My first interaction with the law firm was as an account rep for a famous Los Angeles deli. We made great sandwiches. They ordered sandwiches in bulk. The law firm was my best and worst customer: Best because they bought a lot of sandwiches; worst because they were never satisfied.

The first time we delivered sandwiches, Nancy, the office manager who was as sweet as pie and as tough as nails, called to tell me that the sandwiches were great, but the bill was too high. As a volume customer, she explained, the firm expected a volume discount. While this was not our standard practice – the price was the price – I convinced my manager to agree to a big-client discount.

The second time, Nancy complained that I’d sent too many sandwiches. I hadn’t. The invoice matched the order sheet I had written when Nancy called in. But she claimed not to have said what she said. She was the customer. The customer is always right. I discounted the invoice.

The third time, Nancy called to complain that some of sandwiches did not taste as good as usual. This was surprising because we pumped out several hundred sandwiches each day using the same process and ingredients. I ate a sandwich almost every day for years and never had a bad one. I asked for details. Nancy had none. She was relaying a few comments “from other people,” and naturally, expected a discount – which she got, as always.

So it went. We provided great sandwiches. Nancy came up with reasons to get a discount. To this day, I am convinced that Nancy kept a tally of how much she had “saved” the law firm. Except there is no Nancy. As you probably figured out, I was never an account rep for a deli and the above is the analogy I came up with when I worked at a law firm. Our clients were the best and the worst. Everything was mediated through the mechanism of price. Discounts became a game. When I moved in house, it was not the game I wanted to play.

Problem Solution
Price Price
Communication Price
Quality Price

 

Recently, I told the foregoing fable and showed the above chart at the Thomson Reuters VANTAGE 2015 EMEA Regional Conference in London. It was a wonderful event where I shared my experience as both an outside and inside lawyer, as well as my perspective on why the two sides often engage in the wrong conversation. I’ve been asked to follow up with posts on the problematic mesh point between law departments and law firms.

Price Is A Poor Proxy For Quality

The disconnect between law departments and law firms goes well beyond abstract complaints about inefficiency and lack of innovation. The division is manifest in the Peer Monitor realization data that tells a story of ever increasing volumes of external lawyer time deemed so wasteful that it does not merit compensation. I will dig into the realization data in a subsequent post, but first want to suggest that we are overly focused on certain economic aspects of the relationship. Price, realizations and profit are all mission-critical concerns, but we rely on them too heavily to serve as proxies for other important considerations. My central contention is that with people and price in place, process offers the most levers to drive continuous improvement.

People are the threshold question. The point of departure when hiring outside counsel is whether they are competent to pursue the client’s interest. Law departments therefore rarely hire bad external lawyers. When law departments complain about their law firms, the focus is not the caliber of the lawyering. Instead, it is the ancillary-but-real issues of legal service delivery. Rather than the excellence of the legal insight, the problems arise in the mechanisms by which the insights are translated into concrete deliverables such as contracts, motions, and memos. The production and review of legal documents is the primary driver of demand for legal labor. Attendant to the labor is much of the cost and therefore the waste.

Hiring great lawyers is foundational, but it is not everything. Rarely will a client’s options be limited to one qualified lawyer. The resulting competition is essential because money remains an object and great lawyers must be paid. Law departments are charged with paying them what they are worth. At the account level, rates and fees are revisited, or not, on a regular basis. At the matter level, timekeepers decide what to record, firms decide what to charge, and clients decide what to pay. Cuts, both reasoned and arbitrary, are de rigueur. Even the few who have jettisoned the standard billable hour still deal with collars, caps, success fees, phases, change orders, client adjustment lines, and many other mechanisms to find an equitable balance between cost and value.

Negotiating price is a necessary element of the business of law. But we do the practice of law a disservice when it becomes our primary lever to drive quality. Clients demand and law firms concede discounts. Rates go up, so do discounts. Hours go up, so do discounts. Invoices go up, so do discounts (in the form of writedowns). Until the point where business is taken elsewhere, almost every instance of client dissatisfaction is dealt with through the mechanism of price. But price is the symptom, not the disease. The typical root cause of the discontent is that something should not have been done, was done poorly, or took too long to do. The discount alleviates the immediate price problem but it does not address the underlying quality concern.

To the extent the discount demand is a genuine expression of discontent, it is weak signal. A law firm may know that a client is unhappy, but that does not mean the firms know what caused the displeasure or how to avoid the disappointment in the future. As discounts become a game, the signal is lost in the noise. If law departments are going to ask for discounts as a matter of course, law firms lack incentives to change the way legal services are delivered – the discount will be requested regardless.

There has to be a better way. And, of course, there is. But it entails having different conversations than we are accustomed to. We should have the discount conversation when it is appropriate. But when process is the problem, we need to discuss process. The two sides – the law department and law firm – should sit down and explore the processes by which legal services are delivered, where the processes can be improved, and how to improve them.

I’ll introduce this concept of structured dialogue in my next post.

This post was written by Casey Flaherty, founder of Procertas and former outside and inside counsel who first rose to prominence when he created the Service Delivery Review (“SDR”) to change the way he communicated with his outside counsel. Instead of generic complaints about inefficiency and arbitrary reductions in invoices, Flaherty sought to use metrics and benchmarking to foster structured dialogue, drive continuous improvement, and deepen the integration between his law department and his outside counsel. Follow Flaherty on Twitter at @DCaseyF.