Published by The Australian Corporate Lawyer Spring 2017 edition

1. theAustraliancorporatelawyer
16 VOLUME 27, ISSUE 3 – SPRING 2017
C
orporate law departments and the
organisations they support are in a
business-to-business relationship
with their primary law firms. This differs from
the professional relationships that in-house
counsel have with individual lawyers in firms.
In his book The Inside Counsel Revolution,
Ben Heineman maintains that corporate
counsel must be held responsible for the
quality and cost of the legal work of law
firms, highlighting the responsibility of law
departments to secure greater value from
primary law firms every year. This means
demonstrating that external legal spend is
considered, appropriate and measurable.
Internal performance reviews formalise a
process of setting objectives and targets to
encourage cost-effective work from members
of the company’s legal team. Similarly,
applying leading performance management
practices to law firms encourages a high
standard of service and results; appropriate
fees, and continuous improvement of both
processes and outcomes. However, it takes
more than this to secure greater value from
law firms. Three steps are proposed.
Legal weather forecasts
depend on historical data
The first requires a thorough analysis of
historical data about practice patterns,
work allocation, and legal costs. The legal
department can then prepare a map of
corporate consumption habits and of law
firm practice patterns. It should include the
volume of hours and the number of matters
with associated complexity levels for each
legal specialty. This data can then be allocated
across each business unit and each jurisdiction
where the company is active. When all is
said and done, the basic analysis has at least
six variables.
The law department works with business
units to articulate the underlying planning
assumptions about their demand for legal
services and for the company as a whole.
Once the business plans are clear, it is
straightforward to prepare a multi-year
forecast for legal services. By combining
historical data with business plans, such
forecasts can be incorporated into requests
for proposals for legal services and to support
ongoing discussions with law firms.
Too many legal departments fail to appreciate
their company’s consumption patterns and
the constituent elements of legal economics
in law firms. Many law firms now have
experienced pricing officers on staff that have
mastered the firm’s profitability variables,
understand every variation of alternative fee
arrangements, and drive the firm’s business
response to requests for proposals for legal
services. Legal departments can do no less
and must stay ahead of the curve when it
comes to the business of law.
Legal departments must frequently rely on
their law firms to secure historical data that is
not available internally. Work volumes, staffing
ratios by legal specialty, effective hourly
rates, total legal spend, and legal outcomes
constitute the minimum information and
trends needed by the corporate legal
department. This is then combined with
qualitative data derived from a consistent
approach to evaluating law firm performance,
especially for the most significant matters.
Data analytics and trend analysis are the first
step to securing greater value from law firms.
Adding Value Starts with KPIs
The second step is to choose the KPIs that will
influence the performance of the firm. Ten
years ago, following extensive consultation of
its membership and of progressive law firms,
the Association of Corporate Counsel (ACC)
developed a“value index”. It was originally
intended to serve as a common vocabulary
for legal departments to define and discuss
the value of services provided by law firms.
The factors comprising the index were:
understanding expectations, responsiveness
and communications, efficiency, predictable
costs/budgeting skills, legal expertise,
execution and quality delivered. At the time,
it was easy enough to consider the factors as
performance indicators.
While useful as a framework for discussion,
the original factors - or indicators - were not
sufficiently differentiated from one another.
Legal departments reported that evaluating
primary firms twice a year was cumbersome.
The six original indicators have since been
streamlined by a good number of legal
departments. Part of the stimulus to do so
came from the migration to non-hourly fees
for complex matters and for portfolios of legal
INNOVATIVE KPIS ARE CRITICAL
TO SECURE GREATERVALUE
FROM LAW FIRMS
Sacha Kirk
As well as being the Chief Marketing Officer and
co-founder of innovative Australian legal tech
company, Lawcadia, Sacha is also co-founder of
the Legal Procurement Forum Asia-Pacific, the
first event of its kind in the Asia-Pacific region
dedicated to the topic of legal procurement.
Sacha is an author, researcher and commentator
on the emerging field of legal procurement.
Richard Stock MA, FCIS, CMC
Having recently made his 19th visit to Australia, Richard
is a founding partner of Catalyst Consulting (see www.
catalystlegal.com) Richard has been consulting to
corporate and government legal departments for
more than 20 years. Those engagements have covered
the spectrum of business plans for legal departments,
workflow and workload management, organisation
and resources, performance, and relationships and costs
of external counsel.

2. acla.acc.com
17VOLUME 27, ISSUE 3 – SPRING 2017
each year. A few companies have invested in
their law firms with hybrid fee arrangements
consisting of a monthly base fee combined
with significant funds for innovation projects
that target measurable improvements to
effectiveness and efficiency. As a rule of
thumb, the company and the firm agree
that approximately 15% of fees should be
dedicated to innovation projects.
This unique approach encourages law firms
to research, develop and present their best
ideas for approval by the legal department.
The challenge for both parties then is to create
the winning conditions necessary for the
innovation to become a reality. This approach
seems to work best when the relationship
with the primary firm is long-standing,
however a shared commitment to innovation
is also necessary.
A professional liability insurer used their
innovation fund to improve the efficiency and
effectiveness of legal services. A sample of
projects included:
• Notifications of defective products or
services and recall notices, together with
appropriate hurdles/gates to trigger
a response
• legal, expert, and tactical modifications
required due to changed behaviours of
other litigation stakeholders
• knowledge transfer to out-of-state legal
counsel for out-of-state claims
• paperless practice for claims managers,
internal counsel and the law firm in
collaboration with the IT department
• budgeting/docketing interface between
the legal department and the law firm
• discovery and trial checklists
• privacy requirements, safeguards, and
related protocols given the sensitive nature
of the insured and media scrutiny
• single and multiple
occurrence considerations
In this example, the law firm invested 1,800
hours of professional and technical time for
the range of projects over a period of eighteen
months. Each project included a project plan
with clear milestones, deliverables and
non-hourly budgets. Only a handful of
projects were designed to reduce legal fees.
Because this approach is new for almost all
companies, it was agreed that no project
would exceed two-hundred hours or last
longer than six months.
A global construction engineering firm
selected a different set of innovation projects
that included:
• formalisation of records of instruction
• the use of uniform and detailed matter
plans and budgets
• diminishing the dependency of business
units on the legal department and on
external counsel for routine work
• co-counselling significant matters with
inside counsel to better manage logistics,
relationships with business units and
knowledge transfer.
Both examples demonstrate the benefits that
can be gained from an innovative approach
to KPIs.
Evaluation is a Two-Way Street
Legal departments should select the
right KPIs, formulate the right objectives
and set targets that pass the SMART test
(Specific, Measurable, Achievable, Results-
Oriented, and Time bound) reflecting a
balanced scorecard architecture (see www.
balancedscorecardaustralia.com and www.
thepalladiumgroup.com) for performance.
A company preferring to use KPIs such as
results, service and costs should evaluate
the performance of legal work at least twice
annually while innovation projects should be
evaluated at designated milestones. Recent
evidence suggests that more weight is placed
on results and innovation KPIs than on service
and cost KPIs. The focus of performance is
shifting from processes to outcomes.
Achieving sustainable innovation depends
on long-term partnering relationships with
primary law firms. The purchaser-supplier
relationship is abandoned in favour of a
new balance where the legal department
provides unfettered access to its data, its legal
department and to business units to get the
job done. This is essential when significant
fees are tied to successful innovation as well
as to the legal work.
Innovation is an
iterative commitment
Whether law departments rely on one, four
or six KPIs, expectations and targets for value
should cover the qualitative and financial
aspects of performance. Innovation must
infuse every initiative to ensure that law firms
add value every year.
work spanning several years and jurisdictions.
Most companies do not mind paying a
premium or a success fee for great results
on complex matters but the value must now
be measurable.
Some corporate legal departments rely on
only four KPIs: results, innovation, service and
costs. Expectations for value and performance
from law firms are typically detailed in
initiatives and targets that are aligned with
each KPI. One of the biggest challenges is to
ensure that the process of influencing firms is
robust and sustainable from one year to the
next. The campaign for innovation cannot be
allowed to fall by the wayside because the
company’s primary law firm – the one that
manages the most complex transactions and
litigation - is too close for comfort. One pundit
described this reticence as a“furry rut”out
of which legal departments must climb. It is
worth emphasising that the entire exercise
requires some rigour if it is to be practical,
thorough and timely.
Innovative KPIs
Tom Murphy was mayor of Pittsburgh for
12 years until 2006 and helped lead the
re-birth of the city. He said,“that’s the whole
challenge we face – do we spend all our
money on today or do we invest some of it for
tomorrow? You have a fundamental choice
to make – do you want to be loved or do you
want to be effective? If you want to be loved,
you’re probably not going to be bold.”
This seems like a natural progression given
the range of innovation awards now available
to corporate legal departments everywhere.
Both Telstra and Woolworths are recent
winners of global ACC Value Champion
awards. There is also good evidence that some
of the best ideas and most innovative projects
can originate with the law firm rather than
with the company or its legal department.
A handful of legal departments have decided
that they must be bold if they wish to secure
ever-greater value from their preferred firms