<i>At the Intersection:</i> Cutting Corners

If one purpose of a column or blog is to provoke spirited debate, we surely succeeded in our recent posts on whether client-driven pressures for greater efficiency and cost-control compel outside counsel to “cut corners” in legal service delivery. Our premise that “an inevitable dog fight erupts whenever lawyers try to discuss quality and cost in the same sentence” proved to be true. Passionate and pointed comments filled our e-mail inboxes.

So now it's time take to let you hear different voices first-hand.

On Guard, Sir

Unsurprisingly, we heard from law firm lawyers who took umbrage at the idea that their clients might think them guilty of overlawyering and overbilling. As discussed more fully below, one large firm partner specifically rebutted the suggestion that firms' level of service delivery is keyed primarily to profit motives: “There are real issues here greater than firm greed or ego '”

Over on the client side, a General Counsel expressed equal indignation at law firms' suggestion that they, the law firms, are uniquely qualified ' on the basis of both their ethical responsibilities and their legal acumen ' to weigh risks against legal costs (that is, to unilaterally make scope-of-service judgments): “Today, our cost-benefit analyses are very sophisticated. ' When we consider various forms and levels of service delivery, we are definitely not blind to the stakes and the risks.”

Who Bears the Risk of Curtailed Scope?

For one GC, the answer to the “who should assess risk?” question was clear:

We, and only we, should determine acceptable risk because we are the experts on our companies and business strategies. Our company takes risks every day, and we understand how to evaluate when to dig deeper and when it's time to move on. When we don't want more research or memos or depositions, we have made internal decisions about cost and benefit.

Sounds good, but who bears the responsibility for the consequences of those risk decisions?

Predictably, several law firm respondents immediately focused on the worst-case scenario ' the risk taken proves unwise, bad things ensue, and the law firm gets blamed, or even sued. Of law firm attorneys tweeting or e-mailing responses to our posts, not one thought that clients make wise decisions regarding risk.

Law firm responders suggested that they find themselves on the horns of a dilemma: clients limiting the scope of work (and therefore escalating risk) for cost-management's sake on one hand, coupled with their willingness to sue their outside law firms if/when things blow up in everybody's face on the other hand.

The solution, several lawyers suggested, is simple: If clients agree to a certain level of risk, they should not later be heard to complain if the poor risk decisions lead to problems.

For one commentator, this took the discussion into the realm of power politics as played out in the world of insurance:

No doubt this series of posts strikes a very sensitive nerve. Missing, we think, is the issue of: 1) law firm E&O (Errors and Omissions insurance coverage); and 2) the tripartite relationship dynamic of an insured (brand and loss run concerns), the primary insurer who usually finances Legal, and excess who plays back seat driver and questions unturned stones.

When we first received this comment, we wrote back privately:

' When a client is well-informed and is an active part of deciding how it chooses to proceed, is it not less likely to bring suit, since it was actively deciding and instructing the firm how to proceed? Of course, such discussions should be memorialized, and the client should be well informed of the potential risks the firm can foresee.

To all the law firm lawyers who raised concerns about being sued if they didn't look under every rock, we asked:

In light of the fear of being sued, why not just proceed with the work that you believe is necessary to assess/reduce the risk, and simply bear that as a cost of doing business if you can't bill it to the client?

After all, we reasoned, if you really want to be protected, wouldn't that additional research, contract review or investigation be like your own insurance protection in case things go badly later? For example, you would be able to say, “we read every one of the 500 contracts (even though you only paid for us to read 25), and we now know there are no significant risks or, in the event you do find something, that there is an environmental nightmare in agreement 852 that could really cost the client.” Wouldn't you sleep better if you turned over all the rocks even if some of that rock-turning was at your own expense? And, if you did, wouldn't the E&O and excess carriers be prevented from second guessing you?

You carry fire insurance even though you usually don't have fires. Isn't this similar? Should you do the extra work just in case it will save your bacon someday if a matter goes sideways because your ignorant client didn't follow your recommendation to expend more time and effort?

These intentionally provocative questions were not popular with law firms, and not one said they would choose to perform the extra work on their own dime.

The Profitability Argument

Moving away from wounded pride and risk management, and focusing instead on the dynamics-of-profitability issue, one respected consultant suggested that we “overstated the case” when we raised the possibility, as he paraphrased us, that “if a firm does less work it will derive less revenue on the matter, thus cutting into profits.”

His reasoning focused less on the scope of work performed than on the efficiency of service delivery: “These days, most firms have write-offs or write-downs on most matters. To the extent a firm's efficiency improvements reduce write-offs/write-downs, then every dollar of write-offs or write-downs that can be avoided improves firm profits on a dollar-for-dollar basis. Efficiency improvements that reduce write-offs/write-downs are among the most powerful profit improvements a firm can make ' more powerful than cost-cutting to reduce the firm's expense ratio, and even more effective than increasing leverage (which is hard to do these days).”

True enough, but here we run into a stumbling block ' or at least a huge asterisk ' in the form of this respondent's qualifier, ” ' to the extent there is enough new work to which saved lawyer hours can be applied.” Hold on there, we thought.

The respondent continued in this vein, assuming arguendo, ulimited manna from client heaven: “In fact, as long as new work is available [emphasis added] (admittedly not always the case), even a firm with no write-offs/write-downs will not reduce its profits by a single dollar by becoming more efficient.”

That's Not How It Looks to Us

Ah, but therein lies the rub. We know of many firms that don't have full plates and lots of work pouring in the door. And plenty of the lawyers in those firms are being told ' directly or indirectly ' that they must fill those billable hour targets no matter what. The message is clear: Don't bother being efficient, just fill up those timesheets.

Everything we see these days suggests that in fact, for many lawyers, enough new work isn't available ' that we have too many lawyers, too little work, and too many new technologies and new service delivery modalities that will exacerbate the work scarcity problem going forward. There just seems to be no getting around the fact that client demands for efficiency and limits on scope have the real potential to impact law firm revenues and profitability. To us, there seems little doubt that finding practical ways to re-establish a stable and sustainable law firm-client economic equilibrium is the biggest elephant in the room these days.

Reasonable Folks Agreeing

At the end of the day, what we think is the proper collaborative tone was struck in the response of the Chief Operating Officer of an 800-attorney firm with offices nationwide:

I believe the challenge for us, in developing a competitive differentiation, is ' to address the GC's continued focus on value. Needless to say, education and communication with both our clients and our colleagues will play a major role in accomplishing this goal.

Another large firm partner put even a sharper point on addressing the cost/risk/benefit issue:

Law firms cannot behave like a restaurant that does not include prices on the menu and presumes what should be served to the guest.

Editorial Board member Pam Woldow is a Certified Master Coach. Reach her at [email protected]. Doug Richardson is a partner with the global legal consulting firm Edge International. He can be reached at [email protected].

If one purpose of a column or blog is to provoke spirited debate, we surely succeeded in our recent posts on whether client-driven pressures for greater efficiency and cost-control compel outside counsel to “cut corners” in legal service delivery. Our premise that “an inevitable dog fight erupts whenever lawyers try to discuss quality and cost in the same sentence” proved to be true. Passionate and pointed comments filled our e-mail inboxes.

So now it's time take to let you hear different voices first-hand.

On Guard, Sir

Unsurprisingly, we heard from law firm lawyers who took umbrage at the idea that their clients might think them guilty of overlawyering and overbilling. As discussed more fully below, one large firm partner specifically rebutted the suggestion that firms' level of service delivery is keyed primarily to profit motives: “There are real issues here greater than firm greed or ego '”

Over on the client side, a General Counsel expressed equal indignation at law firms' suggestion that they, the law firms, are uniquely qualified ' on the basis of both their ethical responsibilities and their legal acumen ' to weigh risks against legal costs (that is, to unilaterally make scope-of-service judgments): “Today, our cost-benefit analyses are very sophisticated. ' When we consider various forms and levels of service delivery, we are definitely not blind to the stakes and the risks.”

Who Bears the Risk of Curtailed Scope?

For one GC, the answer to the “who should assess risk?” question was clear:

We, and only we, should determine acceptable risk because we are the experts on our companies and business strategies. Our company takes risks every day, and we understand how to evaluate when to dig deeper and when it's time to move on. When we don't want more research or memos or depositions, we have made internal decisions about cost and benefit.

Sounds good, but who bears the responsibility for the consequences of those risk decisions?

Predictably, several law firm respondents immediately focused on the worst-case scenario ' the risk taken proves unwise, bad things ensue, and the law firm gets blamed, or even sued. Of law firm attorneys tweeting or e-mailing responses to our posts, not one thought that clients make wise decisions regarding risk.

Law firm responders suggested that they find themselves on the horns of a dilemma: clients limiting the scope of work (and therefore escalating risk) for cost-management's sake on one hand, coupled with their willingness to sue their outside law firms if/when things blow up in everybody's face on the other hand.

The solution, several lawyers suggested, is simple: If clients agree to a certain level of risk, they should not later be heard to complain if the poor risk decisions lead to problems.

For one commentator, this took the discussion into the realm of power politics as played out in the world of insurance:

No doubt this series of posts strikes a very sensitive nerve. Missing, we think, is the issue of: 1) law firm E&O (Errors and Omissions insurance coverage); and 2) the tripartite relationship dynamic of an insured (brand and loss run concerns), the primary insurer who usually finances Legal, and excess who plays back seat driver and questions unturned stones.

When we first received this comment, we wrote back privately:

' When a client is well-informed and is an active part of deciding how it chooses to proceed, is it not less likely to bring suit, since it was actively deciding and instructing the firm how to proceed? Of course, such discussions should be memorialized, and the client should be well informed of the potential risks the firm can foresee.

To all the law firm lawyers who raised concerns about being sued if they didn't look under every rock, we asked:

In light of the fear of being sued, why not just proceed with the work that you believe is necessary to assess/reduce the risk, and simply bear that as a cost of doing business if you can't bill it to the client?

After all, we reasoned, if you really want to be protected, wouldn't that additional research, contract review or investigation be like your own insurance protection in case things go badly later? For example, you would be able to say, “we read every one of the 500 contracts (even though you only paid for us to read 25), and we now know there are no significant risks or, in the event you do find something, that there is an environmental nightmare in agreement 852 that could really cost the client.” Wouldn't you sleep better if you turned over all the rocks even if some of that rock-turning was at your own expense? And, if you did, wouldn't the E&O and excess carriers be prevented from second guessing you?

You carry fire insurance even though you usually don't have fires. Isn't this similar? Should you do the extra work just in case it will save your bacon someday if a matter goes sideways because your ignorant client didn't follow your recommendation to expend more time and effort?

These intentionally provocative questions were not popular with law firms, and not one said they would choose to perform the extra work on their own dime.

The Profitability Argument

Moving away from wounded pride and risk management, and focusing instead on the dynamics-of-profitability issue, one respected consultant suggested that we “overstated the case” when we raised the possibility, as he paraphrased us, that “if a firm does less work it will derive less revenue on the matter, thus cutting into profits.”

His reasoning focused less on the scope of work performed than on the efficiency of service delivery: “These days, most firms have write-offs or write-downs on most matters. To the extent a firm's efficiency improvements reduce write-offs/write-downs, then every dollar of write-offs or write-downs that can be avoided improves firm profits on a dollar-for-dollar basis. Efficiency improvements that reduce write-offs/write-downs are among the most powerful profit improvements a firm can make ' more powerful than cost-cutting to reduce the firm's expense ratio, and even more effective than increasing leverage (which is hard to do these days).”

True enough, but here we run into a stumbling block ' or at least a huge asterisk ' in the form of this respondent's qualifier, ” ' to the extent there is enough new work to which saved lawyer hours can be applied.” Hold on there, we thought.

The respondent continued in this vein, assuming arguendo, ulimited manna from client heaven: “In fact, as long as new work is available [emphasis added] (admittedly not always the case), even a firm with no write-offs/write-downs will not reduce its profits by a single dollar by becoming more efficient.”

That's Not How It Looks to Us

Ah, but therein lies the rub. We know of many firms that don't have full plates and lots of work pouring in the door. And plenty of the lawyers in those firms are being told ' directly or indirectly ' that they must fill those billable hour targets no matter what. The message is clear: Don't bother being efficient, just fill up those timesheets.

Everything we see these days suggests that in fact, for many lawyers, enough new work isn't available ' that we have too many lawyers, too little work, and too many new technologies and new service delivery modalities that will exacerbate the work scarcity problem going forward. There just seems to be no getting around the fact that client demands for efficiency and limits on scope have the real potential to impact law firm revenues and profitability. To us, there seems little doubt that finding practical ways to re-establish a stable and sustainable law firm-client economic equilibrium is the biggest elephant in the room these days.

Reasonable Folks Agreeing

At the end of the day, what we think is the proper collaborative tone was struck in the response of the Chief Operating Officer of an 800-attorney firm with offices nationwide:

I believe the challenge for us, in developing a competitive differentiation, is ' to address the GC's continued focus on value. Needless to say, education and communication with both our clients and our colleagues will play a major role in accomplishing this goal.

Another large firm partner put even a sharper point on addressing the cost/risk/benefit issue:

Law firms cannot behave like a restaurant that does not include prices on the menu and presumes what should be served to the guest.

Editorial Board member Pam Woldow is a Certified Master Coach. Reach her at [email protected]. Doug Richardson is a partner with the global legal consulting firm Edge International. He can be reached at [email protected].