Linking metrics, fees and value
Week 5. Each week via the In-House ACCess blog, follow the promise and pitfalls of forming a new value-based client-firm relationship. ACC Value Challenge steering committee member Ken Grady, General Counsel and Secretary of Wolverine World Wide, offered to profile his selection and start-up process of launching a trademark portfolio management engagement with law firm Seyfarth Shaw. Ken’s co-blogger is Lisa Damon, a member of Seyfarth’s Executive Committee and leader of the firm’s efforts to incorporate Lean Six Sigma into its business. To catch up on the story so far, click here.
The client side
From Ken:
Last time I talked about some easier metrics, so now I’ll address a more challenging one. Remember, we measure where we are today and then we measure periodically. We set goals for improvement and then we use “lean” to find ways to meet or beat the goals. For this metric, the lower the value the better. Here it is:
Trademark Services Value Rate equals:
(Licensing Revenue + Recoveries) – (Trademark Expenses + Payouts)
the result of which is divided by the total number of marks in the portfolio.
What am I getting at? On the revenue side, we have licensing fees and recoveries from things like infringement and counterfeit claims. On the expense side, we have the costs to acquire and maintain the trademarks, and we have payouts due to infringement claims. Spread across all 3,600 of our marks, this equation captures most of the inputs and outputs and yields a service value per mark.
It has flaws. For example, it doesn’t capture our internal time and those fixed costs (office rent, etc.) associated with providing those internal services. Since those costs remain relatively constant for us from year to year, I decided to make the equation simpler by leaving them out. It also doesn’t capture mix. Each year, we add and drop trademarks. New marks are more expensive given the acquisition costs. We should probably have a mix metric to see if the proportion of new to old marks changes significant from year-to-year as that could affect the portfolio value equation. The metric probably can’t be used to benchmark against other portfolios (a company using all in-house lawyers would have a different value profile than a company doing everything externally). That problem doesn’t bother me as I am using this as an internal comparison from period-to-period to measure whether we are improving compared to our past performance (though I could argue that it is still a valid comparison – a company with lower expenses to manage its portfolio generates higher service value per mark).
The next question is: should this metric (or any of the other metrics) be tied to the fee arrangement? Does Seyfarth have enough control over the equation inputs to make this work? Is it okay to make that connection as long as Seyfarth has an out clause (and what should that out clause be)?
Here are some of the “pros” for making the connection. The most meaningful driver is outside legal fees (a part of trademark expenses), so incenting Seyfarth to drive those fees down gives them a big lever to drive value to the firm. For counterfeiting, low costs and high recoveries (creative strategies from Seyfarth) also have high value.
Using metrics like these raises another question: is it the law firm’s role to raise the portfolio value or to provide high quality services at acceptable cost for those things the firm is asked to handle? If you believe it is the latter, then the metric I showed above may be fine for measuring portfolio improvement, but not for setting the law firm’s fees.
Next: Continuing the fees discussion.
The firm view
From Lisa:
As I hope comes through in these posts, we have been on a mission to understand and participate in the development of a different (and we hope better) relationship between client and law firm. Ken’s post hits at one of the core elements of that mission – the fee structure. I would like to talk a little bit about Ken’s last point, the role of the Firm in delivering value.
Our experience has been that most discussions revolve around the ability to deliver high quality legal services at an acceptable cost. That is, of course, the principal driving premise of our Lean program. An output of that system, we hope, is an enhanced ability to define the scope of services, find efficiencies and develop a fee structure which reflects those results. That means things like flat fee pricing, per case pricing, portfolio or task-based pricing etc., etc., etc.
What excites us, however, is Ken’s first point: the role of the law firm in the value proposition to the client’s business. How can Seyfarth be tied to the business and incented not as a vendor but as a business partner? Certainly, there may be tranches of legal services where the core goal cannot really be much more that the point made in Ken’s first paragraph. The value to the enterprise is, in fact, handling the matter at high quality and acceptable cost. At the same time, there are many areas, like the trademark area, where – based on the right relationship between client and firm – the opportunity ought to be there for the firm to participate in and it (the firm), should be charged with the goal of adding economic value to the enterprise. I say "right relationship" because this requires a collaborative relationship that goes beyond the traditional role of the law firm and has to be one embraced by both sides of the equation. In turn, making that success (or failure) a component of the fee structure validates that relationship and creates the right incentives.
In a sense, Ken’s model takes the sometimes “cloudy” concept of value and adds substance to it. He is asking us as an outside provider to do more that simply meet the threshold requirement of delivering quality services at compelling prices. He wants more, a business partner that will help strategically deliver value to the enterprise. Although Ken’s focus in his post is on the trademark portfolio specifically, we read his meaning to extend to many other disciplines. At our best, we should be helping to build enterprise value across many different areas of service by supporting productivity, appropriate risk management and higher level development of strategic planning. Bottom line, we believe that Ken is on to something by helping to really define the concept of “value” to mean something more than cost for services rendered.
Next: Getting to “yes”