Efficiency, Partnering and Value
Author: Richard Stock - Lexpert, May 2010 (Vol 11, Issue 6)
I recently participated in a lively panel discussion with the general counsel and associate general counsel of four airlines: Lufthansa, Qantas, Delta and Continental. The challenge was to distill current and possible best practices for three inter-related challenges to legal services delivery.
Before entering into a discussion about which measures increase efficiency, a basic definition was agreed upon. Efficiency is primarily about speed and turnaround, given the limited resources of most legal departments. Efficiency is about creating more capacity in the legal department using existing or fewer resources.
A number of approaches emerged. The first formally, when the year begins, aligns the resources of the legal department with the company's strategic priorities and special projects. This goes far beyond designating a lawyer to work with a specific user. The law department needs to know about specific priorities and objectives for all key departments before the year begins.
The annual planning and budgeting cycle of the company and its market-facing departments is a good place to begin. An estimate of the number of hours and of the timing for internal and external counsel is prepared to support the objectives of user departments. In multiples of 50 hours per lawyer, it should be possible to reserve 80 to 90 per cent of the law department's capacity for the year for specific user initiatives.
Approaching the allocation of legal resources in this way allows the general counsel to reduce the proportion of operational support work done by the department in favour of strategic and project work. This is more motivating for the lawyers in the department than being on call for more routine work. Still, it takes two to tango. User departments have to do their share by respecting more explicit protocols when working with lawyers. These usually include better, earlier preparation and more complete data by the user; alignment with specific relationship counsel; and reducing the number of individuals that deal with the law department.
It takes time and some money for a law department to do all the right things to manage the costs of legal services. Many law departments do not believe that the pain will be worth the gain. Others are very concerned that procurement processes, project / matter management practices, and discussions about rates are antithetical to relationship-based, collegial legal services. Still others are too busy to make the time. For the most part, the available tools and processes are too unfamiliar for law departments to use. General Counsel then default to traditional arrangements with their primary firms
The panel offered four other suggestions to increase legal department efficiency: (1) a reduction of time spent in meetings; (2) better management of interruptions from e-mails, calls and visits to save about an hour each day; (3) training and software to support resource planning and tracking for projects, transactions, and litigation; and (4) a role for the associate general counsel or the general counsel in allocating work to the lawyers.
Partnering The airlines identified four trends in the selection of law firms. The first is the use of a formal procurement process, usually by way of invitational tender, designed to stabilize law-firm teams, prices and workflows. Warren Buffett's executives claim that a purely relationship-based selection of service providers costs 20 per cent more, and the figure is closer to 40 per cent when it comes to legal services. Detailed specifications and a rigorous, but not necessarily competitive, process make all the difference.
A second trend in partnering is the ability of full-service firms to take on all levels of work complexity, including more routine work, on a cost-effective basis. Many firms will use their less expensive offices to bring down the average cost of this type of work - Milton Keynes instead of London, Hamilton instead of Toronto, White Plains instead of Manhattan.
A third trend, at least in the medium term, is shifting some work to less expensive providers, while keeping more expensive firms on the preferred provider list. This tends to occur once the next qualified firm is at least 20 per cent cheaper. Optim Legal in Australia and Keystone in the UK are examples of firms with a business model trying to appeal to this pressure point.
The fourth trend is an accelerated progression to alternative fee arrangements (AFAs). Fixed fees for complex matters, including litigation, can be found in every sector. Intel, Cisco, Bruce Power, Healthcare Insurance Reciprocal of Canada and others have a variety of non-hourly based arrangements in place. Pfizer plans to manage 50 per cent of its $500-million legal spend with AFAs within two years. Most general counsel, however, are still risk-averse when it comes to their legal spend, preferring a discounted hourly rate because it is familiar to them.
The panel suggested three ways that law firms can become better partners with their corporate clients. The first is by offering a more international presence. A new wave of convergence is emerging whereby the client is persuaded that equivalent skill, price and service delivery are available from the same firm in another region or country. Transatlantic firms have emerged, as well as those with a presence in the Middle East, and more recently China and India are on the radar screen. Even with seven or eight firms representing a company around the world, further convergence is still possible. DuPont, for instance, relies on its Seattle-based firm to manage legal service providers in Oregon and Alaska.
The second suggestion calls for formal multi-year arrangements with a reliable forecast of demand for legal services, stable legal teams and predictable pricing, even on an hourly basis. A number of firms like Eversheds LLP in the UK and McCarthy Tétrault LLP in Canada are investing heavily in training, precedents and software to support pricing and project management of complex work. They are early adopters and believe their approach represents a competitive edge. Another firm has created the position of Global Pricing Officer to negotiate all non-traditional retainer agreements.
The third suggestion to improve the partnering experience is to have a few people in the legal department trained and available to invest more time to manage the business side of the relationship with primary law firms. The responsibility includes evaluating their law firms systematically for performance.
The panel debated whether it was possible to demonstrate the value of the legal department by charging an amount back to the business unit. It is straightforward to show that, on a full-loaded basis, a law department costs 45 to 50 per cent of what external counsel costs. But the panel was unanimous in concluding that cheaper is a very poor measure of value.
The best way to show value is by delivering results, in having the business unit achieve its goals. The second way is through service, typically measured with satisfaction surveys. Some departments prepare a report card using a four-part architecture: service levels; knowledge transfers to end users; and cost savings; and, most important, contribution to strategic priorities.
Efficiency, partnering and value must all be managed in the continuum of legal service delivery.