
During Summer 2019, news broke of the largest reported law firm RFP in the profession’s history (see “On Notice, Teva’s Entire $330M Legal Spend Could Go To One Law Firm”). In an interview with The Legal 500’s publishing director, David Burgess, the Chief Legal Officer of Teva Pharmaceuticals, David Stark, states:
Everything is up for grabs at Teva—well, certainly from an external law firm perspective. … [T]he largest manufacturer of generic drugs globally recently announced that all existing law firm relationships were under review. Under the Smarter Law-led system, firms that submit to the process are assessed on pricing and other data metrics …
While the outcome cannot be disclosed at this stage, the ongoing process itself is explained below in “The Smarter Client–Law Firm Relationship” along with an exclusive glimpse at how quality doesn’t necessarily follow cost.
As the definitive performance improvement methodology, Smarter Law comprises the broadest possible range of proven processes to improve personal satisfaction, professional and business performance, including how clients choose lawyers. This range inevitably spans left-brain thinking (logic, analysis, math, and data) and right-brain thinking (creativity, emotions, diagrams, and pictures). From emotional intelligence to artificial intelligence. Soft skills and hard data. This is modern behavioral economics applied to law, transforming busy lawyers into business leaders.
From emotional to artificial intelligence: The broad range of approaches
Fundamentally, a full range of approaches is essential to the success of any endeavor requiring technical excellence from human beings. Millions of subjective, subconscious reasons influence how we behave, and yet we strive to measure, manage, and manufacture objective value through our work product. Exercising one’s full mental range is mandatory for success: people don’t care how much you know (left brain) until they know how much you care (right brain).
Therefore, real-life case studies involve the practical, demystified use of design thinking, Agile, asymptotic curves, and Pareto optimality: the sort of economic techniques one might expect. But equally, you will also find hugely profitable reliance on the behaviors in Stoic philosophy, Rorschach inkblots, marital infidelity, and Batman. Statistical data and ancient myths, rationale and stories, words and pictures, linear narrative and abstract shapes, logical processes and lovely colors. Fun for all the family—and both sides of your brain.
The shape, structure, and segments of success
In the flow of Smarter Law, the progressive lawyer drives better personal performance as an individual and by doing so improves the performance of their legal department or law firm; consequently, those two parties design a more productive client–law firm relationship together.
Please note that unless otherwise implied, the terms “lawyer” and “law firm” will for all intents and purposes be interchangeable with “legal professional” and “legal service provider,” encompassing the many other professionals and experts providing or supporting legal services.
In this edition of The Practice our focus will be predominantly on the eventual client–law firm relationship; how to improve it inevitably involves qualitative and quantitative improvements to all the preceding three elements, and so we will also cover elements of the personal performance of legal professionals and that of the corporate legal departments and law firms they work in.
The Smarter Lawyer
Those who rank emotional intelligence as a “nice to have,” an optional “soft skill” for those so inclined, or a luxury after “getting the work done” ought to take notice of the World Economic Forum, which instead values it in stark terms in its 2016 Future of Jobs report. The report states that “Overall, social skills—such as persuasion, emotional intelligence and teaching others—will be in higher demand across industries than narrow technical skills …” due to the increasing ability of technology to perform purely technical tasks. For example, neuro-linguistic programming (NLP) covers a number of social skills identified as becoming increasingly vital by the World Economic Forum such as coordinating with others, negotiation, persuasion, and training and teaching others.
The key to success is as much an emphasis on personal satisfaction as it is on improving professional performance. Perhaps one can’t guarantee “Happier Law,” but being consciously smarter about our own behavior and those around us results in the greater satisfaction of all concerned. The study “Occupations and the Prevalence of Major Depressive Disorder” shows lawyers as having the highest rate of depression among 104 professions surveyed “with an odds ratio of 3.6” times the others.
Not optional, a luxury, or a “nice to have,” emotional intelligence is a “vital to have.”
The original research that created NLP found that very successful people all shared the same beliefs about how people operate:
- No two people will hold the same picture of the same situation.
- People are not their behavior.
- All behavior is legitimate in the mind of the doer.
- Everyone is doing the best they can with the resources they [think they] have available.
- The person with the most flexibility of behavior has the greatest influence on others.
- You have 100 percent responsibility for ensuring others fully understand your communications.
Adopting these beliefs creates the best chance of success when dealing with other people, clients, potential clients, bosses, peers, direct reports, and juries. You know, people. If you cannot adopt some of them, then act as if they are true and note your improved success when dealing with other people. As a result, you may—somewhat painfully at first but then liberatingly—come to realize that these beliefs are true.
NLP research on the frames of mind of very successful people also shows common, powerful self-reflective attitudes:
- There is no failure, only feedback.
- Wanton experimentation
- Be at cause, not in effect.
- Results, not excuses
- Judge criticism objectively and not defensively.
As for left-brain data-driven skills, take any world-class improvement process—Agile, Design, Six Sigma—and the basic elements are fundamentally the same and are no more elevated or esoteric than common sense plus data. Define the goal, measure current performance toward this goal, analyze what the measurements show one needs to improve, and then improve them. Even the most right-brained instinctive, gut feel, and subjective among us do this form of rationalization on some level, however subconsciously—deconstruct how you arrived at a tolerable daily commute journey and you’ll find a similar process. The most successful people apply rational steps and objective data to looking at a task, however random the environment may be. Process, analysis, and information-based decision-making does not replace creativity, inspiration, or instinct; they serve each other in a business context.
The renowned psychologist Bruno Bettelheim said: “Psychoanalysis is the art of the obvious.” Some of the methods comprised in Smarter Law will be obvious to many, leading to the more opaque and important challenge: if universally successful improvement techniques are obvious common sense, then why don’t we use them more often? Process Network Excellence reported that while “over half of Fortune 500 and as many as 82% of Fortune 100 companies have used performance improvement methodologies to produce savings totalling $427 billion” (obvious), only 12.1 percent of legal departments had done the same (less obvious). Similarly, most managers would regard defining their legal function’s scope and mission with their stakeholders as routine and no smarter than turning up for work every day. Yet recent data shows that fewer than 50 percent of legal departments and law firms have actually undertaken this obvious exercise. Have you?
We have sophisticated psychological mechanisms to resist change, from confirmation bias to “just being too busy.” In case the term “confirmation bias” sounds conspicuously like another New Age, gluten-free philosophy Francis Bacon wrote about in 1620, thus:
The human understanding when it has once adopted an opinion draws all things else to support and agree with it. And though there be a greater number and weight of instances to be found on the other side, yet these it either neglects and despises, or else by some distinction sets aside and rejects.
And while you are undoubtedly busy, a “Time and Emotion Study” would invariably show that you’re only too busy to do tasks that fall into this red zone:
Brutal, reductive elimination shows that stalled progress, personal or organizational, can only return to a success trajectory by focusing predominantly on what you’re relatively poor at and/or don’t like. So do the worst things first. To quote Einstein: “We cannot solve problems by using the same kind of thinking we used when we created them.”
The Smarter Legal Department
For in-house legal departments, performance improvement means increasing legal output (coverage), the compliance of its business, and the satisfaction of its clients, while optimizing its internal head count and minimizing its net cost—that of its internal and external lawyers but also the liabilities, fines, and penalties that a lack of coverage and compliance typically generate.
The legal function contributes to every basic element of business’s return on investment (ROI) and hence can be the widest contributor of financial value, rather than being “business adjacent.” By contrast, gaps in legal coverage and compliance failures that lead to financial losses or penalties are “COI”—costs of inadequate or inefficient legal resources.
A business that seeks to save money by spending as little as it wrongly estimates to be necessary on legal services then ends up with a higher financial bill overall and the customer, PR, or regulatory fallout that consumes valuable management time. This is also known as the “False Economy Model.”
World-class benchmarking such as that produced by the Association of Corporate Counsel (ACC) allows general counsel to objectively assess, improve, and illustrate their legal function value internally. Reducing legal cost as a percentage of company revenue is an obvious metric of scaling efficiency. But resource inputs mean nothing unless they are measured against their corresponding outputs and results. Showing how work allocations have improved legal coverage, compliance, and client satisfaction “bang per buck” helps the business understand the complete value of a legal function rather than just as a back-office expense without a tangible financial return.
There is an array of improvement techniques that deliver not just the old “more for less” but the new paradigm for the Smarter Legal Department: better quality for less. These techniques include:
- Legal work convergence
- Legal work disaggregation
- Optimal legal resource distribution versus the “pyramid” of legal value
- Optimal use of non-law-firm legal service providers
- Legal organization design steps
- Maximizing talent using behavioral expertise such as NLP and effective performance reviews
- Deploying legal technology for maximum ROI
- “Win:Win:Win” RFPs
- Win3 fee arrangements with law firms
Corporate lawyers should also train and regularly work in a front-office business role with pride and commitment, such as sales or customer services. This is not tourism or a state visit to see how the proletariat live before you float back off to the Ivory Tower; this is doing a proper job properly.
Unlike law firms, for a corporate in-house department, proactive efficiency is a cycle of work aimed at ultimately rendering ourselves redundant, due to the clients’ self-empowered legal expertise and flawless compliance, even though it is largely an idealistic endeavor. Wouldn’t you prefer proactive health advice instead of a sirens-blazing emergency doctor rescuing you from an avoidable medical peril? Which doctor would you pay more?
The Smarter Law Firm
“More for less” is described as “the new normal,” although for some law firms “acceptance as the final stage of grief” might have been a more apt label. However, financial data since 2008 shows that economic behaviors within the legal profession have not been new, normal, or logical. The Report on the State of the Legal Market by the Center for the Study of the Legal Profession, Georgetown Law, and Thomson Reuters shows two concurrent, long-running patterns that one might contend defy basic economics or logic, namely increasing law firm rate progression and the simultaneous, decreasing billed and collected realization. In plain terms: running faster in order to stand still.
The report states that:
Over the past 10 years, law firms have continued to raise their rates, albeit at a more modest pace than prior to 2008. … [O]ver the decade, average standard rates increased some 30 percent, while worked rates have increased 24 percent, billed rates 20 percent, and collected rates about 18 percent. … Like “rack rates” in hotels, standard rates in law firms have effectively become nominal rates that are arbitrarily set and are almost never paid by any significant client. … [There has been] increasing client pushback to rate increases and suggests that realization rates must be declining. … [T]hat is precisely what has happened over the past decade.
The legendary economist Vilfredo Pareto who examined zero-sum-type behavior (see below) observed that to achieve such stasis, people act nonlogically “… but they make-believe they are acting logically.”
In the increasingly fractured and competitive market, the Smarter Legal Department is deducing that if a firm’s expertise is broadly equivalent to its competitors, the differentiating factors between hiring and firing will be everything else that the law firm is capable of doing for the client’s benefit. Providing professional advice to clients on their business imperatives such as performance improvement, risk vs. efficiency (see example below), compliance, and human capital is a value-added service that management consulting firms do for significant financial return. Law firms already have expertise in the remedial aspects of compliance for example; hence they are ideally positioned to provide proactive audits and advice using common fact patterns from precedent.
Discussions within the legal profession regarding the Big Four professional services networks tend to pursue one or two “dog whistles”: “they’re coming to get us all” and/or “they do everything better than we do.” The reality is that neither is entirely likely and/or true. The most significant facet to covet is not the shibboleth that the Big Four are five to 10 years ahead of law firms; it is that certain key drivers of their success would cost law firms nothing to adopt today. Having had the privilege of serving as global general counsel and leader of legal services at EY for a number of years, my experience highlighted the following seven significant distinctions in their approach to professional services that can and should be adopted by a Smarter Law Firm:
- Philosophy: everybody is a client, even if they haven’t instructed us yet.
- A systematic approach to everything
- You get what you pay (or penalize) people for.
- The structure and intensity of business development applied by every professional, alongside the other technical disciplines they provide clients
- In law firms, the internal focus on what you know about the law supersedes an external focus on what you know about the client. By contrast, both are equally vital with Big Four practice, not mutually exclusive.
- Systematic internal sharing of client intelligence where permitted and cross-selling of the full, permitted range of professional services
- Systematic management of service quality expectations and results for exceptional client service
As observed earlier, some may well say, “This is obvious,” to which Torvalds would say, “The real work is in the details.” Firms do not need $30 billion of revenue to adopt these practices, but history shows that the ruthless application and systematic management of them make you $30 billion eventually.
The Smarter Client–Law Firm Relationship
I showed a friend of 30 years who had founded a successful law firm the four-diamond flow of Smarter Law to get his feedback. He scanned through the topics until he reached this element and happily affirmed: “Yes, I’d be interested in reading that part; that would be good.” My guy wasn’t in the least bit interested in becoming a Smarter Lawyer who would then go on to develop a Smarter Law Firm; he just wanted to go directly to the part where client relationships were great and mutually profitable, collect $200, and not go to jail. I pointed out this lacuna, which would make it the equivalent of one of those self-help manuals that promise to show you “How to Be Irresistible and Rich, Without Leaving Your Sofa!”
The logical flow of the Smarter Law diamond is that we all have some progress to make first as individual practitioners, persuaders, time managers, people managers, and colleagues while we consequently advance the legal functions or law firms in which we work. In the process of doing both of these, the ability to form sustainable, successful relationships between client and law firm will follow with relative ease. In the absence of such antecedent progress, it may still be possible to form Smarter client–law firm relationships, but only if the other party is in an advanced state and somehow chooses you despite this initial imbalance of capability. Such miracles can happen; my guy was also best man at my wedding, so he witnessed when I myself was a beneficiary of such charitable good fortune.
As one is typically without an enlightened partner voluntarily offering a path to self-improvement, an element of dissatisfaction is a constant in client–law firm relationships. Certain elements of this dissatisfaction such as “running faster in order to stand still” (see above) are sufficiently paradoxical to being plain mad. During the Cold War, the term “mutually assured destruction,” and its acronym “MAD,” stood for the tense balance that ensured each party’s survival through a mistrustful, stultifying mindset. “Mutually assured dissatisfaction” might be an appropriate way of characterizing the inertia commonly found within client–law firm relationships, along with its more active sibling, zero-sum-game behavior. The mundane manifestations of such behavior are commonplace:
These result in headlines such as “[A] Peek at the Practice of Inflating a Legal Bill” (The New York Times, March 2013) and “Clients vs law firms—the war that dare not speak its name” (Legal Week, February 2012).
So while every dissatisfied client and law firm knows that divorce is a valid, disruptive option, they would still need to address their own behavioral issues in order to be eligible, attractive, and productive within the new relationships they will seek thereafter. Note that in this analogy, remaining single isn’t an option.
Having conducted or advised on many request-for-proposal (RFP) processes, I recognize that the concept of “both sides winning” is open to more than one interpretation and more than a little cynicism. For the legal department client, the “other side” that wants to win may be its Finance, Operations, or Procurement Department insisting on cost reductions, not just the law firms seeking profitable work. Law firm cynicism is a perfectly reasonable response when so many competitive bidding processes have price as their principal driver, explicitly or otherwise. Ironically, that cynicism may be shared by the in-house lawyers applying the RFP process, concerned that undue emphasis may be being placed on that one part of the net cost mentioned above, with little regard to coverage, compliance, client satisfaction, and the other elements of net cost such as liabilities, fines, and penalties comprising the cost of inadequate/inefficient resources (COI). Responsible legal departments maintain that quality and coverage of legal expertise are the primary, nonnegotiable criteria and that anybody who expects complex, business-critical work to be bargained away is conflating legal practice with the supply of office materials or travel services.
Therefore, the goal of a Smarter RFP isn’t a client “win” at law firm expense, as this may ultimately prove costly for both parties over time. Nor is the goal just a client finance/procurement—a law firm “win:win” where cheap rates are achieved but are only sustainable by the law firm through quality compromises. The goal is a trifecta of higher client finance/procurement efficiencies, legal service quality, and law firm profits, which equals: “Win:Win:Win” (or Win3 for our finance/procurement friends who might prefer an arithmetic approach). Five aspects of this process are presented here:
- Convergence of the number of law firms used
- Disaggregation of legal portfolio in value tiers: Cream, Core, and Commodity
- Use of alternative fees and how they often fail
- Law firm incentives and how they often succeed
- The correlation between law firm cost and quality, or lack thereof
1. Convergence of the number of law firms used
The first application of Smarter Law to Tyco International in 2007 gained attention due to its dramatic convergence of 282 law firms to just one, with commensurate financial and performance benefits, not to mention the enhanced profits of the single firm. Since then, aggressive convergence has become an expectation of world-class legal transformation. In 2017 Smarter Law reduced Avis Budget’s law firms from 700 law firms to seven, and a global oil company reported convergence from 600 to six. Benefits accrue from any geometric convergence, not just a reduction to a single firm or by 9/10ths, for the following reasons:
- Better oversight and filtering of new matters
- Elimination of work duplication within a jurisdiction
- Elimination of generic work duplication across different jurisdictions
- Higher critical mass of work issues for targeted reduction where statistically significant trends or fact patterns can be identified
- Higher critical mass for low-cost provider outsourcing
- Better identification of overcharging or overstaffing through comparisons across converged legal service providers
- Vastly improved negotiation leverage due to greater scale per supplier
- Greater investment in the relationship by the converged legal service providers
These have resulted in reductions of between 27 and 40 percent in overall costs with improved quality despite no other change in business operations.
2. Disaggregation of legal portfolio in value tiers: Cream, Core, and Commodity
Another now-ubiquitous Smarter Law initiative, the analysis and separation of legal work into value tiers according to their relative risk, contribution to financial performance, technical complexity, consistency of facts, and/or legal approach in each instance and frequency/volume of occurrence. The three value tiers—Cream, Core, and Commodity—will suffice. Then, not only should fee structures be designed per tier, but all legal resources should be deployed throughout this “value hierarchy” to produce better quality for less. This process of disaggregation will place in-house in the top tiers along with select law firms, with legal process outsourcing (LPO) and other alternative service providers toward the Commodity tier. The process also helps pinpoint where and why legal technology should be deployed. Here is a case study resulting in coverage and client satisfaction increasing by 77 percent and 87 percent respectively, while net costs reduced by 22 percent:
The data-driven, left-brain steps of definition, measurement, analysis, and improvement also help expose any number of “convenient truths” repeated throughout the profession, for example:
Law is a relationship and reputation business. This is true, but only partially true, namely for the Cream of the work portfolio; Commodity work is increasingly governed by efficiency and cost rather than the personal ties that bind.
Technology is the answer. This is true but only partially true, namely for Commodity work, whereas the Cream tends to have such complexity, individuality, and impact that technology will play only a supporting role at best to the high art and science of humans. The real, present power of technology is lost in a polarized, all-or-nothing debate because the truth is that we have developed machines with abilities beyond our own whose best, current deployment is the flawless conduct of chores: superhumans making sandwiches.
3. Use of alternative fees and how they often fail
One factor that anchors the consideration of alternative fees by the legal profession, be it law firm, client, or academic, is the lack of reliable financial data. I use the word “anchor” in both senses of the word: underpin as well as weigh down and drag back. Conservatively, one in eight legal departments don’t know what their spend is at all, and others have figures that are so inaccurate as to be unusable in effective fee design.
This lack of data isn’t just limited to legal departments. A Silver Circle firm told me that they asked their clients to provide them with the data on how much the clients spent with the firm because the firm couldn’t work it out themselves. (For those wedded to modern technology as a panacea for these anachronistic ills, I should point out that the latter conversation took place in 2017; as we have seen elsewhere, lack of process defeats technological innovation.) The Silver Circle firm’s clients were either unwilling or unable to produce the data the firm wanted, not surprisingly.
The effects of these information failings are entirely understandable as both parties are bound to struggle with the prospect of financial dealing while blindfolded. They might mistake a $5 bill for a 500 Euro bill (equivalent to more than $500 at time of publication) and end up either unduly rich or poor. Even in an enlightened relationship of cooperation and trust, it isn’t that the respective parties mistrust one another; rather neither of them may reliably know what they are talking about. As a result, the profession justifiably reverts to what it knows best and what it can see: hourly rates.
Separately, the respective reactions of law firm and client to the concept of fixed fees require exposition as a preliminary to fee design. In broad terms, law firms often tend to view fixed fees as an invitation to lose money; clients tend to think that fixed fees are inherently cost-saving mechanisms. And this may be due to their experiences borne of the lack of client data, law firm operational inefficiency, and “all you can eat” client behavior that unmanaged fixed fees might encourage.
However, everyone can calculate that, as a matter of principle, fixed fees are entirely neutral, signifying neither loss nor profit in and of themselves. They are great news for a law firm and budget busting for a client, depending on the level of the fee itself. Is a law firm prepared to undertake $10 million of repeated, identifiable work previously billed for a total of $10 million on an hourly basis but under a fixed fee in the future? Given possible data unreliability, operational inefficiency, and “the buffet effect,” the law firm might still be nervous about a $10 million fixed fee for that work, but $20 million?
This is where process ensures that principles succeed. The Smarter Lawyer uses the same performance improvement methods as the business and objectifies the discussion with data. Win3 fee design then becomes a matter of sensitive, hard work and cooperation based on the mutual trust in transparent, reliable information.
Disaggregation plays a large part here as the fees—in structure and absolute dollar value—must reflect the relative risk, contribution to financial performance, technical complexity, consistency of facts, and/or legal approach in each instance and frequency/volume of occurrence. Here is a case study example:
Over time, the law firms working under a Win3-type fee structure benefit from a converged panel by maximizing LPO use, making profits in each tier, reducing Commodity work, and locking in the client.
4. Law firm incentives and how they often succeed
A bonus program is intended to encourage advice that not only contains legal expertise but also has impact throughout the C-suite, just as the advisory service lines of the Big Four or the consulting specialists provide. As a Win3 design element, three clear objectives for a bonus program pertain:
- Maximum expertise and creativity from the law firm
- Maximum, tangible business benefit, commercially and legally
- Minimum net spend (net = financial benefit minus bonus payout)
Management consulting firms will often use a combination of fixed fees and fees contingent on and in direct proportion to the tangible benefits generated through implementation of advice.
Certain clients have set up separate budget funds of seven-figure dollar sums in order to reward law firms for successful programs; others paid a sliding scale of compensation depending on the financial returns to the business. A well-chosen improvement project should be able to financially “wash itself,” for example, have a sizable ROI and pay the law firms a percentage of each $1 of tangible business benefit generated.
In practice, one of the most popular forms of Win3 bonus projects remains the proactive litigation advice. This incentive exemplifies a transformed relationship between law firm and client in addressing their zero-sum game. If a client has any statistically significant volume of litigation, an incumbent law firm has traditionally had just one incentive and choice, namely, to hope that the client’s disputes go forth and multiply. In a Smarter relationship, the client seeks expert advisory support on how to reduce this level of cost in the business and friction with third parties, be they customers, suppliers, or regulators. In the client’s selection of a performance improvement consultant, an incumbent law firm has what should be an unassailable advantage over the traditional consultancy practices: it already has all the necessary data and understanding of the disputed behavior.
Excerpts from a real-life invitation to participate in a litigation reduction bonus project are outlined below for illustrative purposes; its specific rules are not intended to be prescriptive for all such projects but are representative of the approach that has proven most successful for both client and law firm.
XYZ Performance Improvement Bonus Program [Year]
[Law firm] is invited to analyse the number of litigation occurrences during the 12 months ended [Date] throughout North America and the European Union where XYZ has instructed its law firms as defendant or respondent. [Law firm] is invited to provide its analysis of the ostensible cause(s) of the litigation occurrences and actionable advice as to how the overall total can be reduced during the 12-month period beginning [Date], assuming that the advice is fully implemented by XYZ. The following details should be taken into account:
- The reduction sought in this project is a reduction in the number of occurrences, not the levels of financial liability or cost of each legal action.
- Settlements of commenced actions or use of alternative dispute resolution are not regarded as a reduction in litigation occurrences for the purposes of this project. XYZ seeks insight into the actionable root causes of the disputes themselves.
- Changes in the market, law, business or business practices that significantly impact litigation occurrence levels but are otherwise unrelated to or not a result of actionable advice may cause the bonus program or its parameters to be changed by XYZ so as to ensure fairness to all parties concerned.
- Only factual and procedural information regarding litigation will be shared between the participating law firms. No financial legal fee or cost information may or will be shared and all such information shall be redacted by [Law firm] or [LPO logistics partner].
In respect of bonus awards, two payments will be awarded:
(1) a fixed sum of $[A] for advice regarded by XYZ in its sole discretion as being actionable and therefore will be implemented by XYZ from [Date] onwards, in full or substantial part; such payment to be made regardless of the outcome of the advice implemented, and
(2) a variable sum according to actual reductions in litigation levels as a direct and demonstrable result of the same advice, with measurements being made on [Date] and [Date] and payment(s), if any, being made 30 days thereafter.
- In the event that different advice from different law firms in respect of the same litigation is accepted for implementation by XYZ, the fixed sum in (1) shall be paid in full to each firm. In the event that substantially similar advice from different law firms in respect of the same litigation is accepted for implementation by XYZ, the fixed sum in (1) shall be shared equally by those law firms.
- In the event that different or substantially similar advice from different law firms in respect of the same litigation results in reductions in that litigation, the variable sums in (2) shall be fairly and reasonably apportioned by XYZ to either allot or share the demonstrable credit for those reductions.
- In order to ensure implementation simplicity and minimise potential complications, XYZ retains the discretion to exclusively award both (1) & (2) to one law firm, even if substantially similar advice has been proffered by another law firm, if the totality of one law firm’s advice is deemed to be better prepared for implementation by XYZ and/or augmented by additional advice from that law firm that makes it more like to succeed.
The results of this particular project are compelling:
- One law firm was eventually awarded both bonus payments 1 and 2, totaling $4.75 million over an 18-month period.
- The law firm estimated that the billable-hour equivalent of the work carried out on the project over that period was approximately $350,000.
- The client aimed for an overall reduction of litigation volume of 25 percent; a reduction of 17 percent was registered at the end of the 18-month period.
- Although the client had not shared its financial savings as part of the project or bonus calculation, its monitoring showed that the 17 percent volume reduction resulted in gross savings of $78 million, including net legal fees, settlements, and judgments but not including management time expended on disputes and loss of goodwill. So in reality, the full financial benefits would be well in excess of the net $73 million savings over the 18-month period.
In this instance, the winning law firm applied a performance improvement approach to a significant extent. To succeed, the law firm analyzed the following breakdown of litigation occurrences:
The law firm relied on another principle of Vilfredo Pareto: the “80/20 rule,” namely that roughly 80 percent of the events come from 20 percent of the causes. The Pareto principle has crossed over into popular culture as well as being applied throughout business, sports, science, and sociology. Setting the cutoff point of 80 percent, the law firm identified and separated the causes of the litigation between the “vital few” and the “useful many” causes:
However, at this stage, the law firm pragmatically separated the causes that it regarded as being beyond the direct insight and influence of either law firm or legal department. This is the Stoic approach: “Just start by dealing with the things you can control at the moment; the rest will have to follow as a result.”
For example, the order and logistics processes that resulted in late-delivery disputes were composed of almost no legal components, although suggestions were made to amend the subcontract of the third-party delivery operators to tighten up the penalty triggers, increase the penalty payments, and share information among operators to improve performance.
Instead, the causes that could be readily analyzed and more directly controlled as a result of legal input were separated and ranked, with a cutoff point being set at 40 percent, double the client’s 20 percent target:
In doing so, the law firm identified that almost 30 percent of disputes were related to sales, service, and delivery documentation, and processes that the law firm itself had dealt with as part its litigation docket: wrongful rejection of conforming goods, nondefective goods, or on-time delivery and incomplete documentation.
The law firm was then able to repeat the 80/20 process to identify that just five misleading or confusing document excerpts and one logistics flaw had, in fact, led to more than 90 percent of these four causes. The redrafting, corrective actions, and messaging to the staff, third parties, and customers took six weeks. The implementation was carried out by the law firm, the legal department, and a very grateful logistics and operations department.
- The legal department had contributed to improved business operations, efficiency, and customer experience. By reducing litigation, it also tended itself toward the theoretical redundancy discussed in section A, § 1.3, that is never achieved but always appreciated: Win.
- The business made a net saving of $73 million in the first year even after paying out bonuses and gained vital management time and market goodwill: Win.
- The law firm was paid $4.75 million for services it would have billed for just $350,000: Win.
Even where the law firm’s historical work docket may be reduced due to its performance improvement advice, the cooperation and trust engendered by this business-centric approach has led to different but greater benefits. In the original Tyco-Eversheds appointment, the Commodity-to-Cream ratio was approximately 15 percent to 85 percent, but as the Commodity volumes were reduced by incentivized bonus programs, the firm used its in-depth knowledge of the Tyco business acquired during those programs to obtain higher-tier work. Within three years, the balance had been transformed to 30 percent Commodity, 70 percent Cream.
The result perhaps exemplifies the “diamond” structure of Smarter Law, wherein lawyers adopt a transformative approach that improves their respective legal department and law firm performance and behavior, resulting in a client–law firm relationship that produces multiple wins.
5. The correlation between law firm cost and quality, or lack thereof
During summer 2019, news broke of the largest reported law firm RFP in the profession’s history: “On Notice, Teva’s Entire $330M Legal Spend Could Go to One Law Firm” (David Burgess, publishing editor, The Legal 500, GC Magazine). The interview article with David Stark, the chief legal officer of Teva Pharmaceuticals, states:
Everything is up for grabs at Teva—well, certainly from an external law firm perspective. … [T]he largest manufacturer of generic drugs globally recently announced that all existing law firm relationships were under review. Under the Smarter Law-led system, firms that submit to the process are assessed on pricing and other data metrics …
While very little about the process can be disclosed, one authorized glimpse into the performance patterns of the world’s top law firms, when objectively tested in an environment of extreme competition, provides an unprecedented, real-world analysis of how the cost of law firm services relates to its quality: it doesn’t.
In the process, all applicant firms were asked to answer between three to six legal scenarios that were derived directly from the in-boxes of each of the Teva legal management team. These scenarios are in the Core tier of the Teva legal work value chain, for example, they are not the bespoke, high-end, existential Cream issues, nor are they the high-volume, relatively low-risk, repetitive Commodity cases, but deliberately in the midrange of the vast portfolio of Teva legal work. Working with the legal management team, we chose legal situations that pharmaceutical companies such as Teva did not have ready cookie-cutter answers to and then added creative license by muddying up the fact patterns to make the recognizable, highly relevant problems more intractable. To prequalify for the full RFP, the firms were asked “…to review these scenarios as though they have been communicated to you ‘as is’ in the normal course of business. Your Firm should aim to respond in the same manner and within the period that Teva would normally expect a response to such questions, namely seven to eight (7-8) days.
“In order to appreciate the skill and inventiveness of invited law firms, we have avoided providing undue prescription about the form or substance of the responses we expect. Teva will assess the minimum threshold response standard to qualify law firms for the full RFP and in doing so Teva will apply the following criteria:
I. Quality of legal approach—insightful and relevant use of the appropriate laws and precedents, forensic reasoning and clinical judgement, user-friendly and concise;
II. Effectiveness of the solution—the real-life usability of the advice for lay, business clients within Teva, recognition of commercial realities, brand, customer and partner relations;
III. Staffing—the seniority, expertise and number of your Firm’s staff applied to the advice provided;
IV. Fee structure for the advice provided and
V. Overall cost of said advice.”
(Teva Legal Services Pre-Qualification Questionnaire [“PQ”], March 2019)
The judging and qualification of the responses were initially split into two discrete processes: the grading of the legal quality of the responses to the scenarios and the cost. The senior lawyers on the Teva legal management team, together with the chief legal officer, graded the answers to the scenarios they themselves had posed and wrestle with on a regular basis in their “day jobs,” thus representing the ultimate expert judge and eventual client. However, these responses were comprehensively redacted by Smarter Law so as to be entirely anonymous and to have no costs associated with them whatsoever. Shorn of price, branding, firm reputation, expensive lunches, or personal relationships, the judging of legal quality was focused solely on the following:
Checklists of the technical legal issues that a qualifying law firm should be able to identify in each scenario—irrespective of the substantive conclusion drawn—were drafted in advance and agreed between the judges. They then graded each scenario from 1 (Worst) to 5 (Best) with reasoning and debate where necessary. In parallel, Smarter Law ranked the cost of each scenario response.
Only after the completion of technical quality judging were the associated law firm identity and cost then revealed. Separately, it should be noted that as a matter of ranking to prequalify the law firms, Teva placed greatest emphasis on their legal technical quality, hence the final ranking was mathematically weighted more toward the judges’ quality grading but with a very substantial weight attached to the commensurate cost of the advice provided.
The conventional wisdom, and certainly the proudest boast on which so much of the legal profession relies, is that cost follows quality and vice versa. You get what you pay for and one pays more for one to secure more of the other. Hence, the relationship between the two should be correlative and look something like this:
Here, the blue dots represent how individual law firms would score according to both cost and quality. The green line represents a linear relationship between quality and cost that the most prestigious law firms would argue is causative.
Nonetheless, the one glimpse into the real relationship between the expertly graded quality of law firm advice and the competitive costs of that advice shows a most concerning pattern: the absence of any pattern.
In reality, the array of dots is the average quality grade (between 1 and 4 as it turned out) and average cost (between $0 and $60,000) of the scenarios’ legal advice per firm, thus every dot represents the total performance of an individual law firm, competing for the biggest single prize under RFP.
Even the absence of a green line correlation between the quality of legal advice and its cost when every subjective factor has been minimized reveals its own findings and like a Rorschach inkblot test, you are welcome to stare at this and draw your own analytical conclusions, such as:
- The most expensive answers are not necessarily the best quality.
- The best-quality answers are among the cheapest.
- There is no ostensible link between low cost and low quality as the lower-cost answers are evenly distributed throughout the quality range.
- Answers of the same quality can be obtained from anywhere between $100 and $58,000. Look at the vertical lines of law firm answers that are equally rated at 2/5 and 3/5 for quality to see how they range dramatically in cost, despite being of the same utility to the client.
- The firms who retail advice of variable technical quality above the red line are successfully importing a host of other positive but subjective right-brain factors to remain in business. Because when stripped of, say, branding, reputation, or the old-fashioned reassurance that “no one ever got fired buying IBM,” the client would choose to obtain the same Core legal product anywhere else for a lot less.
- Law firms in the bottom right hand corner are the winners.
Most of us know we can do better, but uncertainty, conservatism, and comfort zones (of others as well as our own) mean that we delay improvement, rather than deny it. But the upsides are tremendous: unleashing the full potential of millennials for whom parochialism and defending the status quo seem counterintuitive, and who thrive on continuous improvement and healthy introspection (by which I do not mean selfies; I said healthy introspection). Creating working environments that reward collaboration, genuinely sustainable relationships, and a deep comprehension of how humans work is of universal benefit, not just for lawyers of all seniorities but for their families and friends, too. Major upsides in financial performance and quality have been shown to be achievable at low to no cost by adopting the behavioral best practices of the Big Four professional services firms and other adjacent industries, instead of being paralyzed in speculation over their perceived threat.
Who persists in believing that the trends of the entire global economy do not apply to the practice of law? I can answer that: any lawyer currently earning what they regard to be an ample living without a plan to hand over the means of such success to their associates, let alone their children. You know who you are. For those surviving the recession—past or in prospect—what doesn’t kill you should make you smarter.
Smarter Law is performance improvement using objective analysis that drives awareness followed by ownership and control of the route and destination ahead. It is for those of us who feel that we’re doing fine and for the greater number of us who are just too busy to feel how we’re doing at all. The key is to ask.
Trevor Faure is CEO, Smarter Law Solutions, a global performance improvement consultancy and author of “Smarter Law: transforming busy lawyers into business leaders” (www.smarterlawsolutions.com); previously a senior legal leader at Apple, Dell, Tyco International and most recently leader of legal services and general counsel, EY Global.