The always interesting 3 Geeks blog
had a post the other morning about the procurement function in legal in general
and reverse auctions in particular.
The bigger question is this: Should
clients buy legal services based on cost?1
I don't want to argue the question
itself here. (The whole industry is arguing it anyway.) But I do want to look
at the meaning of a key term, "cost."
Cost is more than the money
disbursed to pay the invoice. Organizations that lose sight of this fact often
stumble severely, behavior I've seen too often in my years in management.
"Cost" must include the following
- Actual "spend" against the budget.
- Time spent on the project (matter) itself, including
time spent bringing a new firm up to date on your business (a one-time
- Time spent on the "meta-matter": asking for bids,
reviewing them, making the selection, following up on it, even creating
and maintaining any metrics that will guide the process in the future.
- Risk premium: the additional cost, multiplied by the
percentage likelihood, of a less favorable outcome because you went "on
- The positive and negative costs of the experience and
efficiency levels of the attorneys and other professionals who will
actually staff your matter. You could actually factor this into the risk
premium, but it's a significant enough item in itself to be worth calling
- Opportunity cost: what's lost when you jump around
between firms based on price - relationships, the ability to make a quick
call and get an answer rather than a lengthy memo because of the mutual
trust established (which is a one-time cost), etc.
- Opportunity gain, a "negative cost": the "found money"
that you can now spend on something else important to the organization
because you saved money through the legal selection process.
Note that you must account for both
one-time costs and ongoing costs, costs that will be repeated for each
additional matter placed with a given firm. The one-time costs can become quite
significant if you keep switching firms in a particular area of the law or of
your business; otherwise, they should be divided across the number of matters
you're likely to place with that firm in the next couple of years.
It's hard to quantify most of these
cost factors, to place specific numbers on them (but see below). Thus there is
a tendency to talk only about price in this discussion.
The first step is to talk about
value in addition to price. Many clients and firms are already having this part
of the discussion. I've written about value repeatedly, on line and in print,
and won't reprise the discussion here.
The next step is to quantify the
Quantifying the Hard-to-Quantify
Talk to someone who runs a
new-product P&L (profit center with its own budget) at the client
corporation. The VP of New Widgets has this kind of conversation about true
costs every week - with the CFO, her own manager, the department controller,
her own subordinates, peers who want to steal some of her budget, all the
various players in corporate life.
If you're in-house, ask your
business client (the high-level ones, not your daily contacts) if you can sit
in on some of these discussions to both learn about her business and understand
more about how she quantifies the unquantifiable.
Some firm partners may be able to
avail themselves of the same nonbillable opportunity (chalk it up to business
development or even training; in reality, it's both.) Or take the high-level
business client out to dinner and pick her brain on this topic. Ask her how she
handles it. It doesn't even have to be a client; it can be a prospective
client, who may be eager to talk about something other than legal/business
problems. It can be a friend who's in that position inside a large corporation.
The main requirement is that the
P&L owner not be overly focused on operational metrics. They'll have a good
grasp on those too, of course, or else they're not likely to be in the position
they're in for very long, but you need to find someone who works with vision
and possibility as well as COGS (cost of goods sold).
Talk to your child about something
significant in their life: driving, relationships, playing a sport v.
studying, whatever makes sense. It has to be something that you are open to
give-and-take on, not an issue on which you take an absolute stand. Make it a
real conversation, perhaps spread over some time.
You'll find you're covering the
various cost factors in one way or another. You're probably not quantifying
them in terms of money (unless you're an economist - I know a couple of
economists who do frame these conversations around money). Nonetheless, you're
putting specific weights on each of the factors, comparing them to each other,
playing out scenarios and consequences, and probably getting some new gray hair
in the process.
But you can do it, right? Or you've
done it. Sometimes it's worked, sometimes it hasn't, but you've learned from it
or are learning from it.
Now take what you've learned and try
approach #1 in a business environment. It's the same conversation, just with a
different type of scorekeeping.
1Let's assume there's a baseline in place: The providers
under consideration have properly licensed attorneys with experience in the
requisite area of law. In other words, they're at least reasonably qualified
2The risk premium is extremely hard to quantify or even
estimate in the legal world. There are few numbers and only limited anecdotal
evidence on the difference made by Firm A instead of Firm B. There are lots of beliefs
out there, but beliefs aren't evidence. The issue isn't the difference between
top-tier Skadden and just-out-of-law-school-staffed Smith & Wollensky,
because those two entities aren't vying for the same matters. Rather, how do
you quantify the difference between, say, the top firm and the
third-from-the-top firm? Or between the local $350-per-hour-average firm and
the big-city $450-per-hour-average firm?
Read more on the Lexician Blog
For more information about LexisNexis products and solutions connect with
us through our corporate site.