Connecting the Dots: Carrying Costs, Outsourcing, Contract Lawyers and Working from Home

Within hours of publishing my article reacting to Yahoo's reversal of a longstanding work-from-home policy, I was engaged in a lively debate with a law firm managing partner regarding the benefits of a distributed workforce. He posed a simple question, one that I didn't fully address in my earlier article:  Why would a law firm allow any employees to work offsite when collaboration and, more importantly, instant availability when clients call, is so critical? Interestingly, many of his points mirrored those of another law firm managing partner from a separate discussion last week who scoffed at the mere notion of using contract lawyers or outsourcing in his firm, for fear that quality would suffer. The two issues are very much related and I appreciate the opportunity to connect the dots.

Ship in BottleCompanies are in the business of making cars or furniture or software or bed linens or rust-resistant rivets used on ocean liners or x-ray film or lunch meat or ships in bottles or countless other offerings. Most businesses find forays into non-core areas dilutive to earnings, so they hire others to mow the lawn at the company headquarters and manage the company cafeteria or make the coating that they apply to the rivets and so on. Every business eventually encounters a need for legal advice yet few have lawyers on staff. And those companies with enough scale to have in-house lawyers generally hire quarterbacks to manage outside specialists rather than to hire one lawyer for every specialized legal need they might ever encounter.  In a word, the legal needs are outsourced -- first to in-house counsel, when available, and then to outside counsel. The primary reason for existence for most, if not all, law firms is to serve as an outsourcing provider to clients who do not have and do not want to maintain this function as a core competency.

So the law firm leaders who immediately dismiss outsourcing as a tool in their own arsenal are short-sighted. If it weren't for outsourcing, many lawyers would not be nearly as gainfully employed. The reason outsourcing works is a simple economics term: carrying costs.  There is a recurring cost to establish and maintain any function, and some services are needed frequently enough that incurring this cost as overhead is more desirable than hiring one-off experts. But not every business reaches the same conclusion for each function. Some hire salespeople, others use third-party channel providers; some hire accounts receivables clerks, others rely on an outside agency to perform this task; some hire a full-time marketer, others bring in experts on an as-needed project basis.  Sometimes this "make vs. buy" decision is straightforward, other times the addition of an FTE (full-time employee or equivalent) is a big deal that requires deeper analysis.

Yet many law firm partners, especially in Biglaw, have become enamored with the idea of the "instantly hot" water supply -- you know the kind, no matter which faucet or what time of day, the moment you turn it on you get hot water without delay. "The ability to mobilize instantly and staff a complex matter literally overnight is our greatest asset," reported one law firm leader in an interview I conducted several years ago.  In layman's terms, law firms are like the supermarket with 20 checkout lanes, with every lane staffed and open at all hours, every day, all year, regardless of demand, just in case a client might call.  Upon closer inspection, however, we might find the law firm's checkout lanes staffed by guys who normally collect shopping carts in the parking lot, stockroom clerks, butchers and bakers, in addition to specially trained cashiers. This is the result of hiring untrained associates and making them available as a general resource to any partner that needs a body.

We've all been frustrated when forced to wait in line at a supermarket, everyone crowding into three checkout lanes while 17 remain closed. While this memory is vivid, the statistical reality is that we rarely face this delay at our busier stores because they employ statistical modeling called "queuing theory" to estimate peak and slack times, and they staff accordingly. No supermarket would be profitable if it incurred the carrying costs of staffing every checkout lane at all hours, and it would be similarly unprofitable if it constantly forced buyers to wait, which would drive buyers to seek alternatives.

What does this mean for our law firm leaders?  Clients do indeed call and request assistance on a moment's notice. But why not explore a model that allows the firm to quickly access scores, even hundreds, of well-trained, specialized, experienced lawyers, some of whom are nearby, some of whom are remote, all of whom are connected via high-speed Internet access to phones, computers and possibly video, but who prefer not to embrace the daily life of a Biglaw associate?  The carrying costs of the combined salaries, benefits, real estate, equipment, subsidized food and late night transportation of associate employees are enormous compared to the $0 carrying cost of for contract lawyers.  In some cases there will be higher transactional costs ramping up contract lawyers, but as the outsourcing providers have demonstrated beyond any doubt to in-house counsel who regularly hire them, the higher up-front cost is more than recovered by improving the quality of the work product and the reduction in repetitive rewrites, among other factors.  And, by the way, the traditional associate locked in the library for hours on end conducting research isn't collaborating as much as we think she is.

Now, before the ATL crowd overreacts, I'm not advocating the elimination of associates on the law firm payroll. But I am suggesting that many of the unhappy and unproductive associates who are on the payroll today would enjoy doing creative and challenging work from the comfort of their own home office, without the many distractions incumbent in working every day in a law firm, especially if making partner isn't in their future.

It's simple economics. Savvy law firm leaders long ago recognized the wisdom of outsourcing non-core back office functions. The progressive leaders have begun to embrace the use of work-from-home lawyers, contract lawyers and outsourcing firms to provide "instantly hot" services with lower carrying costs, and found that this approach can provide access to greater experience and more productive lawyers too. Whether or not you embrace a work-from-home policy that reduces your overhead while increasing productivity, or establish a network of contract lawyers to serve on a moment's notice, or contract with an outsourcing provider to fill specific needs on an ongoing basis, is a decision only you can make and only after reasoned analysis. You can cling to the notion that quality only results from the Ivy League-to-Biglaw-partner-track staffing model, and you can cling to the notion that 20 open checkout lanes at 3 AM is a wise allocation of resources, or you can apply some established business analytics to your own enterprise and make informed decisions. The choice is yours... until your clients make the choice for you.

Timothy B. Corcoran delivers keynote presentations and conducts workshops to help lawyers, in-house counsel and legal service providers profit in a time of great change.  To inquire about his services, click here or contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.

New Group to Address Client Value - Pricing, Project Management, Process Improvement

Those of us who have spent years in the trenches helping law departments obtain more value from outside counsel, and helping law firms better profit while delivering more value to their clients, have long lamented the lack of an organized effort to share best practices with others facing the same challenges, particularly with regard to best practices in pricing, project management and process improvement.  Our wait is over:  the international Legal Marketing Association (LMA) announced the formation of a new "Client Value" Special Interest Group (SIG) with a charter to network, educate and share best practices among law firm, law department and service provider professionals who focus on pricing, project management and process improvement.  The SIG is one of several offered by LMA; the others focus on Competitive Intelligence, Small Firm/Solo Marketing, Service Providers, Social Media and Chief Marketing Officers. I've faced these issues from all angles -- in my role leading business development for a global law firm, I was constantly faced with drafting RFPs that were client-focused and priced to win while also maintaining law firm profitability; as a CEO and senior corporate executive, I was regularly battling the in-house legal department for more transparency on budgets and risk management, and hiring outside counsel who took a "you need us more than we need you" approach to client interaction; as an executive with several service providers, I've brought to market products and services designed to help law departments and law firms forge stronger and more collaborative relationships; as a management consultant, writer and frequent keynote speaker, I am constantly addressing audiences of in-house lawyers or private practice lawyers struggling with adapting to the enormous changes taking place in the legal profession.  One thread has been constant in every one of these interactions:  no one can do it alone!  It's critical for clients and providers to get and stay on the same page to ensure that both parties enjoy a mutual and financially lucrative relationship.

This issue of mutual advantage, in my opinion, has been lacking from many of the existing perspectives:  whether it's the standard client panel filled with self-important General Counsel providing endless anecdotes of law firm foibles, while simultaneously ignoring the fact that the their own internal corporate clients are just as unhappy with the law department; or the various caucuses of in-house counsel defining the new normal as "law firms made enough money, now it's our turn" as if their collaboration was somehow an ever-shifting zero-sum game; or law firm leaders who refuse to acknowledge the very real impact of economic forces on their practice; or my fellow consultants who have great depth of expertise to advise either law firms or law departments, but not both -- because they've never worked with "the other side" except in an adversarial capacity.  This era is ending.

My expectation is that the new SIG will is represent all stakeholders - lawyers from law firms and law departments, of course, but also business professionals managing corporate budgets, e.g., procurement; pricing experts retained by law firms to better link price, cost and value; vendors building tools to analyze and manage complex matters; business development and marketing professionals who are increasingly asked to differentiate law firms on factors such as budget predictability, use of alternative fees and project management rather than just size and practice mix.  What these professionals can do together is establish an ongoing dialog, define and improve industry metrics, better define for vendors what to build and why, and provide a roadmap and best practices for those who have been heretofore reluctant to join the fray.  Just as other industries have settled on standard technology formats, a common vocabulary, licensing protocols and educational tracks for newcomers, the legal marketplace can greatly benefit from such interaction.  (And for the occasional detractor who assumes any interaction between buyers and sellers or among competitors inevitably leads to collusion or anti-trust concerns, I say "You are more than welcome to remain on the sidelines and keep out of our way!"

So join me in congratulating the Legal Marketing Association for proactively embracing one of the critical four P's of Marketing (product, place, promotion, price) and launching the new SIG.  And join me in thanking the many busy professionals who have, informally and formally, collectively and individually, led these efforts prior to the formation of the SIG, most notably Toby Brown, Director of Pricing & Strategic Analysis at Akin Gump, who will head the new SIG.  Also, thanks to Aleisha Gravit, President of LMA, and Betsi Roach, Executive Director of LMA, for making this happen.  I look forward to a new chapter in the growing book about the business of law.

Full Disclosure: I am a member of the Board of Directors of the Legal Marketing Association and contributed to the effort to form the new SIG.
 
 
Timothy B. Corcoran delivers keynote presentations and conducts workshops to help lawyers, in-house counsel and legal service providers profit in a time of great change.  To inquire about his services, click here or contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.

 

Better Rainmaking Through Relationships and Data

I was recently interviewed by Bloomberg Law for its Behind the Headlines series.  In the interview (click here to view), host Lee Pacchia and I discuss the evolution of rainmaking -- otherwise known as business development or sales -- in law firms.  In the heady days of yesteryear, rainmaking involved networking, establishing and nurturing relationships, ensuring that when clients and prospective clients encountered a legal issue, the rainmaker was top of mind and received a call.  Of course it's slightly more complex than that, as good rainmakers will say that you also have to be credible and competent in your field.  Others will say that working the cocktail circuit isn't enough, particularly with sophisticated buyers, so coming to the table with industry knowledge and solutions in mind is important.  All of this is true.  It's also true that, for the most part, successful rainmakers are a relatively small segment of the Biglaw population.  Most successful partners have had some success in bringing in work, and while many can cover their own compensation and overhead, quite a few don't generate enough business to make a dent in the typical large firm's overhead.  A disproportionately high percentage of revenues are concentrated in a relatively small number of business generators.  And these rainmakers know it, hence the heavy courting of laterals with portable books of business. The essence of the interview is describing how rainmaking has become more challenging in the tougher economy.  Clients are severing long-standing relationships to seek lower-cost providers.  Others are putting immense price pressure on traditionally premium practices.  Still others are demanding budgets and certainty and project management expertise in order to minimize surprise and manage change.  The stereotypical gregarious rainmaker with a winning smile and a firm handshake who can work a room like nobody's business is giving some ground to a more sophisticated, data-driven approach.  This is good news, because as rainmaking evolves more partners have a greater chance to succeed.  Here are five additional thoughts to the points I made in the interview:

Don't chase every dollar.  Revenue is not the same as profit.  In the traditional law firm financial model, the way to generate profit is to bill hours.  The more hours billed, the more profits generated.  This works... to a point.  Most firms track their top clients by revenue.  This is a nice starting point but as a data point to guide future business decisions it's incomplete. Without understanding the corresponding profit for the matters, we might be celebrating dollars that are dilutive rather than additive to the firm's PPP.  So many firms have some version of the top rainmaker handsomely rewarded for bringing in a $5 million client... that costs the firm $5.5 million to service.  When we look at lifetime value of a client, which incorporates repeat business, cost to acquire new engagements, depth of practices engaged by the client, and more, we find that some business is not worth pursuing. It's critical to analyze which work is profitable, which clients are profitable, and devote greater resources to winning and keeping work that is lucrative.

Relationships always matter. But not all relationships are equal.  When I work with practice groups to understand what process they have in place to identify and pursue new business opportunities, the first discovery is that few have any process whatsoever.  However, those firms that reward, and fund, business development activities (not results) will generate an exhaustive list of client lunches, event sponsorships, association dues and game tickets.  By putting in place a simple opportunity pipeline populated with a few key data points, it becomes much easier to distinguish between the lunch with Mary, the chief legal officer of a Fortune 100 company on the outskirts of town, whose company has entrenched legal providers handling most of her premium work, and very rarely encounters "bet the company" issues, and who has dined on the firm's dime 23 times in the last five years without sending a single piece of business, and lunch with Ted, the deputy GC of a small subsidiary of a mid-size manufacturer of aircraft components, who has hired the firm 4 times in the last 3 years for increasingly complex matters and whose company has been named a co-defendant in a high-profile products liability case filed after an airplane crash in Singapore... which just so happens to be where we've recently opened an office.  We may also discover that game tickets have generated, or at least been a factor in, $125,000 in new business in the last year, but our monthly breakfast briefings that cost, in total, $23,000 to produce have generated $432,000 in new engagements, 50% of which are with new clients.

Relationships can't overcome bad economics.  Every partner reading these words has had a longtime client sever ties in recent years.  These are golf partners, law school pals, people we've joined on vacations, even people whose kids' weddings we've attended.  And yet, when push comes to shove and their CFO is breathing down their neck, they change law firms in order to maintain their budget and keep their jobs.  Wouldn't it be helpful to know which clients are changing outside counsel more frequently now than they have in the past?  Wouldn't it be helpful to know if the economics of certain  industries are creating budgetary pressure on legal budgets across all competitors in the space, giving us time to prepare for the tough call?  Wouldn't it be helpful to know which practices, or even which tasks within given practices, our clients feel are declining in value and for which they will refuse to pay premium rates in the future?  This information is out there for anyone looking for it.

Don't confuse strategic pricing with suicide pricing.  It's important to understand the recent remarks made by my friend and colleague, Bruce MacEwen, who is one of the brightest minds I know.  In an earlier Bloomberg Law interview he described the suicide pricing taking place as firms offer substantial discounts to win business.  This is absolutely happening, and in time these firms will become known because they simply can't sustain their infrastructure for very long with non-profitable revenue streams.  But I am also aware of some savvy practice group chairs in other firms who are offering favorable pricing that, to an casual observer, looks like suicide pricing but in fact may be strategic pricing.  Simply put, if I can lower my cost of legal service delivery by eliminating wasteful steps through process improvement, then I can maintain profitability even at a lower price point.  Every firm has wasteful steps, as defined by the client, and this is reflected in the firm's realization rates.  Whether through undisciplined write-downs that partners take before invoicing, or negotiated write-downs after invoicing, the firm's realization rates reflect the difference between price and value from the client's perspective. And here's a scary thought - as more clients embrace billing analysis and benchmarking, it's going to get even tougher.  We're still at the nascent stages of downward price pressure in this market.

Stop smirking, mid-size law firms. You're next.  I have a number of mid-size law firm clients and they are experiencing, in general and in aggregate, one of the busiest stretches ever. As one partner said to me, "Recession? What recession? I've never been busier and I'm getting very little pushback on rates."  True.  One thing the recession proved is that there are fantastic lawyers in mid-size firms whose expertise rivals that of Biglaw. And because these mid-size firms in mid-size cities offer mid-size rates, clients are calling.  The trouble is, if there is no differential value offered by these mid-size firms other than slightly lower rates -- no project management, no alternative fees, no predictable budgets -- then the clients will eventually press forward with fee arbitrage and select firms in the next lower tranche, offering similar quality at slightly lower rates.  And the mid-size firm partners, particularly those who staffed up quickly to meet rising demand, will be left with high overhead and rapidly declining revenues.  Rinse and repeat.  And when the bigger firms start embracing process improvement to lower their cost of delivery and can thrive at lower rates, then the pressure on the mid-size firms will come from above and below.

If you aren't having these discussions in your board rooms and practice group retreats, then you had better get started.  Despite what you may have heard or assumed from the prognosticators of doom, the crisis facing the modern law firm is eminently solvable and law firms can and will thrive.  The question is, will you be on board the bus or under it?

 

Timothy B. Corcoran delivers keynote presentations and conducts workshops to help lawyers, in-house counsel and legal service providers profit in a time of great change.  To inquire about his services, click here or contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.

The Role of Procurement in the Selection of Outside Counsel

My friend Dr. Silvia Hodges recently asked me to contribute to a book she was compiling and editing, Buying Legal: Procurement Insights and Practice, published by the Ark Group in association with Managing Partner.  The book is a collection of articles from 32 leading authorities discussing the increasing partnership between the corporate legal department and the corporate procurement function to select and manage legal expenses, including outside counsel.  The book is divided into two parts, Section A is designed to benefit outside counsel and Section B is for in-house counsel and procurement professionals.  However, I recommend that anyone involved in the buying or selling of legal services would do well to read the entire book. The involvement of procurement in the purchasing of legal services is swiftly becoming the ‘new normal.’ And not just for sourcing low-end, routine or commoditized legal services – but increasingly for higher-stakes legal work too! This critical new report will equip law firms and in-house legal and procurement teams with the necessary tools to make these new relationships successful.

It’s packed with original research, case studies, opinion pieces, practical approaches, and checklists that address the key challenges and opportunities that buying and selling legal services creates – from relationship building and management, to financial and strategic decision-making. Industry leaders, Riverview Law, Wragge & Co LLP, PwC, Dechert LLP, Kennedys Law LLP, Corporate Executive Board, Institute for Supply Management, Akin Gump Strauss Hauer & Feld LLP, Validatum, Vantage Partners LLC, Trusted Advisor Associates and many more provide insightful case studies and advice on key topics, including:

  • Benchmarking the procurement of legal services
  • Pricing and negotiation strategies
  • Bulk buying of legal services
  • Understanding the requirements of the procurement department
  • Successful complex tendering
  • Current trends in the procurement of international legal services
  • Procurement departments’ sourcing strategies
  • Building relationships with the CPO
  • The role of procurement in purchasing legal services
  • The positive and negative effects of discounts
  • Top tips for successfully procuring legal services
  • Trusted tactics to get the most from spending on outside services
  • Demonstrating law department value through analytics
  • Using technology to source legal services; and much more

The chapter I submitted is titled "Why CEOs Love Procurement" and discusses how corporations continually seek a competitive cost advantage.  This is particularly critical in challenging economies or markets when revenues are flat or declining.  A modern CEO doesn't just look at growing revenue or decreasing overhead, but looks to lower the cost of goods sold and service delivery.  For law firm leaders faced with declining demand, increasing price pressure and competition from above and below, it's critical to understand the role of procurement in managing a corporation's expenses.  Lawyers who believe procurement is a euphemism for "selecting the lowest cost provider" are misguided.  Differentiation on factors other than price are critical, yet most lawyers and most law firms market in ways that are indistinguishable from the competition.  As I wrote a few years ago when I first tackled the role of procurement:  "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."

For a brief excerpt, visit here.  To purchase the book online, visit here or here.

 

Timothy B. Corcoran delivers keynote presentations and conducts workshops to help lawyers, in-house counsel and legal service providers profit in a time of great change.  To inquire about his services, click here or contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.

Embracing the New Normal - The College of Law Practice Management's Futures Conference

Calling all lawyers, law firm managers, consultants and vendors! The College of Law Practice Management and Georgetown Law invite you to the 2012 Futures Conference, October 26-27, at the Georgetown Law Center, Washington, DC. Where better to examine leading-edge law practice management issues than to tap our Fellows and guests who are making the future happen now? We’ll discuss:

  • The New Model of Law Firms
  • “Value” From the Eyes of Different Beholders
  • Managing Partners of the Future
  • The Myriad Challenges of Diversity
  • The Consumer Law Revolution (and What It Means for Biglaw)
  • 2012 InnovAction Awards Presentation (hosted by yours truly, the awards chair)
  • New Normal from the GC Perspective
  • Also, for first time, the Legal Academy Practice Research Report —where academics cast a cold eye on your most vexing issues.

The roster of speakers and presenters is unprecedented and includes Jim Sandman, Susan Hackett, Eric Margolin, Amar Sarwal, John Michalik, Thomas Grella, Fredrick Lautz, Charles Vigil, Ward Bower, Aric Press, Toby Brown, Mark Chandler, Tanina Rostain, Stephanie Kimbro, Michael Mills, Marc Lauritsen, Mitt Regan, Juliet Aiken, Heather Bock, Lisa Rohrer, Verna Myers, Ron Friedmann, Mark Cohen, Ben Lieber, Andy Daws, Patrick Lamb and Steve Nelson.  For more details on each speaker, visit the conference website.  If you don't know most, or even many, of these speakers, then you can't possibly be serious about adapting to the new normal.

Learn more about the sessions from conference co-chair, Ron Friedmann, here.

Download the complete Futures Conference brochure here.

Expect a lively and engaging event. Panel presentations with active audience input will combine with breakout sessions to help you understand the forces jolting the legal market today.

Registration is Open 

Register online here for the Futures Conference. Be sure to watch the Futures Conference 2012 meetings page for more information on the program schedule, speakers and special events.

Special thanks to event sponsors (Platinum) Greenfield Belser, Attorney at Work and Practical Law Company, (Gold) American Bar Association's Law Practice Management section, the Canadian Bar Association, International Legal Technology Association, Ricoh Legal and Thomson Reuters and (Silver) Alexander Open Systems, Altman Weil, Inc., Association of Legal Administrators and the Legal Marketing Association.