Corcoran's Greatest Hits, Volume 1

A long time ago when I was a radio and club DJ, I owned a lot of Greatest Hits albums and CDs so I could fulfill listener requests for popular songs. Some of these collections were hastily compiled by an artist's record company in order to fulfill a contractual obligation. But sometimes the collections were compiled with care and enthusiasm and included never-before-released songs from the vault, liner notes from the artist and other material to appeal to the true fan. With that in mind, I present the top five posts from this blog over the past year along with additional insights of my own and public and private reader reactions. Legal Project Management Q&A - For quite some time I've been writing about the need for law firms to embrace business concepts to improve operations.  Last year I adapted some of the concepts and techniques I learned in my corporate life and developed a curriculum for educating lawyers about project management.  Turns out there's a whole discipline growing on this topic, now dubbed Legal Project Management, and there are some quality trainers offering insights.  But there are also a number of folks hopping on the bandwagon.  In my view, one can obtain certification in a discipline, one can even teach the concepts, but one doesn't really know the topic until one applies these techniques in a commercial enterprise to make money.  Ask your project management consultant for real commercial examples of these concepts in action.

In addition to imbuing my approach with real-life experience, I also focus on the big picture and keep away, at least initially, from the statistical and quantitative basis that others believe is necessary to commence a project management process.  One Six Sigma Black Belt criticized my approach, exclaiming in disbelief that no program that addresses project management and process improvement could possibly succeed without a heavy dose of analysis and math.  I disagree.  Well, at least I disagree insofar as I'm confident few law firm partners will sign up for a course that's heavy on math and analysis.  But many will sign up for a workshop such as mine (and hundreds have!) where we cover the basics, whet participants' appetites for how project management skills can be applied to a law practice and generate sufficient interest to go to the next level where -- surprise! -- we get deeper into the underlying math and analysis needed to truly benchmark and track performance.  On a few occasions my colleagues and I have replaced a consultancy that specializes in engineering firms, or that applies a standard Six Sigma methodology to any business process with little customization.  I've learned that the practice of law, while not as unique as some lawyers would have us believe, does require customization and care to ensure that the concepts are properly applied.

If you lead a law firm and you're convinced that with an improving economy everything will go back to the way it was, and this is a good thing because it's right that lawyers should demonstrate value primarily by billing time, and it's right that lawyers should treat each new engagement as if it's the first of its kind because this is the only way to ensure the client receives the most thorough work product, then you don't need project management.  But write down these beliefs and note how firmly you believe in them, and then let's talk again in a couple years.  I'm certain your views will have changed, because once everyone else has adapted you will too.

A Note on Reducing Law Firm Compensation - This post generated a number of emotional responses.  It's also one of the most commonly searched topics on the blog, suggesting that it's a hot topic elsewhere.  When I wrote this post, quite a few large law firms were conducting public and stealth layoffs of staff, associates and even non-equity partners, and just as many were reducing compensation of these same groups.  Popular legal gossip blog Above the Law teamed with Law Shucks to track these layoffs, and according to their research as of today's writing there have been nearly 15,000 job losses in the legal sector.  This is an unprecedented statistic in a business segment that is typically known to perform well in good times and bad.

It's challenging to write academically on such an emotional topic while the lives of real people are so significantly impacted, but the original intent of this post was to provide some context for why the same market dynamics of supply and demand that influence other industries are certainly factors in the legal profession.  In short, when demand for a product or service declines, there tends to be an oversupply of the product or service, and this drives prices down.  When product or service producers experience lower revenues from lower prices, they look to reduce costs in order to maintain profitability.  It should have come as no surprise that associates and staff, the lowest members on the Biglaw totem pole, would experience the greatest pain when demand dropped and law firms cut costs.  But as I said then, when demand returns, hiring and compensation will increase.  And it is, and they are.

That's the thing about markets -- they tend to operate efficiently when you look at the big picture.  Unfortunately, real people and their livelihoods were sorely impacted, often through no action or inaction of their own.  Which is why this blog is intended to help business leaders make smarter choices, to run more efficient and effective businesses, so we can enjoy profitability while also delighting customers and attracting quality employees.

Law Firm Leaders: Save Money Now By Cutting Marketing - The title is ironic.  I would not counsel any business leader, especially a law firm leader, to limit the organization's visibility to its target audience, particularly when there's a good possibility that buyers are actively seeking new providers.  But I figured the title would catch the eye of leaders looking to do just that, because after all, isn't marketing a nice-to-have, not a must-have?

There were a few different points in this post.  First, every marketer will claim that one should spend more on Marketing during a downturn, but like a politician who's developed a nice ten-word sound bite but doesn't know the next ten words, i.e., the substance behind the rhetoric, many marketers repeat this mantra without offering salient details such as when, where and how to increase marketing in a downturn.  As marketers, we can't just try to protect our jobs without regard for the consequences, like auto workers refusing to negotiate labor rates even if it means the plant must close.  We should be thoughtful and prudent in our spending during a downturn, because while surely there are opportunities to be had, there are also a lot of people willing to take our money in return for a lot of empty promises because they too are suffering.

I also wanted to take on the lazy business leader who applies cuts across the board without regard to growth potential or profit contribution.  In tough times we all need to tighten our belts.  But if Mom loses her job, do we sell the car to save money, and now Dad can't get to work and he loses his job too?  A corny analogy, but in effect many business leaders our of some misguided sense of fairness try to spread the pain evenly.  Hogwash.  The current and potential growth engines might need relatively greater investment in tough times, and the slow growth or cash cows might deserve nothing, so long as we're willing to acknowledge that this will effectively kill them.

The other point was to distinguish between marketing as defined by many lawyers and marketing as defined by experts.  Just the other day I was reminded that this is a long-term battle.  A Biglaw partner asked me if I could help the firm get its RFP response approach "right."  I suggested we might have very different views for what is "right."  An elegantly bound booklet full of deal lists, league tables and lawyer bios, accompanied by boilerplate responses to an RFP's standard questions is very often a waste of everyone's time.  An RFP that addresses the client's business challenges and offers potential solutions along with a project plan and a budget is very often a winner, even if it's a tenth of the size and weight of the alternative!  But lawyers want the former (and so do many marketers).  If a law firm leader wants to cut marketing costs, my suggestion is that in addition to reviewing the marketing budgets and org chart, he should look in the mirror and identify the silly things lawyers do under the guise of Marketing.  And the marketers can help.  After all, we're in this together.

Addressing the Martindale-Hubbell Question - I receive calls nearly every week from law firms big and small asking if I'll help them negotiate their Martindale-Hubbell contract.  Many, but perhaps not all, readers of this blog may know that for a period of time I led the large law, international and corporate business for Martindale-Hubbell.  Obviously I know where the bodies are buried and how to negotiate against my old team (actually, now that LexisNexis manages the business, nearly everyone I knew is gone).  But I have no interest in doing so.  Despite the unethical, short-sighted, juvenile and profoundly incompentent manner in which I was treated when I left the organization, I spent too many years building its brand to take any joy in knocking it down.  Besides, the leaders of the parent company need no help from me or other alumni to harm the franchise.

Of more interest is that when it comes to directories, everyone continually asks the wrong questions!  There is no list of "good" directories and "bad" directories.  Even comparing Martindale to Ted's List of Blond-Haired Left-Handed Lawyers of Southern North Dakota is a misnomer, because one is a multimedia network connecting buyers and sellers, and the other is a vanity listing which lawyers buy to feel good.  But I'll leave it to the Martindale marketers to tell their story.  Despite the title, the post is about how one measures the impact of any legal directory to influence your prospect's buying decision.  After all, isn't that what it's about? 

The calculus is fairly simple: define your target market, identify the ways to reach this market, identify the manner in which they make buying decisions, and then be in those places and do those things.  If the cost to do this effectively is too high, seek out proxies.  If a legal directory has access to the target market and influences a buying decision --and it can prove it -- then perhaps an investment of a dollar there gets you ten dollars of return.  If not, move on to the next tactic.

Marketers are just as bad as lawyers when it comes to judging legal directories, just on the opposing side of the argument.  Typical legal marketer discussion of directories:  "Does anyone use the Tall Lawyers of Montana directory?  One of my delusional lawyers thinks it's an important investment.  I've tried to tell him that all directories are a waste, and he should spend time developing a Facebook fan page instead because I think it's a better investment."  In Biglaw land, few buyers will identify, evaluate or select a law firm based solely on its representation in a legal directory (or network), but sometimes it can be a differentiator when all other factors look the same.  It's important to know when this is the case and when you're throwing your money away.

Web 2.0 / Social Media Update - I've long been active in social media, before we even used those terms.  I had the good fortune of joining Steve Brill's team in the early '90s when Counsel Connect was launched as a sort of AOL for lawyers, which was several years after I joined AOL and participated in its chat groups, which was a year or two after I joined Compuserve.  For many of you, these names mean nothing.  That's okay.  Suffice it to say, I've long been a fan of learning from experts wherever they hang out, and occasionally I'll have something to say that I think others might find useful.  The venues change, but the concept still applies.  In this post I shared the many legal and non-legal blogs I read daily, and the legal and non-legal social networks where I spend time, as part of my effort to stay connected and stay informed about the changes in my chosen field.

This was an enormously popular post a year ago, and while untold millions of users have joined the social networking bandwagon since then, I suspect many are still looking for a roadmap of what's good and what's a waste of time, from the point of view of someone who's been there.  Rather than point people to the year-old summary, I'm updating the post and I'll publish that shortly (Update here).  My daily reading list has expanded yet the frequency of my commenting (on this blog and elsewhere) has declined somewhat as I try to strike the right balance between studying my field and working in my field.  I know that I'm not alone in seeking this balance.

So there you have it.  The top 5 posts from this blog in the past year.  I hope you enjoyed them the first time, perhaps enjoyed reading them a second time, and I hope these liner notes were helpful additions.  Feedback is always welcome.

Legal Project Management

I've been spending a lot of time in recent months conducting workshops in Legal Project Management.  What is Legal Project Management, you may ask?  Simply put, it's the process of adapting business process improvement, resource allocation and predictable budgeting techniques to the delivery of legal services.

Some lawyers believe that the practice of law is not like other professions or business disciplines, and that therefore project management principles which work in other areas do not apply.  These lawyers are wrong.  That's not to say one can manage a complex legal matter as if it were an automotive assembly line.  But every legal matter doesn't have to be treated as a completely unique confluence of steps that has not occurred before and will not occur again.  Each of these steps can be broken down and analyzed, and when the opportunity arises for this step to be included in an engagement, there can be a greater understanding of the cost drivers. 

Understanding the assumptions that influence the cost of delivering legal services is critical to setting fees, and clients understand this.  After all, they go through a similar process when establishing their own cost and revenue budgets. My former colleague Pam Woldow and I have (literally) traveled the world delivering Legal Project Management workshops to law firms big and small, to law departments big and small, to corporate lawyers and litigators, to partners and associates, to finance and marketing staff... and our workload is increasing. 

We will be offering a webinar on Tuesday, March 23rd, 2010 at 1 PM ET to share our insights into Legal Project Management, and to address questions from those who are experienced Legal Project Managers as well as those who are just starting to explore this new frontier.  For more information, click here.

Legal Project Management is critical to managing legal work more profitably, but it's also an excellent way to achieve client satisfaction and to develop associates' skills.  We'll touch on all of this in the webinar.  If you plan to attend and wish to submit a question in advance for us to address, please post it in the Comments below.

Legal Budgets and Corporate Budgets - Why Predictability Matters

I recently met with a group of law partners to discuss the feasibility of increasing the firm’s billing rates for the coming year.  Normally this doesn’t require a discussion; the firm traditionally raises its rates 5-6% every year.  And normally this takes place in January once the prior year's books are settled.  This year, however, and to the partners’ credit, they questioned the optics of raising rates at a time when most of their clients are still suffering from the impact of the global economic meltdown, or the Great Reset, as Bruce MacEwen calls it. As we debated the pros and cons, it was apparent that the partners had very little understanding of the impact an increase to their billing rates might have on a client.   In fact, none of the partners had worked in a corporate setting previously so they had no real insights into the typical corporate budgeting process.  Perhaps a peek behind the curtain may help inform this discussion, as it’s a process full of surprises to law firms that often have rudimentary budgeting processes in place, if at all.

The first surprise is when budget discussions commence.  Assuming the fiscal year corresponds with the calendar year, most businesses start preparing budgets in August.  Yes, in August prior to the budget year.  It takes time to develop a budget from the ground up.  In days past budgeting may have been approached as an exercise in what’s different or, in other words, starting with last year’s budget and merely adding new items and deleting old items.  No more.  Now there’s an expectation that every budget must start at zero, and from this starting point we add in each and every cost until we identify the total budget needed.  And then we start paring it back.

Many lawyers operate under the delusion that the practice of law is inherently and infinitely variable, meaning that unlike other business functions one cannot predict legal costs with any certainty.  This opinion is often held by outside counsel and in-house counsel alike.  Imagine the plight of the General Counsel:  she doesn’t know how many deals the business executives may initiate in advance when even they don’t know.  She has no insight into what product liability suits the company may face, or what type of employment actions will be raised.  For litigation already underway, she can’t possibly predict the next move the adversary may make, so by definition she can’t budget for how she’ll react.  And even acquisition due diligence may reveal complications that are impossible to predict.  These are reasonable concerns, but they fly in the face of the number one rule in business: no surprises.

One can make mistakes when climbing the corporate ladder.  One can make some mistakes again and again.  One can even make colossal mistakes that cost the business money.  But the one mistake anyone aspiring to reach the board room can’t make again and again is surprise.  Corporations, both public and private, thrive on certainty.  Forward-looking statements to shareholders and analysts must be based on a reasonable estimate of future performance, or else the stock price will suffer in the market.  Even private companies that don’t publish earnings must have predictability to properly allocate capital.  For business leaders to establish priorities they must have the facts, and the worst crime is to provide inaccurate information because this leads to making poor business decisions.

Another surprise may be that erring on the side of caution can be as egregious a mistake as overestimating performance.  Imagine the Senior Vice President of Marketing who submits a revenue forecast estimating $275 million in sales, knowing full well that the business is on track to deliver $280 million in sales.  On paper this looks clever, because bonuses increase with overachievement, and everyone looks good when we beat the targets, right?  However, it’s not uncommon for the CEO and CFO to punish the business leader who builds in too much revenue cushion, because we might have made different decisions about our allocation of capital if we knew that we had more to work with.  A critical project with great long-term potential may have been delayed or tabled because we didn’t have sufficient investment available.  (The worst offenders allocate a reserve that benefits only themselves.)  Obviously there’s also punishment for missing the targets, particularly when it results from poor planning rather than external market events.

But how do they do it?  How do corporate executives weigh numerous variables to establish an accurate forecast?  After all, don’t most business functions carry some level of uncertainty?  Think of the head of manufacturing who must predict costs despite the possibility of critical supplies being hijacked by Somalian pirates, or labor unrest in the fields of South America, or political unrest in the Middle East impacting oil prices which in turn have a material impact on the costs of transportation in our supply chain.  And what about the corporate treasurer who has to predict the impact of currency fluctuations or interest rates on the company’s cash flows, in order to hedge against this.  Our head of Marketing has to examine multiple products across the spectrum of the business cycle, use a little game theory to predict what the competition might do in response to our new product launches, potentially even identify which customers are at risk before the customer even begins to explore substitutes, and build a revenue forecast amidst ever-changing market demand.

There’s no magic formula.  These business leaders build their forecasts block by block, inch by inch, starting first with the known – in the case of sales, perhaps we first identify guaranteed revenue from committed customer contracts, or in the case of manufacturing maybe we look at commodity materials where we have multiple suppliers to ensure sufficient flow and predictable prices.  We then move on to the harder calculations, one by one looking at product revenue in each jurisdiction, perhaps customer by customer; or examining links in our supply chain where we have limited redundancy and therefore greater risk.  Piece by piece we establish a forecast that builds from certain to less certain, but even with the less certain we identify the likely ranges and provide confidence levels based on identified risks.

So you can imagine the amused chuckles in the board room when the Chief Legal Officer throws up his hands and tells his colleagues that the legal function contains too many variables to possibly establish a budget, so instead he’ll take last year’s budget and add 20% -- to accommodate law firm rate increases and other variables – and he’ll only come back and ask for more if something changes.  Gone are the days when this was amusing.  Now a General Counsel may be shown the door if he can’t apply some rigor to the legal budgeting process.  This also explains the increased involvement of procurement officers in the selection, and management, of outside counsel.  This is a clear sign that CEOs and CFOs don’t fully trust their lawyers to extract more value at a lower cost from the in-house legal staff and suppliers, so they’re putting someone at the table whose sole objective is to reduce costs.  Or they wish to, as the saying goes, trust but verify.

These budget calculations and conversations start in August, are debated endlessly through September, and begin moving up the approval chain in October.  There are numerous revisions, typically, as you might expect, requiring all cost estimates to go lower and all revenue estimates to go higher.  But there’s a balance to be achieved between optimism and realism.  Newly anointed business leaders tend to believe that they can extract unnecessary costs that their predecessors overlooked, or that they can rally the troops to commit to higher revenue performance.  Entrenched civil servants throughout the corporation strenuously object to these stretch goals, and work diligently to maintain the status quo, with sufficient safety valves in place for when something goes wrong.  This can be invigorating, and it can be confounding, but in the end the corporation signs off on its revenue and expense budget for the coming year, typically by early November.

As my group of law firm partners discussed corporate budgeting, a few light bulbs appeared above their heads.  One corporate partner recalled receiving a letter in late October from a key pharmaceutical client indicating that they would not accept fee increases from any outside counsel in the coming year.  She recalls wondering why the letter was sent in October, months before most law firms issue rate increases, but it now occurred to her that the corporation’s budgets must have been locked by then.  Another partner realized that even when the economy is humming along nicely and law firms have the latitude to increase rates, the fee increase letters are potentially six months out of sync with the client’s budgeting process!  “No wonder clients claim we don’t understand their business,” he observed.  One of the partners added some levity by suggesting that the annual fee increase letters should go out earlier, say in July.  Another had us rolling in the aisles when she suggested that since law firms always raise rates, and clients know this, perhaps it’s the client’s obligation to build in these expected increases in their August and September forecasts.  When we realized she was serious, we ended up rolling our eyes.  In some segments in some industries, the suppliers can set the price and require the buyer to meet the price, or else not get the product.  (Have you ever tried to haggle significant savings on a Mercedes?)  There are a few law firms with such pricing power.  Let’s be clear: despite your desire to occup this space, the odds are your firm is not one of these.

But does this budget process really result in certainty?  After all, we’ve all seen – or we’ve owned stock in – companies that miss earnings forecasts.  In reality, one never eliminates surprise.  But we can get a lot closer by minimizing it.  There’s a formal process to deal with the inevitable changes that occur in most corporations.  It’s called a reforecast.  It may come as a surprise that most companies begin revisiting their revenue and expense budget numbers in early January.  After all, what can go wrong in the first few weeks of the year?  However, think back to when we began compiling our forecasts.  We weren’t even done with Q3, let alone Q4, so many of our assumptions for the coming year relied on assumptions for how we’d conclude the current year.  And guess what, things have changed since we incorporated those assumptions.

A reforecast is a formal process to revisit our assumptions, to look at costs that exceed expectations and revenues that fail to meet expectations.  And vice versa.  In many corporations this process repeats itself several times a year, often corresponding with the quarterly earnings report in public companies, and in recent years this process might happen 6 or 7 or even 12 times a year.  And it’s not simply indicating that revenues are falling short or that expenses are trending high and then receiving forgiveness on the goals.  That would be cool.  No, instead every functional leader has certain levers to pull to meet the agreed-upon expectations even when there are material changes in costs or revenues.  On the revenue side, perhaps we launch a sales contest, or lower prices to increase penetration.  On the cost side, perhaps we seek alternative suppliers, squeeze the suppliers we have, or reduce costs elsewhere by reducing staff.  Often the reforecast process surfaces significant trouble in one division that will be impossible to make up, so other divisions receive an involuntary revenue or cost surcharge to make up the difference.  This can be painful.  No business leader in the midst of stellar performance, overachieving on every goal, or even those barely meeting expectations, likes to terminate valued employees or table a valuable project because some other division failed to meet expectations.  But it happens.

To add more enjoyment to the budgeting process, most corporate executives have a portion of their annual compensation based on their ability to manage to their budget.  For example, the company may exceed its revenue and profit targets, the share price may exceed analyst expectations, the division may have enrolled a record number of new customers, but the divisional leader will lose 30% of his bonus because costs were over budget.  Those running the legal function are late arrivals to this party, but it’s becoming a material factor in their compensation now.

Recently I observed a panel of General Counsel discuss their likes and dislikes with outside counsel.  One GC remarked, much to the amusement of the roomful of outside counsel: “If my legal budget goes over plan, at least we’ll save money on my bonus.”  The GC didn’t laugh.  He was deadly serious.  The message he was trying to convey is that the late invoice, the one you generate only at the end of the billing period, the one that reflects billings 40% over the original estimate, the one that you’ll accompany with a brilliant, well-crafted memo explaining the 58 reasons why costs exceeded your original estimate, may literally cost him his family’s summer vacation rental, or a semester of his daughter’s college tuition, or the swimming pool he planned to install in the Spring.  Just as with the General Counsel who remarked, “If I don’t find a way to manage the legal function with a lower budget and without compromising quality and throughput, they’ll find someone who can,” your client needs you to be part of the team.

Perhaps these insights into the corporate budgeting process will shed some light on why your clients are so darned insistent on predicting legal costs.  In many cases, predictability trumps total spending, or, in other words, you can charge premium rates as long as you ensure that the fees are not surprises.  You may also question whether a fee increase is necessary this year, particularly since your client has fewer levers available to adjust for your increased cost.  Perhaps you can do a better job of estimating legal costs for your next project.  The project management techniques used in other business functions apply to predicting and managing legal costs, but that’s a topic for another day.

As another General Counsel said to me recently, “I know a lot of firms that are capable of handing my legal work.  I’m sure there are many more that I don’t yet know.  What wins me over isn’t always low rates or discounts, it’s finding a firm that really understands that challenges I face in my business – and this includes not just the legal issues I face in my marketplace, but how I have to manage my legal department as a business.  If I can find a firm that understands what life is like in my shoes, that firm will win my loyalty.”

What do you say, are you up for it?

Procurement for controlling cost - the cure or the affliction?

There are few topics that generate universal outcry in mixed company, but among these are the number of poor drivers clogging our roadways and the vexing role of the procurement function in modern business.  Curiously, another trait these two share is that each of us, at one time or another, is the object of anothers' ire when we're the poor driver or the buyer, but we tend not to notice. Wikipedia offers a sound albeit unsourced definition of procurement:

Procurement is the acquisition of goods and/or services at the best possible total cost of ownership, in the right quality and quantity, at the right time, in the right place and from the right source for the direct benefit or use of corporations, individuals, or even governments.

Taken in this light, who could argue that procurement doesn't serve a vital role in the conduct of business?  Too often, alas, procurement draws fair criticism as the business function that values cost savings over long-term relationships; that reduces all goods and services, no matter how value-added, to commodities which can be differentiated on price alone; and that relies on negotiating tactics one can imagine being employed by Attila the Hun when dealing with vanquished foes.

But these are epithets we typically direct toward the procurement managers negotiating the value of the services we offer.  How dare our client's procurement manager not recognize the clear distinction between what we offer and the sub-standard offering of our inferior competitors.  On the other hand, when we're negotiating with our suppliers, those charlatans who try to drain away our hard-earned profits, then by all means our own procurement manager needs to take an aggressive negotiating stance to protect our business.

Can't we all just get along?!

Procurement is a necessary and important function in the conduct of business.  But there is an inherent tension in carrying out this mission.  The Institute of Supply Management, an association of procurement professionals, asserts that its members must promote positive supplier and customer relationships while upholding one's fiduciary responsibilities and deliver value to one's employer, but do so without the appearance of unethical or compromising conduct.

Spend enough time in business and you'll encounter an evil procurement manager.  I have fond memories of the procurement manager who was hired several months after my team negotiated a mutually successful long-term agreement with our client.  She called our accounts receivables clerk to demand assurances that the contract would be abandoned in lieu of one more favorable to her employer, then threatened a lawsuit when the frightened clerk squeaked that she needed to speak to someone higher up the food chain.  By the time I was engaged, the procurement manager was practically frothing at the mouth, spouting sobriquets like "But you have to do what I say, I'm the customer!"  We were sure to carefully document our conversations for future use when, as sure as night follows day, she proudly announced to her superiors that she had won concessions that we hadn't even discussed let alone agreed to.  "I'm not singling you out, you understand" was her explanation, "My job is to reduce our vendor costs no matter what it takes."

Therein lies the challenge.  This procurement manager did not have a full understanding of the total cost of ownership.  As we've written in this space previously, the cost to an organization for any product or service is more than merely the price tag.  Selecting Product A because it has a lower sticker price than Product B is hardly a wise choice if Product A is incompatible with our existing systems and therefore incurs significant customization to function effectively.  Likewise, a lawyer charging $425 per hour but who has a terrible track record of staying on budget may be a worse bargain than the lawyer charging $650 per hour but whose budgeting capabilities are precise.

And one must consider switching costs too.  If I hire a plumber to fix a major leak from my hot water heater, and in a fit of pique over high costs I fire the plumber while the parts are scattered across the floor, the leak will continue to generate costs in the form of water damage while I seek a replacement plumber at a fraction of the cost.  Changing lawyers mid-trial, relocating your office across town to save a few dollars per square foot and scrapping a software implementation after a significant investment in training in order to find a lower per seat license cost are examples of business decisions that run the risk of emphasizing price tag shopping over the total cost of ownership, if we don't fully think through the implications and downstream impacts of our decisions.  In our above anecdote, the procurement manager demonstrated no understanding of the concept and therefore damaged valuable business relationships in her quest to save a few dollars.  If your supplier is fungible, damage away.  If you may need that supplier again, take a long-term view.

Those who sell services which aren't commodities, or at least those who aren't willing to admit they sell commodities, fear the procurement manager who reduces all potential suppliers to the lowest common denominator -- namely price -- without understanding the context.  But many service providers are lazy and unhelpful in demonstrating why their services are different and therefore more costly than the alternatives.

A well-trained procurement manager will seek to unpack the value in an offering.  For most products and services offered in a moderately efficient market, there will be a base cost to deliver services below which no supplier can reasonably sell its product and still make a sustainable profit.  And in most competitive markets, there isn't wide disparity in profit margins between competitors.  So if we can assume that within reason everyone can make and sell the same product for roughly the same cost, then why are there differences in price?  This is the procurement manager's quest -- to understand and quantify these differences without the undue influence of past relationships or conventional wisdom.  Just the facts, ma'am.

In this visual, we see the base cost.  A good procurement manager can even identify the increased cost of a comfort brand.  In many lines of business there's that one reference point, a supplier at the high end of the food chain, one whose prices are higher but whose reputation is impeccable, so that if I purchase from them, I'm immune from criticism for making a poor choice of suppliers.  Let's call that the "brand safety" factor.  There's no shame in acknowledging that sometimes we make safe purchases and that we pay extra for that safety.

What remains is an "X" factor, or an unexplained difference between the costs of two apparent substitutes.  A good procurement manager will seek to explain and potentially reduce this difference, first by ensuring that the product offers what is needed and not more, nor less.  This is the true function of an RFP (a request for proposal), to ensure an apples to apples comparison of alternatives.  Absent clear guidance on what is needed, it's a challenge to compare alternatives.  A favorite tactic of some former colleagues of mine who should be elected to the Sales Hall of Shame is to "throw in" as many unnecessary items as possible, allowing them to reflect a much higher starting cost and then apply discount after discount to achieve what appears to be a compelling and substantial "effective discount" off list price.  In the end the customer may get what he wants but at a higher price, and by the way he wins a lot of crap he doesn't need.

A law firm that can demonstrate its prowess in managing to a budget through effective project management, that keeps the client fully informed of any changes to expectations, that staffs appropriately and doesn't "overwork" matters or expect clients to subsidize young associate training, is in a better position to present clear, quantifiable evidence of its higher rates.  A software vendor that has documented compatibilitywith existing legacy systems, thereby keeping integration costs down, may have a strong case for higher license fees.  In each case, the approach reduces total cost of ownership.

Those sellers who have the most to fear are those whose price points cannot be reasonably be justified, or quantified by an independent outsider.  It's not enough that my CEO and your managing partner are golf buddies.  It's not enough that we've done business for a long time.  If I cannot unpack why your rates are significantly higher than some apparent substitutes, and you can't articulate it either, then I'm compelled to explore alternatives.

But let's not kid ourselves.  We sometimes forget these principles when looking at our own cost structures.  It's a sad but not uncommon situation that large buyers will squeeze their defenseless suppliers.  Some years ago I hired a consultant to handle a project when the internal resource dedicated to the task resigned abruptly.  I had moved on by the time the project was complete, but I learned that my former law firm employer gave the consultant a 60 cents on the dollar take-it-or-leave-it offer to settle the final invoice.  The law firm's procurement manager reportedly dimissed the injustice: "We're a global law firm.  What are you going to do, sue us?"  The sad irony is that the law firm took this action as part of a massive cost-reduction effort, initiated in part because its own corporate clients were spending less, at the recommendation of the corporate procurement managers.  Justice served?  Or just a sad cycle of frustration?

When your organization comes up against a procurement manager, this is a good opportunity for some self-examination.  Are we able to articulate why our costs are higher than our competitors?  If not, why not?  Rather than assume our competitors are using predatory or lowball pricing to steal work away, is it possible that we've failed to recognize the inexorable march to commoditization of our products and services?  Do we assume our brand carries with it more prestige and "safety" than the market?  Maybe our competitors have devised some innovative ways to deliver more for less.  Their lower pricing may reflect this innovation, suggesting they can remain profitable at a lower price point.  And yet we assume they're losing money because we can't offer similar savings.

When hiring a procurement manager, focus them on total cost of ownership.  Saving pennies on discrete costs is fine, so long as the impact of these choices doesn't result in higher fees over the long run.  In organizations with many silos, a procurement manager may be in a unique position to recognize opportunities to consolidate services, to seek lower-cost alternatives, to adjust business practices to save money.  This means they put a spotlight on us as well, and not just on our pencil vendor.  If we're serious about controlling costs, it has to start with us.

If you're a procurement manager, please stop issuing RFPs asking 127 questions for which you have not a clue what you'll do with the responses to 120 of them.  Be clear that your role is to maintain positive business relationships with valued suppliers, but help identify those whose costs are not aligned with the value delivered.  Times change, prices increase, needs fall out of synch with what's sold, but except in a few cases the sellers aren't charlatans and the buyers aren't ignorant weasels trying to extort kickbacks.  Shine the light of day on the commerce of your business and start with those areas which are most easily recognizable as commodities.  As your colleagues begin to trust your process, you can then move on to the more sensitive areas, where we business managers tend to protect our turf.

Let's all be prepared to take our medicine.  For some of us, the increased use of procurement managers may be a miracle cure leading to lower costs and new business opportunities.  For others, well, the cure may end up killing us.

The ACC Value Index - We're Not Worthy!

The Association of Corporate Counsel held its annual meeting recently in chilly Boston, and the next phase of the ACC Value Challenge was released:  make way for the ACC Value Index, a "client satisfaction measurement tool that helps ACC members share meaningful information about the value they get from their outside counsel."  I applaud the continuing effort to not just admonish law firms for not fully meeting client needs, but for providing practical tools and techniques to guide law firms in their efforts to deliver more value. We could go on for days discussing the need for yet another law firm rating system, and the pros and cons of closed vs. open systems, the merit of subjective vs. objective rating criteria, which criteria really matter, and so on.  In fact, that debate is already underway (here and here) and will likely continue -- in part because debating lawyer ratings is as prolific and inevitable as the ratings systems themselves!  ACC would probably be even more effective were it to, shall we say, align more with others singing the same tune in order to amplify the efforts. But this isn't a critique of ACC; they should be commended for helping to put a voice and a framework around issues many have been discussing for years.

What exactly is the value index?  Essentially, it's a scoring system that measures a law firm's efforts in six specific categories, plus an opportunity for unfiltered commentary, and ultimately the question at the heart of a client's level of satisfaction:  Would you use this firm again?  For the six primary questions, the rating scales from 1 to 5, with 5 representing excellent.  Others may raise the oft-repeated criticisms that 5-point scales tend to regress to the mean, and that ratings systems often reflect selection bias because dissatisfied customers make their view known in greater numbers than satisfied customers.  I'll merely say that simple is better if one seeks rapid adoption, and ACC's approach appears to meet that challenge.

What are the six rated categories?

• Understands Objectives/Expectations
• Legal Expertise
• Efficiency/Process Management
• Responsiveness/Communication
• Predictable Cost/Budgeting Skills
• Results Delivered/Execution

I have yet to see clear and consistent definitions of these categories, so it's likely there will be some ambiguity and disparity in how law firms and in-house counsel define and therefore rate law firm efforts.  But the entire rating process is subjective, so there will always be variability.  Nevertheless, I'll give my two cents for what each category entails, with references to my earlier blog postings reflecting the same themes. (As I said, there are multiple voices discussing these issues!)

Understands Objectives/Expectations - I don't know whether ACC has listed these categories in order of priority, but if so then this is an apt place to start.  So many engagements falter, and costs exceed expectations, because the outside counsel and in-house counsel don't have the same understanding of the desired outcome and the path to get there.  In business, surprise can be a fatal mistake, so setting proper expectations is critical.  In-house counsel share responsibility in not just explaining the issue, but if they have ideas on the optimal process to achieve the desired outcome they had best reveal it.  This doesn't mean the law firm must adhere to the approach -- after all the in-house counsel is often paying for the outcome -- but this should generate a dialogue regarding what's expected, and what level of risk the client is willing to take.

Legal Expertise - Many lawyers believe this is the primary asset the client is buying.  But in many cases, it's really just the table stakes to get in the game.  The firm wouldn't even be considered for the work if there wasn't already a belief that their legal chops are superior.  So it's not enough to do the work, but demonstrating innovation and an in-depth understanding of the relevant guiding authorities, based on prior experience, is critical.  This isn't done by producing a deal list, substituting quantity for quality, but by regularly discussing strategy with the client, identifying alternatives, and calculating the costs of different approaches, including doing nothing.

Efficiency/Process Management - This may be the single greatest growth area in law firm management discipline in the coming years.  General contractors build tall buildings incorporating tens of thousands of raw materials and pre-fabricated parts and relying on hundreds of sub-contractors and vendors over multi-year construction horizons.  Yet lawyers often insist that managing a deal or complex litigation is a unique experience requiring a new approach each and every time.  "No more!" demand the clients and, more to the point, the clients' clients.  The challenge is that billable hours drive hourly-based compensation but do not encourage efficiency, to say the least.  As more clients insist on alternative fee arrangements, lawyers must become better project managers, wringing efficiency from processes they've performed or led hundreds of times in the past.  Only now the price of inefficiency is borne by the firm.  And if the client is dissatisfied, then there are growing alternatives, and these organizations are all about efficiency.  (Interestingly, this post places some of the blame on law school training, which teaches lawyers how to pull an all-nighter but not how to manage a long-term project!)

Responsiveness/Communication - Many lawyers read this as speedy response times and 24/7 accessibility.  Of course there are clients who define responsiveness in this manner, but as often, probably more often, the better definition would be keeping me apprised of progress so there are no surprises, and so I can develop contingency plans when the unexpected occurs. This also means providing clear updates rather than confusing obfuscation.  Relying on the all-too-often inscrutable notes entered by each lawyer at time entry to inform the client of the project's status is insufficient.  Reduce the noise to a simple dashboard report, reflecting progress on key deliverables and highlighting questions and potential challenges.

Predictable Cost/Budgeting Skills - Hand in hand with project management skills are budgeting skills.  Imagine in our construction scenario above that two general contractors are competing to win the project.  One relies on long experience to provide forecasts and budgets within certain ranges and expectations, while the other claims similar experience but suggests that complex construction projects are too variable to pin down a forecast or adhere to a budget.  Who wins the work?  It's that simple.  Law firms that develop some rigor in providing forecasts and budgets will have a competitive advantage over the firms clinging to the "it's too uncertain to know" school, and they will have a greater opportunity to employ profitable alternative fee arrangements.  Sound financial management isn't the same as trying to win new work by lowering rates.  As many law firms have learned, at times the client is as concerned about predictability as total cost, so those firms that reduce rates when what's really needed is more predictability are leaving revenue on the table.

Results Delivered/Execution - Many lawyers read this as achieving a certain outcome, such as winning in litigation or closing the deal.  Business people often define the outcomes differently, based on their tolerance for risk and their business objectives.  Is the goal to launch the new product in a timely manner and generate new revenue streams, or is it better to delay the launch until every potential avenue for loss of IP protection can be identified and addressed?  Is the goal to win the suit, or to balance litigation and public relations costs with winning?  It's critical that law firms know explicitly what outcome is desired, and orient their actions to that outcome.  Sometimes the best choice is to do nothing.  Sometimes business people knowingly choose paths that expose them to legal risk, but they accept risk in every decision.  The role of the lawyer is to inform these decisions, to help quantify the costs to the business of the various viable approaches.

There are some understandable concerns with the ACC Value Index.  For example, at present, law firms do not have the opportunity to view any client feedback, though that ability will come in due course -- else the exercise would be somewhat ineffective in changing the behavior of those law firms rated poorly.  The anonymity of the program may lead some law firms to dismiss negative feedback.  And there will be some uncertainty as to what constitutes excellent rather than mediocre performance.  The age old questions "What are we doing well?" and "What can we improve?" have found a new locale but the fundamentals remain the same.  It's now more important than ever before to implement a structured and permanent client feedback program that starts by asking the questions relevant to the ACC Value Index, but delves more deeply into areas of particular strategic importance to the firm.  Only by knowing how clients feel can we improve.  And the best way to learn is to ask, something too few firms do according to numerous studies.  If simply asking can be a differentiator, just imagine the loyalty a law firm can engender by actually acting upon client feedback!  So why wait?

For additional insights into the Value Index, see this post by Fred Krebs, ACC President.