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Value-based payments to firms derived from an index of performance

A company and a trusted law firm might agree to a performance index (For more on indices, see my posts of April 3, 2005 regarding an Energy index; Aug. 14, 2005 on a trademark index; Aug. 28, 2005 on client satisfaction; Aug. 14, 2005 on patents; Sept. 10, 2005 on an overall law department index; and May 17, 2006 on risks of lawsuits.). Put briefly, each of several indicia of accomplishment would be combined in an overall weighted index of law firm performance.

For example, one component would be an evaluation score by the inside lawyers who oversee outside counsel. They would rate it, perhaps with scores of 1 to 5, on various performance attributes. Another component could be on cycle time reduction, again on a score of 1 to 5. A third component could be scores by internal clients at the company who have the opportunity to assess the firm’s achievements. Other components might include the blended billing rate, concentration of work on a core staff group, and knowledge management systems put in place.

Once the components are decided on and scores collected, the law department might wish to weight some scores more heavily than others, such as lawyers’ evaluations over clients’ evaluations. If each component’s score has applied to it a weight, such as 1 to 3, then when you multiply each component by its weight and sum all the products you have an index. Part of the payments to the firm could follow from the score on this index of weighted performance components.