I was in Nashville last week at the ILTA conference and Alternative Fee Arrangements were all the rage. My good friend Toby Brown, or as I like to call him Reverend Pricing, will be the first to tell you that the greatest, most brilliantly structured AFA does you no good if you can't control costs. So there was also a lot of talk about improving efficiency through Legal Project Management, and outsourcing to non-partner track attorneys and LPOs to bring costs under control. A colleague from another firm told a story last week about a partner on a vendor spending spree. The punchline was “I don’t care what it costs, just do it!” As I kept thinking about that story, I realized that LPM and LPOs don't necessarily address a fundamental obstacle to controlling costs, the “I don’t care what it costs” problem.
In the heat of the moment, while working on a matter, the cost is not the primary concern of the attorney, nor should it be. But it should at least be on their radar. They may be aware that controlling costs is in their long term interest, but those chickens won’t come home to roost until the end of the year and even then, their personal share of the cost will be diluted across the entire partnership. Meanwhile, they have a vendor offering to fix their client's problem right now for a moderate price. The upside of spending the money is immediate gratification and potentially a problem solved, while the downside -- the cost -- is diluted and delayed.
There is a famous psychological experiment in which young children are left in a room alone with a single marshmallow and told that they can go ahead and eat the marshmallow now if they'd like, but if they can just wait until the researcher returns in one minute, then they can have two marshmallows when he gets back. Some children wait and get the greater reward, but most just eat the marshmallow as soon as the researcher leaves the room. It turns out that how long you can wait in the marshmallow experiment is a greater indicator of success later in life than IQ tests and grades. The truth is, most of us just aren't that good at delaying gratification. Attorneys are no different, they will almost always choose immediate gratification, over future gains, which ultimately leads to the “I don’t care what it costs” phenomenon.
To return to the story about the partner on a spending spree... The partner couldn't decide exactly what she wanted, which resulted in the vendor repeating the same service, in a slightly different variation, three times. Now, maybe these were three legitimate iterations of the process with increasingly refined results, but my colleague believed the attorney was simply ill prepared and poorly organized. She could have saved two-thirds of the vendor cost by deciding exactly what she wanted before engaging the vendor. As long as the client is willing to pay those costs, fine. However, the client will most likely balk at paying three times for one service, so the attorney will probably write off 60+% of the cost, and the firm as a whole will eat the difference. The immediate gratification of "throw it at the vendor and see what sticks" beats the delayed gratification of higher profits down the road.
What we need is a way to change the economics of the situation. Make the attorney feel a little bit of the pain at the time they spend the money, instead of delaying and diluting that pain. In other words, change the marshmallow experiment to “you can eat it now and I’m going to poke you once with a sharp stick, or you can wait for a minute until I return and then I’ll give you two marshmallows and no poke.” Enter my radical proposal. Have the attorneys pay vendor fees out of pocket!
OK, so that's not going to happen, but I think it would work. So here's my second suggestion, give the attorneys a vendor allowance, equal to 10% less than your average vendor expense on a similar type of matter. If the attorney spends more than their allowance then the firm picks up the extra -- after all, they would be paying for it anyway -- but if the vendor expenses come in under the attorney's allowance then the attorney pockets the difference as a Completed Matter Bonus. In my scenario, the attorney is incentivized to reduce costs by more than 10 percent below the average vendor expense for each matter. I suspect, knowing that any unnecessary costs are reducing their personal income, will be enough incentive to make the attorney at least stop to think about whether the service is really necessary. And I’ll bet we never again hear, “I don’t care what it costs”.