As we head into 2020 and the global economy gradually crawls from under the shadow of the global financial crisis, law firm partners and general counsel stand at a crossroads. Client satisfaction scores are at crushingly low levels. Collection realisation rates for law firms have been declining for a decade. In this situation, the spotlight normally turns to renegotiating rates. While important, law firms and legal departments are missing a much bigger opportunity to save money – by embracing a collaborative mindset that prioritises eliminating inefficiency and waste across their interactions.

As we enter the next decade, leaders in law firms and corporate legal departments face a fundamental decision. Do they want to accelerate the drive to transform legal services into a pure commodity – something to be delivered first and foremost at the lowest possible cost – or invest in elevating their relationships to strategic business partnerships that can deliver competitive advantage? Technology is now available to do either.

A trusted adversary?

GCs expect firms to behave like trusted advisors and partners, especially when they are working late to provide carefully considered advice on the most critical decisions in the life of the business. They also, however, expect partners to take it on the chin when their whole invoice is rejected because, for example, they hadn’t pre-approved a junior associate’s rates in advance. Partners rail at the absence of proportionality and reasonableness, and failure to account for the context of the work. GCs feel exasperated at poor internal billing and time-recording hygiene and lack of technology investment, despite huge and ever-increasing law firm profits.

A clumsy billing mechanic or a ‘surprise invoice’ can bring this cognitive dissonance to the fore, where issues of trust in this arena spill over and taint the wider relationship.

Understandably some GCs have felt the need to erect defences in the form of e-billing tools to automate the enforcement of detailed billing guidelines. The instinct to protect oneself seems perfectly rational. Some legal departments are even doubling down on this adversarial stance, arming themselves with tools powered by AI, that can automatically detect billing guidelines violations by spotting suspicious patterns. With a zero-sum mindset, where “your loss is my profit”, the weaponisation of AI against a supplier will seem a perfectly logical and rational evolutionary step.

Uneasy balance

Many legal departments are uneasy at the prospect of antagonising their law firms like this. They recognise that access to a pool of talented lawyers in a given law firm is an enormously valuable intangible asset. Faced with this potential conflict, and seeing little alternative to the status quo – other than a provocative e-billing tool – they shrug and give up. It is important, however, for legal departments to appreciate that the challenge of managing law firms is neither new nor unique to the legal industry. All large businesses have suppliers they are both dependent on, and have leverage over.

A lesson in Lean

The history of supplier management holds some valuable lessons for the legal industry. The Japanese post-war auto industry saw one of the most profound innovations in managing suppliers. A lack of raw materials in the post-war Japanese economy forced the fledgling Toyota car company to focus on eliminating waste. Unit cost savings through economies of scale were out of reach for Toyota. Instead, they focussed on building cars to order, quickly and in small batches. Inventory and work in progress were kept to a minimum. Toyota demanded suppliers invest in technology so they could deliver small, high-quality batches of inventory on demand, and they paid their suppliers enough to afford this.

By focusing on eliminating waste (“Muda”) across the supply chain, instead of just minimising unit costs, Toyota got real-time visibility on supply-chain stock levels, drove higher quality and had faster resupply times using Kanban (“just in time delivery”). This holistic, systems-driven, and deeply collaborative approach ran counter to the prevailing wisdom back then. It not only saved Toyota tremendous amounts of money, but it also provided them with unrivaled agility in the auto industry – a capability that would later prove decisive.

The dramatic rise of Toyota in the 1970s was later studied in economic academia and incorporated into the emerging field of “supply chain management”. The term “Lean” was coined in 1988 by former Toyota quality engineer John Krafcik, and subsequently co-opted into western manufacturing and businesses process culture. Today “Lean” is ubiquitous and synonymous with best practice. Companies like Walmart and Amazon that have embraced these principles dominate the corporate world.

Preventing “waste” in legal

Today, waste takes a variety of forms, but for a corporate legal department, “waste” is a surprise invoice from a law firm, received three months after the fact, for work that was over budget and probably unnecessary.

For legal departments and law firms, the lesson of history is that the key to working together lies in thinking holistically about how to improve the legal department and the law firm relationship as a single entity. “Lean” is not about being small or doing less, and it is absolutely not about squeezing suppliers. It’s about transparency, deep collaboration, high quality, agility, eliminating waste and tight control of work in progress.

Success through transparency

In 1973 the oil crisis caused global oil prices to suddenly rocket 400%. Toyota and its supplier partners adapted quickly, building smaller, more efficient cars and taking market share. By 1980 the US car industry, having failed to adapt, was decimated and overtaken by Japan.

In 2020, the legal industry faces an uncertain future. In the UK, PwC, Deloitte, EY, and KPMG have entered the market and are ramping up their assault on the legal services market, with thousands of lawyers and huge investments in technology. Cloud-based SaaS tools are displacing the legacy on-premise tools that firms are locked into. The entire industry is grappling with the implications of technology like blockchain and looming potential advances in artificial intelligence.

The legal departments and law firms that build the most collaborative relationships with each other, based on mutual trust reinforced through transparency, will be the ones that ride out industry disruption and flourish in the coming decade.

Stephen Wilcock is Chief Technology Officer at Apperio.