The New Normal

Top 10 Ways to Better Manage Legal Spending

Posted Feb 17, 2011 6:39 PM CST
By Paul Lippe

Paul Lippe

As it becomes increasingly apparent that 2011 and beyond won’t bring a “return to normal” for annual double-digit growth in legal budgets, I thought it would be useful to recap the top ways I’ve found to better manage legal spending.

None of these are new, but all are rooted in one fundamental understanding: Unlike law school, which treats every legal issue as the central drama in life, worthy of infinite expense and care and self-contained in its concerns, law in the modern enterprise is part of the broader warp and woof of everyday management.

For most of our lives, we boomers have benefited from what might be called the “three surpluses”: economic surplus generated by our ability to tap available and (apparently) environmentally manageable fossil fuels, demographic surplus generated by a relatively favorable ratio of working-age to retired folks, and competitive surplus driven by the United States’ superior education and infrastructure compared to other countries. For the rest of our professional lives, we’ll be working in a different context, where we can no longer live off these surpluses.

Many lawyers may view this change with shock or resentment, but we just call it the New Normal, where all activities will be closely scrutinized for value and efficiency, including law. So here is my top 10:

1) Clearly define the objectives in any legal matter. Lawyers often proceed as if “legal quality” (i.e., analytical rigor and elegance, document thoroughness, absence of errors) were the benchmark. But in any commercial context, quality is the desired business outcome, e.g., getting the deal done quickly without losses, resolving the dispute favorably, keeping things simple. Nonlawyers don’t like to tussle with lawyers, and lawyers often prefer to keep things opaque, so it’s hard and rare to achieve a true understanding of the desired objectives between lawyers and nonlawyers. But however counterintuitive this may be, the best way to reduce costs is to start by focusing on quality, not in terms of legal inputs, but in the broader sense of intended outcome.

2) Clearly define the process. The classical lawyer model is predicated on a unified client presenting a discrete problem to the lawyer, the lawyer (through her firm) doing the work needed to address the problem, and the lawyer then presenting a solution to the client. While lawyers may model this classical view in their brains, in reality, clients are disparate and conflicted, in-house teams often do a big chunk of the work, projects are usually similar to related projects (the 2011 proxy process looks like the 2010 process, plus Dodd-Frank), and life is both repetitive and chaotic. So in every matter, the relevant team should clearly define and track all the steps (nowadays this may be called project management) and keep an eye on both the “known unknowns” and “unknown unknowns.” Where matters repeat (i.e., all matters), teams should do a post-mortem at the end of the matter to consider how the process might be improved the next time.

3. Align Incentives. I have no interest in the great religious debates about the billable hour. Any system of measurement and payment can work well or poorly, depending on whether the incentives are aligned. In the standard hourly model, the firm’s financial incentives are to generate as many hours as possible, which is often antithetical to the client’s interests. The best example of aligned incentives is FMC Technologies’ ACES model, in which FMC pays firms for how well the outcome of a dispute compares to the expected outcome, not how much time is spent on it. One problem that many clients now face is that they are trying to “bucket-ize” engagements, i.e., have firms handle a defined scope of activities for a more or less defined cost, while the firms’ measurement and management systems still do “shadow” hourly billing, which means lose-lose for the lawyers doing the work. The good news about hourly billing is that it at least aligns metrics—time spent versus cost, so clients implementing any other system must look for ways to align metrics and incentives.

4. Don’t reinvent the wheel. Google says their mission is to “organize all the world’s information and make it universally accessible and useful.” I suspect that includes legal information. The dirty little secret of law is that everybody operates under the same law, and nearly every question has already been answered somewhere. If I’m a global company with 10 major law firms doing my work, that means there are close to 20,000 lawyers directly in my network who may know the answer to a problem that I should be able to tap before paying someone else to reinvent the wheel. Different clients and networks are working on differing collaborative approaches to share (in win-win financial models and with appropriate confidentiality and privilege protection), and the more sophisticated ones will include connecting (with appropriate safeguards for privileged work) firm and client systems.

5) Unbundle. As has been widely discussed, young associates are generally a poor value for clients. Sophisticated clients are now forcing firms to “unbundle,” take what FMC Technologies general counsel Jeff Carr calls the “process and information” part of legal work and give it to lower-cost process specialists, which might be legal process outsourcers like Integreon, a managed network of part-time lawyers working from home, or contract lawyers. While lawyers’ natural reaction to unbundling is to worry about quality, the unbundlers in fact will operate according to a formalized methodology and measurement system and so will have transparent and rigorous quality.

6) Use the smartest lawyers. Contra the notion of unbundling process work, the most cost-effective way to get high-complexity legal work done is to hire the smartest, best lawyers. The smartest lawyers tend to be the busiest (and so least likely to overbill), have the most relevant experience (and therefore quickest to get to the solution), and be most effective in getting buy-in whether from the company or external stakeholders (so cut the Gordian knots).

7) Make sure roles are clear. Other than e-discovery, the No. 1 generator of low-value legal activity is unclear lines of authority. In a modern, complex enterprise, law is not a once-in-a-while thing; it is part of the rules system of governing thousands, even millions, of decisions. Increasingly, law is part of the organizational operating system. In well-run organizations, lawyers provide specialized input or facilitate orderly processes. In poorly run, risk-averse, bureaucratic organizations, every decision making becomes an exercise in rule-making and cover-your-butt, and so lawyers take all facets of decision-making. In those dysfunctional organizations, the most expensive lawyers become the best, because folks can say, “well this decision was OK because it was blessed by so-and-so,” but that abdication of authority to lawyers is usually quite costly and counter-productive.

8) Make sure firm lawyers understand your business; make sure in-house lawyers understand something besides law. Law is specific. If an outside lawyer refers to your business by using the term “widget,” (unless you happen to be a widget manufacturer), then fire them—there’s no chance their work is specific enough to be useful. For in-house lawyers, they need to understand something besides law so they can have perspective on how law operates in a complex environment like a company.

9) Make sure your “team” collaborates. As described above, the firm model is to put the firm at the center of everything and focus one problem at a time. But a sophisticated client has many firms, many problems. So the client’s team consists of all their in-house folks, everyone from any of their firms working on matters, and anyone from any of their firms (at least those with whom they have a sustained relationship) who can contribute to the resolution of a matter. In a networked world, there are lots of ways to coordinate the knowledge and the work of those folks to get to better solutions in less time. The other dirty little (not so) secret is that firms don’t do an especially good job of making this coordination happen even within the firm, so having the client create the structure to make it happen across firms not only helps the client, it helps the firms raise their game.

10) Make no small plans. Most cost-savings approaches in law amount to no more than tinkering—arguing whether two versus three associates should attend a deposition, insisting on fewer motions in a case, imposing rules for how expensive a hotel folks can stay at, negotiating the discount from 9 percent to 11 percent. The good news is that you can guarantee if you pursue those approaches you will show results. That’s the nature of metrics—focus on something, and you can show you improved it. But these results will be trivial, and mask the failure to make meaningful change. But if you start to ask your how you can save 50 percent, you’ll open up lots of possibilities that are not only achievable, but materially improve everyone’s lives. I can’t tell you how many times I’ve been at a closing dinner where I promised (and delivered) to the client a better-quality deal done faster at a materially lower price, and then had someone say to me: “Well, of course if you had told us we should do X, we would have known we could have got things done faster for lower fees.” To which I would reply: ”You mean, if I had told you I wanted to do the deal quickly, focusing on what was most important to company, avoiding unnecessary stuff and really managing risk, you could have done that.” Yup, that’s the idea.

Paul Lippe is the founder and CEO of the Legal OnRamp, a Silicon Valley-based initiative founded in cooperation with Cisco Systems to improve legal quality and efficiency through collaboration, automation and process re-engineering. Lippe formerly was an executive at the electronic design automation company Synopsys and later was CEO of Stanford SKOLAR, a medical digital library and e-learning company sponsored by Stanford Medical School.

Editor’s note: The New Normal is an ongoing discussion between Paul Lippe, the CEO of Legal OnRamp, and Patrick Lamb, founding member of Valorem Law Group. Paul and Pat spend a lot of time thinking, writing and speaking about the changes occurring in the delivery of legal services. We hope you will join their discussions.

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