11/27/16

Comp on the Client Side: Living in a Glass House

The billable hour has been trashed repeatedly over how it motivates bad behavior in law firms. The reasoning goes that rewarding hours billed motivates lawyers (associates and partners) to spend more time on tasks than necessary, resulting in inefficiencies. My personal opinion is that rewarding hard work is not the problem, but instead poor management over the efforts of workers is the real problem.

For now, I will leave that argument aside and turn attention towards clients. It's easy to toss stones at the glass house across the street, but clients should be taking a hard look at their own financial motivations first.

At a conference this fall, I posed a question on how clients reward their internal lawyers. The group involved included both clients and law firms. The question was: What financial motivations do in-house lawyers have for reducing the cost of legal services?  I figured it was a fair question, since that is the primary complaint about law firm compensation systems.

Part of the motivation for the question came from a conversation with a colleague who moved from a firm to a client over a year ago. They noted that in-house lawyers are not threatened by the emerging roles in legal departments focused on cost savings. The reason they are not concerned is that the new roles pose no threat to their own careers. In-house lawyers advanced by - being good lawyers and not by being cost focused.

After I posed my question to the group there was a long, silent pause. It appeared no one had ever asked this type of question, so people had to think about it. But even then, the response was just shrugs. Finally one person from the client-side noted that lawyers who regularly force write offs were noticed positively in some fashion.

Two thoughts:

1 - People in glass houses shouldn't through stones. If misaligned comp systems are a problem, you might want to start with updating your own before you trash others'.

2 - After giving it some thought, the one comment made about financial motivation is actually counter-productive. If in-house lawyers show value by securing regular write offs, they are being rewarded for engaging with law firms who are habitually inefficient, or worse, padding their bills.

I have run into #2 a number of times. My best guess is that in-house lawyers feel write offs are truly driving value since management can view it as measurable cost savings. At a prior firm I had one partner suggest we preemptively write down 2% of the time on every bill to save the client the time since that was what they did. I asked if the work was being done poorly necessitating a 2% hit. He said no. So I said no - since the client would still write the time off 2% to show value to their boss.

The challenge of aligning comp with client cost goals is therefore one faced by both firms and clients. And it is one more argument for why clients and firms should work collaboratively on addressing the needs for more cost savings and efficiencies.

Otherwise, expect to the hear the sounds of more glass shattering.

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1 comments:

Peter Rouse said...

My recent experience indicates that in house lawyers are most concerned with reputation risk, as are private practice lawyers. Reducing external costs going forward only becomes a priority when it is made so by edict from the executive. Identifying costs as being higher than they need be, or being overcharged, also presents the risk of being blamed for having allowed such costs to arise/persist in the past.
As for hourly charges, it seems to me that there is still a place for this model. If you consider the way in which the 'gig' market is developing, there are fixed fees and there are hourly rates; each suits different clients and differing project/work situations. The hours are not the problem - it is the failure to set expectations and exercise discipline on both sides.

 

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