1 putting the value back into legal all the king s horses... BY Ann Kappler and Danny Ertel
2 Once upon a time, you were expected, as good in-house counsel, to keep your department s costs down, send nonstandard work to your preferred law firms and pass those bills to the appropriate business units. The company s overall legal spend might go up, but those costs were considered outside your direct control, because they largely depended on whether the business was growing, transacting, disputing or otherwise exposing itself to new risks. While there were always some exhortations to bring costs down, they were rarely serious. Times have certainly changed: Business is increasingly global and more complex; the cost of compliance grows daily; technology has multiplied the ways in which employees can present, post, or tweet things that might cause the organization trouble (or that, at the very least, must be reviewed when trouble comes a-knockin ); and CEOs and CFOs are insisting that general counsel find ways to bring down total legal spend not just the size of the legal department.
3 Fortunately, you do have access to a broad range of resources technological, human and institutional to help you with these challenges. The same technology that has increased the amount of information we deal with, provides us with tools to manage it, and enables at least some level of self-service by business people. The same globalization trends that brought new compliance challenges to our doorsteps also enable access to a global talent pool. New specialized service providers with expertise in project and process management (something that was definitely not taught in law school) help bring discipline and order to gargantuan undertakings, and leverage the knowledge of in-house and outside counsel to turn craft into process. Yet, connecting the right resources to the right tasks, and then integrating the efforts of different specialized resources into a coherent whole, poses a new and interesting challenge. Under the old model, integration was largely a non-issue: Large law firms had every incentive to bulk up and provide as close to a one-stop shopping experience as they could, leveraging relationships with their in-house counterparts to cross-sell services from multiple practices. Firms that chose not to be full service focused instead on a few specialty practices, often taking care not to compete too broadly, so as to make it easier to get referrals from full-service firms. When multiple firms had to work together on a single matter, they would clearly carve out responsibilities to be handled by different firms (e.g., ERISA work, environmental due diligence and international taxation issues on an acquisition); and/or a lead firm would be appointed coordinating counsel on complex, multi-jurisdictional litigation. But the ways in which the work of multiple firms had to be meshed together into a single, coherent representation were limited. This model met some client interests, including ease of management and clear accountability, but it did not help contain costs. One way in which you could attempt to exercise some control over your legal costs was to develop relationships with different full-service firms at different price points, basing your decision of whom to hire on the complexity and stakes of the particular matter. When you did not need higher-priced expertise, you could move to another tier within your panel and find the right value for your money. But over time, as you and your colleagues added law firms to address different specialties, jurisdictions and price points, the number of relationships you had to manage skyrocketed, with many large companies using hundreds of law firms around the Ann Kappler is vice president and chief legal officer, corporate services at Prudential Financial, and chief litigation officer. Prior to joining Prudential, Ann was a partner at WilmerHale, general counsel at Fannie Mae, and a partner at Jenner & Block. She can be contacted at prudential.com. Danny Ertel is a partner at Vantage Partners, a consulting firm spun out of the Harvard Negotiation Project focused on managing strategic relationships. He has also taught at the Univ. of Toronto Law School and practiced law at Debevoise & Plimpton. He can be contacted at vantagepartners.com. world. That complexity and granularity might have allowed you to save a bit around the edges, but it did little for the quality of your relationships, the work delivered or your ability to work with outside counsel. More recently, some in-house counsel have started to challenge the traditional model by taking advantage of the options afforded them by improvements in technology, the emergence of new kinds of providers and the bargaining leverage provided by the economic downturn. Instead of settling for short-term discounts to hourly rates, these in-house counsel have started to look more closely at the work they retain and send out, and to unbundle tasks below the matter level. By doing so, they can choose which parts of the work to hand off to which providers, incorporating high-value expertise in some situations, and good process management, automation and less expensive resources in others. As is often the case, these new opportunities also pose new challenges. Assigning the right resources to the right job As you start to consider parceling out tasks rather than matters, you gain increased flexibility and the potential to reduce costs, shorten turnaround times and even improve quality. But you can only achieve that potential if you can match the right resources to the right jobs. Law firms providing one-stop shopping traditionally carried that burden but at significant cost and with a somewhat different set of competing priorities (e.g., training associates, improving their margins, amortizing investments in technology, etc.). As a manager of resources in a law department, you will need to think a bit more strategically, and a bit more granularly, about how work is allocated, both internally and externally. Essentially, the challenge is to ensure the delivery models for different kinds of work are truly fit for purpose i.e., the business and legal objectives behind the tasks are well matched to those with the capabilities required to accomplish them. It is very easy (but also very risky) just to outsource everything, or to unbundle work and assign tasks to the least expensive resources willing to do them. You must, however, recognize that the capabilities of technology to automate and eliminate the need for human intervention are routinely oversold. Moreover, there are new providers opening for business regularly, and many of them are not yet able to protect confidentiality of materials or provide effective quality control. Even trying to identify whose rates really are the lowest can be a bit like decipher-
4 ing cell phone plans or cable television packages. This is especially true when it comes to ediscovery services, which may bill differently for standby capacity, actual consumption, storage, processing by the gigabyte, hour or document and then separately for different kinds of outputs and even Bates-stamping. To embrace a new unbundled model and benefit from its potential, you will have to help your company and your departments clarify and align around specific objectives to be accomplished through unbundling. The possible objectives are different: reduce headcount; reduce legal spend; improve predictability and control over budgets; free up time for internal staff to get closer to the business; offer new services to help the business make better decisions and manage risk. Some may occasionally be inconsistent: Bringing in-house counsel closer to the business or offering new kinds of support may not reduce legal spend, and lowering the cost of due diligence on acquisitions may lead to the law department getting involved earlier in more deals that don t actually close. Once the objectives are clear and prioritized, and potential trade-offs identified, you will need to identify the tasks that may be safely unbundled and doled out, which, if outsourced, might actually further one of the aforementioned objectives. Not every task that can be outsourced should be; you need to test whether quality will actually be improved, time or money really saved, or resources effectively reprioritized. Then, with a clear scope in mind for the work you might assign to a new provider, you will need to screen potential providers, select among them and confirm that they can indeed deliver toward your objectives. Putting Humpty Dumpty back together again Determining what to outsource to which provider is only the beginning. After unbundling legal services, someone must reintegrate them so they are useful and defensible. In litigation, for example, you can separate the various stages of the electronic discovery reference model (EDRM) into identification, preservation and collection of documents; hosting and processing of the data; review of potentially relevant documents; production and presentation. Depending on how you choose to parcel out different activities, multiple technology and service providers will carry out separate activities and bring their outputs back together into an end-to-end process defensible in court. As the client, you might take on that reintegration task yourself, or you might ask one of your providers, perhaps lead litigation counsel, to be responsible. Even with the benefit of the great collaborative efforts led by EDRM and the Sedona Conference, integration is no easy task. Interruptions, mistakes and out-of-control expenses can plague a multi-vendor ediscovery exercise that suffers from a lack of coordination. When errors do occur and sanctions follow, the finger-pointing begins. 1 Can You Really Manage Multiple Vendors? For a practical place to start thinking about what you can count on outside counsel to do about integration, and what capabilities you may have to develop yourself, consider asking these questions to outside counsel when they say they are willing and able to partner with you in outsourcing some work to legal process outsourcing (LPO) providers. This is not meant to be a checklist or a requirements list, but rather a way to initiate constructive dialogue about what it may mean for your outside counsel to be ready to integrate the work of third parties. 1. Do you have a centralized vendor management function, or is it left to individual attorneys on a matter? 2. Which aspects of this matter do you think are suitable for offshoring, and which really should be kept onshore? Why? 3. How do you define and communicate specific requirements of the work to the outsourced provider? 4. What steps do you take to make sure the outsourced provider understood those requirements, and is able to meet them and make the appropriate trade-offs among time, quality and cost? 5. How do you handle matter-specific training of the provider s delivery team? 6. Have the partners or associates who will be working with the provider on this matter ever visited the provider s delivery center? Would they travel there for this engagement? 7. Do you have a documented process for working with third parties that describes how and how often you communicate about the project, who makes what kinds of decisions, how you resolve disagreements, and how you learn from experience and improve the process over time? 8. What are the trade-offs between working with your preferred provider and using one we have selected? This is not just a problem for litigators. Other legal processes that can potentially benefit from unbundling and outsourcing, such as M&A due diligence or corporate secretarial services, require effective management of handoffs among providers at each step along a well-defined workflow. Without such integration, there will be, at best, waste and duplication of efforts, and at worst, material errors that will subject the client to real transactional or regulatory risks. The bottom line is
5 New Capabilities Required for Service Integration New processes New skills New tools and templates New metrics Provider selection Onboarding new providers Stakeholder alignment and change management Multi-level conflicts checking Multi-provider project management Governance and relationship management Managing difficult conversations (e.g., about scope, quality assurance) Workflow tools Communications protocols Requirements templates Engagement models Quality of deliverables Efficiency of efforts Forecasts and budgets that the more providers you involve to get the best each has to offer, the bigger the risk of miscommunication, misunderstanding or missed expectations, and the more important effective service integration becomes. The law department as service integrator If you opt to unbundle matters and assign the work to different firms and specialized providers, you will, interestingly enough, be able to use fewer panel firms. Instead of needing different firms at a range of price points for similar kinds of work (e.g., private acquisitions and divestitures, small-to-medium public deals and large and transformational M&A work), you can achieve some of the same savings by unbundling each matter. When you break a matter down into its component parts, you may find that you can outsource the unavoidable (but not very complicated) parts of each matter, and bring down the overall cost of the matter, while reserving for your preferred outside counsel those things that do require their more expensive skills. By using the higher-end firm plus a low-cost outsourcing provider, you may obtain better value than by assigning the entire matter to a firm at a lower average rate. While you end up using two different providers on a single matter, you can use such a combination across a greater range of matters and thus maintain a smaller panel. You could ask one of your preferred outside firms to play the role of general contractor and take responsibility for handling the integration of the services and outputs created by others. In effect, this is what the UK firm Lovells did nearly 10 years ago when it developed its Mexican Wave offering. Lovells managed property work for some of its clients, while retaining the more sophisticated advice at City of London rates and delegating the more routine work to a select set of regional firms at much lower rates. Technology is a critical part of the equation, but so is good process management, clear role definitions, well-developed protocols for regular communication and a healthy dose of training provided jointly to client, counsel and subcontractors. 2 This structure differs from other best friends local counsel or referral arrangements in that Lovells retains responsibility for relationship management and work delivery, much as a general contractor would in other industries. Although the model has been widely discussed, and some firms have adopted parts of it, few have actually put in place all of the necessary capabilities to give clients the confidence that they can achieve the benefits of unbundling without incurring many of its attendant risks. (For some thoughts on how to jumpstart a dialogue about a law firm s service integration capabilities, see the sidebar Can You Really Manage Multiple Vendors? ) As things stand today, if you want to do much more than outsource document review as part of pre-trial discovery something law firms have long had to grapple with by working with ediscovery vendors and temp agencies you will likely need to put in place the capabilities necessary to reintegrate services and outputs. If you opt to become the service integrator, you will have to develop some critical capabilities and work closely with other corporate functions, such as IT, procurement, audit and compliance. One of the biggest challenges many organizations face is having a clear understanding among all parties of the handoffs among various entities, including in-house functions. While you want to avoid gaps into which critical information can disappear, unbundling can quickly lead to costly inefficiencies if there is overlap. Overlap in terms of responsibilities for completing tasks can actually increase risk if parties are reaching different results. The good news is that you don t have to reinvent the wheel. Other corporate functions have significant experience working with multiple vendors, some of which compete with one another while collaborating to deliver services to their mutual client. The other good news is that there are many ways in which the law department really is different, and while you will need to create some
6 fective governance of the joint ventures and alliances they negotiate, or advising IT departments about effective management of their large vendor or outsourced relationships, few have had to take their own advice about how they manage third-party relationships. You may find it challenging to implement. 4 New tools and templates: Key elements of effective integration of services from multiple providers are standardization and transparency. You need providers to stick to standards in how they communicate with you and each other, and in how they deliver their outputs (and in what they can expect from other providers earlier in the process). Similarly, you need to establish some consistency in how you articulate your requirements to them, and in the nature and frequency of your communication with them. Developing standard templates and protocols will go a long way toward making sure your team and your providers teams are on the same page. Workcapabilities that may not exist elsewhere in the organization, they will allow the law department to change how the company uses providers of legal services, with the law department as the critical hub. While we cannot provide a fully detailed road map here, we hope you find these elements a useful start. New processes: If you are going to unbundle services to assign work to those providers best fit for purpose in their skills and value propositions, you will need a robust way to define your requirements, evaluate potential providers and select among them. After selecting the right providers for the job, you will have to introduce them to your company, your law department and your way of doing things. You will also need to get your own internal stakeholders (in the law department and the business) to work effectively with those providers, which will inevitably require some change in their own behavior. On a more mundane, but still unavoidable level, you will need to put in place mechanisms to check for potential conflicts across the multiple providers for a single matter. Your sourcing and procurement organization should be able to provide you with a running start in developing these capabilities, but the fact is few such organizations really understand the law department (because you have largely kept them out for so many years). Learning to work together with them and teaching them about your needs should be on your short-term list of action items if you intend to take advantage of what unbundling and outsourcing have to offer. 3 New skills: As a service integrator, you will need great project and program management skills. We don t mean Six Sigma black belt or methodologies more suited to large-scale manufacturing than to the practice of law. We mean that you and your team will have to become comfortable laying out timelines for matters, breaking them into phases where appropriate, and specifying tasks or activities for each phase and what it means to complete them. It also means having to make some educated guesses about how long those phases may last and what resources those activities will require, while also considering contingencies given the high degree of uncertainty involved. Mapping, and then managing, these processes effectively also means questioning and challenging assumptions, looking for ways to simplify and even eliminate steps, and reevaluating and updating assumptions and plans as you learn more. Along the way, you will have to get better better than many of us are today at having difficult conversations about surprises in scope, timing, quality and more. While some law departments have had significant experience advising business affairs groups about ef- One Approach to Making It Work There are many ways to structure internal resources to facilitate effective and efficient outsourcing. Every company will be different in terms of company resources it might leverage or borrow, resources it can build internally and those it must learn. Here are a few ideas we ve found useful at Prudential: 1. If resources permit, have a dedicated project management team with specific project management skills. Often, these individuals are drawn from the business or other control functions, such as audit. They need not be indeed, most often are not attorneys or paralegals. They can be deployed as support for internal legal teams and interact directly with vendors. 2. If a dedicated project management team is unrealistic, train some staff consider paralegals in project management who can be used to support the entire department. 3. Consider centralizing vendor management within the law department to help standardize metrics, contracting, and reporting and monitoring tools and practices. 4. Engage IT early in both analyzing potential outsourcing vendors and building or buying internal technological project management tools.
7 ACC Extras on Putting the Value Back Into Legal InfoPAKs SM Staying Tax Exempt: Guidance from the American Cancer Society s Senior Counsel (Nov. 2011). Strategic Planning: Why a Plan Is Needed and How to Develop One (Sept. 2009). Top Ten Top Ten Considerations When Evaluating Legal Process Outsourcing (Oct. 2011). Leading Practice Profile Legal Department Leading Practices for Adding Value and Moving Beyond the Cost Center Model (Sept. 2010). Primer Using a Structured Process to Allocate Work (Dec. 2010). How To Legal Process Outsourcing: A How-To Guide on LPO (Sept. 2010). Value Practice Unbundling Legal Services & Strategic Use of Law Firms in Lower Cost Cities (Nov. 2009). Committee Law Department Management Committee. Presentation Managing Change: Moving Law Firms from Vendors to Value-Based Relationships (Jan. 2011). Education Interested in learning more about driving value while reducing your legal spend? Attend ACC s 2012 Legal Service Management Workshop, where you will develop skills to do more with less by unbundling your legal services and allocating work to the appropriate providers. For more information and to register, please visit Alliance Put the ACC Alliance partners to work for you. ACC has teamed up with a wide spectrum of legal service providers to bring ACC members exclusive discounts on the services you need. Find out more at ACC has more material on this subject on our website. Visit where you can browse our resources by practice area or search by keyword. flow tools through which you make requests and providers accept them, commit to a timeline, work on their outputs and deliver them back or along to the next step in the process can add some needed transparency and a greater ability to recognize possible bottlenecks or other problems along the way. New metrics: In a multi-vendor environment, where it is all too easy to lose accountability, or for inefficiencies to eat much of your expected savings, it becomes important to develop and use suitable metrics. As much as we have long counted every tenth of an hour expended by a lawyer or paralegal on our behalf, law departments are notoriously ill-equipped to measure what really matters as you unbundle services and focus on value, quality and efficiency. Once again, there is something to be learned from other corporate functions, such as IT, or even custom- er care, that have developed ways to measure many aspects of their operations. At the same time, it is important not to repeat their mistakes in focusing all their attention on operational metrics that offer limited real accountability and may actually create incentives for the wrong behavior in the relationship. You need to work with your preferred providers to put in place appropriate scorecards for individual matters and the portfolio of work you send them, so you can track the quality of their work, the efficiency of their efforts and their progress against plan and budget. 5 There is a great opportunity facing law departments to change the role we play as advisors and risk managers in our organizations, and to do so in a way that adds more value to the significant investments we are required to make in compliance, dispute resolution and effective contracting.
8 Law departments really can deliver more with less by unbundling what have traditionally been seen as unitary services, ensuring that the right resources are assigned to the right jobs and then reintegrating the work of those different resources to achieve increased responsiveness, higher quality and better value. But to do so, we must prepare ourselves to serve as more than just a window to a community of law firms and other vendors. We have to build the capabilities to understand what can be unbundled and how, what risks have to be managed in assigning work to different providers, and how to tell whether Humpty Dumpty is really back together again, better and stronger than ever. Have a comment on this article? Visit ACC s blog at Notes 1 See, e.g., J-M Mfg Co., v. McDermott Will & Emory LLP, No. BC (Cal. Sup. Ct., County of Los Angeles) (complaint and first amended complaint) Malpractice action filed by client against law firm that worked with two ediscovery vendors and a temporary staffing agency, for allegedly marking up contract attorney costs and failing to adequately supervise such contract attorneys, leading to the disclosure of privileged documents. 2 See, e.g., M. Mullaly, Riding the Mexican Wave, Legal Week, May 15, 2003, available at news/ /riding-mexican-wave; M. Stevens, Mexican wave is the model outsourcing arrangement, The Lawyer, June 14, 2010, available at 3 For a discussion of how sourcing and legal can begin to collaborate more effectively, see D. Ertel, Sourcing and Legal: A Primer for Collaboration, Outsourcing, May June 2011, For a discussion of best practices in the management of third-party relationships, see, e.g., Simple Rules for Making Alliances Work, Harvard Business Review, November 2007, J. Hughes & J. Weiss, available at ResearchAndPublications/viewpublications.aspx?id=407; Managing Outsourcing Relationships to Maximize Value: Evolving Relationship Management Practices, 2010 Edition, June Available at ResearchAndPublications/viewpublications.aspx?id=3921; Value Delivered by Strategic Supplier Relationship Management in Major Organizations, April 2010, J. Hughes, J. Wadd, & M. Webb, available at ResearchAndPublications/viewpublications.aspx?id= For a discussion of how to avoid metrics that drive the wrong behavior and how to develop an effective scorecard, see, e.g., Supplier Metrics that Matter, November 2005, J. Hughes, available at ResearchAndPublications/viewpublications.aspx?id=410. ACC Docket
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