Kids get grades — why not law firms, too?

Everyone gets graded. Why shouldn't law firms? Not just through episodic, informal commentary that occurs between client and firm, but rather through a more disciplined, analytical approach and model. And if firms receive grades, why shouldn't their fees be more closely aligned with those grades? Why shouldn't actual performance, as reflected in those grades, underpin and directly inform actual compensation paid to those firms? In too many cases, fees charged turn simply into fees paid (albeit with occasional discounts). How much sense does it make that poor performance is reflected, if at all, in ad hoc fee adjustments that may occur only every so often? How appropriate is it that the remedy for poor performance is reflected in an abrupt termination of the lawyer-client relationship? "We didn't like your work or responsiveness, so we're going to look for another firm," says ABC Corp. general counsel. That sort of termination, unfortunately, happens all too often without any prior inkling that the client is dissatisfied or that the firm has been skating on thin ice. That outcome isn't ideal for either party - leading inevitably to a loss of potentially important historical knowledge between client and counsel and the severing of long-term relationships that may have developed over many years through the efforts of many lawyers.

And, on the flip side, how much sense does it make that superior performance is not recognized or rewarded more consistently and effectively than we generally see? A one-time transactional bonus - whether in an M&A context or in the event of a successful litigation outcome - is not the same thing as a bonus or enhanced realization rate paid for sustained, steady, superior performance over the course of a relationship.

While corporations may typically spend anywhere between 0.5 percent and 1 percent of gross revenue on legal fees, accountability for legal services remains suspect. And though it may be fairly easy to obtain a sense of so-called firm "rack," or list, rates, that information offers little real value. As most in-house practitioners have come to know, rack rates may have just a slight correlation to actual rates paid. But beyond that, beyond the rates paid, lies the key question - what is, or what should be, the correlation between those fees paid and the quality and value of the services received? Is there, in fact, any direct correlation? And if not, why not? Could it simply be the lack of any reliable data and tracking mechanisms that would allow corporate counsel to pay a "fair" rate? Yet if that's all preventing an effective linkage, it should be fairly easy to fix.

The underlying intent of a scorecard program should be considered. It should not serve as a method for delivering individualized criticism to specific attorneys. That is best dealt with through direct discussion and interaction between in-house counsel and the affected external attorney or her supervisor. Rather, a program of this type should offer a means for enhancing communication between client and outside counsel in a more systemic and institutionalized manner. An effective program should aim to make outside counsel quickly aware of quality and responsiveness issues about which internal counsel is concerned, preferably before those issues become significant or infect the relationship in an adverse way. The program should provide a channel for communicating concerns about matters related to the services being provided. With that foundation and from that perspective, a "law firm report card" introduces a process for continuous improvement, a process that offers the opportunity to improve both the quality of attorney-client communications and the level of services delivered. It should not be feared by external counsel.

How ought the correlation among value, service and fees be established? There are likely numerous alternatives. But a simple solution harkens back to grade school - the report card. Law firms providing a sustained level of service over extended periods should be graded on their performance. Legal departments should proactively review and monitor performance through the application of metrics developed by the in-house legal team. For all the talk of executive "pay-for-performance" within the public company context, in-house counsel need to apply those same precepts to the external counsel relationship.

Performance can be graded across multiple categories - how well does outside counsel understand the client's business? How well does counsel understand the client's legal objectives? How is the quality of the work product and the advice received? How "expert" and strategic has been the advice? Have all attorneys on the account exhibited the same level of expertise or does quality vary significantly by attorney? How responsive has counsel been to the client's requirements? Has the advice received been practical and actionable? Have service levels across different offices, across different regions, within different jurisdictions been similar? There are likely other categories that may be more relevant to a particular client. They should be customized to address each legal department's specific needs and concerns, to focus on the issues and service metrics most relevant to the client.

Grading can take place on a scale of 1-5, or any other scale that can provide both internal and external counsel a sense of trends and relative performance. Internal counsel will need to baseline their grading prior to initiating a scorecard process to ensure that the starting point is neither too high nor too low. Each in-house lawyer that has worked with the relevant external counsel should participate in the process. The accuracy of the database, and the value of the information developed, will require broad, engaged participation among internal counsel.

Written comments can also be provided. Reports can be provided quarterly to outside counsel, or over other periods that are sufficient to allow internal counsel to develop a comprehensive performance database. With that database in hand, tracking the quarterly ups and downs of firm performance, corporate clients can compare firms across multiple service categories. Analytics can be developed and data sets mined to show how the relationship is functioning. Results can be charted and graphed. Results can be shared, anonymously or otherwise, to give firms a real sense of where they stand vis-à-vis other outside counsel.

Incentives can be created based on the performance database. Rewards can be crafted for higher performing firms. Penalties can be introduced for lower performing firms. Value can be aligned with service provided. A yearly bonus, for example, can be offered to the highest performing firm, funded through an offset against the lowest performing firm - in other words, a 5 percent year-end premium for superior performance can be paid for by a 5 percent fee reduction charged against the lowest performing firm at year-end. Other incentives along these lines can be introduced.

The fundamental premise of a scorecard program is to align performance and value, to help incent and align firms with the objectives and expectations of the corporate client. The process should allow outside counsel to become more attuned to the needs and demands of internal counsel. An institutionalized report card process offers the mechanism to communicate and reward superior performance, with the broader goal of strengthening the strategic partnership between internal and external counsel. Enhanced communication and transparency between client and counsel provides the foundation for enhanced relationships, enhanced quality and enhanced outcomes. A simple law firm report card can help build and sustain that foundation.