Strategic Partnering for Win-Win Results
The outside counsel strategic partnering program was a key cornerstone of the Heller Financial, Inc. law department model that yielded spectacular financial and other benefits to Heller and to its partnering law firms between 1995 and 2000 while I was Heller's General Counsel.
An in-house law department is not typically a revenue-generator for its company. It should properly be seen as a revenue-enabler, but too often it fails to achieve even that mark and is instead considered merely a cost center, a necessary evil. The vision we developed for the Heller Legal Services group called for us to become a true strategic asset for the company – that is, an efficient, strategic, and scalable law department that demonstrably contributed to achievement of Heller’s long-term revenue, profitability, and operating efficiency goals. Simply put, we identified what it was going to take to make it worth it for the company to maintain expensive legal personnel as a fixed cost.
Guided by our belief that the only infrastructure worth the cost of building and maintaining inside a company is that which is essential to supporting achievement of strategic corporate goals, we articulated the legal services necessary to support achievement of Heller’s critical success factors. For Heller’s law department, a number of key business factors combined to drive a new organizational model.
Heller provided specialized financing solutions to mid-sized and small enterprises in the United States and in chosen international markets. The company’s commercial finance business was a high volume, transactional business. New business volume, as well as overall corporate assets, were growing at high rates. Due to increasing market sophistication, securitization and other capital markets factors, many financial products had become commoditized, which lowered lending spreads and mandated process improvement to maintain and improve profit margins. Heller’s articulated intent to lower its corporate operating efficiency ratio, coupled with increasing technology and other costs, also drove the need for increased productivity and scalability in the law department. Finally, our in-house lawyers were unhappy because they did not see career development opportunities under the department’s existing organizational model nor did they feel particularly aligned with Heller as a business.
Given the highly competent and readily available outsourced solutions for legal services, such as outside counsel and other legal service providers (including, for Heller’s law department, Legal Research Center, Legal Cost Control, CT Corporation, and Lexis Document Services), we quickly concluded that it made no sense to allocate expensive inside resources solely to documenting deals, despite the company’s high volume transactional business. Instead, we wanted our inside lawyers and paralegals to be managers of legal affairs, process and project managers, process streamliners, and leaders within the company – in short, legal entrepreneurs providing the kind of strategic, proactive, unique value, and goal-oriented counsel that would offer Heller optimal benefit for dollars spent.
When in-house lawyers concentrate on strategic, unique value support services, the company gets more value from its law department, and in-house legal resources have better day-to-day jobs and more rewarding longer-term career opportunities. The need to focus in-house lawyers on this type of work called for a different approach to using outside counsel and, in turn, drove development of the strategic partnering program.
While clearly a very valuable function, documenting deals does not need to be done by inside counsel to be done effectively – unlike the unique value services described above. Outside lawyers who focus on what the client is trying to accomplish and who understand that legal issues are supporting players, rather than stars, relative to the company’s business can easily be substituted for in-house lawyers on routine transactional, and all other, legal work that does not have to be done inside to be done effectively. In fact, outside lawyers are in some ways preferable for this type of legal work because of their exposure to similar work for other clients and their ready access to additional resources to handle volume spikes.
Despite this, the familiarity and proximity of internal legal resources can cause internal clients to prefer those resources even where familiarity and proximity are not important to accomplishing high quality results. This, in turn, can create resistance to sending legal work outside. For our Heller lawyers and business people to be comfortable with the substitution, outside lawyers had to be familiar with our risk appetite and corporate goals, consistent in their approach to our internal and external customers, and willing and able to think proactively about our legal needs rather than wait reactively for our calls.
Our challenge, then, was to transform outside counsel into aligned partners – not to rely on them merely as technically competent guns-for-hire. In addition, even though for a high volume transactional business, outside counsel used only when needed is, in the aggregate, less expensive than maintaining fixed cost in-house lawyers, outside counsel costs can still appear high when viewed on a transaction-by-transaction basis. We thus also wanted to optimize value received from dollars spent on outside counsel. We chose strategic partnering to address both goals.
Our strategic partnering program provided Heller and its law firms with anticipated and unanticipated benefits, both of which increased in value and variety over time. Some of these benefits were financial, and these were significant, but the purpose of our strategic partnering program was not primarily cost reduction. Rather, we designed the program to:
- assure that outside counsel services were consistent with, and served to further achievement of, Heller’s strategic goals;
- align Heller’s and outside counsel’s incentives so that legal approaches reflected Heller’s culture and risk appetite, and legal services were efficient, consistent and economical;
- make a larger number of purchases from a smaller number of firms to obtain high quality legal work at predictable, economical prices from an established team that was familiar with Heller’s businesses, culture and risk appetite;
- permit outside counsel to leverage a predictable flow of work to build new or additional expertise useful to Heller and to create within the firm efficiencies and economies of scale based on familiarity and volume; and
- obtain value (beyond the legal work) from the expenditure of outside legal fees, and increase entanglement and familiarity, by concentrating work with a smaller number of firms and generating "credits" that could be used to pay for future services.
Heller’s law department rolled out the strategic partnering program in late 1995. We split frequently used law firms into two tiers: the top-tier comprised four firms that could satisfy most of Heller’s outside legal needs and to which we believed we could steer 75% or more of total annual outside counsel costs. Our four top-tier firms were: Goldberg, Kohn; Katten Muchin Zavis (now Katten Muchin Rosenman); Latham & Watkins; and Winston & Strawn. In 1999, we added Andersen Legal as a top-tier firm to handle international legal matters. These top-tier firms, which were themselves dynamic over time, were supplemented by a second tier of firms engaged as required to meet specialty or geographical needs not addressed by the top-tier firms. Portions of the strategic partnering approach were also applied to second-tier firms.
The specific tactics of our strategic partnering program evolved over time as we innovated and recognized new opportunities. Tactics included:
- clear definitions of roles, responsibilities and opportunities;
- two-way communication about strategic and business developments;
- joint training efforts;
- two-way deal referrals; and
- connections at all levels throughout both organizations.
Strategic partnering poses a number of challenges for inside and outside counsel. For inside resources, longer-term strategic needs must take precedence over immediate tactical demands, no matter how urgent those tactical demands appear. Both internal and external lawyers and other legal support personnel must shift their focus from producing products to serving clients. This shift makes listening and relationship management relatively more important than technical expertise or document production. It also emphasizes long-term process improvements over short-term or "one-off" solutions, and highest and best use of all useful resources, not just lawyers. In Heller’s law department, we illustrated this distinction by comparing the work of designing, building, maintaining and retooling a machine to build widgets vs. the work of hand-crafting each widget. We believed productivity, efficiency, highest and best use of resources, scalability, and career satisfaction would result when the emphasis was on the machine rather than on the widget.
For the partnering law firms, the shift to partnering requires a shift in traditional law practice procedures, relationships and culture. Our law firms cooperated because they were motivated to keep and grow a valuable client relationship, and they recognized Heller’s uncompromising commitment to strategic partnering – and our willingness to replace firms not willing to partner. For instance, instead of merely offering what they had ready to offer, the firms had to work to understand what we, as the client, actually wanted and needed to achieve our business goals. Relationship skills, including listening skills, became as important as substantive legal skills – and, indeed, they became more important as a market differentiator for the firm. "Control" of the client had to become more inclusive, so that every member of the law firm team gained knowledge about Heller’s businesses and goals, and understood the company’s risk appetite. Paralegals, technology experts, and other non-legal firm personnel added unique value and broadened and deepened the client/law firm relationship, and these people accordingly became more valued by the firm, which improved their career opportunities and satisfaction as well.
The law firms were also obliged to refine their compensation systems to be sure that compensation encouraged the desired behaviors of teamwork, two-way communication at all levels, knowledge-sharing, common ownership, and client service. For two compelling reasons, the traditional emphasis on billable hours as the measurement of contributed value had to become less central to the compensation process. Since unique value was added to the client relationship (and incremental revenues were generated for the firm) by people who could build and tend that relationship, these people had to be appropriately compensated, regardless of their billable hours under the traditional compensation structure. Moreover, the more efficiency the firm could build into its delivery of services, the more profitable it could be. This also diminished the hegemony of billable hours.
Finally, we at Heller requested that our partnering law firms think more broadly about the kinds of client services, in addition to traditional legal work, they could provide to us, and we were willing to pay for non-traditional services when they added value. Examples of less traditional services include:
- proactive compliance, legislative, and "market" intelligence;
- technology expertise and resources;
- business and political introductions;
- deal referrals;
- use of conference space; and
- other non-legal services that exist within the law firm’s personnel and infrastructure.
A unique combination of strategic alignment, focus on long-term goals, vendor management, win-win orientation, and practical, common sense tactics, the partnering program delivered spectacular – and mutual – benefits. From 1995-1999, Heller’s aggregate outside and inside legal costs boasted a negative compound annual growth rate (CAGR), despite a more than 200% increase in the size of Heller’s portfolio, a nearly 300% increase in annual new business volume, materially increased outside counsel hourly rates, and increases in both the amount of legal work moved to outside firms and the payment of premiums and remuneration for non-traditional client services. That is, Heller’s legal costs were actually less (without any adjustment for inflation) in 1999 than they were in 1995. This was a dramatic productivity boost, especially in light of the documentation- intense nature of Heller’s commercial finance business and the occurrence over the same five-year period of a number of significant or non-recurring corporate events, including an initial public offering and several securitizations, acquisitions, and dispositions.
At the same time, the top-tier partnering law firms enjoyed materially improved revenues, realization rates, and profitability on the work they did for Heller. At Winston & Strawn, for example, revenues on Heller work increased 400% and realization rates increased 5% from their already strong performance. Heller’s other top-tier partnering law firms also experienced significant financial benefits as a result of partnering with Heller. All of our strategic partners were free, of course, to use partnering principles to improve their relationships and profitability with other clients, and this further compounded the value of the program.
Other benefits from our strategic transactional partnering program included positive cultural change, increased in-house job satisfaction in line with Heller’s goal of becoming an "employer of choice," improved knowledge management, and enhanced loss prevention – all of which, in turn, further improved productivity and financial performance for all participants.
Best of all, strategic partnering was dynamic and its synergies and mutual benefits showed no signs of slowing or stopping. The challenges also proliferated, but because the partnering firms had committed their resources to making the necessary cultural and institutional changes, they became an integral part of taking strategic partnering to the next level. This entanglement with Heller provided the firms with a measure of competitive immunity – another win-win benefit, and one that is arguably priceless.
For detailed information on Heller's innovative and highly successful strategic partnering program, including a case study, lists of partnering tactics and motivations, and sample documents, read The Productive Culture Blueprint.