25 September 2015

Unlock the Potential of Convergence

A 2014 survey of CLOs found that about 1 out of every 7 law departments had instituted a convergence program in the previous 12 months.

I found this interesting because convergence programs have been around for a very long time. In fact, it has been 20 years since Tom Sager first pioneered the DuPont Legal Model. In the years since, convergence programs have been a consistent feature of corporate legal buy, particularly among companies with significant legal costs. In most cases, however, convergence programs remain primarily focused on controlling those costs.

I believe that these programs have broader potential to drive structural change in how legal services are delivered — and in how the business of law is conducted.

Convergence today: not (necessarily) just about costs

In a recent presentation, James Strother, the General Counsel of Wells Fargo, shared the rationale for the convergence effort at his organization. He identified three main drivers:

  1. The company was finding it too difficult and too costly to drive the right kind of knowledge management across a broad group of law firms. The company wanted firms to understand core elements of their business and did not want to replicate that learning process every time a new case came along.
  2. Particularly after the 2007 financial crisis, the bank (like every bank) was hit with a lot of repeatable cases, which needed to be handled not only efficiently but also consistently.
  3. As regulation has intensified in the financial services industry, the process for setting reserves, and metrics imposed on the industry foster a drive toward more standardization.

While the third reason is fairly unique to the financial services industry, Jim hit upon themes I hear regularly from general counsel who go through a convergence program: the drive for overall efficiency and a desire for easier management of outside suppliers.

Make no mistake — cost remains the prominent consideration in most convergence programs today.

Strother’s portrayal of the effort at Wells Fargo is no exception. Therefore, at first blush, it might seem that convergence programs have not strayed too far from their cost-driven beginnings. A closer look, however, sheds light on the fundamental challenges facing law departments today — and how those law departments might build on Tom’s work at DuPont to go above and beyond the directive to simply cut costs.

In short, if we can begin to think of convergence programs from a different viewpoint, we can begin to unlock their potential to drive service delivery change.

In thinking about these programs differently, it is Jim’s observations about knowledge management and the need for processes that standardize and codify best practices that are key. Those comments paint a bigger picture that goes beyond cost: a holistic ecosystem of service providers, with the company’s needs at the center. In the true DuPont tradition, Jim is talking about better integration and deeper collaboration, across the entire supply chain. If you think about it, this type of result is almost impossible to achieve or manage in a non-converged structure.

Economies of scope, not economies of scale

So, why not be satisfied with a program that simply reduces cost? Well, the same Altman Weil survey mentioned above asks about the effectiveness of various techniques solely with respect to their impact on the reduction of outside counsel costs. Only 1.9% of respondents identified convergence programs as the most effective tool for that particular goal.

The question is, of course, incomplete. It fails to consider the internal benefits, monetary and otherwise, derived from managing a smaller group of firms. Nevertheless, let’s think about the respondents’ answer for a moment. Why would this be the case?

At their core, most convergence programs control costs through purchasing economies of scale. The company initiating a convergence program uses the power of volume to drive lower cost. Just as it was the case with respect to basic cost reduction techniques, the primary focus of such a convergence program is on the inputs of the supplier, rather than the impact on, or the value delivered to, the buyer. With fewer law firms forming the supply chain, each supplier is assigned a higher volume of work, and in exchange, theoretically offers a lower price per unit to the buyer. The primary metric used, therefore, is the price of the portfolio.

Are such programs limited in the value they can create for the company? Absolutely.

Like cost-cutting measures on the expense side, pricing down in exchange for volume can only go so far.

This is because the provision of legal services is only slightly subject to economies of scale.

By and large, the cost of service delivery by a law firm is mostly direct and mostly variable, especially under an hourly rate model. Unlike a hardware manufacturer, the cost of the thousandth unit is not dramatically less than that of the first. Yes, volume matters to law firms. And, yes, every law firm has fixed costs it needs to offset. And, certainly, because pipeline stability and revenue security have value in their own right, firms will entertain lower prices in exchange — but only up to a certain point. In turn, this can provide additional value to the buying enterprise — but only up to a certain point.

The efficiencies most relevant to the provision of legal services are those of scope, not scale. Regardless of volume, the legal and business needs of a given company do not make up a homogenous whole. Rather, variety is the defining trait. Contracts, employment, intellectual property, cross-border compliance. . . the list goes on. If you wonder whether scope of work matters to law firms, simply consider the work many firms have done to broaden their service profiles as a means to better compete in a converged environment.2

Convergence programs that rely on economies of scope in addition to scale will strike at the heart of how the entire supply chain actually works together.

Such programs are intentional and deliberate about establishing shared know-how across the provider group. They also utilize client-specific assessments of risk, impact, and value to shape how legal services are scoped, priced, and delivered. These programs recognize the need for client-centered design, which are nearly always overlooked or disregarded in programs that rely solely upon economies of scale.

Next step for convergence

This distinction between scope and scale may feel esoteric but it matters in the way in which services are delivered. In fact, as we watch these programs evolve, we see some interesting things happening in this regard — and we may be getting a glimpse into the future of legal buy.

Recently, we have seen a few convergence programs focused on both scale and scope in order to reclassify and restructure legal buy. These programs are more precise about the nature of and differences across the services sought. By explicitly tiering the nature of services according to their potential to create impact on the business — typically premium, operational, and commodity — these clients are broadening their focus beyond supplier inputs. It is now a focus on the economies of scope as opposed to being limited to just scale. Further, this enables clients to ask for varying service profiles and pricing models that conform best to each respective value tier. These tiers of services are then bundled into a broader package for relationship management.

Ultimately, the focus on value tiers builds a new service model that is designed to create efficiencies through economies of scope in addition to scale.

This broader type of convergence program seems more likely to drive service model change among law firms. While we have yet to see metrics evolve beyond pricing, the format demands a different analytical construct from responding firms. These programs require candid discussions between provider and buyer about the perceived value of certain types of services. In turn, both provider and buyer must make different decisions about pricing and management that map to the value profile of those services.

It is too early to see whether this trend will stick but, if so, this approach promises to drive more significant change in the industry.


1. In response to a dictate from the then-CEO to reduce costs across the board, Tom led an effort to reduce — that is, converge — the number of firms from which DuPont was buying legal services. By all accounts, the program successfully reduced the costs of legal services to the corporation. Over the years, the DuPont Legal Model has become a benchmark against which other convergence and relationship management efforts are measured. Tom, of course, pioneered a number of things in addition to convergence, like the use of Six Sigma inside a legal department and leading a concerted effort to drive diversity efforts in the profession.

2. This is perhaps one reason for the vibrant lateral market over the years. In fact, one might argue that the merger mania over the past few years has been at least partially in response to this trend. I suppose reasonable minds could differ as to whether greater lateral movement or merger activity create any value for the client.

 

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