Cost or value: Which is more important?

A self-proclaimed revolution began in the legal profession during 2008. The Association of Corporate Counsel began the ACC Value Challenge, a concerted effort to better integrate law-firm billings with corporate clients’ perceptions of value.

The goal, in the ACC’s own words, is to align lawyer training and cost management with what corporate clients want and need: value-driven, high-quality legal services that deliver solutions for a reasonable cost and develop lawyers as counselors (not just content-providers) and professional partners.

It’s an ambitious effort, particularly since the ACC is actually developing a Value Index that will enable corporate counsel to assess and apply statistical rankings to such law-firm performance metrics as responsiveness, adherence to budget, staffing ratios, frequency and thoroughness of communication, expertise and results.

Collaborative model

Corporate counsel are looking back 40 and more years ago, before the ascendancy of hourly rate billing, to a time when legal fees were based not only on time spent, but also the nature of the service, the result achieved and the amount at stake.
They want more professionalism about fees, better communication between the corporate client and its relationship partner at the law firm, and less emphasis on increased profits per partner.

Some law firms tend to see the impetus behind this as merely the corporate client pushing for lower fees, under the banner of such catch phrases as “convergence” or “the DuPont Model” or “commoditization.” However, such firms take that attitude at their
peril, for the issue is much broader.

In discussions I have had with corporate counsel, the message rings loud and clear that their objective is not to reduce law firm revenue, but rather to lower their own costs.

The general counsel of a multi-national chemical company described to me his views about how the law firm needs to partner with the corporate law department, collaborating together, as contrasted to the traditional vendor-buyer relationship.

Collaboration produces more effective representation at a lower cost to the company without discounting either the value or the per hour fee of the lawyer. This in-house lawyer has saved upwards to 100 percent of his budgeted legal fees by working with outside counsel to enhance the value, rather than just cut the cost, of legal services.
This effort may impact the law firm’s total revenue even while not affecting its billing rate structure. And, this may require the law firm to revise its business model.

One can understand, then, the concern and suspicions of law firms when in-house counsel first begin to address these issues.

Fees versus costs

There undeniably is somewhat of a trend among corporate clients to view certain legal services as a commodity and to apply standardized rates or flat fees where appropriate.
However, most clients recognize the importance of and are willing to pay a fair fee for value. What they do not want is to pay too much — to pay for inefficiencies, duplications or unnecessary services.

The skills of a lawyer and the way in which services are delivered to the client must coincide with what the client wants and needs to have. Collaboration in the context of providing greater value in legal services produces more effective representation at a lower cost to the corporate client without discounting either the value or the per hour fee of the lawyer.

For their part, law firms, even in today’s recessionary conditions, view these concerns
as somewhat disingenuous. They recall that it was in-house counsel who first demanded detailed hourly billing statements as a management tool to seek greater efficiencies and specificity in billing. But, they’ve used these statements to pressure law firms to decrease both their billing rates and their total billings.

It is the very same corporate clients’ CEOs who receive eight- and nine-figure compensation and severance packages that criticize law-firm billing rates. The feeling, among some, is that the corporation should clean its own house before criticizing others.

Law firms recognize that Corporate America faces strong competitive pressure and has a right to expect value from its outside counsel. Do corporate counsel, other than defining value as lower fees that are the focus of RFP “beauty contests” and fixed-fee schedules, adequately convey their needs to their outside counterparts?

Why do these same critical corporate counsel continue to use these law firms when other quality firms are available at lower rates, even without bargaining? Because it’s safer and easier to justify hiring Big Law to the same CEOs who supposedly criticize it. When only the very best is desired, only the very largest and most expensive law firms will be accepted by these same very expensively compensated CEOs.

The outside counsel alternative

The bottom line should be that corporate counsel look for performance in the firms they hire. Performance is a factor of many different things: communication, understanding and focusing on the corporate client’s business objectives, use of technology and specialized knowledge.

Yes, multi-million-dollar per lawyer profits and $1,000 per hour billing rates produce winces. But since more than half of the legal profession earns less than $100,000, there are many talented lawyers available to do the work that Corporate America wants done, at a far lower cost.

When the standard for evaluating such firms shifts to value billing, the bottom line becomes identifying which firms can do the work properly. This should open up a seat at the table for smaller, more cost-effective firms that meet the criteria of the ACC Value Index.

Small firms, for example, are perfectly capable of recognizing the cost and time constraints on general counsel and coming up with unique ways to address them. The effective lawyer or firm can show that collaboration produces more effective representation at a lower cost to the company without discounting either the value or the per hour fee of the lawyer.

It might involve the lawyer suggesting ways to manage an IP portfolio more effectively, or offering to submit electronic invoices that itemize and detail services provided. It might involve the client suggesting ways to pare back discovery costs in litigation by agreeing to a reduced number of depositions. It might involve both sides using technology (extranets and knowledge management systems) to share information more effectively.

The important thing is that communication and interaction replace dollars-and-cents focus on fees and billing rates.

Real worth

Corporate counsel live in a world that favors and rewards continuous improvement, and they want to see the same kind of commitment in outside counsel. “Good service,” “value” and “solutions” shouldn’t be vague buzzwords.

All lawyers, solo practitioners and members of mega-firms alike, can structure what they do to consistently encourage a high client perception of value by knowing their clients’ business, understanding their concerns, regularly providing feedback on the legal work done, always being available for calls and questions, and keeping promises.
This is ultimately the foundation of value billing, because it demonstrates to the client the worth, and not just the cost, of legal services received. As we all know, a cynic knows the cost of everything and the value of nothing. In today’s legal services environment, neither law firms nor their corporate clients can afford to be cynical.

Attorney Edward Poll is a speaker, author and board-approved coach to the legal profession. Readers with questions for the Coach’s Corner should e-mail [email protected] or call (800) 837-5880. And visit www.lawbizblog.com.