- How can law firms enhance how they create and measure value for corporate clients when the traditional cost-per-hour analysis is seen as outdated and ineffective?
- By looking at “Value Related Qualities,” law firms can identify their strengths and match those strengths (or develop them) with those of its corporate clients.
In their newly published ABA Business Law Section book titled The Value-Able Law Firm (June 2018), Steve Lauer and Ken Vermilion offer law firms a new, more comprehensive look at the dynamics of value from the corporate client’s point of view.
Several independent forces operating simultaneously have thrust law firms into an unfamiliar environment—a much more competitive one—for which many seem unprepared. Law departments increasingly express the need for more "value" from the legal service their companies require. They focus on the value, rather than simply the "cost," of that service.
Firms often struggle to understand, however, what clients mean by the term “value.” Value has a completely different look to a law firm’s managing partners than it does to a corporate law department. A firm that hopes to succeed in tomorrow's environment must rethink its performance metrics and what "client centric" really means.
The focus on value means that a law firm can no longer simply reduce its hourly rates or propose a simplistic alternative fee arrangement when responding to value-seeking law departments. Success now requires a much more nuanced approach.
In addition, new players now compete for a corporate legal departments' spend. Law firms now must contend with Alternative Legal Service Providers. ALSPs have value propositions and client-focus principles different from those that have motivated law firms for so long.
Finally, law departments must demonstrate in an objective fashion how well they manage the matters entrusted to them by their companies. Satisfying that mandate requires that they develop and implement more meaningful metrics and protocols that demonstrate the overall efficient operations and other management strategies of the law departments. They pass this pressure to external service providers for those matters. Consequently, firms must develop supportive metrics and collect relevant data to meet this ever-increasing expectation.
The changing market for legal service for corporate clients
Until recently, corporate law departments happily assigned outside counsel specific matters and let them run with those assignments with little interference or close oversight. Corporate legal departments were often small and staffed with lawyers who had access to limited internal resources. Those law departments weren’t scrutinized closely by their companies' CFOs and CEOs. "Value" was inextricably—and simplistically—connected to cost; end of analysis. Law firms' accountability didn’t extend beyond informing clients of major developments and, perhaps, complying with billing guidelines.
In connection with their selection and management of external service providers, many law departments can now draw on the assistance of corporate procurement personnel, whose expertise in sourcing and metrics constitutes a valuable asset. Particularly, to satisfy the reporting expectations of the C suite, in-house lawyers utilize those capabilities more and more frequently.
The early 2000s brought dramatic changes to a corporation’s search for improved profitability. Process needed to be made more efficient, new technology was deployed to improve productivity and eliminate quality variances in production, and headcount reduction was often a goal. No corporate department was untouched by the “do more with less” mantra.
Suddenly, the legal department was required to provide budgets for its matters that it was expected to achieve. Law departments began to review the companies' law firms with an eye toward reducing their numbers and costs and providing the C suite more information about significant legal matters, the expected drain on internal resources, and the external resources needed to achieve acceptable results. Suddenly the typical relationship between a corporate legal department and law firms was under stress. Big change loomed.
As they faced their own changing requirements, corporate law departments' operations personnel began applying disciplined, data-driven process evaluations, developing project management skills, and analyzing cost down to individual employees' activities. Corporate legal departments began shifting their focus from the “practice” of law to the “process” of law in their search for greater efficiency. Corporate clients have become more engaged with the overall management of outside counsel in a very different and ever-more-demanding manner.
If corporate clients' greater focus on process weren’t enough to stress traditional relationships between clients and law firms, the emergence of the above-referenced ALSPs added distinct pressures. ALSPs carved out specific legal processes and developed organizations, technology, and artificial intelligence to deliver results more efficiently than law firms. Some clients even directed law firms to utilize ALSPs for their matters.
Finally, corporate legal departments formed professional legal operations and technology organizations and forums for the exchange of ideas. This enabled them to identify improved practices more quickly and to implement the best ones. How can a law firm respond to these new demands?
Recent surveys illustrate general counsel's disappointment with law firm response to their need to reduce costs. Pressure to reduce costs too often resulted in quality control slippage. Outside lawyers demonstrated little creativity when asked to reduce the costs of services. Firms rarely met expectations regarding understanding the client's business and culture. Corporate clients began evaluating firms using untraditional criteria: use of technology, project management skills, responsiveness, diversity, etc.
A new, practical construct for delivering "value"
The book explains an approach to the concept of value that is more actionable for outside lawyers by putting meat on the bones of the concept of Value Related Qualities (VRQs).
Here are a few VRQs of legal service or of the lawyers or law firm delivering the service:
- cost control
- speed of resolution or completion
- certainty of acceptable resolution
The authors demonstrate how law firms should review their core competencies. What services is a firm really good at delivering to its core clients? Every firm (and each attorney and other professional in the firm) has its own VRQs. A firm might be known for a particular representation, whether transactional or litigation-oriented, environmental, or related to mergers and acquisitions. Perhaps a firm has offices in multiple international jurisdictions and routinely handles multijurisdictional corporate transactions or has well-regarded expertise in international arbitration.
Some firms have strength in handling “bet the company” matters, whereas others excel at handling high volumes of low-risk matters. It’s unlikely that any one firm can effectively be all things to all clients.
The VRQ framework helps identify the strengths of a firm’s performance and match those strengths with its clients' VRQs. Firms and clients then can have a broader conversation about the creation of value—an innovative conversation that is more meaningful and actionable than the outdated and ineffective cost-per-hour conversation.
Having a particular reputation does not limit the types of matters that a firm can handle competently and legally. That reputation can, however, constitute an "anchor" for the firm's market presence and its outreach efforts. If a firm understands its existing practice and reputation, it can examine how that current business serves its existing and potential clients' value-related needs. Reviewing its VRQs and those of the market targets, how much overlap exists? If not a precise matchup, how easily could the firm develop the VRQs needed to more completely service those companies' needs?
One of the first, and key, steps in understanding VRQs for a client—Fortune 100 or not—is to understand the client’s business and its role in the market. Then it is critical understand its history as well as important company culture characteristics. We believe synergies exist between a client’s overarching business model and the operational framework for the in-house legal department.
Once a firm has aligned its internal resources with the areas of law in which it wants to provide distinguished services to clients, the task of providing evidence of these skills becomes paramount. Enter the world of metrics. How best can a firm demonstrate to clients its core expertise? Developing easy-to-understand metrics that communicate the firm’s ability to deliver value beyond simple cost reduction is essential to winning clients' work and loyalty. VRQs support the development of value-oriented metrics.
Next, a law firm should focus on the client’s matter-specific objective or goal and strive to understand that objective using the company’s capacity for risk and its business model lens. For example, an insurance company may have decidedly different objectives for the management of its portfolio of tort matters than a modest-sized regional retailer. The former's lifeblood may be the minimization of cost when managing claims, so its value drivers revolve around cycle times, reusable work product, and analytics that support innovative cost agreements with firms. A regional retailer may seek to eliminate repeat occurrences of similar offences. Yes, there will be a sensitivity to cost, but perhaps a focus on lessons learned and preventative steps to take limiting future exposure may be key. Client-centric firms clearly understand their clients' objectives before forcing the spade into the soil, and these firms don’t identify objectives in a vacuum. They openly discuss and formally document objectives in advance of developing key components of strategy and execution plans for that strategy. VRQs can fill a critical role in that planning.
There is much more to understanding the VRQ framework and implementing its concepts to benefit both firms and clients. Hopefully this abbreviated look into a better way to create and measure value for your clients will cause you to dig further into the concept of VRQs to enhance how your firm creates value for your clients and is compensated for doing so.