In our Value Index, a lawyer completing a Complexity Level 1 assignment in 15 hours would be graded as +10; if he or she completed the assignment in 30 hours, he or she would be graded at -5. In addition, as part of the process, supervising lawyers (or perhaps even clients) would value the quality of the work using a similar 1 to 5 system, with 1 being unacceptable, level 3 being acceptable and 5 being superlative. A quality review of five would result in a doubling of the individual Value Score, a quality level of 3 would be neutral, a quality review of 1 would be a reduction equivalent to the total initial Value Index score. Thus, in the latter instance, if the initial Value Index score was 10, it would be reduced to 0.

To keep the playing field level, each firm’s Value Index scoring system would be peer reviewed by a competing firm randomly assigned, similar to the fashion in which accounting firms are peer reviewed.

One commenter suggested that this Value Index is a nonstarter because law firm attorneys prefer the simplicity of calculating a bill based on hours expended and hourly rates. Speaking from the client perspective, having engaged (and let go) a number of firms during the 4 years I spent in-house at a large company, I would offer up the idea that hourly billing is not so black and white. While it is easy to calculate those numbers, as a client, the numbers never meant much to me. I would find firms handling substantially similar matters (with no expensive curve balls) and would charge radically differently for them. Many lawyers would not spend their time grappling with unique issues, but instead would constantly re-invent the wheel due to their lack of a knowledge management program. And no one who ever pitched us did so in a way that convincingly explained how they had driven out waste in their performance and had a strong process understanding of their business. As a result, I think that categorizing matters by level of complexity is an intriguing idea offered up by Jerome. Of course, even for simple matters, the fundamental problem for law firms is that clients are often quite inefficient in providing information and making decisions in a timely manner, and, in doing so, create unnecessary work, thereby driving up the cost of the service.

If clients want to get serious about improving their performance within the overall process, then ideas like this Value Index could be quite effective in building an effective strategic sourcing legal services program.

I think one key method of evaluating who the high performers are within a procurement organization is to use contract metrics. It is important to be able to determine the quality of deal provisions for key procurement concepts over and above simple savings measurements. This approach provides a much better picture as to who is truly excelling in their work. Provisions to measure that immediately leap to mind are:

• Budget Certainty Pricing
• Implementation Deadlines
• Price Growth Controls
• Escalator Clauses
• Compliance with Specifications
• Deal Cycle Time
• Apples to Apples Comparisons (i.e., for the same type of legal service performed in the past, measure the cost savings on a per project basis)

Individuals who consistently excel in these areas are of tremendous value to a company.

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What should you care about in negotiating transportation procurement deals? Typically, these arrangements involve working with a big vendor (such as UPS or Federal Express) using their paper, so you are behind the negotiating “8 ball” from the start. An important issue is to think about the contract clauses on pricing. It’s a good idea to analyze the standard positions transportation vendors take on these issues and formulate your negotiating position in response. If you include along with your price per distance stance your position on escalator clauses, payment schedule, insurance, expenses and liabilities, then you can have a much better idea as to how hard it will be to ultimately strike a deal, and speed up your cycle time to close more savings in your current fiscal quarter. Without such an approach, I’ve routinely seen transportation deals take many months to close after people thought they had concluded price negotiations.

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Procurement Professionals

While measuring savings is the first priority when evaluating the success of a purchasing expert, it’s also important to measure contract cycle time. There are many strategic sourcing managers who think that the deal has been struck and they are finished once they’ve exchanged a spreadsheet or powerpoint presentation with a vendor, and then leave the contract negotiations to others. Alternatively, managers may create a good deal of inefficiency in contract negotiations, further slowing down deal closure. As a result, by not measuring cycle time you may miss poor performance by a manager who otherwise has good savings, but could have produced significantly more savings with a speed contracting process.

What do you like about your company?

If you understand the importance of process, then my company particularly values your talents and wants to develop these kinds of employees in a variety of roles to maximize their positive impact. My company also trusts its employees to make timely decisions and provides them with a strong degree of authority.

What is your negotiating approach?

We often start with a request for information (”RFI“).  Generally, in any RFI, there are critical questions that must have complete, compelling answers or we won’t go forward. Once I’m looking at a leading vendor after the RFI, I check with that vendor to see if they want to do an elaborate written contract on their paper (or our own).  If not, we can move more quickly because I can put the contract on our internal purchase order to protect our company with standard terms. Frankly, the typical purchasing manager in the corporate world is so busy, that if there is not a large amount of money on the line for a given deal, it is preferable to do the deal under a purchase order.

We’ve also had success using online reverse auctions, which are a creative idea to have an existing supplier bid against other suppliers to reduce the fees they charge for a given commodity. This is usually a valuable opportunity for the existing supplier because, in an auction, we are usually offering more business across my company Fluke then they previously served.

How do you handle negotiations from a purchasing perspective?

Our first focus is to work with the end user within our company who we are supporting.  We establish the internal expectations as to when they want the deal to be in place as well as the budget that needs to be met.  We generally pay net 75 days or via our corporate credit card. I also ask suppliers as to what they have done in the past to reduce cost, and whether we can work together to come up with creative ideas to make their fees more competitive. Sometimes, using lower cost subcontractors for nonessential aspects of the deal can be effective. It’s also vital to factor in the total cost of a deal, such as shipping costs, discounts, and rebates, that reduce the total cost of ownership on any arrangement.

What do you think of using strategic sourcing for legal services?

This opportunity depends on the company culture.  At my company, the culture is very open to considering new ideas.  Given the current state of the economy, it’s important to not leave any stone unturned in the purchasing space. At other companies, there is probably a good deal of resistance by legal departments to sourcing legal services due to control issues.

But isn’t the key expertise of an attorney better applied on challenging, unique legal issues rather than negotiating payment terms? It’s important to keep in mind the current situation where in-house counsel maintains the law firm relationship, thus the strategic sourcing of legal services does not need to end that traditional approach. We can layer over the relationship our objective research (from third party experts) to negotiate with law firms regarding such issues as hourly rate decreases, rate freezes, and payments via corporate credit card.  Many times, firms don’t like the idea of using a corporate credit card because of the merchant processing fee, but there’s a tremendous value proposition as well because the firm is getting paid more quickly.

Moreover, bringing a purchasing expertise into the legal department is a great way to ensure that budget parameters can be more easily met. Another interesting method that companies might consider is to use an outside consultant with extensive legal and strategic sourcing expertise to negotiate on behalf of the legal department.

Thank you, Chad.

I would instead reframe the question as: “How can a firm define its knowledge management and litigation/transactional processes, then support them with technology innovation?” Spending on technology tools without a clear idea of exactly how they will be plugged into your biggest intellectual assets – the knowledge and processes you use to perform superior to the competition – will not result in a good return on investment. In fact, poor use of technology tools, no matter how innovative they are, can actually result in a negative result, compromising productivity.

Having spent years as in-house counsel at a Fortune 500 company, the client perspective is that we are under tremendous pressure to get our hands around our outside counsel budgets. At the same time, we often face pressure from corporate procurement departments who want to take over our management of outside legal services. A law firm can assert a leadership role here in business development by taking large clients by the hand into the world of legal services strategic sourcing.

This approach means that the client relationship focuses on supply management: defining the best in class performance for a law firm, driving out the waste and inefficiency that makes the cost and time lines of legal projects difficult to predict, and using flat fee arrangements (with protections to provide a comfort zone for the firm) to achieve budget certainty and overall annual savings for similar services. Once you’ve taken this approach by defining your knowledge management and processes, technology tools can be extremely effective in driving the highest level of productivity among your people so that the firm can reduce hours expended on a project and make an alternative fee arrangement highly profitable.

The failure of knowledge management professionals in most law firms is to closely align their work with business development, which is the lifeblood of any firm. In all my years as in-house counsel, only one firm ever touted their knowledge management capability, supporting technology, and alternative fee arrangements. That firm captured all of our real estate legal services needs.

Also, bear in mind that technology tools do not have to be expensive. Even using word processor macros (which are already built into the word processing software you already have) can result in a tremendous increase in productivity via document creation. Low cost “software as a service” tools exist as well and are offered at a fraction of the cost of traditional enterprise software.

In sum, the first challenge is placing someone in a leadership role to define processes and knowledge management from a business development perspective, the second challenge is finding the most cost effective, high quality technology tools to support that approach.

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“[W]ho said that shareholder value was the primary objective of any firm? The well known and outspoken economist Milton Friedman was a vocal supporter of shareholder value as the primary objective of any firm. He claimed ‘the social responsibility of business is to increase profits’. That may be so and I am not here to argue the ins and outs of economics, but surely the objective of any business is to enhance client value and create economic value through innovation. Not only that, but economic value should be based on innovation and not destruction. Within the law firm environment and professional service firms in general, we are sorely lacking an alternative view of capitalism.”

I certainly agree with Robert that the leveraged law firm model is an entrenched system that does not do a very good job of creating economic value through innovation.

I would take issue with the comment regarding Milton Friedman, as I don’t think he would have ever said that creating value for customers through innovation is in opposition to shareholder value. Friedman’s core message was quite the opposite, mainly, that focusing on shareholder value pushes firms to compete to provide the best possible products at the most affordable prices, and they do this by innovating under competitive pressure.   However, I think Robert does a strong job of pointing out how law firm path dependence creates a big problem for Friedman’s supposition, because law firms’ laser-like focus on profits per partner leads to poor, short term oriented decision making and worse allocations of resources which result in unnecessarily costly services that are often not provided with optimum performance.

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• Too Much Legal Expense.  Most companies are spending way too much on legal services.  Moving away from the billable hour and turning towards alternative billing models focused on results creates a significantly better return on investment.
• Standard Procurement Fee Reduction Efforts Fail. Procurement departments routinely make the mistake of using a strategic sourcing manager without a strong understanding of the legal field, which makes their effort to cut outside counsel fees fail.
• Unique Nature of Legal Services.  Legal services are a unique animal.  In legal procurement, a strategic sourcing manager must dispense with the normal approach of treating a law firm as one company, as a law firm is not much more than a group of diverse people, each with a book of business, and the lawyers and staff that support each book.
• Use of Statistics. As a result, law firm wide statistics and quality management are often unhelpful and do not drive across the board quality improvement and spend reductions.  You are much better off measuring the performance of the handful of lawyers who are controlled by the equity partner who manages your relationship.
• Year Over Year Fee Targets Don’t Work.  You cannot set a target of year over year reductions in legal spending because the law department often has no idea, for any given year, what may materialize. A sudden class action lawsuit could be filed, a major construction vendor may walk off the job, or a sexual harassment lawsuit could result. Insisting that the law department spend less money than the previous year without taking this into account alienates the lawyers who are already reticent to support any kind of spend management.
  
• Compare Apples to Apples.  The better approach is to compare apples to apples, and try to get year over year reductions in purchasing the same kind of legal service that was previously acquired, as well as looking into whether a particular legal service is needed in the first place.
• Where to Start? The best areas to target include M&A, labor and employment disputes, regulatory research, commercial real estate, and litigation amenable to alternative billing models that use clearly defined objectives and efficiency bonuses to drive results oriented, more efficient legal services at lower fees.

You can read more on these issues here and see all of my strategic sourcing posts here (scroll down).

There’s a nice debate going on right now on this subject within the Legal Innovation Group on Linked In, you can check it out here.  Here’s my most recent comments on the issue, challenging the idea that it is not easy to change the current model (it is, but there is little incentive to do so) and the supposition that managing partners often have firm wide policing to prevent padding (they usually do not):

Gary, I would have to respectfully disagree as to this point “It is not easy or obvious how to accomplish this”. Law firms, being loose federations of individual businesses, each business consisting of an equity partner with a book of business and the willingness to walk away from the firm, would need to do the following:
1. Secure a commitment from each partner with a book of business to make the clients those of the firm.
2. Impose optimized processes using Lean/Six Sigma for doing all of their work and make sure that they are followed.
3. Use knowledge management and software automation to speed up document preparation.

Frankly, Patrick is right, without fixed fees there is little incentive to take these steps, and, in fact, a disincentive to do so. But it would be a straightforward process that is already widely performed in other fields, such as software development.

And:

Chris, I would recommend caution in referring to firms where certain behavior is allowed or isn’t, as I find that firms don’t do much of a job of policing behavior internally, and often times one partner will pad a bill while another partner at the very same firm would find that ethically abhorrent. Also, speaking from the in-house perspective, it really is one’s responsibility to question bills on a regular basis from larger law firms because of this lack of policing. At small firms I find this is less necessary, as you have much more of a chance of establishing a regular relationship and better billing expectations once you’ve removed leverage from the equation.