Friday, December 28, 2012

The Nuances of Cost in the Legal Supply Chain

Posted by Jeff Lipshaw

Images-2My colleague, Carter Bishop (left), just sent over some comments by a friend of The Legal Whiteboard, Paul Lippe (below right).   Among other things, Paul contributes to The New Normal blog for the ABA Journal.  Much of the discussion over there centers around the current upheaval in the way sophisticated users of legal services (mostly big companies) interact with their suppliers (mostly big law firms).

 A post from Patrick Lamb (below left), the New Normal's other Images-1 proprietor, not only captures a primary thesis of that blog, but also reflects something my non-lawyer corporate management team colleagues were saying to me in the executive suite almost twenty years ago:  "Lawyers Are Not Special - The Rules That Apply to Other Businesses Apply to Us."

Images-3Carter's e-mail concerns comments from Jeffrey Carr, the GC of FMC Technologies to this effect: outside lawyers do four primary things:  Advocacy, Counseling, Content, and Process.  The first two have relatively high value, and lawyers are pretty good at it.  The second two are the kinds of things that don't, on their surface, seem to have much value to the client, like legal research or document preparation, and which, in the New Normal, are getting outsourced to places like Wheeling, West Virginia and Bangalore, India.

Notwithstanding the fact that I was thoroughly inculcated in the New Normal twenty years ago, I was intrigued by Paul's very recent observation to the effect that lawyers still resist the jargon of Six Sigma and lean enterprise, that "this 'industrial' language is anathema to many lawyers, even though nobody seems to substantively rebut the New Normal analysis."  (Well over twenty years ago, the then-GC of Motorola, Richard Wiese, came to talk to my law firm about Six Sigma, and he got precisely the same reaction from a good number of my partners.)

Anyway, Carter asked what I thought, and he may have been surprised.  I think one aspect of the fundamental truth that "Lawyers Are Not Special" is that companies can't simply beat the crap out of law firms (in the long run) any more than they can beat the crap out of other suppliers.  Here's what I noted:

1.   What has facilitated the "New Normal"  is the migration of smart lawyers into corporate management, and the resulting syncretism of business like value propositions into the market for legal services.  That's a reflection of lean business management philosophy generally, which is that we develop entitlements or expectations of value and productivity to be derived by any investment of resources, whether the investment is money, time, property.  Value is what the user is willing to pay.  Productivity is the ability to produce output (value) with the fewest possible inputs.   When I was in the business world, the mantra was "growth and productivity."  That is, you made money by expanding the reach of your value proposition (growth) and adopting the best possible cost position (productivity).

2.  The New Normal purchasers are better able to distinguish, or unbundle, those aspects of legal work that have high value propositions.  I do think the long term/short term distinction is meaningful.  When I was full bore hard charging toward a business objective, I at least had the capability of hearing what the lawyers were describing as the long term risks.  I didn't always take their advice because I was in a better position to balance long term and short term (for example, as a seller, I would not generally not want to let a debate over the caps, baskets, and limits of the indemnification provisions to the buyer take dollars off the purchase price).   But getting sophisticated legal advice is more complex than it looks.  People like David Katz at Wachtell or Peter Atkins at Skadden, whose M&A advice is probably worth well more than whatever they charge per hour, or Steve Newborn at Weil or Helene Jaffe at Proskauer, whose antitrust/merger analysis is the same (to name several whose advice I've valued or counseling I've admired), don't just pop into existence.  The infrastructure of the firm creates people like that.  So costing is more nuanced than just saying "I only want to pay for Katz's or Atkins's time."

3.  In business, sophisticated purchasers want their suppliers in the supply chain to be profitable.  For example, auto parts manufacturers need stampers to provide steel stampings.  You can put enough price pressure on a stamper, even an efficient one, to drive it out of business.   The trick is to design the supply chain so that the stamper makes what you need at a price appropriately reflecting its value to you, and productively enough to make a fair profit.  What you do is work with the supplier to remove the non-value added stuff to the extent you can.  If we can reduce the material cost on that stamping by engineering it in a different way, the price AND cost go down.

4.  That's pretty much what you are seeing in the market for legal services.  It seems to me the appropriate balance is when I, as GC, say to the Big Law firm - this is about how much I'm willing to pay for the deal, given that I need a mix of high value and low value services, and when the Big Law partner says that I'm going to charge you for the low value stuff to the extent necessary to allow the firm to continue to produce the high value stuff.  It's a decent position on the law firm partner's side to say to a buyer - I'll strip as much out and send it to West Virginia or India as I can, but it's a legitimate part of my overhead to charge you for some training, because my value to you is actually about $50,000 an hour (or something like that - I just made the number up).

5.  So my working philosophy as a GC was to be smart, not to be doctrinaire:  to push when I thought it made sense to push, but also to back off and be responsive to the long term health of my best suppliers.

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