If you follow the automotive industry (I was in-house counsel at a car company), you follow Toyota (usually the top selling automaker in the world). If you study process improvement (I am a Lean Six Sigma Black Belt), you study Toyota (the Toyota Production System is the precursor of Lean). If you are interested in sourcing (like Toby, I wrote a chapter in the Legal Procurement Handbook), you are interested in Toyota (posterchild for deep supplier relationships). I do not pretend to be an expert on The Toyota Way. But I have been convinced that a strong-arm approach to strategic supplier relationships is a sub-optimal strategy over the long term.
I already told the story of how experience with stellar outside counsel changed my outlook on the inside/outside counsel relationship. But the most influential narrative in the evolution of my scholastic understanding of supplier relationships comes from automotive industry after the SUV bubble popped in the late 90’s.
For the first time, the Big 3 experienced the Japanese automakers as an existential threat. In studying their competition, the Big 3 found that the supply base was a substantial source of the Japanese cost advantage. The Big 3 sought to mitigate this advantage by leaning on their own suppliers for cost reductions, which they got—just not enough. The Big 3 also had to deal with the fallout from the rapid transformation of their supplier relationships. This fallout included inferior quality parts and a depleted, antagonized supply base, many of whom went bankrupt in the Great Recession.
The Big 3’s cost savings were insufficient because the Japanese automakers responded with cost reduction targets of their own. In addition to lower costs, the Japanese also mandated quality improvements. The Japanese automakers achieved both reduced cost and improved quality while emerging with an engaged, profitable supply base, which included many American suppliers. The distinguishing feature in the Japanese approach is that the Japanese assisted their suppliers in hitting their targets.
Consulting teams were dispatched to strategically important suppliers with the sole purpose of helping the suppliers achieve the twin mandates of cost reduction and quality improvement. The effort was not only about developing better processes at the suppliers but also better integration of the suppliers into the overall economic value chain. The objective was more than just better performing suppliers, it was deeper supplier relationships, which are founded on a commitment to coprosperity.
It is hard to imagine a well-regarded law firm run by smart lawyers going bankrupt (well, not that hard to imagine). And not even I am arrogant enough to entertain the notion of inside counsel telling outside counsel how to run a law firm (which has always struck me as akin to herding drunken cats). But I have first-hand experience with how structured dialogue, clear expectations, and collaboration can benefit both sides of the relationship. Law firms can do better. So can clients. It is much easier to pursue better together.
In my next post, I will discuss how, even in an environment still dominated by the billable hour, improved quality and reduced costs for clients can result in higher realizations and profits for law firms.