LEAN for law departments and law firms

The LEAN philosophy emphasizes creating more value for customers with fewer resources by optimizing the flow of work. Thousands of books have been written about process improvement, Six Sigma and LEAN methodologies over the last 15 years. “LEAN Six Sigma for Law Firms”, written by Catherine Alman McDonough in 2014, argues that it is easy to understand, inexpensive to implement, lowers costs, improves quality, enhances communications, facilitates lawyer training, makes fixed fees profitable, and makes clients happy. While the genesis of process improvement is in the manufacturing sector, there have been a few applications in the legal services industry.

Some firms, like Seyfarth Shaw LLP, have set up consulting entities to leverage their hard-won track record into a revenue stream. A good number of firms, but still a minority, have retained them as well as specialized consultancies to advise on how to better manage internal processes and service delivery. Others have their own lawyers and professionals certified as Six Sigma green belts, red belts and even a few black belts.

I was curious about the extent of any recent developments where law firms are citing their experience in process management as a competitive tool to securing more work from clients. A bit of research uncovered six basic principles in support of process improvement. The first three are a focus on the customer for value creation, figuring out just how the work gets done, and removing waste and inefficiencies.

There is a lot of opportunity with the third principle when taking into account eight types of waste: defects, over-production, waiting, non-utilized talent, inventory, transport, motion and extra processing. The fourth LEAN / process improvement principle requires a certain doggedness because it entails tracking progress and making decidions based on evidence rather than on assumptions and goodwill. The fifth principle empowers people, in many cases these should be business people, to operate the process. And finally, the sixth principle, sustainable process improvement, depends on doing everything in a systematic way so that elements can be changed and adjusted over time.

This sounds tedious, detail-oriented, and not what “lawyers learned in law school.” Yet success with such an initiative can matter to the company, its law department, and its law firms. Every company wants to deliver greater value to its customers and to its shareholders. Law departments and the law firms they work with understand that they can improve their value proposition by delivering “less for less” faster without compromising their effectiveness. I have recently heard one global and three national law firms claim that, under the right conditions, they can reduce a company total spend by 10 per cent to 17 per cent with process improvements. There are significant implications for pricing legal work.

In a recent round of meetings with a dozen law firms following a Request for Proposals, the client was able to ask each firm about their experience with legal process improvement. Every firm itemized initiatives that made them more efficient. Every firm talked about collaboration technologies, the training in process and project management, and the specialty teams they had recruited to support process improvement. But none were able to demonstrate that those changes translated into lower fees for clients. Instead, the savings hardly paid for the costs of technology and training.

Still, three firms had enough confidence, and background about the client’s business, to say that they could apply process improvement to the client’s business practices, at least insofar as they related to retaining external counsel. Their focus was on how the work was done and on eliminating some of the eight wastes. Coupled with this was a determination to influence the somewhat undisciplined client behaviours affecting the need for services from the law department and its law firms.

Making this type of undertaking viable for the company, the law department, and its law firms depends on three factors. First, a fairly good multi-year forecast for the type and volume of legal work must be available. Second, the usual 15  per cent to 20  per cent discount on fees that should be in place in exchange for the company’s commitment to a critical mass of work to the firm. And the third is the migration away from time-based fees in favour of a negotiated price, possibly with a performance component. These are prerequisites so that the law firm can reduce its already discounted prices by a further 10  per cent to 18  per cent on a permanent basis. Otherwise put, the law firm will undertake to reduce demand for legal services through process improvement – hence less for less.

With gentle prodding, two firms agreed to a price reduction before commencing process improvements for a three-year period. The third firm preferred to rebate or discount based on a semi-annual review of progress. It appears counter-intuitive for a law firm to ask for lower fees, not a greater discount. A fixed fee with a performance feature can   be more profitable for firms than discounted hourly rates because there is an incentive to be efficient. It is also a way for firms to grow their market share from existing clients and to maintain it over time.

General counsel should re-configure their work, their partnering arrangements and their pricing to take advantage of such emerging opportunities. The remaining law firms will need to work hard to overtake their competitors with a LEAN strategy.

*Adapted from R. Stock, Lexpert, March, 2016