Me: Which “genius” decided savings should be a prime objective and metric of success for law departments?

Jae: [purses lips & tilts head]

Me: But…

Jae: [rolls eyes]

Me: No…like…well, actually…but see…what had happened was…

Jae: [sighs]

Me: Fine. I’ll recant and repent. But, just so we’re clear, I am not happy about it.

Jae: [shrugs]

Saving money is essential. But not as an end in itself. Centering savings in our value storytelling is seductive but, long-term, counterproductive. Our story should be one of delivering business value. Delivering business value is contingent on us having sufficient resources to meet the evolving needs of the business.

To the extent I have played any role in promoting the narrative that law departments should prioritize savings for savings sake—as in, “today over half of these departments are targeting savings of 20% or more” (2021 EY Law Survey)—I seek absolution, and wish to atone, for my sins.

I remain a harsh, vocal critic of waste in the delivery of legal services—without remorse. Yet, in what may be revisionist history, I protest: I have been misunderstood. I hold nuanced views. My focus is reducing the unit cost of legal services as one component of us collectively solving for scale.

My operating assumption remains that demand for legal expertise is on a steep upward trajectory in our law-thick world; to the point where, even if we can reverse the correlated trend in relative costs, many law departments will require more, not less, budget to address the legal dimensions of business problems. Indeed, this series commenced with my observation that “Some law departments simply need more money. Not all of them will get it.” This was the conclusion to a post I wrote about ever-increasing demand for expert legal guidance, the rise in relative costs, the failure of corporate legal budgets to keep pace, the limits of insourcing, the resulting productivity imperative, and our need to improve at value storytelling.

I built on this observation last post contending that superhuman efforts to do too much with too little (excessive MacGyverism) sabotages our legitimate ask for allocation of incremental resources to the legal function. I maintain it is incumbent on us to do the uncomfortable, including saying “no” and “I told you so” the right way. Our natural state is a reflexive “yes” followed by extraordinary, unsustainable effort. Holding the line on strategic prioritization is an unsettling but necessary exercise, as is elevating our effectiveness at the “executive art of the business case.”

Herein, I posit that savings, as an end in and of itself, should not be a strategic priority and, like excessive MacGyverism, undermines our business case.

This is supposed to be hard. This is the big leagues. Corporate dollars are fungible but finite. The opportunity costs of apportioning incremental funds to legal are considerable.  I am intimately familiar with how challenging it can be to secure budget. I am also intensely familiar with how it becomes increasingly impossible to satisfy ever-expanding business needs with an ever-shrinking budget—we can only do so much extraordinary gap filling. It is essential we do the hard things well to avoid facing the impossible. When put in a no-win situation, we lose.

Our general value may be self-evident but our marginal value probably isn’t. “We need more resources because we’re busy” is only moderately useful as an argument for the allocation of marginal dollars. It is, however, quite common because it is inherently logical—if we accept the premise that legal support is necessary to the proper functioning of the enterprise.

“what we do is important” + “don’t have enough resources to do it” ≠ more resources

We often face a high evidentiary burden when requesting incremental increases in resource allocation even where the foundational case for our existence is treated as axiomatic. We ratchet up the difficulty setting when we suggest we already have more resources than we need—or worse, have been wasting resources for years.

Corporations underinvest all the time, for many reasons. Organizational underinvestment is endemic. This includes underinvestment in legal, which is often a budgetary rounding error (in percentage terms, even where the raw dollars are massive). Sometimes, corporations underinvest because they must consciously make hard choices. Sometimes, corporations underinvest because they unintentionally make poor choices.

Good value storytelling will increase the likelihood of adequate investment in legal but is no guarantee. In crafting a compelling story, centering savings can be enticing in the near term. But, long term, framing savings as end in itself can prove to be an unforced error as it perpetuates the attractive fiction that corporations can, and should, spend less on the legal function.

Saving money is easy in the short term. Just fire someone. Who? Doesn’t really matter. A reduction in force will eliminate nominal costs from one area of your budget. Too crude and close to home? Fine. Demand ever deeper discounts from your law firms. Or hold a reverse rate auction. Or add another dozen items to the list of what you won’t pay for in your outside counsel guidelines. Keep going back to the well; double down on whatever “worked” before (or has purportedly worked elsewhere).

The levers available to superficially cut costs in the near term are legion. Most of them are fine as far as they go—they just don’t go very far.

We absolutely must make decisions about the size and shape of our law departments. We must regularly revisit and refresh our relationships with external providers. But we should do so with an eye towards long-term sustainability, not only short-term savings. The associated messaging should be about optimal reallocation of finite resources to better support strategic enterprise priorities—not a net, permanent reduction in resource requirements.

With an eye towards quick, tangible wins, too many law departments have seized on building their fiscal bona fides through aggressive, explicit efforts to save money. This is understandable. “Less-expensive alternative to outside counsel” is the origin story of many law departments. But after quick wins are quickly forgotten, a savings-centric value proposition positions us poorly for our next magic trick. One-time lifts do not lend themselves to repetition or, at the very least, are subject to diminishing returns. Worse, foregrounding savings creates, or cements, the expectation that the law department should be judged on our ability to spend less money. This expectation is at odds with our true purpose (meet the needs of the business) and long-term reality.

One hope is that by showing ourselves to be conscientious stewards of corporate resources with an established track record of fiscal prudence, we will garner credibility that serves us well in our quest for more resources. It rarely works this way. In some narrow contexts, savings are a path to glory. Most of the time, however, the sole reward for spending less of your budget is less budget going forward. Short-term cost savings only imprint to short-term memory.

Track record matters. But, most places, goodwill is earned through recognized value delivered to the business, not cutting legal costs (a fractional amount of a fractional amount). We are remembered best when we help make or save real money. The job is to enable the business. The symbiotic responsibility is to secure sufficient resources to do the job.

What about doing more with less? Sure. We must do more with less—on a relative basis. We face a productivity imperative grounded in ever-increasing demands with which our budgets will simply not keep pace. Our resource/demand gap can only grow so large, so fast, until something critical falls into the gulf.

Business activity is increasing. Government activity—legal complexity in the form of statutes, regulations, investigations, etc. compounded by cross-border complications–is increasing in response thereto. The related costs of doing business escalate with the amount of business being done. Specifically, legal is a cost of doing business on an explicable upward trajectory.

Given the uptick in total demand (more economic activity in a more densely regulated environment), there is no self-evident reason to expect total spend on legal will be reduced in the foreseeable future.

Process-driven, tech-enabled legal service delivery can reduce the unit cost of legal services while moving upstream to address business drivers of legal spend (e.g., #dolesslaw, prevention) can reduce the number of units of legal services required per quantum of business activity. But I am still hard pressed to imagine a world where aggregate spend decreases even if we materially increase our yield per dollar expended. Costs in raw dollars will still likely trend up, even if we bring relative costs down dramatically. Pretending otherwise is a recipe for pain. Frankly, our expectation should not be more with less, regardless of how common that refrain has become. Rather, we will need to do more with more. Embedding this expectation with our stakeholders requires us to be expert in arguing for more in an environment where that is the opposite of what anyone wants to hear.

A word of caution even about relative spend. Measurement is a tricky beast. Goodhart’s law, for example, tells us that once a measure becomes a target, it ceases to be a good measure. The answer is not to abandon data. Rather, we are best served by a balanced bundle of meaningful metrics and the attendant ability to weave them into coherent stories—raw data is not a story.

Legal Spend as % of Revenue, for example, is a solid benchmark and KPI. No argument here. In a stable environment, reducing spend as a percentage of company revenue can help tell the story of our ability to control unit costs relative to company activity while simultaneously reinforcing the proposition that the legal budget should remain on a smooth upward trajectory. Yet spend as a percentage of revenue can be wildly misleading in a volatile environment or during periods of punctuated equilibrium.

The fun version of budgetary chaos is a healthy, well-run, growth-oriented company going on a smart acquisition spree, injecting a large bolus of M&A activity that spikes legal spend. Great. We exist to support the enterprise in creating new business value. Totally understandable if previously unbudgeted expenditures on deal counsel, due diligence, and post-merger integration do some violence to our expected outlays.

Alternatively, our company could find itself in new regulatory environment or on the wrong end of a government investigation. Less awesome from the company perspective. But legal’s role in value preservation is no less vital—and no less expensive. Per Jae, when we look at the prevalence and severity of fines against large corporations, the upward pressure on legal budgets presents as an organic outcome.

We should not erect false idols (“reduction in legal spend is our objective”) to which we can be sacrificed when events outside our control force us to violate self-imposed strictures. Instead, we need to properly manage expectations by meticulously crafting a convincing story of how corporate funds should be spent, and why. Exogenous events will shape our story, so we should be exceedingly careful not to paint ourselves into narrative corners.

So we shouldn’t save money or talk about it if we do? We should continuously strive to maximize the value derived from every dollar spent. This will often involve creatively identifying ways to reduce costs in one area so we can reallocate money to other underfunded mandates. We absolutely should talk, proudly, about how we saved company money but should be careful not to speak as if saving money is itself an objective. Rather, the mission is to better support the company’s strategic priorities. Our emphasis should be on the enhanced business value the savings enabled, not the savings themselves. Our framing therefore should be focused on more optimal allocation of scarce resources, not the reclamation of excess resources.

What about when the enterprise requires us to reduce spend? Then we reduce spend. The foregoing is not some pollyannaish take willfully blind to the realities of operating in a corporate environment. The reality is, even with exceptional value storytelling, most legal functions will remain chronically underfunded relative to the intensification of demand, and will also have to weather episodic cost-cutting mandates. I’m not saying it is easy. I’m saying don’t make it harder than it already is by falling prey to the Siren Song of Savings and centering cost cutting in our narrative as some sort of intrinsic, independent good.

More about more for more in the next post in this series.

I posit that the most valuable skill that every corporate law department needs in 2021 and beyond is the executive art of the business case….The reasons for this are many, but I’ll give just one: This is a task that cannot be outsourced.  Without the ability to secure the budget and investment required by the demands on the function, corporate clients will remain forever trapped in a never-ending cost-cutting exercise, to the detriment of everyone involved.  Worse yet, sustained strain on the corporate legal function and its outside supply chain introduces net-new risk — legal, financial and compliance risks — not only for the enterprise but for the social system to which we all belong.

Jae Um

I concluded my last post, on ever-increasing demand and our resulting productivity imperative, with the observation, “Some law departments simply need more money. Not all of them will get it.” In what may be a mini-series of follow-up posts, I try expand some on the value of value storytelling with a bias towards the uncomfortable and controversial. As I have been recently helping some GCs with annual budgeting, my primary orientation here is in-house but many lessons are more generally applicable.

It depends (on context). As Jae says, the business case cannot be outsourced. While good questions tend to be universal, good answers are almost always context dependent. We are responsible for achieving mastery of our own context. Mastery entails being able to navigate our context successfully, a higher bar than issue spotting for outsiders as to why “that won’t work here.” Having an information advantage over outsiders is meaningless. Your audience, and your competition, are inside your organization.

This is supposed to be hard. The Australian women smashed the world record in the 4x200m freestyle relay during the 2021 Summer Olympics—and still only won bronze. Falling short is common when competing against the best in the world. In seeking to secure finite resources within a world-class organization, we likely face world-class competition.

Maybe, just maybe, don’t be MacGyver. When we are under-resourced, the temptation is to fill in the gaps through extraordinary effort augmented by ingenuity. Yet any system predicated on extraordinary effort is unsustainable.

In one sense, it is laudable to meet several unfunded mandates with a paperclip, chewed bubble gum, and some duct tape, while working nights/weekends. Then again, if our organization is accreting operational risk by underfunding mission-critical work, it is our responsibility, as a conscientious steward of said organization, to make this manifest and pursue adequate resourcing. Superhuman gap filling can be counterproductive. We undermine our own case. Extraordinary yet unsustainable performance masks deficiencies and gives outsiders the illusion we have all we need—almost no one cares how busy we are perpetuating the illusion.

I recognize not doing things that, ideally, should get done demands uncomfortable choices and uncomfortable conversations. That’s the job. Sometimes, it is incumbent upon us to be correct, consistent, and persistent (Andy Dufrensene) rather than heroic (MacGyver).

Be prepared to say “No” and “I told you so” often (and ever so politely). Not being MacGyver requires saying No more often, and more clearly. I am deeply familiar with the angst this triggers. Many legal professionals have rightly cultivated a service mentality and are committed to doing everything in their power to meet the multifaceted (and multiplying) needs of their organization. Saying No reeks of disappointment, if not outright dereliction of duty. Continue Reading Maybe, Don’t Be MacGyver – Value Storytelling (#1)

My partners and I made a thing. We hope you enjoy it.

We poke light fun at lawyers (which all three of us are) for remaining too analogue in an increasingly digital world. Our central premise is that digital transformation is inevitable (and already happening and good and hard and we at LexFusion can help). Underpinning the premise are some hypotheses about the shape, pace, and drivers of change in legal service delivery. We might be wrong. But our bets match our predictions. We all left excellent jobs to push our chips in on an accelerating growth curve in legal innovation. In short form:

• The absolute demand for legal expertise is increasing; this will continue
• The relative cost of legal services is also increasing; this will continue until we dramatically improve productivity
• The uptick in demand powered the rise of BigLaw for decades; this peaked in 2007
• Next came in-sourcing to meet demand, somewhat keeping costs in check, largely through labor arbitrage; this has likely peaked, or will soon
• Now, to satisfy growing demand while truly bending the cost curve, we must also materially improve productivity—i.e., innovate through process and tech (the trend LexFusion is betting on)
• Innovation is necessary but hard; we need to upskill in many respects, including value storytelling

As is appropriate here, I nerd out slightly on our hypotheses below (for an even deeper treatment, let me commend to you the inimitable Jae Um, one of our advisors, from whose magnificent five-part series I borrow liberally–or check out Jae’s recent Tweet storm).

Cost 🡹 The clip hits on the general dissatisfaction with how lawyers operate in the modern age, seemingly not taking full advantage of tools that have transformed much of our world.

The world has changed; lawyers, not so much.

For $600, Amazon will next-day deliver a pocket computer (phone, camera, browser, word processor, gaming device, rolodex, clock, calendar, calculator ….) that remains constantly connected to a searchable repository of nearly all human knowledge (real and fabricated). This technology barely existed in recognizable form twenty years ago. My favorite piece of context: less than a decade after their introduction, iPhones were 120,000,000x faster than the $23,000,000 computer that weighed 600 lbs. and guided Apollo 11 to the moon. (“The iPhone is nothing more than a luxury bauble that will appeal to a few gadget freaks” – Bloomberg, 2007 😂)

Alternatively, also for $600, a junior BigLaw associate will allocate one heavily discounted hour to a client matter. Despite the apparent opportunity to be tech enabled, this associate hour is hard to distinguish from the same associate hour that cost $200 two decades ago. And because legal complexity has outpaced productivity, the number of hours required has also gone up.

Clients “feel” they get less for their legal spend dollars because they do—relative to the trajectory in electronics, logistics, consumer goods, transportation, clothing, food,  etc.

Law suffers from a cost disease, previously covered here:

This is Baumol’s cost disease, an economic phenomenon that undercuts the classical theory that wages rise with productivity. The classical theory: the more productive you are, the more you are paid. The reality is that (across industries, as opposed to within them) the less productive you are, the more we need to pay you (unless there is a glut of qualified workers competing for your job). Unsurprisingly, the eponymous Baumol identified “legal services” as subject to the cost disease. And recent scholarship has concluded, “Legal services are decidedly in the stagnant sector.”

Continue Reading Explaining the joke: lawyers lagging behind