Reducing difficult-to-measure legal costs

When people use words like ‘costs’ or ‘expenses’ in relation to legal services, it can mean anything readily capturable in financial software. Some important costs can be difficult to measure but nevertheless significant. How can you practically estimate these hard to measure costs?

“It is wrong to suppose that if you can’t measure it, you can’t manage it – a costly myth.”  - Deming, US Management Consultant

Introduction

When people use words like ‘cost’ or ‘expense’ in relation to legal services, it usually means things readily capturable in financial software. 

So, for people or organisations with legal needs, it usually means some combination of bills for legal services, expenditure on buying or subscribing to legal information or technology, or maintaining an in-house legal function.

For law firms, a focus tends to be the cost of delivering the relevant time of a lawyer of a certain grade (typically as some function of how much they’re paid plus a share of overhead). Combined with other metrics (relating to rates, leverage, utilisation, realisation, lock-up and more), this can be translated into the firm’s financial performance. 

All very familiar territory. The rest of this article is about reducing costs in two other senses: costs that lawyers can help clients with, and costs that law firms themselves incur.

Five costs for clients which law firms can help with

One obvious cost for clients is the cost down the road of not getting advice, or not the right advice. If you’re a lawyer in a specialist area, you probably recognise it. But a challenge is how to communicate it to someone who is unaware of it and help them assess whether to act. One way you might do it is to try to translate it into monetary terms, however approximate this may be. For example, if issue A arises in B number of transactions each year and is likely to cause £C damage in D% of those transactions, then the cost referable to just that one year not addressing it can be approximated as A*B*C*D and compared with the cost of addressing it systematically. Vary the algorithm if it’s more sensible to express it as a one-off issue rather than in terms of numbers of transactions per year. The point is that translating a concept into a credible number makes the value more comprehensible.

A second cost for clients that it’s all too easy to overlook is the time and distraction involved in dealing with a lawyer. Many firms have started to take onboarding frictions more seriously in recent years, but how about the friction of communicating advice, status, budget and so forth, and empowering clients to engage conveniently with all this? For example, lengthy emails can be annoying to in-house legal clients as they can find them a bit ‘back-covering’ and also feel irritated by having to pay you for the time spent writing them instead of doing something to advance their matter. Simply asking critical questions objectively about your own processes and the tools you use can reveal some friction points. How can you make it less distracting and annoying for clients while still covering off the risks you really need to? Ask your team, ask clients. Draw up a list and try to quantify the impact, prioritise the things that are easier and most impactful and figure out whether and how to address the others. And give progression of the issues worth addressing to one or more people as part of their jobs, with a reasonable time allowance, with a clear expectation from management that partners and everyone else will engage constructively.

A third cost for clients is if the drafts which you prepare for negotiation with counterparties are more complicated, one-sided (in favour of your client) or otherwise further off from the end result than they need be. This creates extra costs for your client and the counterparty as the process required to reach the end result is more time-consuming. The resulting extra costs can superficially be justified in terms of the effort required to reach a negotiated landing, but under the surface there is real cost in terms of effort that could have been preempted, delay that could have been avoided and sometimes even relationship damage that need not have been caused. Some clients are becoming ever-more savvy to this and it may increasingly have an impact on their choices.

A fourth cost for clients is if the material you produce for in-house lawyer consumption has to be transformed unnecessarily by them into something their business can understand. This need not take you long, as it’s usually just a condensation of what you’ve done already, or a matter of using language that works for both audiences. Speak to in-house legal to see what they’d appreciate.

A fifth cost for clients is if they or their external law firms forever reinvent wheels for them rather than encouraging them to develop their own knowledge and resources, including standard starting points for documents and processes. If you can find ways to help clients with that sort of thing then you may find that the cost savings for them translate into an increase in trust of your firm, meaning that you’re better placed to win the really complex, high-margin work when it does come up. Of course, it depends on whether you’re really in the relationship game.

Costs for law firms

In discussing costs for law firms, I’m not going to set out a long list. Instead, let’s take up the example already given of the long email the client doesn’t really want.

I’ve already mentioned the cost that this imposes on the client’s time, state of mind and money. Obvious costs that it imposes on your firm are, in the short term, whether the client will pay that part of your bill and, in the longer term, the effect on the client’s attitude towards your firm (and all that may flow from this). A less obvious cost, perhaps, is on your own staff’s morale and retention. If you’re consistently writing off, say, 10 or 15% of the time recorded on matters because it’s not going to be acceptable to clients then that’s not only a cost for the firm, it’s a burden on your individual lawyers. Translate it into extra hours per month or year and reflect on the implications for people’s happiness and health (in various senses) and for them staying and growing in your firm.

And to take that point further, if some of the hours that your people charge to client matters end up in bills that clients do currently pay, but which you know in your heart are for things that could be done more efficiently, then you can be sure that trainees and junior associates will be alive to that as well, only more so. And that their peers who are individual clients or are in in-house legal jobs, either now or soon, will also know. And if your people feel that they’re grinding through things that really need not be done so painfully then you are probably, in the modern context, increasing the risk that they will leave at a greater rate than they would if you were giving them a sense of progress and increasingly interesting work. 

This is something else that you can try to quantify roughly by looking at what people actually do with their days, and working with them to understand what they find exciting, satisfying, acceptable (people differ, and nobody needs excitement all the time) and what is more of a grind, or even alienating. Analyse time entries, hold conversations, run surveys – there are various ways you can do it. Don’t just rely on one. Then, having broadly understood the situation, think about what you can do to shift the balance, accepting that some things will be just facts of life or will require a community effort (beyond your own firm) to influence. 

To build willingness among partners to bother with this, you could share publicly available information on generational motivations plus your internal findings. Also try to put it in monetary terms, for example by quantifying the cost of losing people in the years after qualifying at your firm. An easy way to measure that is in recruitment fees and in lost billings while a leaver winds down and a joiner gets up to speed. But also see if you can estimate the value of the relationships built up even during a person’s relatively few years with the firm as a trainee and junior associate, and therefore the cost of losing it and having to backfill.

Conclusions

I’m sure you could build on the examples above, but the simple message of this article is that some of the most important costs for your clients and firm are things that you can’t see directly in your day-to-day matter metrics but can estimate. In a world of inflating salaries and deflating legal budgets, it may be worth your while at least to identify the big ones, put some rough illustrative numbers on them and then chip away at addressing them. Incremental improvements, not just mega projects.

I’ve deliberately framed this article negatively, focusing on costs rather than talking about value. Cost reduction is more motivational for some. But of course decide how to frame it for your own audience. 

One last thing I would suggest is, unless you’re very sure it will land well with your audience, minimise fancy terminology. My experience in the legal world is that it usually alienates more than it helps if you want to engage with a wide range of people. Keep things grounded by expressing it in simple words like time, money, convenience, distraction and expense.

Written by Graeme Johnston, who used to be a partner in Herbert Smith Freehills but these days runs Juralio, a software company based in Dundee.