February 2011

Pop Quiz. You have completed an engagement and been paid. How do measure if the engagement was profitable and, if so, how profitable? Discuss. You cannot refer to hours worked in any part of your answer. Good Luck.

If this exam determined your final grade, would you pass the course?

I just finished an arbitration (on the heels of a trial), so I’ve been catching up on some reading. So with apologies for being some “out of date” in getting these thoughts on paper….

In the January issue of American Lawyer, there is a terrific article by Mark Roellig, General Counsel at Massachusetts Life Insurance Company, addressing the issue of firms failing to mine their data on cost of handling certain kinds of legal work.   Here is Roellig’s thesis:

What businesses don’t have is much success in establishing fixed fee arrangements with their outside counsel, despite years of discussions, conferences and articles. I believe the greatest obstacle to such arrangements has been an asymmetry of information between the buyer and seller—the disparity between what firms know about the true cost of legal services they provide and what clients know.

My reaction? Spot on—almost. It is true that firms do have data to determine the price they have charged for services. It is not true that they know what it cost to generate their work product. Far from it. But the general idea that the marketplace does not provide ready access to pricing data is exactly right, and it clearly operates to the client’s detriment.

I believe don’t accept the idea that if firms mined their data and shared it with their clients, there would be enough data to really create an efficient marketplace. For example, a firm that is inefficient could mine its data and share that information with its clients and come to agreement on fixed fees. But clients sharing data, which is Mr. Roellig’s suggestion as to what is starting to happen, is a far superior solution. Client data sharing does three things. First, it provides a better sense of average cost for certain kinds of work. Second, it allows inside lawyers to know that their agreement to a fixed price is reasonable. But perhaps most important, it provides a basis for price and a reason for competition. And frankly, given the inefficiencies in production occasioned by hourly billing, one would expect to see prices decline for a while as firms figure out how to drive inefficiencies out of their “cost of goods sold.”

I know that many lawyers (at least many outside lawyers) tend to rail against these notions because their work is, well, special. My only comment on that is that if your work is so special, letting the world see what you’ve charged for it should not result in any loss of work. It is, in my mind at least, hard to argue with the concept that an informed client making decisions based on all relevant information (cost and “special-ness” among them) is a bad thing. I hope businesses seeking to share price data are successful.

I recently attended a Legal Lean Sigma training course, and I tweeted that I had gotten a great deal out of the course.  Someone whom I respect a great deal tweeted back: "Pat, for real?  Yikes.  Efficiency kills innovation.  Effectiveness always trumps efficiency.  Use client selection and right price."  I was, to put it mildly, surprised by this comment.  Effectiveness always trumps efficiency?  I didn’t realize that the choice was one or the other.  And, in reality, the choices are not mutually exclusive.  Effectiveness obtained efficiently is always going to be better than effectiveness obtained through a meandering, wasteful path.  I can’t imagine much debate about this point.  Certainly from a profit margin standpoint, driving down the cost of production is always going to improve your margin.

The real issue is whether efficiency kills innovation.  I asked my Twitter friend for evidence and got anecdotes.  Obviously, anything pushed to an extreme has the potential to yield silly results.  Some anecdotes support that notion.  And if you begin with the premise that efficiency is the ultimate objective, I can see the risk of the "checklist mentality."  But particularly in a small organization, there is no need to be forced to pick one or the other.

Here is the event that convinced me of the importance of both efficiency and innovation. An adversary filed a set of interrogatories.  One of our fantastic associates in an effort to impress, prepared a set of answers, worked with the client to make sure things were in order and gave them to me for final review.  I read the answers and quickly realized that the efforts to object or shield information was exactly contrary to the way I wanted to try the case.  All of the early work was wasted.  So we built into our process handling a requirement that before time is spent answering interrogatories, there needs to be a meeting of the case team, including the lead trial lawyer, to discuss the responses and how they fit into the case theory.  Typically a very short meeting, but it ensures everyone is on the same page.  I can’t for the life of me see how this process improvement limits innovation.  In fact, experience is the discussions breed innovation and improvement in our approach to some cases.

Since litigation is governed by rules, it only makes sense to build processes to insure the rules are followed precisely, every time.  No time should be spent exploring how to satisfy the rules since processes are in place.  Following the rules is not "knowledge work," but it is important.  And so there is a role for process management even in an area most susceptible to creative thinking, litigation.

It also seems to me that every knowledge worker looks for ways to be more efficient on the parts of their work that are not knowledge work.  An accountant may exercise great creativity, but they want their addition and subtraction to be right every time and fast, so they use a calculator.  Programs are created to help tax accountants more quickly process returns.  That doesn’t mean that they are not knowledge workers or that they do not exercise judgment.  It means that every job includes some measure of process.

This phobic disdain for process as part of even customized work is widespread, but I have to confess to not understanding it.  Let me offer this example.  ABC Company decides to acquire another company.  Having never handled a transaction, all of my work on the deal would be entirely customized—pure knowledge work at every level.  For one the elite M&A firms on Wall Street, this would be another in a long line of deals of this sort that the firm has handled.  Where does the client go?  To the experienced Wall Street firm, and rightly so.  Their experience means everything.  From the firm’s standpoint, it needs processes to draw on the collective experience, and it is plainly better if those processes are efficient rather than not.  The fact that even an elite M&A firm has processes does not mean that what its lawyers do on the deal is not knowledge work.  The judgment exercised to know which precedent to draw on and which to supplant is critical knowledge work, and is the creation of work product that is novel.  But even in the midst of all that customized knowledge work, there are processes at play.  

False choices, such as between innovation and efficiency, do not advance the ball.  Both should be areas of desired improvement.