Two Lessons From the HP-Autonomy Mess

Last year HP bought Autonomy for $11,000,000,000.1 I write that number out fully to make it plain how large it is.

What was your reaction at the time? My mouth dropped. I could see no way that Autonomy was worth that kind of money.2

Neither could many other people, none of whom seemed to be on HP’s board at the time.

Now HP has taken a write-down of $8,800,000,000 for overvaluing the acquisition. In other words, it was worth less than one quarter of what they paid for it!

(Imagine a $10 product with nothing but one-star reviews on Amazon. Now imagine you bought a billion units of it.)

There are two big lessons here that relate to Legal Project Management.

1. Define “Done”

I go on and on about the key precept of “Done” because it’s violated so often, and violating it often leads to terrible results.

In my seminars, I use the hypothetical example of an acquisition attempt. What does “Done” look like for the lawyers representing the acquirer? If I open it up for questions, I usually hear “due diligence completed,” “successful acquisition,” “no snags in the deal,” and so on.

What do all of those statements assume? They assume that the goal is to acquire the other company!

If those are the marching orders the lawyers have received, either explicitly or implicitly, then they’ll acquire the company pretty much no matter what happens. They’re not looking for problems, missed valuation, or potential accounting errors. Rather, they will focus on the pieces that make the deal go smoothly.

Shouldn’t the “Done” include recognition that it has to be a good deal for the purchaser? “Ensure that the deal meets the purchaser’s expectations,”  or something along those lines. The lawyers aren’t asked to be forensic accountants, but they have a responsibility to their client, I believe, to raise appropriate questions and get answers. (If their own client lies to them, well, that’s probably out of scope.)

In other words, “Done” must include the possibility of alternate acceptable outcomes. Offer the client the option to walk away from a lousy deal. Settle a high-profile case early before the PR gets out of hand. Few matters have a single acceptable outcome, largely because in matters of any import, both parties have good attorneys and positions that may be at odds.

2. Why Did We Spend All That Money on Legal Fees?

At the time, I didn’t think this deal passed the sniff test; I would have expected the very high-priced attorneys working the deal to have smelled it even more strongly, since they were closer to the source. Even without accounting fraud, which remains unproven, in what possible universe did this deal make sense at that price? Did we learn nothing from the dotcom bust?

One estimate suggests that HP spent $70MM on professional fees for this deal.

I suspect some HP finance leaders are asking, “What did we get for $70MM?” (Yes, barn door, runaway horse, but everything has to start somewhere.)

More importantly, how many other large corporations will look at this mess and ask, “What do we get for our huge outside-counsel expenditures?”

The follow-up question will be, “Can you prove that paying high fees correlates with better results?”

That’s a very interesting question.3

I think there’s a huge opportunity here for second-pricing-tier firms to go after larger corporations. Second pricing tier doesn’t necessarily mean second quality tier. They’ll say, “We have great attorneys. We charge less. Give us some significant but not bet-the-company work on which we can prove how effective we can be.” And they’ll hope the client hears, “Look at what HP got for $70MM. Price doesn’t necessarily mean quality.”

Actually, they may not have to whisper that last part.

There will be CFOs shouting it loud and clear.

The Moral of the Story

Here’s one moral I draw: Legal providers need to build up their effectiveness and efficiency skills. Pressure to deliver work less expensively can only increase. That doesn’t necessarily mean firms have to cut rates; rather, they need to prove to their clients that they deliver at least as much bang for the buck as firms in the pricing tier below them. In other words, if they charge 50% more (e.g., per hour), then they need to show they deliver higher quality work in fewer hours.

CFOs know that the $100 Ikea desk isn’t as sturdy as the $1000 Steelcase desk. They get the fact that value, not price, is the driving factor.

Here’s a great chance for firms to use their Legal Project Management related skills not just to deliver increased value, but to demonstrate to their clients just how they do that.

Maybe this acquisition was a lemon. Find a way to make lemonade.

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