Innovative KPIs Are Critical to Secure Greater Value from Law Firms
Author: Richard Stock - the Australian Corporate Lawyer, Spring 2017 at pg 16
Corporate law departments and the organizations they support are in a business-to-business relationship with their primary law firms. This differs from the professional relationships that in-house counsel have with individual lawyers in firms. In his book The Inside Counsel Revolution, Ben Heineman maintains that corporate counsel must be held responsible for the quality and cost of the legal work of law firms, highlighting the responsibility of law departments to secure greater value from primary law firms every year. This means demonstrating that external legal spend is considered, appropriate and measurable. Internal performance reviews formalise a process of setting objectives and targets to encourage cost-effective work from members of the company’s legal team. Similarly, applying leading performance management practices to law firms encourages a high standard of service and results, appropriate fees, and continuous improvement of both processes and outcomes. However, it takes more than this to secure greater value from law firms. Three steps are proposed.
Legal Weather Forecasts Depend on Historical Data
The first requires a thorough analysis of historical data about practice patterns, work allocation, and legal costs. The legal department can then prepare a map of corporate consumption habits and of law firm practice patterns. It should include the volume of hours and the number of matters with associated complexity levels for each legal specialty. This data can then be allocated across each business unit and each jurisdiction where the company is active. When all is said and done, the basic analysis has at least six variables.
The law department works with business units to articulate the underlying planning assumptions about their demand for legal services and for the company as a whole. Once the business plans are clear, it is straightforward to prepare a multi-year forecast for legal services. By combining historical data with business plans, such forecasts can be incorporated into requests for proposals for legal services and to support ongoing discussions with law firms.
Too many legal departments fail to appreciate their company's consumption patterns and the constituent elements of legal economics in law firms. Many law firms now have experienced pricing officers on staff that have mastered the firm's profitability variables, understand every variation of alternative fee arrangementss, and drive the firm's business response to requests for proposals for legal services. Legal departments can do no less and must stay ahead of the curve when it comes to the business of law.
Legal departments must frequently rely on their law firms to secure historical data that is not available internally. Work volumes, staffing ratios by legal specialty, effective hourly rates, total legal spend, and legal outcomes constitute the minimum information and trends needed by the corporate legal department. This is then combined with qualitative data derived from a consistent approach to evaluating law firm performance, especially for the most significant matters. Data analytics and trend analysis are the first step to securing greater value from law firms.
Adding Value Starts with KPIs
The second step is to choose the KPIs that will influence the performance of the firm. Ten years ago, following extensive consultation of its membership and of progressive law firms, the Association of Corporate Counsel (ACC) developed a “value index”. It was originally intended to serve as a common vocabulary for legal departments to define and discuss the value of services provided by law firms. The factors comprising the index were: understanding expectations, responsiveness and communications, efficiency, predictable costs / budgeting skills, legal expertise, execution and quality delivered. At the time, it was easy enough to consider the factors as performance indicators.
While useful as a framework for discussion, the original factors – or indicators – were not sufficiently differentiated from one another. Legal departments reported that evaluating primary firms twice a year was cumbersome. The six original indicators have since been streamlined by a good number of legal departments. Part of the stimulus to do so came from the migration to non-hourly fees for complex matters and for portfolios of legal work spanning several years and jurisdictions. Most companies do not mind paying a premium or a success fee for great results on complex matters but the value must now be measurable.
Some corporate legal departments rely on only four KPIs: results, innovation, service and costs. Expectations for value and performance from law firms are typically detailed in initiatives and targets that are aligned with each KPI. One of the biggest challenges is to ensure that the process of influencing firms is robust and sustainable from one year to the next. The campaign for innovation cannot be allowed to fall by the wayside because the company's primary law firm – the one that manages the most complex transactions and litigation – is too close for comfort. One pundit described this reticence as a “furry rut” out of which legal departments must climb. It is worth emphasizing that the entire exercise requires some rigour if it is to be practical, thorough and timely.
Tom Murphy was mayor of Pittsburgh for 12 years until 2006 and helped to lead the re-birth of the city. He said, "that's the whole challenge we face – do we spend all our money on today or do we invest some of it for tomorrow? You have a fundamental choice to make – do you want to be loved or do you want to be effective? If you want to be loved, you’re probably not going to be bold."
This seems like a natural progression given the range of innovation awards available to corporate legal departments everywhere. Both Telstra and Woolworths are recent winners of global ACC Value Champion awards. There is good evidence that some of the best ideas and most innovative projects originate with the law firm rather than with the company or its legal department.
A handful of legal departments have decided that they must be bold if they wish to secure ever-greater value from their preferred firms each year. A few companies have invested in their law firms with hybrid fee arrangements consisting of a monthly base fee combined with significant funds for innovation projects that target measurable improvements to effectiveness and efficiency. As a rule of thumb, the company and the firm agree that approximately 15% of fees should be dedicated to innovation projects.
This unique approach encourages law firms to research, develop and present their best ideas for approval by the legal department. The challenges for both parties then is to create the winning conditions necessary for the innovation to become reality. This approach seems to work best when the relationship with the primary firm is long-standing, however a shared commitment to innovation is also necessary.
A professional liability insurer used their innovation fund to improve the efficiency and effectiveness of legal services. A sample of projects included:
- Notifications of defective products or services and recall notices, together with appropriate hurdles/gates to trigger a response
- legal, expert, and tactical modifications required due to changed behaviors of other litigation stakeholders
- knowledge transfer to out-of-state legal counsel for out-of-state claims
- paperless practice for claims managers, internal counsel and the law firm in collaboration with the IT department/li>
- budgeting/docketing interface between the legal department and the law firm
- discovery and trial checklists
- privacy requirements, safeguards, and related protocols given the sensitive nature of the insured and media scrutiny
- single and multiple occurrence considerations
In this example, the law firm invested 1,800 hours of professional and technical time for the range of projects over a period of eighteen months. Each project included a project plan with clear milestones, deliverables and non-hourly budgets. Only a handful of projects were designed to reduce legal fees. Because this approach is new for almost all companies, it was agreed that no project would exceed two-hundred hours or last longer than six months.
A global construction engineering firm selected a different set of innovation projects that included:
- formalisation of records of instruction
- the use of uniform and detailed matter plans and budgets
- diminishing the dependency of business units on the legal department and on external counsel for routine work
- co-counselling significant matters with inside counsel to better manage logistics, relationships with business units and knowledge transfer.
Both examples demonstrate the benefits that can be gained from an innovative approach to KPIs.
Evaluation is a Two-Way Street
Legal departments should select the right KPIs, formulate the right objectives and set targets which pass the SMART test (Specific, Measurable, Achievable, Results-Oriented, and Time bound) reflecting a balanced scorecard architecture (see www.balancedscorecardaustralia.com and www.thepallidiumroup.com) for performance.
A company preferring to use KPIs such as results, service and costs should evaluate the performance of legal work at least twice annually while innovation projects should be evaluated at designated milestones. Recent evidence suggests that more weight is placed on results and innovation KPIs than on service and cost KPIs. The focus of performance is shifting from processes to outcomes.
Achieving sustainable innovation depends on long-term partnering relationship with primary law firms. The purchaser-supplier relationship is abandoned in favour of a new balance where the legal department provides unfettered access to its data, its legal department and to business units to get the job done. This is essential when significant fees are tied to successful innovation as well as to the legal work.
Innovation is an Iterative Commitment
Whether law departments rely on one, four or six KPIs, expectations and targets for value should cover the qualitative and financial aspects of performance. Innovation must infuse every initiative to ensure that law firms add value every year.