‘You’re wrong!’ – probably not something I should be saying to potential clients very often.
Increasingly on the topic of benchmarking though, I am.
We get asked all the time if we use our data to offer benchmarking services so that clients can see how they ‘stack up’.
The honest truth is that this comparison exercise is almost always misleading and often counterproductive.
The core principle of benchmarking is that by making a like-for-like comparison you can rank your performance versus peers.
Too often though clients do not look at all the control factors that need to be accounted for to make the comparisons truly apples to apples.
Let’s look at the two most commonly requested benchmarks – rates and diversity
Let’s start with rates.
The Ask – “I want to know what everyone else is paying so that I don’t over pay a firm!”
The Problem – Most hourly rate data for these sorts of comparisons comes from clients e-bill systems. E-bill system data is notoriously bad and often uses fudges when looking at things like AFA’s, discounts and write-offs leading to numbers that can be wildly off.
The Root Cause – An enormous number of factors go into law firm pricing, and the ‘hourly rate’ that appears on a bill is often about as reflective of reality as the latest Marvel film.
Just a few factors:
- Size of client – a large law firm client will often get 20-30% off ‘rack rates’ straight off the top.
- Strategic value – if a law firm thinks a client will grow they often invest in free or heavily discounted work
- Cross selling – if a client does a lot of corporate work a firm might end up zeroing out a small amount of tax work that was needed
The Horror Story – A client bought a benchmarking service that showed they were paying 30-40% more than the ‘average’ client for a firm’s mid-tier associates. The client had a ‘most favoured nation’ clause (meaning that no one should be paying less than they were) leading to a big blow up with the firm. The law firm flatly denied that other clients were getting better rates and mistrust was created on both sides. When the client queried the benchmark provider they were horrified to learn that actually the reason that the rates were so low was because the client, who’s data the ‘average’ was based on, had gotten some free corporate work because they spent so much on tax. Those hours in the e-bill system were recorded as 0, dragging down the average and leading to a very misleading conclusion.
The Solution – Task cost benchmarking – stop focusing on hourly rates and start focusing on what an outcome should cost. The quality of legal data means this is still a way off being effective at scale, although some larger institutions are doing it well internally. We have our fingers crossed that projects like SALI (Here) will help speed this along.
Moving on to diversity.
The Ask – “I want to know how diverse my firms are compared to others so I can set targets for my firms and hold them to account!”
The Problem – Are you really going to change firms if you find out yours are less diverse than others? If you aren’t then why does it matter how firms stack up?
The Root Cause – Clients experience of diversity often comes down to how they use their firms. The diversity at most law firms varies massively by department. Spoiler alert, employment tends to be far more diverse than M&A. To make an accurate comparison then you’d need to have access to diversity data on a department by department level. Not easy data to get and extremely time consuming to use effectively even if you could.
The Horror Story – A client did an enormous benchmarking exercise to understand how their firms compared to other AM200 firms. They asked for lots and lots of data and got back massive spreadsheets that took their firms ages to complete. They got back so much data in fact that it was almost impossible to analyse and come to a conclusion as to what to focus on. Not to mention that all the firms answered the questions slightly differently.
In an attempt to move forward, the client ended up taking the averages of the 20 data categories they’d collected as targets for the firms. Those above the average were good, those below it were threatened with rate reductions. It was an extremely complicated and confused system where neither side really understood what ‘good’ looked like. The outcome was significant friction as firms doing certain types of work (tax and litigation) were being consistently chipped on rates verses those doing other types of work (employment and regulatory).
In the end they scrapped the program all together as it didn’t incentivize the right behaviours at their firms and was far too complex.
The Solution – Work with the hand you’re dealt. Understand the diversity of the firm as a whole and of the staffing on your matters today and then put in place a program for incremental improvement rather than targets. Identify areas to accelerate this change by working with your firms and providing incentives for them to do better. Use data to hold them to account for progress.
So, sorry – benchmarking just isn’t what lots of people promise it to be.
The good news is that there are better ways to achieve your objectives in both cost control and diversity.
Let’s chat about them.
Being transparent,
Christopher Thurn
Founder – Alacrity Law
