Instead of a New Year prediction, here is a fictional account about how the legal market revolution began. [References to articles and blog posts appear below.] 

The Setting: CEO’s office in an innovative, multi-billion dollar company. It’s late December 2008, so relatively quiet. The CFO walks in and starts a conversation.

CFO: We need to talk about how much we spend on legal. Since our fiscal year ends in November, I usually have time over the holidays to do some real thinking. This year, I read up on the legal market. It’s not pretty. And I’m not sure our general counsel is the solution.

CEO: Ok, you catch me at a good time. Yeah, I agree our GC is not controlling costs. What can we do?

CFO: Legal costs keep going up, both in absolute dollars and as a percent of revenue. Other cost centers – HR, Marketing, Facilities, and even my own Finance department – have driven costs down as a percent of revenue. Sure, we face more regulations and law suits. But give me a break. Lots of articles report on inhouse lawyers complaining about costs. The GC response? Precious little beyond begging for discounts.

CEO: You’re preaching to choir. I hear lots of complaining about legal costs. The whole legal thing is like that movie Ground Hog Day with an even worse twist. Every day is the same but nothing ever improves, lawyers don’t learn from re-plays. It’s hard to figure out how a whole economic sector got so stuck.

CFO: Actually, it’s easy to see why we’re stuck. Who buys legal services? Lawyers. Where do our lawyers come from? The law firms we retain. Do our lawyers think the same as our outside firms? Yes. Are lawyers trained to manage? No. What do our inhouse lawyers do? Lawyering, not managing. So we’re stuck with buyers who share the same bad traits as our suppliers and who travel in the same circles. The hard question is how to get the system unstuck.

CEO: Something tells me that you have some ideas about that. Hey, unlike lawyers, you come in not just with problems, but also solutions.

CFO: Yep, I have some ideas. Let me set it up for you. It really hit me what’s wrong when I read a Business Week article about health care. A Harvard prof wants to put consumers at the center of it. Interesting approach. Her critics say you can’t trust consumers but her response is, why not, they can choose from 200+ models of cars.

CEO: Ok, but what’s that got to do with lawyers?

CFO: I was getting there…. Law is like health care – the consumer / client is lost. Lawyers treat our business unit managers like they can’t deal with the law. Our managers are smart enough to deal with business; they are also smart enough to deal with lawyers. But lawyers don’t get it. That’s where another Business Week article hit me, about how Apple, with the iPhone, won control of consumers from the cell carriers.

CEO: I think I see where you are going. You’re saying that we need to find a way to put business people in charge and make the lawyers work for them the right way. But how do we get there?

CFO: Exactly, and right question. I found a blog by a law department management consultant. His idea is like sharing cake: one person cuts, the other chooses. He says have one law firm propose a budget for a matter and give another firm the option to do the work at the budget. I think we can extend that idea.

CEO: How so? How would that work and what happens to our law department?

CFO: OK, my idea still has some rough edges. Start with how much it costs us to manage matters. I asked the GC how much we spend managing our lawyers and outside counsel. He doesn’t know. For discussion, let’s say it’s 15%. So we take 15% of our legal spending and use that to retain one or two law firms whose only job is helping our inhouse clients retain and manage other outside counsel.

CEO: So you’re saying we figure out the management cost and then spend that money on a fixed fee deal with a law firm . That firm doesn’t get to rack up hours doing legal work. Well, I guess they’d need to do some initial assessment. But they’d mainly focus on finding the best firm for each matter and then actively managing it?

CFO: Exactly. One cuts. The other chooses. Only a little more complicated. We’ll need to structure the management fee so it motivates reductions over time. And the management firm must ride herd on other firms to make sure they find the lowest cost, most effective way to handle the work. One big firm ought to know what it really takes to do the work and manage it. Of course, I don’t have fantasies. I’m not convinced that any large firm really does know how to manage. But I can set up a set of financial incentives to motivate all this.

CEO: Hmmm. Sounds promising. What happens to our law department? And can you really find a law firm to do this?

CFO: I don’t think all our lawyers go away entirely. We keep the GC and a few lawyers who help on legal strategy and keep an eye on the new arrangement. But they’ll just have a high level advisory role and if they can’t get with this program, they’re outta here. As for finding a law firm, I’m willing to consider smaller, non-traditional firms for the management role.There’s a chance we’ll have start this in England. With legal reform over there, I’m sure we’ll have new options soon.

CEO: It sounds very promising. But what’s our upside? We save some bucks but a flop leaves the company and us personally pretty exposed.

CFO: I hear you and I’ve thought about that. Remember – we’re known for doing cool, new things. So if we innovate here, we get good PR as well as good results. If we fail, we go back to the old way and the market still gives us points for trying. Plus, I think I can get you some air cover.

CEO: Wow, you’ve really though about this. What kind of air cover?

CFO: We talk to some key suppliers and customers. Share with them our idea and see if we get some on board to try the same thing. No arm twisting but they’re just as tired of their legal spend. If we can really drive down costs along our whole supply chain, we gain share with ultimate consumers. So we’d all win – lower legal costs, lower product costs, less headache, and good PR.

CEO: Ok, I’m sold. Let’s do it.

* * * * *
– Law department consultant Rees Morrisson blogged in Dec 08 that outside counsel spend as a percentage of revenue has increased steadily over 25 years
If Health Care Were Run Like Retail… is the article about the Harvard prof who wants to focus on consumers (22 Dec 2008 print edition, Business Weeks)
Cell Phone Carrier Lose Their Grip, from the same issue, reports on “How Apple’s iPhone Reshaped the Industry”
– Rees Morrison also proposed in December the idea of One firm proposes, another disposes – a clever budget technique?