Discounts are the market (via specific clients) telling a firm their prices are too high for a piece of work. One might think firms should lower their prices in response to this information, however, that could be a mistake. Sometimes clients shop price by the level of discounts. They are not concerned with the actual price but instead focused on the amount of discount they are extracting. Whether this is rational behavior in an economic sense is not relevant.
“Whether this is rational behavior in an economic sense is not relevant.” Remind me to write a post entitled What’s The Matter With Inside Counsel (preview: they’re human beings).
As the preview suggests, my bottom line answer is nothing. Nothing is wrong with inside counsel. In general, I think inside counsel are quite good at their jobs. The real investigation is why inside counsel sometimes do things that appear to outsiders to be illogical (e.g., the discount issue above), especially their ostensible unwillingness to impose discipline on external counsel. There are a number of interlocking explanations, most of which boil down to inside counsel being busy lawyers who also happen to be human beings.
What follows is a crude sketch. It does not describe everyone. Indeed, it does not describe anyone. The caricature highlights a number of forces that are not always obvious to people who have not sat in the chair or do not recognize the classic principal-agent problem.
For years now, the mantra of inside house counsel has been “do more with less” (still second only to technology among forces driving change in the market). Gone are the days when moving in-house meant the ‘mommy track’–the sexist description of the supposed lifestyle benefits that have fueled so many escape fantasies. Inside counsel work extremely hard on matters that are vital to the success of their companies.
How inside counsel allocate their finite time is therefore of considerable importance. In general, legal fees are a small percentage of the value of business outcomes. A lawyer who directs their efforts towards saving $10,000 out of $100,000 in legal fees on a $10,000,000 deal does not necessarily have her priorities straight. Getting the right result (the $10M) is more meaningful than 0.1% net savings (the $10K).
Inside counsel rely on outside counsel to help them get the right result. They also rely on outside counsel to relieve as much of the burden as possible. It is not that outside counsel make their life easy, but outside counsel can make inside counsel’s life easier–i.e., just easy enough for inside counsel to almost have time to give proper attention to the many mission-critical matters on their plate.
You know who makes life particularly easy? Incumbent outside counsel. There are legitimate advantages associated with incumbency. Among those advantages are how much less ramp-up time and hand holding incumbents require. Incumbents know the procedures. Incumbents know the personalities. Incumbents know how to get what they need from the company in the least intrusive way. Incumbents (one hopes) have a track record of success. Moving business away from incumbents entails real costs (ramp-up) and risks (to success).
It should be here reiterated by this court that the practice of law is a profession not a business or skilled trade. While the elements of gain and service are present in both, the difference between a business and a profession is essentially that while the chief end of a trade or business is personal gain, the chief end of a profession is public service. It is the obligation of lawyers to preserve the heritage which is theirs as members of a time-honored profession, and to justify the confidence which the public reposes in them. It is the duty of the lawyer to make certain that commercialism is not allowed to debase the relationship of attorney and client.
Inside lawyers are still lawyers. Moving from outside to inside counsel is not usually an epistemically transformative experience. It’s the same people.
They went to law school to do law stuff. They were hired to do law stuff. Contracts, closings, litigation, statutory analysis….is all law stuff. Invoice review, rate negotiation, AFA’s, project management, technology…..not so much. I will refer to the not-law stuff as “MacGuffins.” Given the choice between law stuff and MacGuffins, lawyers will direct their finite focus towards the law stuff.
If you try to convince lawyers to chase MacGuffins, you are likely to trigger the distinct personality of professional issue spotters. As has been discussed in previous posts (here and here), lawyers diverge from the general population on a few key psychological traits (studies from Dr. Larry Richard). By trying to persuade lawyers to focus on MacGuffins, you may encounter extreme instances of:
Autonomy. Lawyers prefer to do things themselves and react poorly to being told what to do. Telling them that they should focus on something other than what they prefer/choose to focus on is a violation of their autonomy. So, too, is bringing in someone else to do it for them.
Sociability. It’s not just that lawyers do not like relying on or taking direction from others, they dislike interacting with them, period. Lawyers score their lowest (12 out of 100) on the sociability measure. The new person or outsider with the new idea about how things could be done differently is going to find it hard to establish the rapport necessary to properly communicate the logic and mechanics of their MacGuffin.
Urgency. Lawyer time is valuable. Deadlines are imminent. Failure is not an option. Lawyers have an ineffable urge to get everything done now. Combine this urge with high autonomy and low sociability, and it all needs to be done now by them. They do not have time for whatever MacGuffin you’ve concocted to distract them from their urgent work.
Resilience. Law has a small margin for error. Lawyers therefore have a low threshold for failure. Their ability to be resilient in the face of setbacks is much lower than the general population (this is the finding that most surprised me). Apparently, the dark side of perfectionism is the paralyzing fear of imperfection. Lawyers are experts. And expertise is often a good excuse not to leave one’s comfort zone. MacGuffins are outside their comfort zone, which means a high prospect for error, failure, embarrassment, etc.
Skepticism. If Moses had been a lawyer, he would have explained to Yahweh that the 10 Commandments were materially incomplete. Lawyers can find holes in anything. Part of this prowess stems from the fact that lawyers are naturally suspicious of new and different. Their innate skepticism gets put on high alert when your MacGuffin also runs afoul of their need for autonomy, demands sociability, conflicts with their sense of urgency, and poses a threat to their low resilience.
1. MacGuffins are unfamiliar and outside the areas in which the lawyer has been trained (skepticism)
2. MacGuffins are not foolproof and introduce the specter of error, failure, embarrassment, etc. (resilience)
3. Avoiding failure and embarrassment requires investing time, effort, and attention, all of which are in short supply (urgency).
4. True success probably also means asking for help (high autonomy) and getting buy-in from other stakeholders (low sociability)
5. Wait, remind me why anyone would volunteer to chase the MacGuffin?
Whether the lawyer personality is born or made remains an interesting question. The most common supposition is that people with the foregoing profile self-select for law school and, even more so, choose to remain in a profession that reinforces and amplifies their predispositions. It is not just the individual lawyers have personalities that are attracted to settled precedent and familiar patterns, they are then shaped by institutions that are also inclined to defend entrenched paradigms. Even if the individual lawyer has a favorable view of the MacGuffin, it is logical for them to survey the institutional landscape and conclude that it will be too hard to get the necessary cooperation, participation, support, funding, etc.
Many aspects of law departments are more culturally similar to the law firms that produced the inside lawyers than they are to the companies in which they now operate. That culture is driven towards homogeneity and unpunctuated equilibrium. In a great post entitled Why things stay the same, Mark Gould shares the research on institutional isomorphism, which is defined as:
Once disparate organizations in the same line of business are structured into an actual field (as we shall argue, by competition, the state, or the professions), powerful forces emerge that lead them to become more similar to one another.
Coercive isomorphism — resulting from both formal and informal pressures exerted on organisations by other organisations on which they are dependent and by cultural expectations in the society within which they function.
Mimetic processes — in conditions of uncertainty, organisations may model themselves on other organisations.
Normative pressures — these arise from professionalisation, especially when (a) there is a common cognitive base derived from universities and professional training institutions and (b) strong professional networks arise, spanning organisations.
Check, check, and check. Individuals who are risk-/change-averse by nature and nurture are then embedded in a culture that pressures them to operate in a uniform manner. For lawyers, including in-house lawyers, it seems that “worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”
Despite some evidence to the contrary, lawyers are human. And status-quo bias is not just a lawyer thing, it is a human thing. So are loss aversion, regret avoidance, and endowment effects. These are not only cognitive biases, they are woven into the fabric of large organizations. Doing what has always been done is truly the path of least resistance.
For the most part, inside counsel has free rein (and reign) with their outside counsel as long as there are no major screwups, including something resembling adherence to budget. Internal investments in infrastructure, technology, etc. are a different story. There are many inside counsel who have more authority to spend a $100K on legal fees and then settle the matter for $1M than they do to purchase a $200 piece of software, which raises any number of bureaucratic and procedural hurdles. Similar barriers exist when they try to negotiate alternative external arrangements (e.g., fixed fees and LPO contracts). That’s a lot of work for not a lot of personal benefit.
Generally, the sole ‘reward’ for coming in under budget is a lower budget going forward. This only increases the probability of a major screw up (going way over budget is a different story than coming in way under). Indeed, why would an inside counsel voluntarily reduce their budget in the first place? Inside counsel’s budget is, like a partner’s book of business, their source of power. The bigger their budget, the more sway they have. Part of the tradeoff for earning less money than most law firm associates is that even the partners who take home 50x more than inside counsel still have to kiss inside counsel’s tukhus. More budget means more smooching. It’s easy to convince yourself that your jokes are funny when everyone is laughing.
And it isn’t just about pomp and deference. It is pretty great for you and your friends when they can start expensing all your drinks, meals, golf, etc. Not having to pay for nice outings is one of the hidden perks of being inside counsel. Telling the person who picked up the check that you are going to start putting the screws to them and their firm is simply poor manners, especially when that person is your friend.
Scoring low on sociability does not mean that lawyers have no friends. Rather, they have fewer, more intense friendships:
Sociability is described as a desire to interact with people, especially a comfort level in initiating new, intimate connections with others. Low scorers are not necessarily anti-social. Rather, they simply find it uncomfortable to initiate intimate relationships and so are more likely to rely on relationships that already exist, relationships in which they’ve already done the hard “getting-to-know-you” part…
The inertia of incumbency is not just professional, it’s personal. Lawyers are frequently friends with other lawyers. They bond in law school. They bond in the trenches of law firms. They bond as part of the inside/outside counsel symbiotic relationship. There is social pressure on inside lawyers to maintain the status quo.
The friendship is not always between the relationship partner and the managing inside counsel. Sometimes, the relationship is with the GC or one of the managing inside counsel’s other superiors, including those on the business side (executives, board members). While it may seem like an instance of Stockholm Syndrome when an inside counsel responds to a potential savings opportunity with “my outside counsel wouldn’t like that,” it can indicate real personal and professional consequences for violating the ‘natural’ order.
The impotence of the nuclear option
Mention of the business side often brings up the ‘nuclear option’ of going above the GC. If the inside lawyers aren’t serious about savings, surely the CEO, CFO, etc. care that Legal is wasting so much money. Not really. Earlier, when I referenced the $10K savings representing 0.1% of the $10M deal, the numbers were not arbitrary.
In a mature organizations, total legal spend as a percentage of revenue is around 0.4%. Even if your MacGuffin can cut total legal spend by 25%, you are only getting at 0.1% of company revenue. This is real money in raw dollars, but it is not the kind of savings for which most executives are inclined to intervene, especially when the GC can list the parade of horribles that will befall the company if the executives do not let the lawyers do their job.
The GC, of course, is not the only department head who is arguing that their team needs more resources, not less (end-of-year shopping sprees are a holiday tradition). But the GC can recite the parade of horribles to great effect because law is really scary. The consequences of legal mistakes can be cataclysmic but the working of the legal system are inscrutable. Lawyers are often treated as clergy who can penetrate the divine mysteries and keep the company in the favor of capricious legal gods. As long as it doesn’t cost too much, the lawyers should be left alone to their alchemy, sortilege, and other numinous pursuits.
The trouble with incentives is that they work
This opacity suits autonomy-seeking lawyers just fine. For all the talk of the perverse incentives that the billable hour introduces for law firms, there is scant attention paid to how the illusion of unpredictability and uncontrollability advantages inside counsel by shielding them from scrutiny. Indeed, just about every MacGuffin for holding outside counsel more accountable also creates additional accountability for inside counsel. Who volunteers for additional accountability?
Even if the MacGuffin works, there is a chance that improvement is interpreted as indictment of the past. The attempt could be seen by predecessors and their allies, many of whom may now be superiors, as implicit attack on how matters were previously handled and, by extension, the people who handled them. Success could serve as a tacit admission that the law department has been wasting resources for years.
Plus, circumstances will eventually create an improvement imperative, and it is sensible to keep the powder dry until eventually arrives. While CEO’s and CFO’s are not apt to meddle in the law department’s affairs (outside of helping a few of their friends at law firms), they are certainly inclined, from time to time, to announce spend reduction mandates that apply to all departments, including legal. The mandate does not care about previous cost-cutting activities. The lawyer (or law department) that has been lax about spending is in a much better position than their zealot peers. The intrinsically-motivated, technologically-enabled, automated, Lean, Six Sigma, Agile legal ninja with metrics about her metrics will have far less low-hanging fruit than the colleague who annually raised rates out of unthinking habit.
The allure of fake pricing
All of this brings us to where the column began: the (il)logic of shopping by discounts. Discounts are familiar and easy to calculate. Discounts fit within the traditional paradigm while also paying homage to the cost consciousness of the New Normal. Discounts guarantee success. Discounts deliver immediate, measurable benefits while avoiding hard conversations, tough decisions, and the real work of exploring alternatives. Discounts appeal to ‘smart shoppers’ who like to brag about how much they saved. Driven by anchoring effects and the dynamics of credence goods (where the inability to objectively measure quality leads to an inversion of the price/demand relationship), discounts (as opposed to less expensive alternatives) thrive based on an implicit acceptance that alternatives are not truly fungible. The $2,000 HDTV is inherently ‘better’ than the $500 HDTV by virtue of the price tag. And isn’t it amazing that I saved $400 when purchasing the $2,000 model? In the legal market, every day is Black Friday.
To the extent the appearance of quality and the appearance of savings have gained currency in a law department, getting ever bigger discounts from a high-priced firm is the best of both worlds. Reprising and expanding the chart from my last post, consider how much the inside counsel is ‘saving’ while their budget (power) increases, their friends make more money, and they get to rely on the ‘best’ outside firm:
Back to reality
Well, that was a long, casual devolution into cynicism. Not only are there conspicuous exceptions to the foregoing (we hand them awards on an annual basis), but, as I explained in the beginning, everyone is an exception to the above. It is a crude sketch, a caricature that highlights pressures, constraints, and influences that are not always obvious from the outside.
I still think the first factor has the most explanatory power. Inside counsel are really busy doing work that is mission critical to the enterprises they serve. They are overburdened and do not have the time or other resources to pursue transformative change within or outside the law department. While not nearly as crucial, psychology and incentives have an impact at the margins. They are also at odds with what seems to be a common view of inside counsel as crusaders consumed with lowering legal spend. There are good reasons why things do not change nearly as fast as the bombastic headlines would seem to suggest.
And, yet, in spite of this textbook agency dilemma, things are changing. The picture painted above would seem to argue that the status quo will persist. But status is not nearly as quo as it used to be. It is almost as if the above is not a complete picture. More on that in a later post.