Legal pricing (Part 6 of 8): Using metrics to define value
In the legal profession, everybody’s talking about value, but nobody seems to know how to measure it.
In September 2009, the Association of Corporate Counsel announced the creation of the ACC Value Index , a “client satisfaction measurement tool that helps ACC members to share meaningful information about the law firms they engage.” Clients were asked to rate law firms on a 1 to 5 scale on six key factors
- Understands objectives/expectations
- Efficiency/process management
- Predictable cost/budgeting skills
- Legal expertise
- Results delivered/execution
Then they answered a single summary question: “Would you use this firm again?”
The idea of Zagat-type ratings of law firms was controversial from the start. Six months ago, ACC announced that the Value Index had been closed because “ACC members voted ‘with their feet’ by continuing to use the eGroups for law firm referrals, instead of the Value Index.”
While the idea of a Zagats of law firms has disappeared for now, the six key factors in its rating system remain a great starting point for defining value. The key phrase in that sentence is “starting point.”
In a panel discussion at a March 2011 Georgetown Law School Symposium entitled “Value: How do we define it? How do we measure it?”, Susan Hackett, then head of the ACC Value Challenge, noted that “Value is hard to define… The ACC Value Index offered an early set of categories of common interest to examine but it needs to move to the next level of assessment. The future of value assessment will be data-driven.”
Thought leaders are beginning to discuss exactly what value metrics should look like, and how they should be related to prices. A few months ago, Paul Lippe listed several value metrics that might be used to evaluate sales contracts:
- “How quickly did the contract get done?
- How favorable are the terms to the company (opportunity gained and risk avoided)?
- How easy are the terms for other parts of the company (finance, manufacturing, sales, etc.) to understand and perform?
- How satisfied were the true business clients?
- How satisfied was the counterparty?
- How much did the contract cost?
- Did the contracting process improve?”
If you want to explore just how complicated this type of measurement can get in the real world, see the series entitled “A Value-based Client-firm Relationship” on the ACC’s web page. It includes 16 posts in which a client – Ken Grady, General Counsel and Secretary at Wolverine World Wide – and his law firm – Seyfarth Shaw, represented by Lisa Damon – talk through the details of how they defined value metrics and determined cost for work on a trademark portfolio.
Here is one list of possible value metrics from the law firm side early in their negotiation:
- ‘Success’ rate, measured by things like first action allowance, watch hit outcome
- Overall satisfaction
- Timeliness of communication
- Effectiveness of ‘lessons learned’ sessions
- Strategic participation/understanding of Wolverine business
- Proactive issue identification
- Budget variance
- Cost management effectiveness”
Here are a few of the value metrics that the client proposed:
- “Trademark Risk Rate (total dollars spent defending trademarks, divided by total number of trademarks defended)
- Counterfeit Recovery Rate (total dollars spent on anti-counterfeiting actions, divided by total number of units seized)
- Specimen Response Productivity (days from first request for specimen to receipt of acceptable specimen, divided by number of trademarks for which specimens requested).”
On the positive side, if you read all 16 posts about the details of this relationship, it is clear that the two sides developed a very trusting relationship, and that Seyfarth went the extra mile to be a proactive strategic partner that puts its money where its mouth is. On the negative side, this is uncharted territory, and it took months of discussion to come up with metrics that enabled both sides to stay in control of the process and measure how it was going.
When the time came to tie the metrics to a portfolio price for the year, Grady proposed:
"One way to set the new fee relationship for year one of the relationship would be to:
Adjust the baseline based on what we know about the business (that is, increase, decrease or the same amount of portfolio activity)
Adjust that amount to account for improvements in the processes to handle the portfolio using lean activities we will undertake with Seyfarth
Adjust that amount to build in whatever cost-sharing is appropriate for Seyfarth to get up-to-speed on our business as reflected in the portfolio
We then could agree on a base price to handle the portfolio work. We can gainshare on additional improvements – we get part of the benefit (lower costs) and Seyfarth gets part of the benefit (we don’t get 100% of the lower costs). We could add a topper fee: depending on performance against certain other metrics (e.g., increase in average mark value using the equation I showed in the last post), Seyfarth gets an additional payment for helping to drive the increased average mark value.”
Here is one small part of how the payment system actually worked:
To measure Seyfarth’s systemic improvements, we will use two metrics: time to process an application, and time to receive a useable specimen (we have to file specimens in certain countries to show we are still using the mark). We need one score across both metrics to determine Seyfarth’s bonus, so we will combine the results on the two metrics by weighting them 80% on trademark applications and 20% of specimen gathering. We calculate the trademark application improvement metric, multiply it by .8, calculate the process improvement on specimens metric, multiply it by .2, and add the results. For every X% of weighted process improvement, Seyfarth will earn $.75.
This example is much more sophisticated, complicated and demanding than the simple value pricing examples we quoted in Part 4 of this series in which a client simply paid a hefty premium because he felt that he had received value in excess of hourly rates.
There can be little doubt that in the current environment, some clients will continue to look for metrics that allow them to precisely define value and tie it to payment. But we predict that many lawyers will see the example above as excessively complicated, with a whole lot of arithmetic and price uncertainty. So it is far less certain how many clients and law firms will ultimately develop and use metrics like this.