Susan Raridon Lambreth, principal with LawVision, interviews Steve Harmon, vice president and deputy general counsel, Cisco Systems, about assessing, managing and utilizing in-house and outside counsel at Cisco.
Susan Raridon Lambreth: How do you assess the performance of outside counsel?
Steve Harmon: As many have seen in the legal press, Cisco is more committed than most to the use of ﬂat-fee arrangements focused on measuring outputs rather than inputs like time recorded. To achieve this, we strive to have a lot of rigor around the definition of success at the outset of an engagement. We evaluate vendors based on these mutually agreed-upon factors. We get very granular about our desired outcomes since the definition of a “win” can vary widely depending on the circumstances. Winning in some matters where we might have some fault might be not going to court at all but settling at a certain price. In another case, a “win” might mean defending until no further appeals remain.
In another example, some of the quantitative measures we use might look at the fact that the case was likely to cost us $50,000 but it settled for $25,000; then, the outside counsel has done 100% better. Qualitative measures can vary significantly. In one case, success might be having the case take a long time to resolve and another might be trying to stay out of the press.
The best practice at Cisco is ending every engagement with a summary of the matter and performance against expectations. This may tie into the compensation for outside counsel as we are very open to paying success fees when the performance provides exceptional value. For example, for a matter likely to go to trial but settled with a Motion for Summary Judgment, we would likely be happy to pay a success fee in that instance.
Performance measurement is critical to our evaluation of counsel and our future use of them. We are not simply measuring by the same metrics as a company that is paying law firms primarily by the hour. Firms that insist on basing the relationship on inputs (e.g., hours) are not in line with our thinking at Cisco. It is fine if firms do shadow billing for their own reasons but we don’t want them saying at the end, “Look at the time we put in …” if it is way more than they agreed to be paid. We are fine with firms making “windfall profits” if those profits are attributable to their exceptional management and performance against our matters. Similarly though, we are not sympathetic when firms ask for additional fees to compensate for poor management or a failure to account for reasonable uncertainty. Part of the expertise we are paying for is the ability of the firms to manage their businesses.
Key benefits of this outcome-based approach are both sides getting rid of some overhead that is used now in many organizations to work in the billable hour system. For example, for our engagements, we and our outside counsel don’t have to spend time reviewing lengthy invoices to determine whether the time was appropriate for the matter.
Raridon Lambreth: How do you evaluate your outside counsel?
Harmon: We have periodic discussions with our outside counsel. We give them feedback and compare performance against predictions – more on a matter level than overall for the firm. As a purchaser, your primary obligation is to define your desired expectations, then step back and let them manage the matter in the way they see best – not to look at law firm staffing ratios or other aspects of how they get the work done.
Also, our in-house team is expected to understand the relative importance of the matter, its dependencies, desired outcomes and be able to communicate this to the outside counsel. We measure this in periodic performance reviews at the end of an engagement, as well as adherence to budget.
Raridon Lambreth: What attributes of outside counsel are most important to you?
Harmon: The view of this varies by individual lawyer within Cisco and for the legal issues involved. Some key ones are their understanding of the Cisco businesses, proactivity and responsiveness. One of the biggest skills gaps we see in law firms is the lack of lawyers’ project management expertise. Project management skills are viewed as a core competency in our department and we offer training to all members of the department.
Most issues come down to a failure to listen and failure to communicate. For example, a litigator coming in touting her win-loss rate in court when a “win” in that area might be never having to litigate. Some lawyers could do a better job of listening.
Raridon Lambreth: How do you determine what work to handle in-house and what to handle using outside resources?
Harmon: We use a four-quadrant matrix to demonstrate how Cisco evaluates where to invest in-house and outside legal resources:
- Core/Mission Critical: These are activities that contribute to competitive advantage and, if performed poorly, pose immediate risk to the organization. These matters are handled primarily with in-house resources.
- Core/Non-Mission Critical: These activities contribute to competitive advantage; however, if they are handled poorly, they would not pose a risk to the organization. Ideally, these matters are handled using self-service tools and process optimization with escalations going to internal legal staff.
- Context/Mission Critical: These activities are necessary but not tied to competitive advantage; however, if they were performed poorly, they pose a risk to the organization. This would include compliance work or big-ticket litigation. Many of these activities are handled with small teams internally who have deep expertise in that area and using outside resources to support that.
- Context/Non-Mission Critical: These activities are necessary, but present limited risk to the organization if performed poorly. Most of these activities are outsourced.
Raridon Lambreth: How do you assess the performance of inside counsel at your organization?
Harmon: The top metric at Cisco’s legal department is the total cost of legal services as a percentage of company revenue (for legal and compliance). At the aggregate level, legal work is essentially a “tax” on the profitability of the company. As a directional metric, assuming acceptable quality if the spend grows more slowly than revenue growth – or even ideally declines – it is reasonable to infer that performance is improving. The trend is as important as the absolute number. For example, Cisco is very acquisitive. If we buy a company with small revenues but a large legal spend, it will negatively affect this metric in the short term, but we can also track normalization as our best practices filter out in assimilating the new business.
We have relatively few quantitative metrics for the in-house lawyers. Our role is to do what we need to support the businesses. We are very initiative focused so our projects tend to have targeted completion times. On the transactional side, there are some relatively repetitive matters where we look at cycle time, customer satisfaction, time from the beginning of the engagement to orderability. The contract is only part of those matters. We want to reduce the total time to allow our end customers to begin purchasing products or services.
We track delivery against expectations. One person might be working on three large deals and another on dozens of smaller projects. For each matter, we set parameters of success at the beginnning and determine whether we are performing against these. Simple “transaction counts” are not granular enough to account for complexity variations so we endeavor to prospectively assign performance baselines focused on complexity. This is where project management expertise comes into play.We also have a captive legal process outsourcing (LPO) we use to service many activities that other companies typically outsource. The rationale is that using our captive LPO allows us to reduce information transfer costs and move beyond the typical labor arbitrage business case that others use to justify outsourcing. In that business, we measure cases closed and transaction counts more carefully since we are typically dealing with well- understood transaction types and business processes.
We also have a corporate initiative around customer satisfaction and ease of doing business so we do periodic surveys of satisfaction of our internal clients for the legal department.
Raridon Lambreth: Any final thoughts and advice for law firms?
Harmon: As I have often said, legal departments exist to help their companies grow and sell products or services in a legally appropriate way. We believe that our outcome-based approach to buying and managing legal services has enabled our firm and our outside counsel to work together toward common goals, manage legal spend and enhance relationships.