Articles Posted in Outside Counsel

Another perspective on the law firms that were ranked highest on M&A deals is to look at the average size of the deals they worked on. That data appears in the following plot.

The X-axis shows average deal size in billions of US dollars. The plot adds another piece of information: the home country of the firm.  To do so, the software alters both the shape of the “point” and its color for each law firm. An example is the Blake Cassells, the only Canadian firm in the group, and thus the only one in red and with a circle.

At a glance you notice that the two firms in the top right, Cleary Gottlieb and Sullivan & Cromwell, have had a “fewer but bigger” set of clients; by contrast, Jones Day in the lower left appears to churn through many more deals but much smaller ones.

If a company wants to buy another company or has been approached by a company that wants to buy them, either company’s law department might like some guidance as to which law firm to retain. Since large deals announce the law firms representing both sides in mergers and acquisitions, companies compile the data. The New York Times published some of that data regarding M&A legal advisors through the second quarter of 2014 (July 1, 2014 at B8).

The firms are Allen & Overy; Blake, Cassels; Cleary Gottlieb; Davis Polk; Freshfields; Jones Day; Latham & Watkins; Simpson Thacher; Skadden, Arps; Slaughter and May; Sullivan & Cromwell; Willkie Farr; Wachtell, Lipton; Weil, Gotshal; and White & Case. Together, these fifteen firms accounted for a significant chunk of the nearly $1.77 trillion worth of deals announced in the first six months of 2014.

Let’s present the M&A data on leading law firms using graphs. The first graph shows the 15 law firms and the number of deals on which they have been retained.

If we had more data on the sizes of law firms retained by U.S. law departments, the industry would have some guidelines for typical distributions. For example, it might be a rule of thumb that roughly one-third of the law firms retained by a typical U.S. law department would be small, say with less than 10 lawyers. Perhaps one-third of the firms would be in the intermediate category of 11-to-20 lawyers. The final third would be large firms with more than 21 lawyers.

The guidelines would vary depending on how you rank the firms. If it is by total fees paid perhaps larger firms of predominate. For example, 60% of fees to the top third of firms by size. If you rank by number of matters handled that could present a very different picture. This data from a representative group of law departments would likely undermine claims about convergence.

The U.S. legal system is the world’s most costly, according to a study released this week [PDF] by the U.S. Chamber Institute for Legal Reform (ILR). The study, conducted by NERA Economic Consulting, shows that the American system costs about one and half times more than the Eurozone average.  I would be remiss if I did not mention that the ILR may have a political agenda.

The NERA study compared liability costs as a percentage of a country’s gross domestic product. The 13 countries included in the study have similar levels of regulation and legal protection, leading analysts to conclude that higher costs could be attributed to more frequent and/or costly claims.

According to the NERA study, the U.S. costs were about 1.7 percent of GDP.  For our $13 trillion economy, that finding would say that “liability costs” consume on the order of $221 billion.  That amount includes outside counsel costs, but also many point items.

Aric Press writes in the Jan. 2013 American Lawyer at 134 about an analysis he did of law firm billing data from 37 substantial companies.  CT TyMetrix provided the data and Aric explored various findings, such as total hours billed over a three year period and total external spending.

One finding that struck me was that $800-an-hour-and-up billings accounted for 179,768 hours during the first two quarters of 2012 out of a total of 2,796,077 hours.  That means a bit more than six percent of all the hours billed to those law departments were at $13.33 a minute!  As Aric put it, “For the right talent, price is not the problem.”

He also made the point that increasing shares of work flowed to Am Law 200 law firms.

The Wenham Law Group pays its network of experienced lawyers between $75 and $100 an hour, but bills clients a flat $150 an hour – for everything.  As described in New England In-House, July 2012 at 5, the cofounder of Wenham Law group, Inder-Jeet Gujral, expects the firm to handle work especially in the non-compete, contract, and employment areas.  Interestingly, Gujral is not a lawyer.

If there were a number of organizations that priced their legal services on a fixed hourly rate, law departments would over time sort out their work according to the appropriate cost structure.   Work the departments felt was worth $150 an hour or more if done competently will flow to such a provider. If this were to happen, it would put intense cost pressure on law firms that charge the same hourly billing rate regardless of the work done.

The 2012 Real Rate Report, produced by TyMetrix and the Corporate Executive Board, includes some data on 2011 litigation rates. As explained in the ABA Journal, July 2012 at 33, the average hourly rate for associates was $357. Whether those rates are representative of other services provided by law firms the article does not explain.

If we assume that for every associate hour there is one-half of a partner hour, a leverage ratio which may be approximately correct for U.S. law firms when litigating, the overall rate – assuming partners are in the $500-$700 an hour range – would near $500 an hour.

This blog has repeatedly written how internal costs per lawyer hour for US law departments, when fully loaded, are around $200.

In the 2012 supplement to Bob Haig’s massive compilation on law departments, Successful Partnering between Inside and Outside Counsel (West 2012) at 42:18, the authors of a piece on project management mention an idea. An unnamed law firm “combined a timely ‘workload report’ sent by e-mail or fax early each month with a progress report sent two weeks later.”  The workload report describes recent activities, total hours spent on the matter during the prior month, and the staff breakdown of those hours. It also includes a trend line of hours worked and a forecast of the key activities upcoming.

The progress report follows by the 20th of each month, and it adds new developments and revises the forecasts. The law firm provides these previews for its insurance company client in addition to normal, monthly invoices.  For massive, long-running engagements, something like these early-warnings can help a law department ride the tiger.

A lawyer from Littler Mendelson, speaking at the InsideCounsel SuperConference, described the firm’s software to handle administrative agency charges.  The firm developed the system to coordinate EEOC complaints on behalf of a huge employer who wanted to bring down its outside counsel spend.  Built on Contract Express, the innovative system had handled about 4,000 matters.

A law department can have the firm handle take over its administrative charges for a flat fee per charge.  Armed with the system, Littler can offer this unit-costing.  From what I heard, this investment in knowledge assembled, software written, and processes streamlined points the way law departments should push their primary firms.

The General Counsel of Kaplan Inc., Janice Block, spoke on a panel at the InsideCounsel SuperConference.  She described a quick-step process by which her legal team selects law firms to handle certain matters.  When an appropriate new matter comes in, they pick six law firms and send them an e-mail with the basic information about the matter.  Kaplan gives the firms 48 hours to respond with their strategic approach, their proposed staffing, and the key tasks they foresee.  She did not mention a budget, but that might also be part of the response.   She also did not say how much the Kaplan legal team knew about the firms beforehand, but I presume they knew enough to entrust any of them with the work.

Block added that often they narrow the group down to three and invite those finalists to come in for an interview.  This selection with alacrity makes sense.