At present, the most universal priority for law departments is “controlling outside counsel costs” per 85% of respondents to the most recent TR Legal Department Operations Index.
I understand. I also doubt the marginal utility of simply pressing harder on the traditional levers of cost control (discounts, panels, RFPs, outside counsel guidelines, AFAs). My sometimes solicited, alternative advice:
- Package work. Identify opportunities to enter portfolio arrangements, including integrated law relationships with New Law offerings.
- Move work. Right source, including greater use of legal marketplaces to find the right talent at the right price.
- Re-examine costs on autopilot. Major advances in ediscovery, ADR, court reporting, staffing, etc. present substantial, immediate spend-optimization opportunities.
- Don’t stop investing in compliance by design. Embedding legal knowledge in business processes is the only viable, long-term approach to meeting the evolving legal needs of business in an increasingly complex operating environment.
If you want to discuss, call me, maybe.
Herein, however, I am not focused on being better. Rather, we will continue our exploration of avoiding worse. The unpalatable message remains that even when something must be done, doing nothing is superior to doing the wrong thing. Running in the wrong direction cannot be course corrected solely by redoubling our efforts.
WORD COUNT WARNING: the original, short version is here. Proceed at your own risk.
It is getting ugly out there. We have a failure to communicate grounded in a lack of trust. Even when times are good, clients express surprise, anger, and dismay as they “vow to fight” law firm rate increases that are roughly in line with inflation. I take zero issue with clients pushing back on rate increases, but the moralizing strikes me as a distraction from productive commercial negotiations. Yet, with deteriorating economic conditions and being that time of year, we appear to be in for another edition of clients berating law firms for inefficiency while doing nothing about it beyond demanding discounts and, in some places, additional supplier consolidation—which is to say, doing nothing effective about it, in the vein of ‘old man yells at cloud.’
I’m on an apology tour, in part, because I’ve had several recent conversations with prominent law departments currently revisiting their outside counsel programs. They inquired if they should employ the questions on law-firm technology usage contained in my guidebook Unless You Ask. I advised them not to. While it may appear like I am producing parody, I assure you these exchanges hewed closely to the following:
In-house: in our RFP to law firms, should we include questions about technology, like in your guidebook?
Me: who will read the answers?
In-house: I don’t know.
Me: how will the answers affect your decisions?
In-house: I don’t know.
Me: then don’t ask. You should not include any questions in your RFP that won’t inform your decisions. Why would you consider doing so?
In-house: seems like we should. Technology is important.
I know the logic presents poorly when laid out in this manner. But I wrote the book on this subject. I get the opportunity to probe. Such decisions are often made rapidly, without much reflection let alone scrutiny.
Ponder the related but more familiar rituals around discounts—which I have labeled “rack-rate kabuki—through the lived experience of Laura Frederick, who was kind enough to comment on my first installment:
Laura is correct in her judgment that the practice is nonsensical. My aim is to pair judgment with empathy.
We intuit the impetus: equitable prices for, and effective oversite of, external legal services. Less automatic is our understanding of how the pursuit of legitimate objectives results in nonsensical practices.
Almost no behavior is irrational, in the sense of being inexplicable. Rather, behavior is rational within context. If a behavior strikes me as irrational, then I lack sufficient understanding of the context. Context is critical. And the in-house context is bordering on crisis. Installment #2 is an exercise in deliberate empathy—almost 3,000 words of deep nerdery exploring context.
Already burned out professionals are under intensifying pressure to immediately address increasingly complex problems in areas outside their core competencies as demand grows while resources remain flat (at best). If you come away from this series not understanding the choice architecture that results in the foregoing examples, I will have failed (again).
this is important
something must be done
but we’re already underwater
X is common and is considered a quick, if only partial, fix
even if X is insufficient, X is still something
let’s do X
….[problems persist while bandwidth continues to dwindle]….
more X it is
Make things as simple as possible but no simpler. In a resource-constrained environment, simple solutions present as the only affordable options to address our complex problems—that is, solutions for which we have sufficient time, attention, and money. For entirely comprehensible reasons, in-house departments consistently choose the path of least resistance and default to simple solutions when addressing the wicked problems of legal buy—to everyone’s detriment.
Unfortunately, while I can explain why simple solutions to complex problems are wrong, I cannot offer simple alternatives—problems amenable to simple solutions are, by definition, not complex. I consistently disappoint in-house departments because they ask me for a fish, and I offer them a worm.
Still, I persist in my belief that hard ≠ impossible. But we must first our complex problems are not amenable to simple solutions. At the very least, if circumstances render the right approach impracticable, we can stop wasting energy being wrong. Misguided pursuits, no matter how well intentioned, consume finite attention and move us further away from our objectives. Even when something must be done, doing nothing remains superior to expending energy unproductively, let alone aggravating an already precarious situation.
DISCOUNTS DISCOUNTS DISCOUNTS!
Discount is not rate. Rate is not price.
The same way car buyers have been conditioned to not pay over MSRP (except when supply-chain chaos radically alters market dynamics), enterprise legal buyers have conditioned themselves to demand discounts for no other reason than demanding discounts is what enterprise legal buyers do. The market equilibrium is now such that in-house departments would be derelict in their duty by not engaging in the discount discussion. Discounts are baked into most rack rates. And where this is not yet true, in-house departments will ensure rates become artificially inflated so they can then be discounted (see Laura Frederick above). More’s the pity.
This bazaar-like mandatory haggling introduces unproductive friction into commercial relationships. Much worse, many in-house departments delude themselves into believing that with discounts they are somehow delivering on a dubious more-with-less savings mandate, disciplining profligate law firms, “winning” the negotiation, or some other such nonsense. They double down. Conditions deteriorate further.
Over-indexing on discount culture extends an already elaborate mating/negotiation ritual and consumes finite focus—in an information economy, attention is the scarcest commodity. Meanwhile, despite all the activity and acrimony, rates (standard, agreed, billed, and collected) continue to ratchet up because of how inflation and markets work.
Some lawyers are totally worth it (yes, I absolutely believe the business value delivered can justify far more than $1,500/hr). Clients should pay a premium for premium work from premium lawyers because the return on investment makes commercial sense. But fake discounts on premium rates for non-premium work is a bad plan.
Rather than treating discounts as some independent end in themselves, the objective should be to (i) price work, rather than lawyer, based on (a) the value of the work to the enterprise and (b) the market dynamics in which the work is being sourced, and then (ii) allocate work to fit-to-purpose suppliers. Like so much in our space, this is far easier said than done. The foundation is mostly missing.
In-house counsel must first understand the nature of the work (work sorting), including the composition of the work (work decomposition), the business drivers of work volumes (work drivers), and the value of the work to the business (work segmentation). While in-house lawyers genuinely care about business success and view themselves as strong business partners (the business does not share this view), few in-house departments have undertaken the system-level project work to align legal activity to business outcomes. An accessible example from my value storytelling series:
- Few law departments measure contract volumes
- Fewer measure contract cycle times
- Fewer still connect contract cycle times to business-centric KPIs like sales velocity
- And even fewer have deconstructed cycle times to determine which interventions would truly improve contract velocity and the resulting business impact
The example is deliberately straightforward. Such exercises become more challenging when endeavoring to characterize risk, uncertainty, avoidance, reputation, business interruption, etc. But the fact that low-hanging fruit remains unpicked is telling.
Work sorting is a pre-requisite to proper supplier sorting, pricing, and management: who should handle which work, how, and at what price. Work should be allocated to the most cost-effective resource where paying market price results in the greatest overall return on investment to the business.
We should not confuse sticker price with market price. We should also recognize there is no monolithic “market” for legal work. Work type, work complexity, supplier scarcity (or abundance), geography, etc. all complicate the analysis. In theory, good data can uncomplicate it. In reality, the available data is fragmented, uneven, and fraught (among the many reasons in-house counsel should actively push and contribute to industry standards like SALI).
Add on search + switching costs, it is no surprise that instead of trying to strategically source work at market prices, clients instead attempt to rely on their individual market power to drive down rates with their existing law firms—to limited effect, and often in the form of provider panels.
PANELS (AKA ANOTHER DISCOUNT DISCUSSION)
It is really hard to change how you buy if you are unwilling to change what you buy.
Panels take many forms but, at core, mostly serve as a discount variant. While the motivations are multi-faceted (e.g., reduced administrative burden) and the stated rationales often meritorious (e.g., partnership), most convergence initiatives are merely prolonged negotiations where clients theoretically consolidate their buying power to extract greater rate concessions.
Sadly, most panels fail in most respects. Those charged with putting the panel together lack the authority to distribute the work. Work allocation remains essentially unchanged. We should weep for the opportunity cost of the countless hours squandered auditioning for and constructing preferred provider programs that award no preference.
Sadly, some panels ostensibly succeed. Clients consolidate work at purportedly favorable rates. But they start from the wrong premise: an arbitrary goal of concentrating work amongst an arbitrary target number of firms. This construct favors firms with broad practice and geographic footprints—i.e., the largest and most expensive. While bizarro savings math dictates that discounting a standard rate of $900 down to an effective rate of $650 is a big win (the more you spend, the more you ‘save’), actual arithmetic still holds that a standard rate of $450 is less money. Moreover, the resulting entanglements can grow so gnarly that moving the work becomes exceedingly difficult—creating a perverse form of lock-in that reduces client leverage in subsequent negotiations. Again, so much effort, so little ROI.
Sadly, panels need not be worthless—I commend this series from the consistently excellent Dan Currell. Purposeful lock-in (i.e., mutual commitment) can create alignment and deliver returns on investment for both parties. But true strategic partnerships are uncommon because so few have the mindset, bandwidth and patience to create, nurture, and grow them. Instead, we rely on increasingly byzantine mechanisms like excruciating RFPs and onerous outside guidelines, counting on mere words to be sufficient to drive positive change (spoiler: they aren’t).
RFPs (DISCOUNTS ON DISCOUNTS)
Panels are often the product of a tortuous RFP process. But RFPs are also in broad use for individual matters. Even Cravath has a full-time RFP manager.
As with panels, the personnel charged with putting out RFPs are usually not empowered to make the final selection. Despite so much ink being spilled, the ultimate decision makers continue to go with who they know and default to their favored firms. Automaticity is among the most potent forces driving human behavior:
the idea that purchase decisions arise from conscious choice flies in the face of much research in behavioral psychology….Processing fluency is itself the product of repeated experience, and it increases exponentially with the number of times we have the experience…In short, research into the workings of the human brain suggests that the mind loves automaticity more than just about anything else — certainly more than engaging in conscious consideration. Given a choice, it would like to do the same things again and again….A driving reason to choose the leading product in the market, therefore, is simply that it is the easiest thing to do.
To counter automaticity, RFPs, done well, have their place.
On large and complex matters—assuming proper scoping (an audacious assumption)—responses from independent experts laying out proposed strategies, sequencing, and staffing can enrich a client’s understanding, in addition to aiding firm selection. Similarly, RFPs can serve as a price-discovery mechanism for non-standard work in a noisy market.
Often, however, RFPs are merely a price-competition mechanism dressed up as something more. Reverse auctions have a mixed history that need not be revisited here. Rather, I’ll be concise: if that is all clients are doing, they should just do it. Precious time is wasted on the fluff and ceremony surrounding what is at core a straightforward negotiation. So many questions asked. So few answers that genuinely inform the purchase decision.
This is a lesson I failed to learn before I put out my guidebook aimed at improving the situation at the relationship-level (i.e., for preferred providers, including, but not limited to, panel firms). I had—and have personally executed on—a vision for sustained structured dialogue to continuously improve the process and technology of legal service delivery. RFIs/RFPs are a first step in collecting the information necessary to engage in the dialogue. I should have known this would usually also be the final step. In-house counsel added the proposed questions to their RFPs (now approaching ubiquity) but are doing absolutely nothing with the answers, including reading them. I shudder at all the hours wasted as a result.
Misguided pursuits, even if they are my own and well intentioned, consume finite attention and move us further away from our objectives. Among my good intentions was to stop the madness of outside counsel guidelines.
OUTSIDE COUNSEL GUIDELINES (MICRO DISCOUNTS, POST HOC)
Micromanagement is bad. Blunt instruments are bad. Micromanagement via blunt instrument is terrible.
I’ve always been a hater when it comes to OCGs (receipts). Playing silly word games to circumvent client billing prohibitions was among the first lessons I learned as BigLaw associate. Clients had constructed administrative apparatuses to identify technical violations of their guidelines. My firm had a corresponding administrative apparatus dedicated to malicious compliance. It was white-collar CAPTCHA.
No substantive behavior changed. No money was saved. Ample suffering was inflicted. And considerable energy was wasted making billing narratives even less informative (no small feat).
Recently, in highlighting this point during a presentation, I was challenged by a legal-operations professional who possessed hard data on the violations flagged when her organization switched on automated billing compliance software. I have no doubt her data was correct, and the corporation paid out less than it would have otherwise on that initial tranche of invoices.
In response, I offered three conjectures:
- Compliance increased rapidly and then stabilized
- The corporation lacked sufficient metrics to determine whether their total cost of ownership for matters was reduced due to enhanced enforcement
- In particular, the corporation had no way of identifying whether outside counsel were padding their entries to compensate for the extra time spent playing silly word games (consciously or not, it is easy to tack on 0.1s at the end of the day/week/month when exhausted, annoyed, and guestimating anyway)
My conjectures were confirmed.
Returning to the graph showing rates smoothly ratcheting up, note the stable relationship between what is billed and what is collected despite almost two decades of increasingly onerous billing guidelines, advances in automated bill review, and the proliferation of bill-review specialists, including dedicated third-party providers.
Cast in a more favorable light, OCGs are not about paying less than billed. Law departments hope OCGs will reduce how much is billed in the first instance. Hope is not a plan.
Again, discounts are not rates, and rates are not price. Price is usually determined by an equation, the function of rate x hours. OCGs are an attempt to control hours, the multiplier. Understandable impulse. Ineffective manifestation thereof.
The first rule of legal work is to expertly execute the work—by whatever means necessary. Everything else is subordinate to mission accomplishment. Mission-oriented outside counsel do the work as best they know how (after all, they are the experts) and then perform the requisite linguistic gymnastics to conform the narratives of their unchanged behavior to each clients’ peculiar description prescriptions.
If in-house departments want to change how work is done, then in-house departments need to be directly involved in changing how work is done—i.e., sustained, material improvement in active management at the relationship and matter levels. But this requires time and attention (and, frequently, expertise) they cannot seem to spare.
Outside counsel guidelines have their place and their use. “Send invoices to” is an essential OCG. The best use of OCGs is not to serve as a discount variant but, rather, to improve data quality [cough, SALI, cough]. Better data can be used in many ways, including legitimately useful alternative fee arrangements (“AFAs”).
AFAs (STILL, MOSTLY JUST DISCOUNTS)
If it quacks like a duck.
I know some readers too well. They are geared up to fire off a tweet because the righteousness in their soul tells them the cure to the ills outlined above is to finally kill the billable hour—plus, they are chafed I refer to alternative fee arrangements, instead of appropriate or value fee arrangements.
First, I try to ground my observations in the empirical (what is) rather than the normative (what ought to be). The billable hour remains dominant to the point where vocal practitioners of AFAs exclaim that most purported AFAs fail a purity test and are simply slight variants on the billable hour. So, too, the familiarity of the term AFAs. Pretending otherwise only causes confusion.
Second, I agree we are over reliant on the billable hour. I also consider hourly billing essential to the pricing toolkit, even in an ideal world. Like Bill Henderson, I am not a billable hour truther. To those who regard eradication of the billable hour as the skeleton key to improving legal service delivery, I implore you to revisit your root-cause analysis.
Consider that the billable hour lacks explanatory power as to why in-house departments exhibit the same pathologies as law firms despite the complete absence of compensable timesheets. And if you persist in defending, rather than re-examining, your thesis by proposing some form of original-sin theory where law firm culture has infected in-house departments, you must come to terms with the fact you are negating your own contention that excising the billable hour is sufficient to unleash transformational change.
Third, and most pertinently, I am not being critical of AFAs—just as I am not critical, in the abstract, of price negotiation, panels, RFPs, and outside counsel guidelines. There is nothing wrong with AFAs except the false hope they present a simple and easy cure-all. This mischaracterization renders most real-world attempts at AFAs a colossal waste of collective time. Even law firms are frustrated:
Leaders of international law firms are frustrated by a perceived unwillingness on the part of existing clients to move from traditional billing and hourly rates to alternative fee models… Many firms have spent considerable money and effort in building up more robust pricing and legal project management teams…Yet despite these efforts, alternative fee arrangements had remained fairly consistent at roughly 20% of law firm revenues… firm leaders report that clients remain more likely to accept either traditional hourly arrangements with discounts or budget caps applied.
Among those time-wasting RFP questions is the requirement for AFA proposals that will never go anywhere because:
- Law departments cannot provide the requisite scoping parameters due to insufficient information, lack of bandwidth, poor data quality, etc.
- In-house lawyers are unfamiliar with AFAs, which makes them uncomfortable, including the fear of striking a bad bargain due to insufficient information, lack of bandwidth, poor data quality, etc.
- Law department systems and metrics are billable-hour centric (e.g., accounting, reporting, savings math)
Mostly, this results in time wasted crafting and negotiating AFA proposals only to have the in-house team default to discounted billable hours. The worse, and painfully common, outcome is nominal AFAs that are discounted billable hours in camouflage, fooling no one but adding all manner of complicatedness to tracking and invoicing—exacerbating the already wicked problem of billing at scale and further degrading data quality.
Scoping can be genuinely challenging even with good information (matter specifics) and solid data (benchmarks for similar matter). Few legal matters are composed solely of known knowns—if all is known, there is little need to lawyer up. Basic matters present all manner of known unknowns—assumptions that could fall somewhere along a range and are often dependent on choices made by others (counterparties, judges, regulators, et al.). Expertly scoped matters are still susceptible to unknown unknowns—those fun surprises that turn a matter on its head.
The noise of such variance can often be smoothed out with volume (the law of large numbers). Hence my strong preference for portfolio arrangements. For one-off matters, I am a proponent of inherently flexible arrangements that enhance alignment, like the ACES engagement model. And where circumstances dictate we dive in immediately and blindly, there is nothing wrong with starting on the billable hour and reaching well-calibrated terms as the matter comes into focus. Similarly, some matters are so infrequent and so small that scoping is not only impossible but wasteful—the billable hour is entirely serviceable in such instances.
The problem is that all three “alternative” approaches—portfolio partnerships, flexible engagement models, hybrid structures—require work and trust. There is little slack for the former. And the latter continues to erode.
Trust is a basic building block of economic exchange. Returning once more to the well on discounts, panels, RFPs, OCGs, and nominal AFAs evinces the corrosion of trust between law departments and law firms.
What law departments experience as price gouging, law firms characterize as market-responsive, client-tailored dynamic pricing. What law departments characterize as introducing business rigor, law firms experience as harsh moral judgment, ad hominem attacks, and increasingly extreme demands untethered from market realities. Both sides are right. Both are wrong. Both are responsible for remedying the situation. But in a buyers’ market, the professional buyers must lead.
Data and dialogue will drive better outcomes than performative discipline and browbeating. But that requires law departments to materially reconfigure what they buy and how they buy, rooted in a more nuanced understanding of why they buy.
The problem, of course, is that like insourcing, the standard approaches to external cost control work until they don’t—i.e., real initial benefits are followed by diminishing returns and problematic path dependence. This is fixable. But the fixes are not obvious, simple, nor easy.
I urge in-house departments to take advantage of the current crisis to explore true transformation in their approach to legal buy as part of a larger spend-optimization effort. But if bandwidth or political constraints make that impracticable, I implore you to, at the very least, not waste your own finite energy or that of your law-firm partners on cost-control theater that will not do much to control costs. Even when something must be done, doing nothing is superior to doing the wrong things.