In the first part of this series (Post 029), we discussed why there are sometimes serious problems with the way law firm preferred provider panels are structured and managed. In particular, we often see that law firm panels:

  • Take clients “up-market”, raising rather than lowering their legal fees;
  • Reduce firms’ responsiveness, because larger firms tend to be less responsive in general (see our Harvard Business Review blog post on the matter) and also because, by putting a firm on a panel, the client is signaling that the firm won’t lose their work; and
  • Diminish the firm’s incentive to provide efficient service, since the firm is assured of its position as a preferred provider.

Yet we also said that law firm panels are a good (and sometimes essential) management tool if done right. So – how can we do them right?

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

As we begin, a word about how we have developed our views on the matter.  AdvanceLaw is a GC-led group that identifies high-performing lawyers by, among other things, sharing performance feedback within a group of senior in-house counsel. We are involved in outside counsel hiring decisions every day, and we regularly work with general counsel and their senior lawyers to construct and manage preferred provider panels.  We have seen what works in practice, and we have researched the efficacy of outside counsel management practices through years of data collection and through the General Counsel Thought Leaders Experiment.

Here are some elements of what we believe is the right approach.

First, correct structure.  The right law firm panel setup carefully balances constant competition with intentional cultivation of the client-firm relationship. Second, intentional management practices.  The way firms are managed, the kind of relationship they have with the client, and the incentives and motivations they feel as a result will have more impact on their performance than the contractual or formal aspects of the relationship.

Let’s start with structure.  We believe there are five key structural principles:

  1. Double Coverage. The final panel of law firms needs to have at least two viable providers, at different firms, for every economically significant and legally distinct area of practice and major geography. So if your company has a lot of FDA regulatory work, the panel must have at least two strong FDA firms competing for that work at all times. If your company has a lot of California litigation, there must be at least two strong California litigation shops. Competition makes the firms stronger, ensures market pricing, and provides redundancy for the client in case there is a conflict or problem.
  2. Panel Size. The number of law firms involved in a panel will depend on the client’s total legal spending of course, but an American company with a few billion in revenue will need a dozen law firms or more. If this seems like a lot, refer to Part I of this article, which discusses why in the legal marketplace uniquely, consolidating onto a very small number of providers leads to much higher costs.
  3. Varied Cost Tiers. The firms in each practice area should be at different cost levels, and efficient firms should be favored. Look at a firm’s revenue per lawyer numbers, not just their rates. Continuing the FDA example, the two firms with an FDA capability should be at two different price levels so that the competition between them results in price pressure on the more expensive firm, quality pressure on the more efficient firm, and better choices for the client.  This kind of competition can show where more efficient law firms are just as good as their more expensive competitors – but at the same time it will often clarify the unique value delivered by an expensive and sought-after lawyer.  Overall, our research has shown repeatedly that cost and quality don’t correlate the way we might think they do – meaning we need to give lawyers at all price points a serious look based on the particular needs of the matter at hand.
  4. Open Competition. Providers need to know that they are competing for every piece of work. This does not mean regular RFPs and reverse auctions – those should be reserved for certain situations. It just means that no firm has the work “locked up.” Pilots should be run periodically with new firms, ensuring that different options and approaches are always considered.
  5. Re-Selection. Preferred provider panels cannot go on indefinitely. The panel should expire in two or three years, and everyone should know that from the start. When the panel ends, everything is on the table again and there are no guarantees.

So we think this is the right basic structure. But as we mention above, management practice is more important than structure. Put another way, as our friend Casey Flaherty has said, creating a law firm panel is just the first step.  The second step is to do something with it. What should you do with it?

We believe there are three key management practices necessary to getting the most out of a law firm panel:

  1. Assertive Change Management: Lock Down New Matter Initiation. The most common practical outcome of convergence onto a preferred provider panel is nothing: executives, in-house lawyers and others simply continue to hire law firms as before. They may have agreed that a panel approach is best, but current matters are grandfathered in, and when new matters come up, shifting work to a panel firm is never quite right in this particular case. It is no exaggeration to say that in many cases the status quo ante is perfectly preserved after a months-long convergence exercise. To change this powerful inertia, new matter initiation needs to be locked down in a process that drives the right work to the right firms. Also, existing work needs to be closely assessed to determine whether it should also move into the panel. Everyone needs to see how and where all matters go; matter performance assessments must be rolled up and distributed; successes of the new system should be communicated and cost outcomes broadly known.
  2. Positive Psychology. Panel lawyers should be given opportunities to connect, collaborate across firms in a positive way, share best practices and celebrate victories or compete for honors in a friendly way.  One way to do this is to gather key partners at an annual or biannual law firm summit.  Events like this always remind us that law firm leaders are – get this – very human. They respond to incentives – and yet they respond much better to incentives when clear expectations are set, results are communicated, and relationships built. Then they put their best foot forward, their best staff onto matters, and more effort into the relationship. Post-convergence you may only have a dozen law firms . . . but those law firms still have hundreds of clients. Becoming a top-priority client is not simply a matter of forming a panel. You need to figure out how to become a client of choice for the firm.
  3. Structured Communication: Law firms and in-house counsel alike perform better with feedback. Performance assessments should be structured and consistent, and performance conversations should go in both directions. Talk about how the firm can improve, but discuss how in-house counsel can do better too.  Assess at both the matter level and the relationship level.  And share information across the entire in-house group.

These conclusions flow directly from our experience of law firm panel arrangements that work well because they are correctly designed and actively managed. The third and final installment in this series (Post 031) will go deeper on how to carry these out, and it will also consider some of the more nuanced issues in law firm panel management.

What’s next?  See Part III on Convergence: Clients Must Manage to Get Results (031)