A Value-based Client-firm Relationship: Part IX
Translating value and metrics into fees
Week 9. 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. The voice, views and stories expressed by the authors below are their own and not ACC’s. To catch up on the story so far, click here.
The client side
From Ken:
In all the fun of setting up our new trademark portfolio representation and fee arrangements, one thing I can’t overlook is the equally fun world of accounting. Our company focuses on building brands, and with about 3,600 trademarks in the portfolio those marks are an important part of our brand building process. Since they are valuable assets, we need to track the asset value from day one. In the old days, this was relatively straightforward, yet somewhat tedious. For each mark, we captured the dollars spent on acquiring the registration. That meant hours times billing rate plus expenses. Once the mark registered, we expensed the costs of keeping the mark so they were not built into the asset value.
As we work out our new structure with Seyfarth, the accounting piece becomes a bit more complicated. While Seyfarth will keep track of the time it spends on each mark, our fee structure looks at the total work performed by Seyfarth (with some exceptions, such as litigation) and puts that under one umbrella figure. We then adjust that figure based on factors such as efficiency gains.
That means we need to develop a way to determine the initial value of a mark. The method I am considering is to take the total number of hours worked by Seyfarth in a given period (e.g., a quarter), divide the total payments to Seyfarth for the quarter by those hours, and take that resulting rate times the number of hours worked on a particular mark application as the “value” generated for the asset during the period.
While the calculation works, it raises some questions. Is the “value” of the mark really determined by this “hours times average rate calculation”? Should the initial value of a mark be determined by the average cost to obtain a mark rather than the specific time spent obtaining the mark (this assumes all marks are of equal value out of the box even though some required more work than others)? Should the initial value be unrelated to the costs to obtain the mark, and instead be based on something else, for example, some metric based on sales during the period prior to when the mark is registered?
I’m sure the valuation experts could chime in with many other thoughts on how to get to the initial value of a mark and would point out various flaws with the methods I have listed. I’m not trying to get to the right answer in this post. My point (and I do have one), is that as we push ahead with modifying the way we compensate outside counsel we have to work with other groups to modify their thoughts about valuation. Many of our colleagues have learned to think about lawyer’s services based on hourly rates and have adapted their systems to this model. Educating others--corporate controllers, CFOs and CEOs – that the hourly rate is not an appropriate model is part of the process.
By the way, if anyone does have a great model for determining initial trademark values, please let me know.
Next: What are reasonable first-year efficiency gains?
The firm view
From Lisa --
Ken's last few posts have outlined critical standards and metrics of value that he expects us to deliver at different levels -- strategic, artisanal, industrial. During this time, we also have worked to demonstrate to him that we have the right expertise, chemistry or fit, and that an ongoing relationship with our firm would make sense to him and his team. (Chemistry and fit is important from our perspective, too, but hey, Ken’s the client!) We also have begun to build the principal process design and project management mechanics of the first big project, the trademark initiative.
Now, our team is challenged to take all those needs and address them in a cohesive fee package that reflects Ken's definitions of value and also provides us with an appropriate return.
Here are some of the considerations and challenges we are working through as we develop our pricing structure:
As Ken has pointed out, some part of the value we deliver must be understood in terms of what we can contribute to asset development and enhancement, starting with what it costs to create the asset in the first place -- a specific trademark, for example. This work is the “industrial” activity that Ken has described. It is the core blocking and tackling that has been the mainstay of outside providers in recent years.
From our perspective, the development of the pricing model for this “industrial component” offers deep potential for innovation. It is one of the places where we have a real chance to advance the model from the traditional "hours times rate approach" -- with its inherent inefficiencies -- to a strategy that rewards both quality service and efficiency minded delivery. Early examples of innovation in this area involved moving away from straight billable hours to applying simple flat fees for a menu of individual tasks associated with trademark prosecution. A more advanced, qualitative model would charge a flat fee for a trademark registration, all-in, from filing to registration, thereby having the law firm bear some of the risk for issues that might arise in the registration process. More recently, fee structures have evolved into a single flat annual fee for the management of all activities for an entire trademark portfolio. And to this model can be added a gainsharing feature whereby the law firm and the client both participate in the benefits of reduced costs that result from greater and greater efficiencies.
By taking this kind of an approach, we are creating rich opportunities for ourselves (1) to develop a pricing alliance with our clients, (2) to build efficient workstream processes and effective project management capabilities, and (3) to enable us to then turn around and share the benefits with our clients. As our discussions with Ken on pricing advance, we expect and look forward to the development of a model centered on these principles.
We will focus on driving efficiency through the volume of 'industrial' work we will do on trademarks, so that we can focus on adding greater value to the strategic use of those marks. This is the 'artisanal' level of value that Ken has mentioned. We will be proposing strategies that will create value for the business through better deployment of intangible assets -- trademarks, patents and other forms of IP -- that are chiefly a creature of the law. One way we can do this for Ken is to through the better management and communication of data about his trademark portfolio -- his active matters, his registration coverage, his enforcement activities, his risks, etc. -- to enable him, his business units, and us to rise above the fray of day-to-day trademark issues and make strategic decisions about the global direction and objectives for his brands.
This type of value may be measured with additional tools that fall more into the kit of the financial analyst than the accountant, using metrics like discounted cash flow, or comparators, or whatever. Although efficiencies are also important in this context, this may be more the place for discussions about the client’s subjective, gut level, sense of contribution by the outside provider. In this context, our pricing model may need to build in metrics or drivers beyond cost-efficiency -- such as strategic contribution and trademark value improvement -- that appropriately measure success and value.
To be successful at the 'artisan' and strategic levels relies on a strong relationship between client and outside provider, so our fee and metrics package also to measure the level of trust and confidence between client and firm. We have metrics in place to both measure the success of our efforts as a relationship. These come from our initial 'voice of the client' discussions, as well as scoreboard metrics, derived from the ACC's Value Index. We think that’s why Ken started with relationship in the first place.
Next: Delivering on first-year efficiency gains
