Clients too often ignore law firm incentives and market power.  They also substitute management for leadership.

Editor’s note:  This post returns to a subject first addressed here in Posts 029, 030, 031: successful law firm convergence and the management of law firm panels.  In this article, Dan looks back over AdvanceLaw’s work in the intervening five years and identifies four of the most common and consequential flaws in corporate law firm panels.  What follows draws on input from the staff of AdvanceLaw, where Dan is a Managing Director.

Why law firm panels matter

Law firm panels are a primary client strategy for controlling legal spend, but they also help stimulate innovation.   Innovation matters because panels wouldn’t be worth the effort if they didn’t produce better performance, which requires changes in how things get done.  Yet as Legal Evolution has documented in its posts on diffusion theory (tip: start with Post 001 and read chronologically),  many forces resist innovation in legal services, and those forces can only be overcome by sustained change management efforts from both law firms and clients.  Neither firms nor clients will commit to this effort if their relationship is temporary or poorly defined, so structured approaches like law firm panels are necessary to create the conditions under which innovation is at least possible.

Unfortunately, law firm panels are really hard to do well.  Many fail to launch at all, and in our experience, the vast majority fail to achieve their potential.  This post outlines the four most common major flaws in panel arrangements and suggests how they can be avoided.

Some of what follows lean on economic frameworks, but our perspective is overwhelmingly practical.  At AdvanceLaw, we have counseled dozens of companies on their panel arrangements — sometimes formally, sometimes informally.  We have read hundreds of law firm responses to client RFPs, and we have sat in on dozens of live and virtual pitch sessions.  The last decade has given us a box seat view of how panel arrangements succeed and fail, and of course, we have taken these lessons into account in our work.  In addition to running the AdvanceLaw global panel, we also directly manage law firm panels for about ten companies, including Honeywell and DXC.  These experiences have sharpened our sense of how to do things right, and where continued corrections are probably necessary.

Harmonizing two clashing approaches — the motivation model

In their commercial dealings, lawyers are generally making use of one of the following management tactics:

  • A “people model” that tries to use relationships to reduce the other side’s desire to maximize revenue, minimize cost, or take their business elsewhere. This model is intuitive to law firm rainmakers, and it is often embraced by senior in-house lawyers, CEOs, and board members.
  • A “process model” that tries to sidestep relationships and exert control using various management protocols. This model is natural to legal operations leaders, with analogs in corporate procurement practices as well as Big Law’s increasingly regimented cost recovery and billing practices

Both models have logical appeal and often show short-run results.  But when these models collide – and they always do – they tend to fight one another into an incoherent mess. People who are focused on relationships react unpredictably and sometimes irrationally to process constraints.  People who have carefully designed a series of process controls react angrily when those controls are violated by players in the system and then, as often as not, diminished or undermined by their own senior leaders.  (Remember Celebrity Death Match?  Nothing can compare to it’s elegant and powerful imagery, but it’s a little like that.)

Because of these natural conflicts, people and processes need to be blended thoughtfully in a panel arrangement in order to create the conditions for long-run success.  To distinguish it from the “people” and “process” models, we’ll call this the “motivation model.”  It’s a balance that uses process, pricing, and relationships to get all the players involved to want the panel to succeed.  In the “motivation model,” total benefits to the client and its firms are maximized in the short run, and clear value for each can be expected over the long run.  (Economics nerds will see in this formulation elements of both Pareto and Kaldor-Hicks optimality.)

But aren’t law firm panel arrangements designed to reduce client costs?  Why should clients design them to make law firms better off?

For two reasons.  First, panels should make the client better off in total, which is only partly about legal fees.  The risk of a service interruption at a critical moment is very real and often impossible for law firms to control.  Panel arrangements should motivate firms and individual lawyers to provide continued, high-quality service even when the client’s legal needs are at risk of being overwhelmed by a tight market for key talent.  During M&A upcycles or periods of heavy SEC activity, even big clients can be stuck searching for lawyers in predicament akin to needing a last-minute hotel room at the World Economic Forum in Davos.  The result is very expensive, but when you’re hiring lawyers under frantic market conditions, the bigger risk is reliability, which is heightened when everyone is scrambling.

The second reason clients need to pay attention to law firms’ interests is that firms are generally in a messy equilibrium in which their lawyers are mostly busy.  This means that firms can maintain a profitable status quo by doing nothing at all.  Panel arrangements—and especially innovative ones—might represent a growth opportunity, but they are also a disruption to that profitable status quo.  Not every practice group will benefit from a new client relationship, so these arrangements can be hard to sell to the profitability committee.  An innovative panel arrangement is more likely to attract law firm interest if it is structured to represent clear a long-run growth opportunity, and especially if it does so for multiple practice groups at the firm.  If you want to sell a big piece of legislation, at least 51 senators need to get something out of it.  Similar dynamics apply here.

Clients are often puzzled at the caution with which law firm leaders approach opportunities for new work.  Most corporate suppliers are very eager for new business and happy to negotiate the terms on which their services are provided.  Imagine enterprise software sales, for example.  The difference with law firms is how slowly their offerings are able to scale: they have to invest today in talent that might be profitable down the road.  This makes growth risky, and in the last two decades that risk has been intensified by the tendency of dissatisfied partners to leave the firm and take clients with them.  Partners who leave for greener pastures often do so because they feel that they are subsidizing unprofitable practice groups.  Those practice groups, in turn, are keeping talent around that in their judgment will be profitable in the long run.  All of this means that investing in talent to meet future demand includes at least some risk of losing key partners, and sometimes losing a few key partners can tip over the whole firm.

This mismatch between variable client demand and inflexible law firm inventory is why even large clients can’t simply dictate terms to the market.  Proposed panel arrangements need to offer a clear long-run benefit to firms in order to motivate enough of a firm’s key decision-makers to depart from the profitable status quo.  Among other things, a well-structured panel arrangement will motivate firms to make talent investments to serve the client during future moments of peak load.  When load-shedding is unavoidable, the firm’s place on the panel should motivate its partners to serve the panel client before serving others.

Obviously, these are subtle points that are far from obvious unless you’ve been observing the gap between theory and practice for a few dozen iterations.

The four fatal flaws

The above analysis is arguably a long way of saying that law firms have real market power. But three of the four fatal flaws below are rooted in clients’ tendency to ignore law firm incentives and market power.  This leads to proposed panel arrangements that don’t thoughtfully motivate the players within each law firm—and those deficiencies end up being fatal flaws.

Flaw #1: Clients ignore the long run.

The terms of proposed panel arrangements are often very unattractive, imposing demands and constraints on law firms while promising them no flow of work over the long run.  Clients generally issue RFIs on the assumption that law firms will be hungry for the work—why wouldn’t they want to increase their revenue?  But firms have very limited inventory and a profitable status quo, so they have learned to be choosy about which solicitations to respond to.  Moreover, every firm has had the experience of putting hundreds of hours into winning a spot on a law firm panel, only to get no work out of it.

This experience is puzzling to law firms, but we know from seeing both sides that in-house lawyers don’t shift work away from incumbent providers without a sustained change management effort.  Making that kind of shift takes two to three years of work.  But most companies treat the law firm panel project as a panel creation project, with no recognition that it actually requires a continuous management workstream.  To succeed, the panel must be marketed internally, overseen, subjected to process controls, measured, and reported upwards and outwards on a monthly or quarterly basis.  A primary measure of success should be the percentage of total legal spending that goes to on-panel vs. off-panel law firms, and that number needs to be going up at every interval until it’s above 80%.

This ensures that the panel achieves its goals, but it also takes care of panel firms’ long-run interests.  Seeing more work come into the panel gives each firm a motivation to invest in talent that can serve the client in the long run, and motivates lawyers and practice leaders to learn and understand the client’s unique needs.

Yet sustained follow-through rarely happens.  As a result, law firms see a very limited return on their efforts and the client sees no transformation in the cost or quality of legal service.

Flaw #2: Clients don’t put enough value on the table.

Clients sometimes want to divide a panel arrangement by practice area – declaring that Firm A is a preferred provider only in practice areas 1, 3 and 5, while firms B and C can serve the client in areas 2 and 4 and so on.  This makes for a very satisfying Excel spreadsheet, but it diminishes every law firm’s motivation to participate.  In practice, it means that the partner who really wants to get her practice group on the panel can’t sell it to the pricing committee.  With cross-selling opportunities off the table, the total value to the firm is too little, and even if the dollar value is big enough it may be so concentrated that only a few practice groups benefit.  Joining a big company’s panel entails taking on more conflict of interest constraints, so a practice group that sees no new work from a panel may be particularly unexcited about the deal if it means that other future clients are now foreclosed.

Even if the firm joins a practice-specific panel, the practice-limited client has downgraded its own significance within its law firms from strategic to tactical.

A balanced approach to overcome the first two flaws will gather as much spending as possible – across areas of need and over a defined period of time – and put it all on the table at once.  This maximizes the value firms can see, it motivates firm leadership to take the client seriously, and it will mobilize real resources to ensure that the client is being served well.  Importantly, it is also the precondition for clients to get what they need: innovation, better economics, technology investments, and a willingness to embrace client-specific process and protocol that firms often struggle with. To do this requires intentional client leadership – which brings us to the third flaw.

Flaw #3: We substitute management for leadership.

Management is giving people what they want; leadership is convincing people to want something better.  A transformative panel arrangement is a true leadership exercise because all the management oversight in the world won’t get lawyers to change how they do their core work.

Panel arrangements need to be consistently and clearly championed at the GC level.  Messages from the top need to articulate how everyone benefits from the change—including law firms.

This requires a leadership assertiveness that is surprisingly rare among in-house counsel.  “Collegiality” is a central value of so many legal departments, but it often accompanies an unwillingness to drive change from the top.  In our experience, no CIO would become convinced that a material change is needed – and then go ask his team if they want to do it or not.  But this is almost always how GCs operate – collegiality means that everyone has a voice, which is great.  It can also mean that everyone has a veto, which is terrible.

A normal legal team’s answer, when asked if they would like to embrace a new way of working, is usually “sort of,” followed by “don’t we kind of do this already?”  Skewered by their ambivalence, the idea is left to die of its wounds.

Leadership starts with a vision, continues through months and years of consistent communication, and is made real with rigorously applied financial and operational controls.  Most critically, retaining an off-panel law firm should require written GC approval.  Other deviations from the panel approach should get the same treatment.  Purchasing controls of this kind are ubiquitous in large companies—except in law.  In fact, law firms regularly conduct internal investigations culminating in a report recommending enhanced financial controls . . . that don’t apply to them.

Flaw #4: RFI = Request for Inundation.

Like a glass of sparkling water, a little information is refreshing and attractive.  In larger volumes, however, water is an unstoppable force.  Information is a lot like water in this way.

Client teams very often go out to the legal market with an RFI seeking enough information to swamp the whole process.  One of the most common outcomes of an RFI process is actually nothing at all: all law firm responses combined run to hundreds of pages; the client team begins to wade into it, loses steam, and never even reads all the firms’ submissions.  The RFI process dies of neglect in the ensuing year, and often the law firms who made submissions are never even told.

Law firms are guilty parties here, but only the client can prevent the problem from arising.  Clients must ask focused questions and then constrain how many words a firm has for its responses.  How can clients ask better questions?  It’s more art than science, but here are a couple of considerations:

#1. If a law firm marketing department can answer the question by pasting in material from the firm website (which they very often do), don’t ask the question – or force the answer to be so short that the response must thoughtfully distill existing material rather than simply pasting it into a form.

#2. Ask tightly-wound questions that call for objective, short answer responses. For example:

  • How many lawyers on the team have first-chaired at least one securities fraud trial?
  • What share of your practice group’s revenue is attributable to work for pharmaceutical clients?
  • List the courts in which your lawyers have sought equitable relief in a trademark matter, and indicate in which instances it was granted. Of course, word or character limits should be used, preferably in forms that will auto-enforce those limits.

“Request for Inundation” is actually the most common and most lethal of the four flaws above.  When a client team is writing an RFIs, they need to think critically about how many words or pages will come back in response and plan accordingly.  If there is any doubt about the team’s ability to digest all the information, responses should be forced into a shorter format.  It’s rare not to have enough information, and if that happens the law firms are always happy to provide more detail on request.  The bigger risk by far is that a flood of information will drown the whole process, in which case the client never achieves any of its goals even after the process has consumed hundreds of client and law firm hours.

Conclusion

Panel arrangements can be transformative if they present a compelling opportunity to law firms and they have leadership commitment at the GC level.  The whole effort needs to be rooted in a clearly stated approach that motivates every player to make the system succeed.

Because this takes a lot of effort, we currently see only a few clients realizing the transformative potential that law firm panels represent.  Fortunately, that group is growing as the market matures and these lessons are learned.  Our hope is that fewer clients will learn them the hard way, allowing more law firm panels to achieve the status of large-scale, long-term exchanges in which everyone benefits.