Understanding how the client’s business makes money: A critical step for all lawyers

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business

Amid the current pandemic crisis, the impact felt by law firms and their clients has been great; and this pressure has ratcheted up the necessity for law firms to better address their corporate clients growing needs during this time. Indeed, one area of need is particularly acute — the requirement that lawyers deeply understand their clients’ businesses in order to offer the savviest advice and most valuable solutions.

Corporate clients represent about 80% of all legal spend, even though on average, companies spend 0.5% of total revenue on outside legal work. This could give one the idea that legal is not a top priority for companies.

Jaap Bosman, founding partner at TGO Consulting and co-author of Data & Dialogue: A Relationship Redefined, sees it a bit differently. “In helping to understand when it would make business sense for a company to spend money on lawyers, we have to take a closer look at a matrix created after analyzing huge amounts of legal binning data in combination with budget expectations on company side,” Bosman explains. The matrix below clearly shows that companies do not mind spending — indeed, spending substantial amounts — of money on outside lawyers as long as it helps the client make money or avoid losing money.

In those situations, he explains, legal fees are seen as part of the investment that is justified by the return on investment (ROI). “Any legal work that is not considered part of the investment to get ROI is considered part of the cost, as it does not contribute to the company’s bottom line.”

Companies often focus on cash flow and profit rather than costs. In the case of a litigation matter, for example, the calculation should be made as to how hiring outside counsel will prevent a loss or reduce the size of the loss. Companies need to take into account not only the direct cost to the business but also the possible result in terms of revenue and cash flow —in addition to the corporate brand.

Law firms must be given this information when preparing their fee structure so that they understand the ramifications of the matter. Indeed, transparency on both sides of the equation are critically important.

“The key to providing quality analytics and sound approaches to how matters are supported is with the use of tools like the TGO matrix,” says Vincent Cordo, co-author of Data & Dialogue. “The matrix is invaluable for the inhouse allied professionals supporting the legal team, the in-house counsel teams, and equally for the firms bidding on work.”

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Understanding the business

So, what can lawyers do to demonstrate their willingness to understand how important certain matters are for clients? “For any lawyer, both external and in-house, it is paramount to understand how their client company makes money,” Bosman says. “Only lawyers that understand how to be part of the opportunity rather than part of the cost, will be able to return added value to the company.”

While this may sound straight forward enough, in reality, most lawyers do not have a clue how their client companies make money, Bosman explains, adding that surprisingly, this is also true for most in-house lawyers. “I have asked in-house lawyers, including General Counsel, on numerous occasions if they were able to say which of their company’s product or services had the highest profit margin or even the highest sales volume, and most of them did not know.”

Knowing where the highest profits come from in a company’s portfolio of products is crucial when deciding where to focus the attention of the legal department — whether it’s on certain files, on staffing, or on outsourcing. It is also important for law firms when responding to Request for Proposals (RFPs) for legal services and pricing requests. Firms need their responses to demonstrate whether the firm has a solid understanding of the client’s business in order to prove that they are the best lawyers for the matter. Unfortunately, this is sorely missing in the RFPs I have seen and, in the responses, gathered from law firms.

In-house legal teams, too, can do a better job to prioritize those matters that have the biggest impact on their companies’ bottom-line — and they also should convey that information to their outside counsel. In order to remain relevant in times of an economic crisis, in-house lawyers must get the business perspective on the business and share that with those external service providers that need to better understand where the client sees its business priorities.

Law firms need to bone up on the revenue stream and profitability factors of their clients. This may require meeting with department heads, the company’s finance team, and even the CFO. If external lawyers take a leading role in helping their clients understand the math, they will add significant value to their clients and develop a stronger relationship during these difficult times and on into the future.