Part I of this series (029) laid out some pervasive problems with law firm panel arrangements, and Part II (030) outlined the basics of how we believe those problems can be overcome through correct structure and active management. This final installment will go deeper into what we believe are the most important aspects of a law firm panel approach: the management practices that keep law firms motivated, focus firms on innovation and strong outcomes, and result in high quality and stable or declining costs over time.  Our experience is that law firm panel arrangements can be tremendously successful, and that the success always comes from good management practices – not just panel structure.


A formatted PDF of Dan Currell’s three-part series on convergence is online here. wdh

Quality is fragile, and quality is King

Quality is paramount in law, and preservation of quality is always a key factor informing convergence efforts. This highlights a natural challenge with them: a consolidated preferred provider deal only works if we can define and hold the firm accountable for quality – and that’s very hard to do.

If we bid out a million sheets of paper but do not define quality, then we’ve just committed to a million sheets of whatever is most convenient for the supplier to deliver.  So – paper buyers are careful to define paper quality.  (We all remember Frigaliment . . . you need to specify the right chicken.)

But can we define legal quality? Not usually. We can define who works on the matter, and for clients who are managing counsel closely, this is a good approach. But for most matters the client and firm cannot define in advance the quality or even in many cases the basic character of what is going to be delivered, since the trajectory of a transaction or litigation is so variable. A legal matter could end tomorrow or go on for a few years, often independent of anything the lawyers are doing. Because of this, when all is said and done it’s very hard to know if the firm has delivered on its promised quality of services.

The difficulty of controlling for quality on the front end of an engagement is arguably the most confounding feature of the legal services marketplace and the primary reason why credentials, brand and track record are so critical in law. Quality varies widely from one matter to the next, from one lawyer to the next, from one firm to the next. The fact that we lost a case doesn’t mean we got bad quality representation. The fact that we did very well in a negotiation doesn’t always mean that we had good quality legal work. So we rely instead on a series of proxies for quality: law firm brands, law school brands, past performance on similar matters, and so on.  This is because we can’t define quality.

Most of all, we rely on who does the work. As well we should – it’s the closest thing we can do in most cases to controlling quality. And if the client has the market power, making an effort to control staffing is probably the most important single negotiation move the client can make.  We hire the lawyer, not the law firm.

But the presumption behind everything said above is that once staffing is settled and the matter is under way, there’s nothing much the client can do to inflect quality. This is a common presumption in our experience, and we believe it’s wrong. The same lawyer can do great work and mediocre work in the same day for two different clients; the difference is focus and incentives. How can we set them up for success on our matters?

Incentives matter

There are knowable factors that influence whether and how quality shows up in legal work, and one of them is how we structure deals with law firms. To stick with our theme of the effects of consolidation, here are some effects of consolidation we see regularly.

When the client settles onto a small number of preferred law firms, each firm is thereby formally protected from competition, undermining the incentive to be responsive and hard-working for that client.  Let’s imagine a perfectly typical scenario. You are the managing partner of the employment practice of a large firm that is the sole provider of FidgetCo’s employment work for the next three years. Your firm also has a decent chance of getting more of BananaCo’s employment work, but doesn’t have much of it yet.

You just got a matter in from BananaCo, the new client who might or might not give you more work in the future. You also have a matter for FidgetCo going on right now too . . . and as we know, FidgetCo is committed to sending you all of their work for the next three years no matter what. You have two lawyers who could work on either matter and one of them is better than the other. Where do you send your best lawyer?

The BananaCo and FidgetCo example shows that successful law firm partners will be pressed by market forces to adjust the character and quality of what is being delivered in order to continue to grow their practices. This is not malicious; this is not in bad faith. It’s the free market. Partners make trade-offs that bias towards practice growth because in most firms it’s an eat-what-you-kill environment and each partner needs to kill enough to feed every mouth up and down the hallway. Once a client is secure – and perhaps especially when that security is in writing – firm economics will shift the partner back to business development.

This may be why we see that firms who are on a formal panel for a client are frequently out-performed by law firms working for the same client who are not on that client’s formal panel. The firms that aren’t on the panel want to get on it – and they work harder. The firms that are on the panel believe they have the work sewn up, so they don’t feel they need to work as hard to keep it.

Why can’t we control quality?

In response to these concerns, a client contract can attempt to define which lawyers will do the work, but this is usually hard because staff are so mobile. It’s a free country, associates leave at a rate of 20% or more per year and the partner lateral market is very active. Departing staff, practice group moves, family medical leaves, trials for other clients and other unavoidable factors take staffing decisions out of the client’s hands.

But when we are able to control the law firm’s staffing of our matters, consider the potential effect on a lawyer’s career. We have struck with the law firm a fixed-term contract specifying who will do the work. We can specify that Mary will do our contracts work, because Mary is good. But we can’t force her to do it with passion and focus if the firm isn’t rewarding her for it.

Will the firm reward her for it? If it’s a locked-in, long-term contract on client-favorable terms (i.e., not as profitable as the firm average), why would the firm reward Mary for doing the work? For a host of reasons, working that file is a career dead end; it will not lift Mary out of the role of non-equity service partner. Indeed it will solidify her position there. Will Mary do it? Maybe. Will she leave the firm for greener pastures? Possibly. It’s certainly not the route for Mary to become an equity partner in an eat-what-you-kill firm.

Imagine how different the firm’s perception of Mary would be if she were seen to be bringing in each new project from the client as a newly won piece of work? If the client were seen to be choosing her each time on the competitive market because she’s so good? It’s not just a difference of semantics – it will make an economic difference of the first order to Mary.

These are just small, illustrative points. The point is that consolidated sourcing arrangements in law, unless very carefully engineered, invite the firm to define both service quality and price against a backdrop of limited resources and an internal war for talent.  We can’t know in advance what true quality and price will look like, but we do know in advance that the firm will do everything possible to maintain its revenue per lawyer and profit per partner numbers in any given period. To do this, within the life of a contract the firm’s lawyers have an incentive to square the terms of service with the firm’s economics. And they will always have a marginal incentive to prioritize new business opportunities over work for settled clients.

Can relationships help? Yes, but no unconditional love

We all know from experience that law firms regularly don’t make decisions this way.  They often prioritize existing clients over new business, or go above and beyond for a client where the economics don’t strictly make sense.  But we’ve also seen it the other way.  Why?

I believe we see narrow economics-only decisions when the client and law firm are dealing at arm’s length.  If as clients we cultivate a purely transactional feeling, if we minimize the feeling of relationship, we will reap what we have sown.  Law firm leaders are entirely human in our experience, and cultivating the right kind of relationship will go a long way towards maintaining a consistent quality of legal service. In law, unlike many other industries, we still have a choice about how much we deal at arm’s length versus how much it feels like we’re in a relationship with a firm. A big part of success with preferred provider networks is getting the balance between relationship and arm’s length correct.

This point is rich enough to warrant its own book so I will keep it short with a single illustration. Overall, we want most of the cost benefits of an arm’s length commercial deal – but not quite all. It just doesn’t serve the client well in the long run for firms to feel no emotional allegiance to the client. Yes, our relationships need to conform to the logic of the marketplace, but we need firms to invest in the relationship, build and preserve human capital that serves the client well, and care at an emotional level about the success of the client.

The trick is to do this in a way that doesn’t quite signal unconditional love.

Here’s one practice that clients and firms both benefit from and we strongly encourage. Hold an annual summit attended by a few lawyers from each primary law firm. Firms won’t bill you for the time and they will happily cover some of the cost – it’s good marketing spend for them, builds the relationship, and it’s a nice perk for a top associate to come along if she’s a key player on your files. Spend two days together, set an agenda that’s substantive but also sometimes fun, let the firms compare notes and think about how they can collaborate to serve you better. A common experience here is to discover that firm lawyers do not want to be hostile to their “competition” within the panel. Instead they want to have positive relationships with other panel firms and even discuss how they can work together for the client’s benefit. These folks are also potential sources of referral work for one another.

Can this kind of relationship-building overcome the performance and staffing issues outlined above? Our experience is that it largely does – as long as the lawyers serving you have enough power to resist whatever countervailing political and economic forces may be at play within their firms.

Communication

Good communication is the foundation of nearly all success in the legal world. Equally, bad communication is the basis of nearly every major mess. So the question is – how do we ensure good communication between all relevant parties?

This is a matter of persistent management practice. The primacy of good communication is one of the reasons we favor building a small preferred provider panel – you just can’t get good communication practices in place with 50 or 100 law firms. A smaller list of firms is easier to manage and communicate with, and with more of each firm’s revenues coming from a single client the firm should be more willing to invest time and energy into communicating with that client.

The right way to do this could fill a book, but in short we believe the following practices should be followed.  In practice, they will be followed best by firms who do the most work for you.

  1. Matter plans commensurate in detail with the value of the matter should be in place 2-3 weeks after the start of a representation. The important thing is not that the plan has been written; the important thing is that it has been discussed with the client.
  2. Simple, early-stage performance evaluations should take place 4-8 weeks after the start of each significant matter. Discuss it with the lead law firm lawyer. Get his or her feedback on what the client can be doing better, too. This early evaluation is here to identify problems before the cement dries. It lets the firm and client make corrections. Evaluating a representation only once it’s over misses much of the potential value.
  3. Similar evaluations should take place quarterly or half-yearly after that, again depending on the scale and significance of the matter.
  4. Conduct matter post-mortems on significant matters – a meeting to collect lessons learned and make plans to do even better next time. If you’ve done #1-3 above, this is an easy meeting.
  5. At the level of the firm-client relationship, conduct quarterly or half-yearly reviews of the overall relationship with the law firm. Firms will welcome the chance to talk overall about the workflow, and it provides a critical opportunity to discuss alternative fees, staffing, cost control, quality issues and other key items.

In our experience, lawyers are great communicators who are simply terrible about communicating regularly. The checklist above is hard to stick to – and to do it right. On the one hand, the substance of these communications are what really matters – not the form. But lawyers are generally tempted therefore to skip steps, ignore some of the formalities, and generally erode the ethic of consistent communication. Forces of entropy return us to substantive but highly irregular communication, the lawyer’s natural habitat. And that is the root of nearly all evil in the lawyer-client relationship as noted above.

So it takes an operational mindset and some considerable structure to ensure that these exchanges take place. The bureaucrat’s comfortable path, of course, is formalistic communications with little substance. The only way to do communication right is to stay on the middle path: combine persistent and regular communications with a unbroken focus on client outcomes.

So – what’s the final recipe?

Law firm panel convergence can be done right – it just needs to be tailored to the legal market. The structural basis of success in legal procurement is constant competition in the context of a long-term relationship.  In other areas of procurement, competition is used at the outset of the contract – to set terms to which a vendor is then committed.  But in law, because price and quantity are being adjusted at all times, and because quality can’t well be defined, competition has to be in effect at all times.  Lawyers need to know that their performance on each matter will determine whether they get more work from that client. That single principle is not a complete substitute for defining quality and cost for every matter, but it’s an indispensable backstop. Moreover, communication needs to be constant within the relationship – and if done right, that relationship will grow in a way that helps both the law firm and the client.

How do we make this happen? These are the five principles we laid out in Part II (030):

  1. Double Coverage
  2. Varied Cost Tiers
  3. Sufficient Panel Size
  4. Open Competition
  5. Re-Selection

These structural principles set the panel up for success, but management practices matter even more than structure. Here are the ones we think matter most:

  1. Assertive Change Management
  2. Positive Psychology
  3. Structured Communication

As we have said, these principles have been learned from years of working at the intersection of law firms and their clients. They have guided us as we have constructed our approach at AdvanceLaw, and we believe success in convergence rests on getting them right.