8/21/16

Firing A Few Law Firms Isn't Enough; Why Clients Must Ask For Change

When buyers are dissatisfied, they shop elsewhere. Decline in demand signals the seller to change behavior. It's textbook. And yet it does not seem to be working in the legal market. Despite a decade of buyer dissatisfaction, behavior has remained mostly the same. Managing partners recognize the many signals of client discontent but still claim that clients aren't asking for change.

Last post, I explained why clients rely on exit rather than voice to express frustration. Here, I will try to illustrate why voice remains critical. In short, there is too much friction in the market. The current pace of exit is insufficient to drive major change. Nor does exit necessarily ensure structural reform, as opposed to reallocation of the same damn problems.

Clients are mad but not that mad

Clients' bark is much worse than their bite. The overall trend isn't so much a decline in demand for law firm services as a flattening. Rather than a net reduction in law-firm business, the insourcing and managed-services pushes are still experienced as a slowing of the explosive growth that marked the law firm market for decades.


This not-quite-decline is why managing partners point to insufficient economic pain as a barrier to change.


While the slowdown is enough to sustain a cottage industry in conferences and thinkpieces (see e.g., me) about the imminent implosion of the traditional law firm model, it is not enough to fundamentally threaten the model. What is true generally is especially true for the partners with the most power within law firms--i.e., those with the biggest books, best relationships, and shortest time horizons. They are doing just fine and that seems likely to continue.

Why clients don't use exit more

Exit is risky and expensive. Incumbents mostly do quality work, and switching costs are high. We tend to form long-term supplier relationships. We should act accordingly.

Even if prices are a problem and service delivery is frustrating, good lawyers remain extremely valuable. If a client already has good lawyers, they are loath to move their business elsewhere. We have few reliable proxies for, let alone measures of, lawyer quality--which currently resides somewhere between a credence good and "I know it when I see it." There is risk inherent in transitioning from known to unknown commodities. As Firoz Dattu of AdvanceLaw has observed, we have an information problem.

Moreover, the transition itself is resource intensive because of search and ramp-up costs. An incumbent that already knows the company, personalities, procedures, etc. offers genuine advantages. Indeed, the more rigor a client adds to protocols, processes, billing guidelines, etc., the more painful it is to find a new firm and bring them up to speed.

The transition to insourced or managed-service alternatives can be even more daunting, including the part where inside counsel attempt to repurpose budget that the organization is acclimated to directing towards law firms (law firms aren't the only ones biased toward the status quo).

That, on net, the most common preference is to remain with incumbent firms does not mean those firms couldn't stand to improve (hence the dissatisfaction). Repeating some of my standard schtick: with people and price in place, it is process that offers the most levers to drive continuous improvement. The only way to address process is to actually address process. That requires having a data-driven conversation. In short, voice.

If most incumbents are going to remain incumbents for a material length of time (i.e., no exit) then voice is the only real option to affect behavior.

Repeating the same thing, expecting different results

I'll never understand shopping primarily on the size of a discount (where the client chooses the firm with the higher effective rate because the firm came down by larger percentage from their rack rate). Then again, I also don't understand moving from one firm to another solely because the latter has lower rates.

All else being equal, lower rates mean lower spend. But all else is rarely equal. Even assuming the same quality, the basic math problem is that the variable you aren't controlling (hours) tends to have a much wider range than the variable you are controlling (rate). Where the difference in rates is usually linear (5% to 30%), the hours required can differ by orders of magnitude (20 hours of superfluous research to support the same 2 hour drafting exercise). The extra hours can swallow up the lower rate subtly and quickly.

This realization is usually accompanied by the resolution to do something about hours followed quickly by the awareness that proper scoping militates towards alternative fees. You'll get no objection here on the shift to alternative, especially value, fees. But recognize that it is the move to value fees that is doing the heavy lifting on changing behavior, not the switching of firms. That said, I can get behind selecting a new firm because they excel at value fees (e.g., they employ Toby). Still, we're now a long way from exit for the sole purpose of reducing hourly rates.

You are not going to change behavior by moving from one traditional firm to another simply because the latter has lower rates. You may not even save money.

Insourcing

Of course, you can move to the ultimate flat rate--a salary--and still not solve your problems. You are not just bringing a lawyer in-house. You are also insourcing the attendant challenges of scale. Resource allocation, document management, knowledge management, project management, data/analytics, technology, training, professional development....The demands and difficulties of scale will always grow faster than the in-house team.

Returning to the discount analysis, the problem remains much less about (i) the unit cost of lawyer hours than (ii) the number of units legal tasks demand. While insourcing in the present environment makes it easy to demonstrate a reduction in unit cost (rate), it is not automatic that the transition will do anything about unit volume (hours).

It is certainly possible for in-house teams to get a handle on scale (legal ops!). But they do so by addressing service-delivery issues--i.e., the same issues on which they were silent with their law firms when opting for exit over voice--and prevention (a separate but vital topic).

There is an argument to be made that coherence is easier to achieve when everyone answers to the same boss. They've handed out Nobels in economics (Coase, Williamson) for explaining why we have islands of dictatorship (organizations) dotting the sea of the market. That is, there is logic beyond unit-cost reduction that supports insourcing trend.

I agree with this logic to a point. I think it was absolutely essential for in-house departments to get bigger and more sophisticated relative to their external spend. Exit, let alone voice, requires extraordinary effort for a law department that is already completely underwater trying to triage too many matters. Any system predicated on extraordinary effort is doomed to underperformance.

But, as I said, only to a point. The unit-cost ROI is proving a little too compelling for many law departments. They are mostly just throwing less expensive bodies at the same problems. They are growing in ways that make perfect sense and save real money, for now. But they are trading short-term tractability for long-term flexibility.

Today's cost-saving hires are tomorrow's roadblocks. "We've been doing it this way for 10 years...we know what we're doing...we just need more headcount" is something all new hires will be able to say eventually. Entrenched employees, especially autonomy-obsessed lawyers, are challenging to retrain, repurpose, or retire. (Recommended: here and here from the peerless Ken Grady).

Sustainable cost savings may prove illusory. No matter the extent of the short-term savings, the in-house department will eventually have to address the systemic service-delivery issues (i.e., voice). Insourcing just changes the audience. I would not be the first one to observe that, often times, in-house departments have an easier time affecting external behavior.

Managed-Service Providers

The inevitability of addressing systemic issues remains true even if the bodies being thrown at the problem are really inexpensive on a relative basis. Managed-service providers, too, can suffer from the legal cost disease.

I've said many times, there is nothing wrong with labor arbitrage. If a law department can get the same product at a lower price, they should. In a world of tradeoffs, it is even worth considering slightly lower quality at radically reduced costs on non-critical work. But labor arbitrage only slows, rather than levels, the uptick in legal spend--i.e., it does not fundamentally bend the legal cost curve identified by the essential Bill Henderson:

It is justifiable for a law department to enter into a relationship with a managed-service provider expecting that the initial savings will come from labor arbitrage. But the long-term strategy has to involve systematization through process and technology. Systems do not arise spontaneously with managed-service providers, just as they are not naturally occurring at law firms or in-house. Law departments will still have to pay attention to and address (voice) the systems by which their managed-service providers are delivering legal services.

Just as there is logic to insourcing beyond labor costs, there is a compelling argument to be made that managed-service providers are in pole position to thrive in a more system-oriented legal market. First is the simple but genuine advantage of being relatively new and nimble. Building from scratch is often easier than retooling. Second is that the value proposition of managed-services providers is already expertly designed systems, rather than the individual expertise of particular partners. Not only is this more in line with the drive to systemization but it also suggests more stable long-term arrangements (no lateral mania with client work treated as chattel), especially since it complements law department insourcing of expertise. Underpinning both of these advantages are a capital structure and culture more amenable to infrastructure investment, process re-engineering, and technology deployment.

Back to Law Firms

I truly believe that in-house teams and managed-service providers will continue to grow as central pillars of legal service delivery while the frantic growth that law firms experienced for decades seems very much dead.

But let me conclude with some love for law firms. Inertia is unavoidable but not indomitable. Because they have been ascendant for so long, law firms have more intellectual capital than anyone. They have relationships, track records, experience, perspective, etc. They are filled with brilliant, experienced, talented, hard-working domain experts who are genuinely dedicated to quality and client satisfaction. Some of these domain experts are lawyers. Some of them are allied professionals who have spent more than a decade preparing for the transition to a more system-oriented legal market (see y'all at ILTACON next week). In theory, law firms even have more financial capital than anyone.

Law firms have the time, the talent, the funds, and the opportunity to make us doomsayers look silly. They just need a little push. But, clients, you do need to ask. A tad more on why in a subsequent post.

Exit isn't enough. Whether work is being done in-house, by a law firm, or by a managed-service provider, the systems for delivering legal services will need to be addressed. Clients will have to use voice at some point. There is no time quite like the present.

_______________________________________
D. Casey Flaherty is a consultant who worked as both outside and inside counsel and serves on the advisory board of Nextlaw Labs. He is the primary author of Unless You Ask: A Guide for Law Departments to Get More from External Relationships, written and published in partnership with the ACC Legal Operations Section. Find more of his writing here. Connect with Casey on Twitter and LinkedIn. Or email casey@procertas.com.

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3 comments:

Jeffrey Carr said...

Great analysis. As usual, I concur -- I only have some comments around the periphery. In part, customers don't use voice because of the perception that the alternatives are either non-existent, or too risky to try. Both are false. Perhaps it's professional hubris - what others might call in-breeding. Perhaps it's professional focus - what others might cal myopia. Perhaps it's professionalism itself - what others might call protectism. Perhaps these and many many more. There is, however's a deep seated fear of being wrong or being the point of the spear, the sacrificial anode, whatever metaphor or analogy you prefer. It's far too easy to simply dismiss this fear with "get over it" or "put on some adult clothes" -- but those palliatives are also lacking. Accepting is risk is, well, fraught with risk - start small, experiment, try, fail, ask why, and try again. At ValoremNexst, we call this Stretch, Step & Leap. Keep the cycle going in a virtuous cycle of continuous improvement. At aValorem Next, we call this P3 - Plan, Perform, Perfect

Providers must offer real change and real alternatives -- not simply less expensive ones. At ValoremNext, we call this the 3rd Wave (Engaged Law) and the 4th Wave (NextLaw).

Customers must be willing to vote with their fees and feet (exit) but more importantly, as I commented on part one, must find thier voice by having the clarity of purpose (setting expectations), the rigor of discipline (insisting on standards), the courage of self-reflection, and the commitment to feedback.

Simple. Clear. De-complexified.

But as Confucious might have said, "The solution to the problem is simple. But those with the power to solve the problem find it quite difficult.

Luci Sharma said...

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David Bjornson said...

Law firms have the time, the talent, the funds, and the opportunity. They just need a little push.

 

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