I was born in Detroit and grew up in the heyday of the auto industry. So, when I first heard Ron Baker speak about Lee Iacocca, I listened with great interest. Iacocca was a Detroit icon, first for his trailblazing work for Ford and later for saving Chrysler. Ron set the stage: Chevrolet had created the Corvette. It was very expensive, relatively, but it was the first real sports car.  Ford needed to challenge it. Iacocca came up with the idea of the Ford Mustang. Baker picks up the story in The Firm of The Future: 

When Lee Iacocca developed the Ford Mustang, he reversed the order of the usual car-making pricing up to that point. Rather than giving his engineers carte blanche to develop a sports car and then marking up the resulting costs—as GM did [with the Corvette]—he solicited the opinions of potential customers as to what features they would want in a sports car and what price they thought they would be willing to pay. He then went to his engineers and asked if they could manufacture a sports car with the desired features and sell it at this price and still turn a profit for Ford. The engineers developed the Ford Mustang (based on the platform of the existing Falcon), and it was launched in April 1964 at a price of $2,368. In its first two years, net profits were $1.1 billion, in 1964 dollars, far in excess of what GM had made on the Corvette.

This form of pricing is known as price-led costing. It has been widely used by many businesses. But not law. That needs to change.  Read the quoted paragraph and substitute the “lawyer” for “engineer” and “handle a matter” for “develop a sports car.” There is the germ of really important idea in this concept, and I’d like to play it out in the setting of a law department getting a new matter, say a lawsuit, though this approach works for any issue.

A new lawsuit is served on the company. The first reading makes it clear that the pleading is defective, but the defect is curable. The complaint is also filed in the wrong state. It is a garden variety claim that poses no material risk to the company.  In other words, it has “routine” written all over it. The law department, like all other parts of the business is under orders to cut costs.  So, what does the inhouse lawyer do?

One possible response is the typical one. The inhouse lawyer sends the case to an outside lawyer, who analyzes the claim and recommends filing a motion to transfer the case to the right state (meaning the case is in Federal Court) and to simultaneously file a motion to dismiss because of the defect in the complaint.  Based on counsel’s recommendation, that plan is approved. Two motions are briefed and argued, the matter is transferred, the complaint is dismissed and an amended complaint filed that cures the defect.  Back to square one, with a 5-figure fee already incurred.

Or there is this alternative. The inhouse lawyer, realizing the features of the case, calls an outside lawyer and says “I want this case permanently dismissed or more likely settled and I won’t spend more than $25,000.”  Stop here: would the lawyers recommend the same plan as in the typical scenario?  Of course not. The 5-figures spent on the two motions is almost certain to have had no impact on the outcome. Here’s how it would play out: The lawyer’s first step would be to determine the Expected Value of the case, based on information available at that time. That analysis would be submitted for approval to the inhouse lawyer. Once approved, the lawyer would develop an approach to get to resolution because dismissal on the merits was unlikely.  The lawyer may decide to file some limited, targeted discovery requests. Or not. The lawyer may call the plaintiff’s lawyer and initiate dialogue to lead to resolution.

The point of this is not to decide which strategy the lawyer should follow. The point, instead, is to identify a different approach to pricing that can be highly effective for many matters. It forces the lawyer to ask “what difference does it make to the outcome?” for every step, every action.  And if the answer is “none,” then not performing the step should be proposed to the inhouse lawyer who should approve it if she concurs in the analysis.

I’ll end with a personal story to reinforce the point.  My wife and I had purchased a piece of property on the Lake Michigan lakefront. We wanted a weekend getaway.  We had a budget. The architect designed first and presented us the design, which we loved. When we asked about the price, he then got estimates from 3 builders. The best price was twice our budget. Needless to say, that design was scrapped and we went to the builders and said, “what can you build within our budget?”  The house we ended up with was simple, functional and like the style of other homes in the area.  We didn’t get everything the architect tried to sell us, but what we got was perfect given our budget.

The Next Normal is going to force law departments to look at pricing and matter handling much differently than we have until now.

The Next Normal is also going to require law departments to ask whether a matter even requires a lawyer at all. That will be discussed in my next segment.

 

Posts in this series:

The Next Normal

The Next Normal: Law Departments Learn to Prioritize Spend Based on Fundamental Investment Analysis