Managing Partner, Andrew Clinton, explores how law firms and legal providers can work together with legal departments to deliver greater value.
What path dependencies exist in law?
Large corporate entities (LCs) establish a panel of law firms (on the basis that there are “horses for courses” and to introduce some competitive tension, mainly on rates). The law firms operate as independent silos.
Control mechanisms are procurement driven, with discounts secured on headline rates, value added extras, purchase order protocols, outside counsel guidelines, bidding contests, e-billing systems, audits and imposed panel terms between the LC and each firm.
There is often no established standard in terms of quality and culture as defined by the client. This results in variability as each firm attempts to understand what is important to the client.
This is an inefficient model with high transaction costs. Competition is not performing its primary role of wringing out much of the economic surplus that exists in law for the benefit of the client. In a fully functioning market, the returns on capital should be close to the cost of capital, short of an enduring competitive advantage.
Law firm partners make very healthy returns from this path dependency with relatively modest capital risk and little by way of enduring competitive advantage. What is there, other than an inefficient market to justify premium pricing for a fair chunk of what law firms do? The law firm model is not difficult to copy, there is no IP that is protected through patents or otherwise, the economic model is simple and the switching costs are not particularly high. Why then are LCs locked into this path dependency?
The characteristics of this path dependency are typically territorial behaviour, self-interest and little, if any, information-sharing across organisational boundaries. There is a lack of trust and a high degree of ambiguity. It fails the test of being able to create as much value as possible for the buyer.
Developing a legal eco system
The alternative could be a collaborative network of legal providers (not just law firms), the goal being agility aligned around client need. The characteristics would be partnership behaviour, joint knowledge, empowerment and support.
Such a model requires collaborative leadership, which is a concept explored in the White Paper written by Thomas J. Hurley of Oxford Leadership in October 2011. Collaborative Leadership is defined in that paper as “the process of engaging collective intelligence to deliver results across organisational boundaries, when the ordinary mechanisms of control are absent.”
Partnering in this way needs to be seen as the voluntary coming together of the client with the panel members, to do something transformative. (It should not be pursued as a strategy if the desired outcome is not transformative as it takes a lot of effort).
The benefits can be extraordinary and it can create value in a way that almost no other mechanism can. The “deal” for participating members is an acceptance of a reduction in the economic surplus on each matter in return for enhanced status in the eyes of the client, clear differentiation, access to new clients and the ability to more closely match demand to resource. It requires members to embrace coopetition and dance with their competitors.
Should the new model be open or closed?
The answer is somewhere in between. The hallmarks of effective collaboration are trust, openness and transparency. However, successful collaboration requires a mindset shift from “Ego to Eco” and partnering with organisations that do not have the right mindset is unlikely to deliver any additional value over a panel of independent, siloed firms. Collaboration is an unnatural act as it involves giving up an element of control and so is not for everyone.
The model can be partially closed through a set of qualification criteria, such as the willingness to invest in taking part in a collaboration workshop, submit to an external assessment process and seek ISO 44001 (Collaborative Business Relationships Standard) accreditation.
It is a business methodology with protocols and rules between all panel members and the client, not a series of parallel panel terms and conditions. The goal is to create as much value as possible for the client, with value being delivered to the firms in the form of long-term relationships with clients that share the culture. One objective would be to create a unified culture of quality and service.
Global, integrated firms cannot deliver on that promise because the various parts are independent silos.
In essence, you can’t dance with anyone, only people who can demonstrate that they know how to dance to the tune of collaboration. It is acquiring the dance moves that acts as the small advantage that can be leveraged.
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