Chief legal officers can push firms to deliver better service by using evaluation criteria
Over the years, I have written a series of articles about law departments and legal fees (“Performance Plans for Firms,” “Budgeting Complex Legal Work,” “The Evolution of KPIs,” and “Too Little, Too Late”), and last year posted “Evaluating Preferred Law Firms” in Canadian Lawyer. There is also a long list of related topics, including comparing law firms, legal project management and budgeting, and alternative fee arrangements. But now is time for a few ideas about tying performance to legal fees for complex files.
A multinational company recently asked several primary firms to provide legal support for a construction project. The company and the firms had years of experience in project management, including legal project management and budgeting. The company’s law department was able to communicate its legal objectives for the file, including the expected deliverables. These included detailed planning assumptions for eight phases of mostly contract and sub-contract legal work stretching over 18 months.
The successful firm had an edge over its four competitors because it was willing to accept a hybrid fee arrangement consisting of a fixed fee for all phases and a performance fee. The firm was asked to list and describe the criteria that could be used to evaluate its performance. In our experience, only a few firms have formal evaluation programs that the client completes. This firm used it with several clients to share financial risk and reward as a pathway to non-hourly fee arrangements.
The legal budget for the file was $825,000 in the form of a fixed fee, appreciably lower than proposals from other firms. In addition, the client agreed to a performance fee of $130,000. Our experience with this type of hybrid fee has been primarily with portfolios of active files rather than applied to a single file, as in this case.
The firm proposed 10 evaluation criteria. Six of these could be categorized as “service-related”: responsiveness, meeting deadlines, substantive and regular communications, professionalism, and adaptability to change. Two other criteria focused on “efficiency”: managing the legal team and varying timelines. The last two criteria could be categorized as focusing on “results”: delivery of work product that met the client’s specifications and the contribution of valuable solutions and strategies across the 18-month project.
The firm’s proposed criteria configuration was heavily weighted toward relationship management and resource efficiency. Only two criteria would tie the performance fee to expected results. This approach is not unusual for professional service organizations, as law firms are inherently risk-averse. The firm was commended for its readiness to apply a broad range of criteria and to be evaluated formally.
However, the company thought tier-one firms were relatively evenly matched regarding service levels and efficiency. Therefore, it preferred fewer criteria and a heavier weighting for results. Three criteria emerged: results at 70 percent, efficiency at 20 percent, and service at 10 percent. Thus, with a performance fee of $130,000, $91,000 (70 percent) would be allocated for results, $26,000 to efficiency, and the remaining $13,000 to service. Relying on only three criteria reduced the number of “angels on the head of the pin” debates that would inevitably occur with 10 criteria. Each of the three criteria can then correlate to the project’s specifications and plan.
The company opted for a scoring system based on 20 points in this case. The allocation of points was without ambiguity:
Weighting allows for a perfect score of 20 points:
A minimum of 16 points (80 percent) was used to qualify for the performance fee. A graduated 5-point scale determined the amount of the performance fee. Thus, 20 percent of the performance fee is for 16 points, 40 percent is for 17 points, and so on, up to 100 percent is for a perfect score of 20 points. The company agreed to provide monthly informal feedback to the firm, without any scoring, so that it could address and improve performance on a timely basis. The company also agreed to provide a written summary of evaluations of “Does Not Meet Expectations” and “Exceeds Expectations.”
The firm responded with confidence that it would manage its performance and exceed expectations. CLOs must challenge and reward their firms to focus on performance.
