AFAs: looking at the tip of the iceberg through the wrong end of the telescope

AFAs: looking at the tip of the iceberg through the wrong end of the telescope
Can IBM’s Watson supercomputer or progeny like U of T’s Ross replace the law firm partner or general counsel as the trusted adviser to the organization? No, or at least not yet, but I suggest that there are forces at play conspiring to change that role in fundamental ways beyond tweaking the billable hour model with alternative fee arrangements.

The reality for successful in-house counsel is the volume of work increases as the legal department successfully moves closer to serving vital interests of the business. This virtuous spiral is confronted with a harsh reality that legal budgets are not keeping pace; in fact, many face reduced overall legal spend. Some GCs view law firm models tied to billable hours and profit-per-partner metrics as encouraging inefficiency and suppressing innovation. The challenge to the in-house bar is to seek out and reward the innovators that deliver value for fees.
In a world in which the influence clients have over their external legal providers is typically proportionate to legal spend, there is a growing insistence that budgets are not just estimates with negotiated adjustments.

The traditional “build vs. buy” dilemma of in-house counsel and the tendency to ship out repetitive non-core work has come under pressure from near and off-shore legal service and technology providers. Higher-end work that does not arise with sufficient regularity to justify development of internal expertise continues to be supplied by bespoke firms supplemented by sophisticated boutiques.

When legal budgets get reduced, in-house legal teams are looking for relationships with external legal advisers that are not just discounted/blended rates and other putative AFAs. Two major forces are conspiring to alter the dynamics of the existing external legal provider relationship that I believe are relevant here: 1) technology, in the form of knowledge management and predictive analytics to aggregate the experience of the senior outside counsel; and 2) project management.

The same computing power that allows IBM’s Watson to defeat chess grandmasters and Jeopardy champions is being applied to cognitive computing. Much as analytic algorithms applied to real-time data are enhancing the predictive capacity of scouts, coaches, and marketers, innovative legal technology has the potential to supplant the experience of senior legal advisers in truly disruptive ways. Technical legal skills are no longer a sufficient differentiator. Certain legal functions may be replaced by professional and non-human technological support capable of gathering, analyzing, and disseminating client-useful information in near real time. Predictive technology and cognitive computing has the potential to enhance predictability of result, and therefore predictability of cost. In a world in which legal data is just another commodity, technology will allow law firms to focus on what is really important to clients: predictable results at predictable and agreed costs, thereby freeing innovative legal advisers to develop skills like legal project management that are true differentiators of legal value. This should result in fixed fee and not-to-exceed arrangements that allow clients to properly budget external legal spend with appropriate risk premiums. Risk-reward project pricing with KPIs and SLAs should be applied to legal projects in the same way that they have been successfully utilized on major construction and technology projects. Defining objectives and using established efficiency techniques will allow firms to put the right people and technologies in place at the right time and price.

One of the biggest challenges to in-house counsel is finding the time to manage such legal projects. They must find external providers that continually innovate; manage and share knowledge effectively and with clearly articulated objectives; and that use technology to predict outcomes and provide cost certainty. These skills can be either: 1) developed internally where justified; 2) entrusted to external law firms; or 3) supported by advisers with project management skills to work with and represent client interests. Only with such a periscope will in-house counsel successfully avoid the icebergs of current law firm billing models in the key function of the identification, assessment, and mitigation of legal risk.

Barry Michael Fisher recently retired as vice president, general counsel, and corporate secretary of SAP Canada, and is currently, inter alia, a principal and chief innovation officer to Avokka LLP.

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