[Posted at end of session; please forgive typos and failures to capture every detail accurately.]
Background: Started in KM, mentioned alternative fee arrangements, then a day later, was talking to a GC about AFA.
How pricing and AFA works:
1. Partner calls seeks help with AFA
2. Asks what partner thinks number should be and factors that might cost the price up or or down.
3. Toby then models how to staff the matter, presents alternatives to partner; they agree on one.
4. Toby then monitors progress on the matter, sending regular reports to partner, checking with partner on staffing. “Here’s where you are, here’s where you said you would be, here is where you are going off track”. Learn from other industries to raise red flag when projects go out of scope or when team exceeds budget. This ultimately requires process re-engineering.
The real value Toby adds is in probing with partner abut the relationship with client and how much of the value / price / cost conversation has already taken place with client. “Value comes out of the conversation with client”. If partner has not had sufficient conversations, Toby talks to clients about pain points and what they want. Example: client initially asked for fixed fee for a very large, ongoing matter. Toby explained that because of risk, that number would have to be high. Client’s real requirement turned out to be predictable quarterly spend, which is quite different. So questions designed to draw out what’s really important to client. In another instance, one client just did not want first year associates on a matter. Yet another example: client needs to be able to demonstrate to an auditor that they are paying “market” for certain legal work.
Mark has not heard the type of analytic framework Toby put forward a decade ago. Legal market has been slow to adopt the changes technology has wrought in other service markets. For Cisco, certainty is a keep goal. Cisco management notices of legal goes $1M over its quarterly $50M budget.
Value is subjective. Mark cites macroeconomic concept of consumer surplus, where many consumers benefit from a market price that below what they would be willing to pay. This stands for the proposition that each consumer has a different definition of value. Mark is trying to align law firm thinking with law department needs. Hours are in internal accounting mechanism; they are fine for firms to measure their factor inputs but its not necessarily related to value.
For Cisco, value depends on type of work. Value means one thing for patents (of which Cisco has about 750 applications per year). Cisco gives buckets of patents to each firm so that each firm can take risk per patent but do OK on portfolio. For corporate secretarial work, Cisco outsources all work to Orrick, which hires counsel around the world as needed. Each year, price must come down 5%.
Bottom line: measure value by the case. Value does not mean shifting all the risk; it means aligning interest. Most aggressive bids tend to come from firms that do most work with Cisco. Trust relationship is core to achieving relationship
Mark talks about some law firm ads and taglines. One firm says “Everything Matters”. His view is that’s great - if you bill by the hour. Not great from his view because for Cisco, not everything matters as much.
Question & Answer
To Toby: do you use firm data to analyze past costs or performance. Toby: no longer will do this. Finds that partners will say look at these 5 similar matters and then finds the total fees range from $300k to $1.5M - so how similar can they be. Firms don’t capture data the right way but tools are no emerging, for example, Sky Analytics, to capture data the right way.
Some firms, e.g., Kirkland & Ellis, track their own litigation costs. Is this a growing trend? Toby: yes, more and more firms are using task codes to track and understand time. But even better is to understand the cost of delivering service and finding ways to reduce the cost.
If we track hours, if we analyze historic hours, shouldn’t we be concerned that we are simply quantifying bad ways of working? How do we be sure we can be more efficient? Toby: I can’t get better, faster, cheaper until I have more data about my cost of production. Effort does matter but it is not the only driver of value.