Demystifying Outsourcing for Corporate Counsel

I was recently asked to contribute an article on the topic of outsourcing to the corporate counsel section of the Philadelphia Legal Intelligencer, the oldest law journal in the United States.  Below is the published article copy, followed by additional commentary developed while conducting background research for the article.

The Legal Intelligencer

By Timothy B. Corcoran

September 23, 2009

Corporate law departments face an unprecedented level of pressure to reduce costs, to do more with less and to deliver a quality legal product to internal corporate clients. In days past, as the saying goes, the chief legal officer would offer executive management a choice: “We can do the work well, we can do it quickly or we can do it cheaply. Pick two.”

Today’s CEOs want it all, and who can blame them? Every business function faces a relentless drive to eliminate defects, improve production capacity and accelerate time to market. Law departments have been somewhat sheltered from these pressures, in part because of the unpredictable nature of legal issues, much to the chagrin of executive management. Adding to the tension is the trickle-down effect of an unprecedented growth rate in law firm revenues over the past 10 years, which, according to a recent study by the Corporate Executive Board, increased 75 percent while other supplier costs increased by an average of 25 percent.

But is it only about cost? Will executive management be satisfied if the CLO extracts substantial discounts from its primary law firm suppliers or migrates some work to lower-cost regional law firms? According to some business leaders, this will simply no longer suffice.

Imagine the boardroom presentation by the chief marketing officer in which he or she provides a two-year revenue outlook for multiple global product lines, reflecting varying levels of demand and market share. This is followed by the head of manufacturing, whose production forecast incorporates the probability of interruptions in raw material supplies, ranging from droughts in South America to pirates off the coast of Africa to labor unrest in Asia. The treasurer, in turn, presents a plan designed to hedge against the risk of currency fluctuations.

Then the chief financial officer presents an eight- to 10-year cash flow projection for a pending acquisition. Raise your hand if you would like to be the general counsel in this setting who admits that since few variables managed by the legal function can be predicted with any certainty, and because of increasing supplier costs, the legal department will be submitting a 20 percent budget increase over last year.

Small wonder, then, that the drive for improved metrics and efficiency has arrived in the law department with some fanfare, and not a moment too soon. One recent innovation available to the chief legal officer is outsourcing, or assigning work to specialist providers in the United States and abroad that offer non-traditional legal services.

But is this really so new? Hasn’t it been the case all along that the company, which manufacturers widgets or develops software or provides business services, has outsourced its legal needs to specialist providers, first within the legal department and then to outside law firms? The corporate legal function serves both an operational and strategic role, but there are few business owners who dream of a sizable and well-run legal department as a strategic asset in the same way that they dream of, say, a world-class sales force. So let’s acknowledge that we’ve already been engaged in outsourcing, and then let’s take a harder look at what new options are available.

First, it’s helpful to define terms. Outsourcing refers merely to the delegation of work to another organization, where it can presumably be carried out more efficiently. Offshoring typically takes place when the other organization is in another country. Insourcing involves delegating work to another specialized group within the same organization. The delegation of work to outside counsel is an example of outsourcing, as is the use of contract lawyers to handle overflow volume in document review. Hiring legal research experts in India is an example of offshoring, as is moving a customer service call center to Ireland or a graphics design team to the Philippines. And insourcing, of course, is exactly how most companies perceive the legal department — an internal organization with specialized skills.

Most companies, and indeed most law firms, have engaged in business process outsourcing, or BPO, for some time. Whether it’s operating the corporate cafeteria or the mailroom or hiring a third party to ship goods, organizations have learned that subject matter experts can generally take over these tasks with minimal fuss and at a lower cost.

Many law departments have found that hiring contract attorneys provides an excellent opportunity to test their appetites for outsourcing, before establishing any offshore relationships. Market research firm Gartner estimated the 2007 BPO market to be $173 billion. The potential for cost savings in the legal function is also enormous, in relative terms. In a recent move that raised eyebrows in the global legal market, Australian-English mining conglomerate Rio Tinto announced that it expects to save $25 million annually, or 20 percent of its legal budget, after hiring a legal process outsourcing, or LPO, firm to perform routine legal tasks.

Critics declare that legal matters are much more strategic in nature than administrative functions and can’t be easily delegated. After all, do you really want the company to rely on the lowest-cost provider when it comes to a “bet the company” transaction or litigation? But therein lies the issue at the heart of the matter. Chief legal officers have long known that even the most important legal issue facing the company is composed of multiple smaller components, many of which involve routine, commoditized tasks. Law firms are expensive suppliers in part because they tend to treat all aspects of an important transaction as high value and high cost. With some exceptions, most lawyers believe their particular area of expertise is a premium offering housed within a firm that provides other premium services. It’s other lawyers in other firms who provide commodity services.

The truth, as usual, lies somewhere in the middle. The legal profession is not typically viewed as progressive in its business practices. However, the overwhelming growth of LPO has raised a number of questions about the practicality and ethics of relying on outsiders to provide legal services. Isn’t it a disservice to the client, possibly even unethical, to rely on low-cost providers for important legal matters? Not so fast, according to the American Bar Association. In Formal Ethics Opinion 08-451, the ABA declared: “There is nothing unethical about a lawyer outsourcing legal and non-legal services, provided the outsourcing lawyer renders legal services to the client with the ‘legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.’”

So how does a chief legal officer ensure a quality work product from an outside provider? The following are a few suggestions:

• Test-drive the work product of an LPO provider on a single project before engaging them for the long term. Quality providers will invest in significant ongoing training for their workforce and should welcome the opportunity to demonstrate their quality.

• Develop objective measures of quality. This can be achieved by working with the LPO to develop a detailed model of operating procedures for the required work. Once these procedures are in place, it’s easy to establish a quality template that tracks deviations from the desired outcome.

• Institute standard project management techniques like those used every day in most organizations to manage technology initiatives and manufacturing operations.

• Manage LPO relationships with diligence. Don’t lose focus after the initial engagement discussions. Be aware that your LPO staffing team may change over time and insist on the same level of training for team members rotated in later to maintain consistent quality.

• Consider cultural implications. If you offshore, it’s important that your LPO liaison have solid English speaking skills as well as an understanding of the local culture. And conversely, you must communicate your own company’s culture and objectives.

In the end, outsourcing can generate far more than labor arbitrage. Ray Bayley, co-founder of Chicago-based NovusLaw, in an interview on the “Adam Smith, Esq.” blog, discarded that as the primary objective of LPO: “We’re not in the business of ‘lifting & shifting:’ Taking what’s done here and moving it to a cheaper jurisdiction in order to do it the same way. That’s a brute force approach that adds nothing to the quality, reliability, and repeatability of the work.” Instead, for example, a routine service like document review can be studied and modeled and the multiple variables influencing the cost can be identified and quantified, thus reducing the cost and adding efficiency and value.

What’s to prevent a legal department from embracing this sort of “Lean Six Sigma” approach to analyzing and improving its own legal services? Nothing at all. In fact, legal departments that adopt these techniques will be better positioned to identify, evaluate and select appropriate outsourcing providers. Among the hidden benefits to outsourcing is the familiarity the client generally gains regarding business process improvement techniques. Once ingrained into an organization’s operational mindset, it’s difficult to revert to a blissfully unaware state where efficiency and quality are abstract concepts.

It would be remiss to conclude without addressing the emotional response outsourcing and offshoring can sometimes generate. Whether from organized labor or politicians or trade groups, it’s not uncommon to hear opposition to outsourcing, particularly when it’s perceived as sending jobs overseas. The Economist recently declared offshoring to be a win-win phenomenon, at least on a macroeconomic scale. But the backlash has led to a reversal in some industries, such as the return of technology call centers that lowered costs but also lowered customer satisfaction rates. Many LPO providers offer services across the United States and in English-speaking countries to help mitigate these very concerns.

Human nature tends to question that with which we are unfamiliar. And to many, it’s an uncomfortable realization that some sophisticated legal processes can be analyzed, broken down into constituent parts, delegated to disparate providers and returned with higher quality, lower costs and greater predictability than we’ve been accustomed to. But with change comes opportunity. Imagine tomorrow’s boardroom presentation by the chief legal officer, who can now submit, with some certainty, the costs and implications of ongoing legal matters. Even better, imagine having the capacity to focus on matters of more critical long-range interest to the company, demonstrating that a well-run legal department is a significant strategic advantage. •

Copyright 2009. Incisive Media US Properties, LLC. All rights reserved.  The Legal Intelligencer

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There are numerous sources to help understand the changing legal landscape, with more arriving each day.  I found a white paper “Future Law Office” distributed by Robert Half Legal, the legal professional placement division of Robert Half International, to be very informative.  While its position may be considered somewhat self-serving, the white paper describes the very real use of contract lawyers by in-house legal departments as a means of testing whether they can obtain quality legal work product through non-traditional means.  In fact, this has the same effect as the approach taken by many corporations who “test” potential new hires by first hiring them as a temporary employees.  And why not test the goods before purchase?  Rocky Dhir, President of Chicago-based Atlas Legal Research, invests a significant portion of his resources in training, so he encourages potential clients to take a test drive.  “Actually test the work product of any LPO provider before engaging them long-term.”  Selecting wisely is critical, because “picking the wrong firm can end up being more expensive.”

Suhasini Sakhare of Zeta Intelex recognizes the challenge in demonstrating quality in a profession that tends to not have objective measures of quality.  Her organization follows a rigorous process to ensure the highest-quality output, using as a foundation very detailed operating procedures based on the client’s needs.  These are often developed through repeated observation, as “most clients who should be intimately familiar with their own legal processes actually aren’t.”  Once these procedures are in place, it’s easy and intuitive to establish a quality template that tracks all deviations from the desired outcome.  It may come as a surprise to Biglaw partners, but not to many clients:  the quality of the legal work can actually be improved by outsourcing due to the intense focus and quality controls in place.  Of course Biglaw legal work product is routinely high quality, but absent objective measures of quality clients are no longer willing to pay high rates on reputation alone.

It’s not as challenging as one might think to implement quality control processes within a law firm.  This is project management 101, after all, and the techniques aren’t limited to managing technology initiatives and manufacturing operations.  Ron Friedmann, senior vice president of marketing for Integreon, ran practice support for a large law firm and was CIO of another.  In his view, “There are many parallels between managing projects and managing a company’s legal strategy.”  He elaborates, “Law departments can reduce costs by explicitly acting as general contractors to solve company legal problems. Like any GC (general contractor that is, not general counsel), a law department should consider what resources it employs full time and what it sub-contracts.”  I’d go even further and say that outside counsel can also act as project managers and even general contractors.  Why couldn’t a Biglaw relationship partner serve his clients needs by coordinating internal services with outsourced services on behalf of the client?  We do it already, quite regularly… local counsel, anyone?

Like any relationship, the connection between an outsource provider and an in-house legal department takes time and effort to maintain, even with good metrics and processes in place.  Stephen Seckler, a lawyer and consultant, advises IPEngine, an IP outsourcing firm with operations in India.  “It’s important that your liaison have solid English-speaking skills as well as an understanding of the local culture.”  John Roney, President of Applied Dynamic Solutions of New Jersey, has long experience with managing outsourced IT projects, and suggests the lessons are universal.  “Many projects get off to great starts but when the spotlight is off, there is often a break in the continuity of the team, and sometimes new team members don’t receive the same rigorous training.”  He also urges companies to treat the outsource vendor as a part of the team.  “This means attending staff meetings to understand the company’s culture and grasp the company’s objectives.”

We’ve focused primarily on the challenges facing corporate legal departments and Biglaw.  “Much of the LPO industry is geared to serve the needs of large corporate legal departments and large law firms, but there’s a lot more to it,”  declares Ed Scanlon, president of Total Attorneys, which provides contract lawyers and paraprofessionals to handle general legal work overflow and specialized services, such as bankruptcy case management, to small law firms.

The results so far suggest that non-traditional means of delivering legal services, via contract lawyers or outsourcing or offshoring, should be an essential aspect of a law department’s tool kit in the future.

Fungibility - An Organizational Malaise

I'm a longtime fan of Stanley Bing's irreverent take on business in his Fortune magazine column.  As with many columnists, he takes a slightly edgier tone on his accompanying Bing's Blog.  In a recent post Bing discussed the critical employee, the one with specialized knowledge, the one who is irreplaceable.  It called to mind the old joke:

A factory machine shop mechanic retires.  Some weeks later, the machines at the factory stopped working. No one can get the equipment running again, and the factory is losing hundreds of thousands of dollars every day. The factory manager call the retired mechanic back in as a last resort. The mechanic walks through the whole place then tells the factory manager, "It'll cost $50,050 to fix the problem." "Anything!" he cries. So the old mechanic walks onto the factory floor, approaches a complicated series of pipes and valves, and taps a stuck valve with a small hammer. All of the equipment instantly comes online and starts humming. The factory manager exclaims in surprise, "You're charging us $50,050 to tap a pipe?"  The old mechanic responds calmly, "No, I'm only charging you $50 to tap the pipe; the $50,000 is for knowing which pipe to tap."

Too often, we fall into the trap of believing that we alone know the right pipe to tap.  This malady applies to assembly line workers, secretaries, salespeople, corner office managers, executives and even to the CEO.  In my career I've encountered this multiple times.  There was the sales manager who bragged that he "closed every one of his sales team's deals personally" and the finance manager who proclaimed that "the revenue recognition model is so complex, no one else can run the reports."  I'm sure that they believed they were establishing job security.  After all, if no one else can do the job, then they should have jobs for life.

There was once an unwritten rule in sports: you never lose your starting position due to injury.  Then in the early 1990s, Joe Montana, the 4-time Super Bowl winner, was injured and his replacement, Steve Young, had successful starts and ultimately won the starting job even when Montana was healthy again.  Montana left in a fury and was never as dominant again; Young brought another Super Bowl win to the franchise over several successful seasons.  In sports as in business, the organization or the team is what's important.  If you are so critical to the team that we can't live without you, then the team's highest priority is to find a way to live without you.  Or, in other words, your irreplaceability makes you highly risky, and, therefore, replaceable.

This sounds counter-intuitive.  After all, why would we risk offending a star performer and potentially hasten his or her departure, just to ensure that we have someone ready to take his place?  It's all about reducing the organization's risk.  If I can't live without you, then I can't live with you.  If your knowledge is unique and specialized and mission critical, then my obligation as a business owner is to add redundancy.  In many cases we find that these star performers aren't as unique and specialized as they claim.  But in other cases, we find that they are as important as they say they are.  It doesn't matter.  The organization must reduce its risk by spreading that knowledge.

Like all aspects of organizational behavior, it's a balancing act.  Do some managers mistakenly assume that everyone is fungible, that no one has specialized knowledge?  Yes, it happens all the time.  An old employer of mine routinely re-assigns salespeople to new territories and product lines, without any apparent regard for the importance of the relationships the salespeople have established.  And many companies lose good people and solid performers during layoffs, because they try to spread the cuts evenly rather than measuring the relative contributions of those impacted.  But just as risky is allowing the organization's success to be funneled through one person.

In Bing's anecdote, one of these irreplaceable employees recognizes his importance and makes some outrageous demands.  His plan backfired, and his manager began planning for a different future:

“Otto has succeeded in doing one thing,” he said darkly. “He’s made it necessary for me to think about life without him. Once I started thinking that way, I realized it was possible. Now I’m thinking, what do I need this aggravation for… to pay this much for the job that cost me so much less last year? Sure, it’ll be hard to replace him. But nobody is irreplaceable. Sometimes I have to remember that.”

Good business owners don't allow themselves to be painted into a corner.  It's important to grow your people, to provide them training so that they become subject matter experts.  But at the point where this specialized knowledge becomes mission critical and no one else can perform the role, then it's time to share the knowledge.  Done right, the expert then moves up to bigger and better things.  Whether or not we actually have a plan in place to keep star performers moving up is a topic for another day.

Update: According to Bing, Otto ultimately received the raise he demanded.  I faced this same situation some years ago when I met a valued employee's aggressive demands.  I then spent the next year making him dispensable, and eventually he moved on.  While some thought it was retaliation, it actually resulted from his raising my awareness to the shocking fact that we couldn't operate without him.  Had he never made the outrageous demands, he might still be there today.

10 Sales Tips for Legal Vendors

I've spent years in sales, sales management, general management or CEO roles with a focus on law firms and corporate law departments.  I've also worked on the buyer side leading business development efforts for a global law firm.  Over the years I've made every sales mistake possible, and if I've missed any my team or my competition made up for it!   Now, as part of my consulting practice I advise law firms and legal vendors on how to improve their business development and sales efforts.  With this in mind, the ILTA 2009 conference team asked me to present a session for legal vendors on selling to law firms in a tough economy. I've written previously that some of us have been fortunate beneficiaries of high demand for what we offer, and as a result we have generated successful results, even if our sales efforts are not particularly effective. As I walk the exhibit hall at legal technology conferences and trade shows, I see as many examples of poor salesmanship as I see of excellent consultative selling. So as I considered what to present, it occurred to me that a tough economy is a good time to get back to basics. Below is a brief list of back-to-basics sales techniques that every legal vendor should review and embrace. Savvy readers will note that I have previously offered some of these suggestions here or on Twitter.

1. Have an elevator script. And practice it. Don’t assume recognition of our brand equals intimate knowledge of our offering. If we can’t succinctly articulate what we offer, imagine the challenge our prospective client will have when explaining our offering to his decision makers.

2. Define our value proposition by what benefits we offer and what problems we solve, not by how we compare to the competition.

3. Focus on benefits, not features. Features are what our product does. Benefits answer the question, “So what?”  Let's seek to know what benefits the prospective client will derive from our offering. Also let's seek to understand what it will cost her if she’s unable to meet this need.

4. Consultative selling involves asking questions so we can customize our offering to the prospect’s specific needs. We need to learn how to ask open-ended questions and actively listen to the responses. And let's not start and stop with the tired, “What keeps you up at night?” We can be more creative than that.  Plus, until we've developed rapport and credibility, the client won't trust us enough to share their deepest, darkest fears, uncertainties and doubts.

5. Don’t lead with discounts. Ever. The only message we send is that our offering is a commodity differentiated primarily by price. We can always offer a discount later. Too many vendors create our own price wars by focusing on price too early in the conversation.

6. Seek to understand the prospective client’s total cost of ownership. What other costs will he incur for implementation, retraining, configuration, etc.? What savings will he experience in reduced maintenance, faster throughput, less downtime? Let's position our product in context of the total cost, not as a stand-alone item.

7. If you promise to follow up, then follow up. Every salesperson promises to call, but few do. Seriously. Many of us use avoidance actions like sending emails, letters, and now Twitter DMs, but nothing replaces a live conversation with a prospect.

8. If you rearrange the letters in persistence, you get sincere pest. Persistence is a desirable trait, but let's not become annoying. Each prospect may require a different approach – some want a call back but are busy; some truly delegate decisions to subordinates; some really are avoiding us. Learn to tell the difference. Knowing when to walk away is not just good business sense, it’s also good for the ego. Yes, we may let one slip away, but generally speaking the opportunity cost of endlessly chasing everyone outweighs the benefits.

9. A sales manager known to be a “savior” is often more trouble than he’s worth. If you have to personally close every sale, then let's save money and get rid of the salespeople. Or let's get rid of the sales manager and find one who can train people how to properly sell. And there’s nothing worse for morale than a sales manager who swoops in at the last moment to seal the deal by including a discount that the salesperson isn’t authorized to offer. We don’t need a sales manager for this; someone less expensive in Accounting can perform this role.

10. Memorize this phrase: “I don’t know but I’ll find out.” This is a salesperson’s best friend. A salesperson who believes that she must invent an answer when she doesn’t know the answer merely perpetuates the myth that salespeople are ill-informed hucksters. We demonstrate credibility by promising to find the correct answer – and this also gives us a valid reason to follow up with the prospect.

I have countless additional sales tips to offer.  But I'd love to hear what works for you.  Feel free to post a comment below.  Happy selling!

Compassion and Change are not Opposing Principles

By now you may have learned that there was a shooting in Pittsburgh last night, and several people were killed and even more were injured.  The shooter was one of the dead.  He was a single, middle-aged IT professional at a large Pittsburgh law firm.  Despite the legal connection, that doesn't normally qualify as newsworthy for this space.  However, Above the Law discovered a troubling online diary by the shooter that detailed, long in advance, his intentions to take his life and to take others with him.  I spent a few moments reading the diary and it was tragic and sad.  I imagine it will be pulled offline at some point, but one doesn't have to read it all to realize this was one very troubled guy sorely in need of professional help. In the diary he discusses the several rounds of layoffs taking place at his law firm.  He appeared to understand the necessity of the first round, but with each subsequent round his temper flared as he was convinced he would unfairly lose his job.  Ironically, he survived all the layoffs and was even recently promoted.  But this didn't deter him from his course.

I've written at length in this space and elsewhere about the need for reform in the legal marketplace.  Whether it's large law firms' colossal inefficiency and feigned client focus, corporate law departments' tendency to complain without taking action, or the large divide between legal vendors' great products and their fumbling and sophomoric execution, there are plenty of teachable moments to choose from.  These issues existed long before the recent global economic downturn, but the challenges are now more acute and finally we're seeing organizations taking long overdue action.  However necessary it might be from a macroeconomic perspective to cull the ranks of underperformers, or outsource tasks or entire functions to lower-cost suppliers, or stop doing business altogether with poor suppliers, there is always a real cost to the man on the street.

Opinion polls may confirm that most Americans feel the automotive and health care systems are in need of an overhaul, and all of us would like to spend less for a doctor visit or a new car, but it has a whole different meaning when someone you know or care about loses his livelihood as a consequence.  In the legal marketplace, demand for legal services is undeniably down and so the logical reaction is to eliminate excess capacity.  This means idle lawyers and staff are let go, in the same way that gas guzzling SUV manufacturing plants were idled and workers sent home during the recent gas price crisis.  This makes sense from a business perspective.  But let's not lose sight of two important considerations:  there's a right way to let people go, if not for their sake then for the organization's reputation; and owners and managers whose incompetence or inattention contributed to poor performance shouldn't get a free pass while others suffer.  Some businesses have increased sensitivity to these optics, while others remain blind.

So without delving into the reasons why, for the purposes of this exercise let's stipulate that the correct course for a business is to lay off a handful of employees.  How should this be accomplished?

Look, I'm not a credentialed and certified human resources professional, whatever that might be.  I've worked with far more over-promoted buffoons in senior HR and personnel roles than those whose contributions demanded respect.  I've sat in board rooms with senior vice presidents leading the corporate HR function who couldn't articulate the company's value proposition, name more than 1 or 2 products, identify a competitor or tell the difference between NPV and NOC.  Yet because layoffs are messy affairs we turn to them to run the show.  Large law firms, who time and again hire middle managers from the corporate sector and give them senior titles and responsibilities, or promote valued employees from functions where they excel to functions they know nothing about, shouldn't be surprised when these duties tax their capabilities.

Years ago a fellow manager and the head of HR conspired to lay off one of my colleagues.  This 18-year veteran, whose primary failing was allying with the wrong political faction, and whose contributions included training all salespeople, including every top performer for the prior 10 years, was given 15 minutes to collect her personal items into a box, with building security hovering conspicuously in the open doorway, and then escorted to her car at midday in full view of the lunchtime crowd.  There was no particular reason to fire her on that day and at that hour, but due to an obvious lack of compassion and perhaps a bit of a mean streak, they chose a timetable and an approach guaranteed to obliterate any sense of dignity left in this loyal employee.  Some years later a new head of HR, smoother on the outside but just as inept, counseled managers to conduct the periodic terminations on their own, then hid in her office as they took place.  When it came time to fire one of her own direct reports, she flew in another subordinate to do the deed!

The point is that the supposed experts don't have a perfect formula.  I've had to terminate or layoff multiple people over the years, and I relied primarily on common sense.  My experience might be helpful.

When a layoff must be conducted, use a scalpel instead of a broom. Too often a layoff results in the loss of good people in one area while known incompetents in another area are unaffected.  Break through the artificial barriers we erect with org charts and identify the poor performers across the board, and let them go first.  This requires a certain business-first attitude that is sadly lacking in many managers, but in the long-run it's better for the business when every layoff shifts the productivity bell curve to the right rather than eliminate high performers due to some misguided sense of fairness.  (The concept of fairness is often misused by managers.)

Performance metrics should be standard across the business and should be compiled long before the layoff. I've been asked to participate in a charade where managers evaluate and rank layoff candidates who have been previously, and sometimes mysteriously, identified.  The task is ostensibly to pick the poor performers but the real intent is to have a paper trail showing proper due diligence, which presumably insulates the organization from charges of unfairness, discrimination or wrongful termination.  The problem is, the easily discoverable paper trail also shows that the managers only evaluated the likely candidates, not all employees.  A little selection bias perhaps?  Also, there is quite often disparity between an excellent performance review conducted some months prior and a sudden and undocumented downturn in productivity.  If the organization has a performance management system, use it!  Measure and track performance on a regular schedule, use a consistent methodology, and don't shy away from capturing tough comments when performance is sub-par.  Law firms are criticized for allowing powerful partners to protect their favorites, using vague performance measurement criteria if at all, but the fact is this behavior is prevalent in the corporate sector as well.  The best way to eliminate favoritism and truly identify poor performers is to implement and adhere to a standard evaluation process.  And use this as the basis for the layoff, not a new, isolated and suspect vetting process two weeks before the termination date.

Don't confuse poor financial performance with poor job performance. Let's be clear:  sometimes -- whether through our own missteps or due to market turmoil -- a reduction in the workforce must take place, even though those affected haven't been poor performers.  It's unprofessional and caustic to an organization's reputation to label financial victims as poor performers.  Call a spade a spade and move on.  There are few stakeholder groups -- clients, the press, alumni, recruits, etc. -- who will harshly judge the organization for declaring that "Demand in our core market sectors has declined to a point where we must reduce excess capacity and unfortunately let some of our valued employees go" rather than the obvious fabrication "While our competitors and clients are suffering we are doing quite well, thank you, but we coincidentally decided to use this time to terminate the many poor performers who have somehow escaped our notice previously."

Layoffs are costly, so expect to spend a few more dollars to do it right. In the long-run, the intention is to save the ongoing payroll and benefits costs of the departed employees, so offsetting that savings with outlandish severance packages isn't sensible.  But neither is conspiring to shave every cent off the severance package to save a few dollars.  I've had to negotiate with fellow managers and HR professionals over half-days of vacation, an extra month of pay for a long-time employee who had the misfortune to be laid off just before a pivotal anniversary date, and whether to pay a package at all when the departed employee was lucky enough to find a new job before all the paperwork was signed!  I'm well aware of the tired HR objection that on an individual basis doing the right thing seems cost-effective, but on an aggregate basis the costs become unwieldy.  But even a cursory read of the many books on viral marketing and customer service reveals that a happy workforce, happy alumni, happy clients, serve as multipliers to the firm's own marketing and sales efforts.  Imagine the low cost of sales when a valued former employee who left with her dignity intact ends up in a new role with influence or even decision authority over the purchase of her former employer's services or products.

It really all comes down to dignity. It's appalling the manner in which good people, otherwise unsullied by a vindictive nature, turn on their former colleagues when it's time to let them go.  I've let people go in person and on the phone, one-on-one and in a group setting, so there's no perfect approach.  Open, honest communication should acknowledge the potential trauma and disruption, while firmly guiding the employee to the inevitable conclusion.  There should be a script to ensure that the key points are covered, but it's okay to go off-script and address unforeseen questions.  However, there's a point at which compassion becomes drama.  I learned of a fellow manager who dissolved into tears as she terminated a long-time employee.  The terminated employee ended up consoling the manager who was too distraught to proceed.  In my view, the wrong person was shown the door that day.

Let's close by addressing directly the circumstances that our Pittsburgh shooter calls to mind, that a terminated employee will become violent.  This is a real dilemma.  Does the organization build all termination procedures around such an extraordinarily unlikely outcome, meaning that security guards are on hand, and terminated employees do a perp walk as they depart?  What impact do such measures have on the departing employees who don't deserve such treatment?  The risk of getting it wrong is potentially high, as evidenced by the occasional anecdote of a disgruntled employee becoming violent in the workplace.  But the earlier point about misguided fairness applies here as well:  conduct a risk assessment of the terminated employees and handle the exit discussions differently with some; everyone doesn't have to be treated in the exact same manner.

This discussion refers to making rational but compassionate choices when conducting the inevitable layoff.  I don't purport to provide legal advice on what approaches are more or less likely to generate an accusation of wrongful termination.  The underlying thesis is that organizations taking the high road, that find ways to marry sound business judgment with compassion for employees and clients, will generate better financial returns and maintain a positive image in the marketplace.

There are plenty of examples of organizations performing poorly in these situations.  If you are involved in planning for a layoff, tack a photo of your kindly grandfather, your beloved mother, and your free-spirited child on the bulletin board.  As you plan each action you're about to take,  consider how you'd explain yourself to them.  Better yet, consider how you'd feel if one of them called you to describe the manner in which they were laid off today.  There are pretty good odds that this conversation will take place at some point... though I can't predict whether you'll be the one making or receiving that call.

Calculating the Cost of Doing Nothing

In any business school finance class you learn capital allocation techniques, whereby you reduce competing projects to a single measure in order to more easily select the capital project with the highest potential to add value to the business. Examples of these measures include NPV (or Net Present Value) which reduces multi-year cash inflows and outflows to a single value in today's dollars; and RI (Residual Income) or EVA (or Economic Value Added) which both reflect the value created from a project after achieving a required rate of return; or the more simple ROI (or Return on Investment) which is the ratio of money gained relative to money invested for a given project.  Inherent in these calculations is the notion that there are alternatives for the investment of the firm's capital.  There is no such thing as a good or bad rate of return in isolation.  Only by comparison to alternative uses of the capital can a business deduce what investment returns the maximum long-term value. In each of these calculations assumptions must be made, particularly with regard to future cash flows.  When a law firm calculates that an hourly rate increase of 10% will lead to a 10% improvement in top line revenue, the partners have assumed that other factors will remain constant, such as demand for their legal services.  And in a price-insensitive (or inelastic) market, this is true.  In other words, when a client is faced with the proverbial "bet the company" litigation, price is far less important than quality in the selection of outside counsel.  Given constant demand, an upward adjustment in hourly fees will increase top line revenue.

Similarly, a prominent legal vendor with which I have some familiarity tends to treat annual price increases as a mechanism for printing money. In one product line it issued annual price increases at about three times the CPI for a very long time, with a continuing assumption that these increases would directly correlate to increased revenues.  As the business innovated to reduce internal costs, the marginal profit on the new revenues was significant, leading to a perpetual assumption that increasing prices will lead to significant increases in profits.

However, each has experienced steep revenue decline and customer attrition, to the consternation of the baffled leaders.  Can you spot the critical mistake made by both the law firm and the legal vendor? It's not rocket science. Obviously each overestimated the price sensitivity of the market. By assuming that buyers will continue to buy at the same pace even as the price increases, each made a fatal miscalculation. Each assumed that its product was of such high quality, was so unique and special, that buyers didn't want and wouldn't seek alternatives. Of course we now know this isn't true. BigLaw partners everywhere are getting a crash course in microeconomics. After a generation of near unlimited demand for legal services -- as close as one gets to the very definition of a mathematical constant -- clients are refusing to pay the high rates, realizing that a good portion of their legal needs are closer to commodity than "bet the company," and they're running, not walking, to find lower-cost alternatives.

The legal vendor is similarly challenged.  Whether it's a backlash to high prices, or the rise of alternatives and substitutes in the marketplace, buyers are pushing back, even canceling their purchases.  The vendor is caught in a vicious spiral.  By baking its perpetually flawed assumptions into its annual profit expectations, every cancellation or significant downward renegotiation creates a gap which it tries to make up by -- surprise! -- increasing prices to other customers or in other product lines.

But law firms and legal vendors aren't unique.  Every industry, even government, has its own flavor of flawed assumptions.  Pharmaceutical manufacturers lobby Congress for trade protection to prevent consumers from buying lower-cost prescription drugs from Canada.  The music industry laments the millions of dollars in lost CD revenue due to unauthorized music file sharing.  Government officials rail about lost tax revenues from individuals and corporations aggressively seeking tax havens.  In each example, buyers are doing nothing more than logically and legally seeking lower-cost alternatives.

Okay, I guess music file sharing is illegal, but the sentiment's the same.  None of us who used to pay $12.99 for a music cassette and who now pays $19.99 (or more!) for a music CD really believes that the cost to produce a CD is higher than than the cost to produce a cassette.  Some would say the music industry created its own demise by positioning CDs as a premium purchase and therefore limiting its potential buying audience, rather than lowering the price and dramatically increasing the addressable market, which is exactly what Apple did with iTunes.  (Personally, I believe music file sharing is a backlash against the typical music CD's inexplicably confounding security wrapper!)

In my years leading a business, my team and I developed the most precise forecasting methodologies and as a result year after year we achieved our revenue goals while others floundered.  Our approach was simple:  we always included a line to reflect expected losses due to rejection of our price increases, and we developed a sophisticated predictive index to identify which buyers were at risk.  Most organizations have a contingency for bad debt but this is reflected on the balance sheet and not at the product level.  We were required to increase our prices by corporate mandate, even though we demonstrated time and again that it impaired our brand equity, resulted in emotional total losses (buyers who would refuse to do business with us again in any product line) and unfairly assessed penalties on good customers who didn't complain (because when the bad customers left, who do you think had to pay an even higher price to make up the difference?).  The leaders were tone deaf, and today that product line has experienced monstrous losses which, in the usual manner of corporations, the present management blames on past mis-management.

Among the many questions law firm leaders and business leaders should be asking is whether or not they have properly considered their customers' alternatives.  Many BigLaw partners are astonished to learn that the pedigree of the firm truly doesn't justify fees that are substantially higher than smaller competitors in most cases.  This isn't a character flaw and their myopia is shared by many others.  However, those that do nothing now to address the change in circumstances should be held accountable.

You don't have to be an experienced economist or financial analyst to lead a large enterprise (though it helps to have some chops).  What you do need is a healthy understanding of the mathematical drivers of your success.  In your revenue calculations, use different assumptions for those products and services which you can charge at any rate and those for which buyers have numerous lower-cost alternatives.  Assume the services you believe to cater to a price-insensitive buyer to be shorter-lived than they used to be.  Look to grow your top line as much by offering an innovative new product or service  as by increasing your prices for your present offerings.  When marginal profit contributions from price increases are elusive, look to achieve your profit objectives by reducing internal costs through outsourcing or business process improvement programs.  But do something.

Seth Godin recently described the calculus of change:

"Do nothing is the choice of people who are afraid. Do nothing is what you do if too many people have to agree. Do nothing is what happens if one person with no upside has to accept downside responsibility for a change. What's in it for them to do anything? So they do nothing."

In the legal marketplace we have relied on assumptions that are no longer true.  We can roll up our sleeves and re-work the underlying math in our assumptions.  Or we can conduct a few layoffs, cancel the annual meeting, put a freeze on hiring and travel, and wait for the old assumptions to revive.  Or we can do nothing.  Your call.