Would You Rather… Predict the Weather or Build a Legal Budget?

by Timothy B. Corcoran on December 12, 2012

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When my daughters were younger and we were trapped in the car on a long drive, we’d play the “Would you rather…” game.  Players must choose between two distasteful actions posed by others, such as “Would you rather eat a cockroach or kiss your cousin?”  As the game continues, the choices become increasingly preposterous: kidsmurf “Would you rather dive into a swimming pool full of warm spaghetti or go to the mall wearing a Smurf costume?”  If it sounds like fun, well, trust me, it isn’t!  But in-house lawyers engage their outside counsel in a version of this game every day:  “Would you rather submit a legal budget that’s probably inaccurate and hope we pay for any overages, or refuse to submit a budget and risk losing the project to a competitor?”  And when it’s the outside counsel’s turn, they pose equally vexing choices to their client:  “Would you rather hire a firm with the right experience in this matter but have no insight into the potential cost, or hire an inexperienced firm merely to obtain the lowest rate?”  In the children’s version of the game, there are no appealing choices.  In the legal market’s version of the game, it always seems as if the choices favor one party or the other, but never both.

This zero-sum approach stems from the belief that legal matters are impossible to predict, that budgets set forth before we begin will always change before we’re done.  We can’t know in litigation whether the adversary will file numerous frivolous motions designed to delay and harass.  When conducting M&A due diligence, we can’t know in advance whether we’ll find leaking underground storage tanks under the target company’s headquarters.  We can’t know whether government regulators will issue onerous new hurdles for regulatory approval.  As Prussian Field Marshall Helmut von Moltke said, “No [battle] plan survives contact with the enemy.”  Case closed.  Legal budgets are impossible, right?  Of course not!  If we extended this mindset to other fields, we’d never be able to predict the outcome of elections (and some do this quite accurately).  We’d never be able to assess athletes’ potential (and some do this quite accurately).  We’d never know whether to take an umbrella when we leave the house in the morning.  In reality, there are many fields with as much, if not more, substantially more, uncertainty as legal budgets.

I write more about this in my article on the LN CounselLink blog:  Weathering a Hurricane of Uncertainty.  I draw comparisons between predicting the weather and developing legal budgets, suggesting that budgets don’t have to be perfectly accurate to be helpful to the business:

“Part of the disconnect stems from different perceptions of the nature of predictability.  For risk-averse outside counsel, a client who demands a matter budget before even awarding the engagement is asking for the impossible.  For the client, however, creating such a budget is an exercise in the probable.”

LN CounselLink blog

I closed the above-referenced article with an anecdote about speaking to a roomful of lawyers, outside counsel gathered at the invitation of their large multinational client, on the topic of legal project management and budget predictability — at the exact time that Hurricane Sandy was making landfall mere miles from my home in New Jersey.  After delivering my keynote address, I chatted with a number of the lawyers during breaks.  The conversations touched both on the looming hurricane and on the nature of unpredictability in legal matters.  Based on these conversations and experience gained elsewhere, many outside counsel and inside counsel have a blind spot when it comes to understanding the nature of predictability.  Allow me to paraphrase some of these conversations:

Partner 1: “Do you expect the hurricane to be serious at your home?”

Tim: “I can’t know for sure, but the weather channel and local meteorologists have mapped out a likely route based on all available data and it shows the eye of the storm will stay about 40 miles East of my house, but the wind in my area is expected to wreak quite a lot of havoc.”

Partner 1: “I appreciate your remarks, but I should tell you that in my practice, labor relations, achieving any measure of predictability is unlikely.  You see, the uncertainty of union negotiations and the unpredictability of wage and hour claims or wrongful termination suits make this practice uniquely reactive.”

Tim: “The client mentioned that there’s a marked increase in employment-related suits in years when they conduct layoffs, but otherwise there’s a historically narrow range of suits.  Similarly, next year is the second consecutive year with no expiring union contracts, and given the company performance and economy, they don’t expect the unions to accelerate talks.”

                                                    _____________________________________

Partner 2: “Do you think you’ll lose power at your house?”

Tim: “I can’t know for sure, but the emergency response coordinators in my town and all surrounding towns have said it’s highly likely, and have been urging for days that people stock up on canned goods and bottled water, check for fresh batteries in flashlights and radios and fill gas tanks so you can charge your cell phones in your car in the driveway.”

Partner 2: “Your talk about managing costs was very interesting, but probably doesn’t apply to us as we’re generally retained only for high-stakes litigation, and as you might imagine when the stakes are high the client is less concerned about budget and more concerned with survival.”

Tim: “I don’t disagree that high stakes matters generate far more concern, but the Deputy GC in his remarks was crystal clear that they will use their own internal resources for certain key litigation tasks, tasks which historically are premium-priced by firms like yours.  Just because the overall matter is high stakes doesn’t mean the client will pay premium rates for even commodity tasks. 

                                                     _____________________________________

Partner 3: “What happens if you lose power?”

Tim: “Well, the options are finite:  if we lose power for a day or so, I don’t expect much beyond inconvenience.  If we’re without power for more than 24 hours, my sump pump will fail and I will have flooding in my basement.  The longer I’m without power, the greater the magnitude of damage.  If we’re without power for more than a couple days, I’ll take the family out of town to stay with relatives and we’ll all take time off from work and school.”

Partner 3: “We enjoyed your talk and are pleased to report that we employ alternate fee arrangements with this client regularly. Trouble is, sometimes we just can’t predict all the outcomes and we’re left with either an unprofitable engagement or an unhappy client when we ask for additional fees.

Tim: Alternative fee arrangements aren’t supposed to be win-lose, they’re supposed to be win-win. A well-designed AFA will anticipate multiple outcomes and apply probabilities to each – we call these the optimistic, realistic and pessimistic scenarios.  When one of the less favorable or less likely outcomes occurs, it may be unwelcome but it’s not a surprise and the client is generally quite willing to adjust the fee.  AFAs that assume only one path are most likely to be bad business decisions for law firms.

The point isn’t that creating legal matter budgets is easy.  Of course it’s not.  But who is better equipped to create decision trees and assess probabilities of the various paths a matter may take than a lawyer who has vast experience?  While the changes taking place in the legal marketplace may seem to favor inexperienced low-cost providers, nothing is further from the truth. There has never been a better time for lawyers to demonstrate how their specific experience can add value to their clients.  Clients will continue to hire trusted advisors who have their best interests at heart, just as assuredly as the sun will rise tomorrow.

 

Timothy B. Corcoran delivers keynote presentations and conducts workshops to help lawyers, in-house counsel and legal service providers profit in a time of great change.  To inquire about his services, click here or contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.

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{ 2 comments… read them below or add one }

Would You Rather February 7, 2013 at 8:22 am

Must admit this is all way over my head, but still I’m much for the predict the weather approach. Only on the basis that in my market (websites) being ahead of the technologies gets me my work.

Mike O'Horo December 13, 2012 at 1:01 am

Just because you’ve not previously done something doesn’t mean it can’t be done. During the 25-year run of what’s been called the Golden Age of Law Firms, universal prosperity meant that both outside counsel and their clients had the luxury of working a cost-plus hourly fee arrangement. Nobody had much interest in fixed fees, budgets and predictive capability.

That era is over. Lawyers who fail to develop the ability to predict cost and outcome within reasonable probabilities will suffer the consequences of irrelevance. The law departments who tolerated the shared financial laxity are no longer calling the economic shots. Now, the C-suite is demanding the same financial discipline of the law dept. that they’ve always gotten from every other department in their companies. And they’re not accepting any excuses. They don’t want to hear “It can’t be predicted.”

As for the inherent variability of litigation, we’ve already proved a model whereby the client and outside counsel collaborate to yield a rational estimate, but more importantly, identify the variables that determine how close the case will be to either end of the high/low spectrum, and a system to alert both to variables that are showing early signs of moving out of range. You end up with an estimate that’s the product of both parties’ knowledge/experience, and for which both are equally responsible.

It’s kind of like the behavioral canary in the pricing coal mine. This concept is so elegantly simple that we can teach it in 20 minutes, and even the most skeptical lawyers who try it are stunned by two factors: 1) How reliably it produces a confidence-worthy outcome and 2) how much the clients recognize its inherent legitimacy and embrace it.

Clients don’t want to hear that litigation cost cannot be rationalized. It’s been done.

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