Deconstruction of a definition of value-based payments to law firms

In its campaign to change the basis on which corporate counsel pay law firms, the Association of Corporate Counsel has seized on the lodestar of “value.” ACC defines value as a law firm “returning a desired outcome in a matter which corresponds to its appropriate cost and worth.” This definition comes from the ACC Docket, Vol. 26, Oct. 2008, at Value Challenge 2, and deserves deconstruction (and possibly destruction).

“Desired outcome.” A verdict against a client could rarely be a “desired outcome,” yet a law department should pay the firm that represented it in the litigation. Perry Mason can’t win a case with horrible facts. Some acquisitions fall through; sometimes polluters settle with the Environmental Protection Agency.

If “desired outcome” really means the “best outcome a reasonable person could have hoped for” we are closer to reality but no closer to an unarguable, quantifiable conclusion regarding how much to pay. Given people’s propensity to rationalize and manage perceptions as well as to revise history, it’s like painting a target around the spot where the bullet hit the barn. A retrospective decision about what to pay is highly suspect (See my post of Oct. 22, 2008*5: cost-benefit analysis.)

“Corresponds to its appropriate cost and worth.” The result of the law firm’s work should bear a reasonable relation to what someone in retrospect judges to have been a reasonable quantum of work for what the company got [the number of expected timekeepers at prevailing or better hourly rates doing sensible tasks for plausible amounts of time]. “Corresponds” leaves ample room for discretion, as its plasticity can cover a wide range of decisions.

“Cost.” Cost has to do with the law firm’s economics, not the client’s benefit. A firm can pour tens of thousands of dollars of time into useless research or trivial proofreading, with no return to the client. Or a single partner’s discernment regarding one key decision could shape the entire deal and assure success. In neither situation should the costs of the firm influence how much the firm gets paid.

“Appropriate.” This weasel word begs the central question: what’s appropriate to be paid is the value of the services. To say that the right value is the appropriate amount to pay creates a tautology (See my post of March 30, 2008: bumps on the road to value billing.).

“Worth.” The worth to a company of specific legal services can be exceedingly difficult even to estimate. What is the relevant time period? What about how the worth of something can change over time? What else is the “worth” dependent on?

Having unpacked ACC’s definition of value, consider an example to test its parts. An in-house lawyer responsible for a senior executive’s severance agreement hires a law firm to make sure the agreement addresses the right legal issues and reflects the latest thinking among employment lawyers. The firm’s lawyers toil away and the agreement is signed. The firm deserves to be paid even if a massive payment to the executive fleeces the company and its shareholders, because that resolution depended on many factors other than the law. The pseudo-definition gives no guidance on what to pay the law firm.

Economists and psychologist teach us that what something is worth varies enormously – worth, in the form of price, is what markets circle around and eventually settle on to some degree. In any specific instance however, value is in the subjective and variable eye of the check holder.