Value chain: How to redefine the value of your legal services

Articulating value in commercial legal services has been a difficult area for law firms and general counsel alike. It is not that there is doubt that value is created, but rather how one demonstrates this in a tangible manner.

In this article, I try to piece together my experiences in the value debate, based upon 14 years in industry (since 2005 as an international GC and, before this, working for two leading London law firms).

I see value in supply chain terms. This supply chain of value means that there are many different and key steps which build and create value in legal services, particularly when considered across the combined function of in-house and external legal services. This supply chain would vary by circumstance but could look something like Figure 1.

 

 

This example of the supply chain of value is simplistic, especially bearing in mind the complexity and cross-border nature of legal services, which often involve multiple practice groups and client stakeholders. However, just as in any other supply chain, value can be and is created at any one of these steps.

By the same token, it is very important to understand that value and relationships are lost at any stage in this supply chain of legal services. Both GCs and law firms should break down their instruction and legal services processes into a bespoke supply chain and understand the value pivots in each aspect of this chain. Value aside, it is a great way to really analyse, understand and score legal services on a more holistic basis.

This supply chain concept is central to being able to articulate value in legal services. Both the GC and external advisers should insist on the whole organic structure of the supply chain being reviewed and being made more effective and efficient at each stage. What you get out of each step in the legal supply chain is what maximises value creation in legal services.

Of course, you cannot de-link value and the final aspect of the example chain in Figure 1: fees. Invariably, the fee will influence perceptions of value. However, value is much more complex than fees and involves many components. Fees are an issue when the perception of value is that it has not been delivered. On the other hand, the right fee does not mean that value has been delivered.

In relation to fees, the two words that keep repeating are certainty and predictability. For value, the two words ?that immediately spring to mind are create and demonstrate.

Challenges in demonstrating value

There is no single value formula which can be applied. Value has to be customised to the specific organisation, set of relationships and matter being addressed.

A major challenge is that, when a business talks about value, it tends to view it through the CEO’s or CFO’s lens – that is, in numerical terms – and it is hard to quantify the numerical value that legal services and the legal function create.

For example, developing and rolling out effective compliance programmes creates huge value to an organisation, but how do lawyers quantify the value that de-risking creates? We hear a great deal about innovation in legal services but I would ?like to see much more about how GCs ?and law firms work together to create ?and measure value.

A key aspect of this issue is collaboration between law firms and GCs to develop value. Invariably, one cannot do this without the other, hence the importance of true partnering. However, just as this works where the law firm understands the business of the GC, and the GC understands how best to use his or her external counsel, it is as important that the relationship is kept at the centre of the business and freshened up from time to time.

What creates leadership value in how law firms and GCs work together comes out of risk management, breaking down barriers to the business achieving its goals and creating an issue radar. What are the key issues that keep the CEO, CFO and GC awake, and how can the GC (working with their law firm partners) proactively manage these areas?

The behavioural change that is needed can be a gradual one, but small changes can deliver significant results. For example, if invoice narratives were based on value rather than agreed fees or time spent, ?both law firms and GCs would be forced to better understand and reflect value in their discussions.

Any discussion about value cannot ignore the growing divide between relationships and the advantages that ‘equity’ in relationships brings. Also important are the trend towards shorter-term legal relationships through regular panel turnover and changing service providers based on price.

Longer-term relationships should create and deliver greater value, recognising that relationships also need to be freshened up from time to time. More attention should be given to metrics which encourage longer-term relationships.

As chair of the think-tank Global Leaders in Law, a global GC community, we developed a value chain to begin to articulate value in much more holistic terms around services, expertise, partnering and leadership (see Figure 2).

Changing parameters

The key to the value debate is a behavioural one – that is, GCs and law firms alike having the ability and confidence to lead and ultimately be business leaders. The value parameters of business leadership are altogether wider than that of simply being a first-rate lawyer.

This applies in myriad ways, from providing commercial advice which moves a business forward to linking legal services to value, such as a value-based billing approach (i.e. charging based on the value created rather than the time spent). This is important because there is a disconnect between conventional billing practices and what business wants.

As a GC, I bought outcomes (a ?closing to a deal or successful completion of a dispute). This is counterintuitive ?to conventional billing such as the ?hourly rate, which is not outcome based but rather a process. So, the issue becomes reconciling these. Billing on ?value terms is different because it is ?billing according to and based on delivering the agreed outcome.

Value-based billing works, but it needs longstanding relationships and agreed value principles between the GC and client partner. These principles should ?be customised to the needs of the business. We all have our own sense of how to value personal possessions, a house or a holiday, so why not do the same for legal services?

The reality is that many law firms are already providing some form of value-based billing. Therefore, it is the tools and behaviours which are required to embed this into relationships. Every law firm should (and many do) offer bespoke pricing and a billing practices menu, and every GC should utilise tools to select what suits their needs best.

I am a great believer in a more rigorous approach to value and reward. This is the win-win: a business wins through the creation of business value and the law firm wins as it has contributed to this and should be remunerated accordingly.

 

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How to approach value discussions and principles

As a starter, general counsel should list what activities in-house and external legal teams do and prioritise them on a 1-5 value scale. After that, panel law firms should work collaboratively with the GC to define principles that are value creative to their businesses. These may include:?

• business understanding;?

• financial awareness;?

• pricing menu;?

• aligned pricing with risk profiles (such as deals);?

• regular review of how value-based billing would apply to your organisation;?

• service levels;?

• delivery methods;?

• sharing of synergies and efficiencies;?

• use of IT for speed, efficiency and know-how;?

• risk sensitivity and de-risking strategies;?

• defined communication standards;?

• putting a system in place for an ideas greenhouse – generating ideas to create and capture value; and?

• business feedback on what you put in place.?

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Be prepared to work up joint strategic business plans for legal services and to measure performance against key deliverables, with the legal strategic plan placed in the context of the strategic plan of the business. Understanding the latter will change the conversation and is always the first step towards unlocking value.

Deepak Malhotra is a consultant and former international general counsel