Legal Fee Lessons Corporate Legal can take from Henry Ford

by | May 12, 2015

Note:  this post was compiled by a team (this post has been updated since publication for clarity).

Charles Proteus Steinmetz was an unlikely hero in a key note speech to corporate legal attendees at the 2015 CounselLink Annual ConferenceD. Casey Flaherty, the key note speaker, opened his talk with an image of this gentleman.

According to Mr. Flaherty, Mr. Steinmetz, a genius of his time, was commissioned by Thomas Edison to solve a big business dilemma for none other than Mr. Henry Ford.

Ford was having problem with one of the generators at his River Rogue plant in Dearborn, Michigan. Upon arriving, Steinmetz asked only for a cot and some water. For two days he paced next to the generator, sometimes stopping to press his ear against it, and scribbling incomprehensibly on a notepad. Finally, Steinmetz requested a ladder (he was a dwarf) and piece of chalk.

Steinmetz climbed the ladder, made a mark with the chalk, and gave some instructions to Ford’s engineers about what do at the mark (remove a plate, add some windings). After Steinmetz abruptly exited, Ford’s engineers followed his instructions. The generators worked perfectly. Ford was ecstatic until he got the bill.

Steinmetz had billed him $10,000 for fixing the generator. That is close to $225,000 in current dollars for two days of work. Ford, being a sophisticated client, requested an itemized bill. Steinmetz obliged. Steinmetz’s second invoice:

Make mark with chalk                              $1

Know where to make mark                $9,999

Ford paid the bill. Ford recognized the value was in the service Steinmetz provided, not in the effort he put into it. Output, not input.

Mr. Flaherty took the liberty of creating a third, hypothetical invoice. What if Steinmetz had brought associates to do the laborious work and billed like a law firm. The bill would have looked entirely different. Instead of billing for knowledge, the entries would have been entirely based on labor (the inputs). Mr. Flaherty set the bill amount at an amount that when cut by 16% would equal $10,000 (the established value). That 16% is not arbitrary. It is average realization rate for law firms, a metric that has been falling steadily for years.

Flaherty believes the downward trajectory of law firm realization rates is symptomatic of the fraying relationship between in-house attorneys and their law firm partners. Inside counsel knows that there is real value being provided (the $10K) but also have a sense that they are being charged for non-value-adding activities (the 16% reduction).

Legal Invoicing Analogy for Corporate Legal

Mr. Flaherty used this analogy to explain the importance for corporate legal attorneys to understand the value they are getting from their law firms partners. Clients value the relationships but have an impressionistic sense that inefficient processes are costing them.

To distinguish the valuable work from the potential waste, Mr. Flaherty referenced Jeff Carr’s four buckets for legal work:

  1. Counseling
  2. Advocacy
  3. Process
  4. Content

Corporate legal attorneys, he said, are more than happy to pay for counseling and advocacy because they are valuable, customized services which require deep expertise. However, Flaherty suggests, inside counsel are more reluctant to spend large amount of money on categories three and four – process and content, especially because these costs should be going down over time because, paraphrasing Carr, “the only thing I hate more than answering the same question twice, is paying to answer the same question twice.” As the industry has matures, paying for process and content has becomes more problematic.

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The State of Corporate Affairs

“Lawyers are miserable people” said Mr. Flaherty. Citing survey data, Flaherty lamented how unhappy attorneys are, especially the young ones. They are chained to their desks 10-20 hours a day working on, you guessed it – process and content.

One important issue, Flaherty claims, is that young attorneys spend much of their time using a tool, a computer, they have never been trained to use. Having already tested over 1,000 attorneys, staff, and law students via an automated assessment that is part of his Legal Technology Audit, Flaherty is convinced that the digital native is a myth. His empirical findings suggest that lack of tech acumen alone probably accounts for something like 13% of billing being attributable to non-value-added drudgery endured due to lack of basic tech acumen.

Flaherty also highlighted his and other corporations’ findings that inaccurate record keeping (a pure process issue) costs corporations around 23% of their total bills in the form of phantom billable time. “The longer people wait, the more they inflate”, claimed Flaherty as he shared research as to how reducing the lag for recording time entries from an average of 17 days to an average of 3 days reduced the average entry by almost a quarter.

The focus on process and content is not about dismissing the value provided by counseling and advocacy, it is about separating them out and making sure that the right lawyers are doing the right work the right way. As Mr. Flaherty puts it, “Not all legal services require a genius.”

Going back to how Mr. Steinmetz handled Mr. Ford’s unique business problem, he handled the knowledge work himself because he could do it in the fastest and most effective way possible for his client. Steinmetz left the labor – the content and process – to someone else. Mr. Flaherty noted that sometimes there will be instances where a legal department will need a genius and other times, like when the firm is handling process or content related work, when it will not.

Mr. Flaherty discussed the Legal Technology Audit (the RFI for which he gives out for free) he developed to measure the process and technology aspects of legal services. Mr. Flaherty emphasized that the Audit score was not meant to be precise. Rather, his focus was on broad accuracy. He was more interested in getting a general picture of how well firms handled process and content than trying to make granular distinctions between firms that were substantially similar.

Mr. Flaherty also championed the idea of strategic sourcing, with its focus on long-term relationships and continuous improvement across the entire value stream. Communication followed by collaboration to improve performance is critical to a successful relationship. Done right, his Audit helps open a dialogue between the legal department and their law firm partners. “It is as much about carrots as it is about sticks” Importantly, the firms doing a good job should get rewarded with more work. If not, the measurement doesn’t matter. “If dollars do not depend on innovation, dollars will not be spent on innovation.” Mr. Flaherty said that the ultimate responsibility for changing behavior was on the clients, not the law firms. “It is a buyers’ market. Only the buyers can fix it.”

Lessons from Henry Ford

The Uphill Battle

Mr. Flaherty rightfully acknowledged changing the culture of the legal department is no small feat. Rather, he suggested, it is an arduous process that takes time and a great deal of effort. It takes a true commitment both in terms of culture but also in terms of headcount. Without something akin to a legal operations team, you have to convince busy people working on important projects to give up short-term goals in order to tackle the long-term consequences of inattention to process, “I have time to be inefficient, but I don’t have time to reduce inefficiency.”

Change is undoubtedly difficult and people, by nature, are averse to doing things differently. He even cited a study that showed when people were informed that they were in imminent danger of a heart attack, only 1 in 7 were capable of meaningfully changing their behaviors. To say changing a corporate culture is a challenging process is an understatement, but as we’ve seen in the past, sometimes stepping out of your comfort zone can mean the difference between being just good and being great. Just think about what Mr. Steinmetz and Mr. Ford would do…

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Photo Credit:  Wikimedia Commons, CounselLink

Contributing Writer
Contributing Writer

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