Articles Posted in Outside Counsel

Late in 2009, while the U.S. economy was in the tank and cost control was the cry of the day, The American Lawyer and the Association of Corporate Counsel surveyed approximately 587 general counsel regarding their use of alternative fee arrangements. Some of the results appear in Lit. Mgt. Mag., fall 2011 at 58.

Particularly intriguing to me were the findings surrounding who initiated the AFAs. 54 percent of the surveyed top legal officers claimed to have initiated the use of AFAs; 18 percent said that the initiatives were jointly initiated with outside counsel; and only three percent said their outside counsel “first raised the issue of AFAs to them.”

According to the co-authors, a law firm partner and the general counsel of Life Time Fitness, “Less than two years later, the climate seems to be the same.” The point has been made before on this blog: both sides point fingers at the other to blame them for passivity.

A proponent of alternative fee arrangements summarized six “major benefits” of AFAs, one of which set me on the path to this post. The author does not define AFA, but seems to assume everyone knows it as fixed fees for a volume of legal services, primarily litigation. He writes that a major benefit is that AFAs “Reduce the average cycle time (age) of litigation resulting in potentially significant timesavings (sic) for attorneys and expense savings for companies.” Later in the article in Lit. Mgt. Mag., fall 2011 at 51, the author says that the insurance company (Selective Insurance) where he practices has more than 5,000 cases a year on fixed fees. To the point: “the average age of cases decreased by more than four months.”

The implication seems to be that before, firms didn’t mind stringing out a case because they could keep opening the cash register; now, under a fixed fee, speedier resolution earns them more (See my post of March 5, 2008: cycle time with 18 references; Nov. 29, 2008: part of AKS-Labs balanced scorecard; March 19, 2009: matter cycle time from matter management systems; April 9, 2009 #3: Takt time; and Dec. 30, 2009: no linear relationship between length and cost.). Whether settlements go up to enable those speedier resolutions the article doesn’t mention.

Logical, I agree, that shorter cases give les opportunity to charge time, but what about cases that languish because they are weak? Let sleeping dogs lie, perhaps, even if that ruins your average cycle time – and stick with medians. Perhaps too the extra effort, if it is required, to close a case quickly piles up more time – or more senior lawyer time – than a less rushed approach because cycle time was a target.

Toward the end of 2009, American Lawyer and the Association of Corporate Counsel conducted a joint survey of approximately 587 general counsel regarding the use of alternative fee arrangements. Some of the findings are cited in Lit. Mgt. Mag., fall 2011 at 58.

One out of four of the respondents “reported having paid all of their firms by the billable hour.” Recall that 2009 saw the feverish discussions of cost control in the face of the economic collapse. Recall that replacements for the much-maligned billable hour had been talked about ad nauseum for years. Bear in mind that matter management systems were well established in hundreds of law departments as sources of data for fee arrangements. Consider that the respondents to the survey knew it was about AFA’s so they might have been more open to those arrangements than non-respondents. And, finally, take into account that even a single departure from hourly billing, over an unstated period of time backwards, would have reduced the one-quarter finding.

All that leaves me impressed that one-quarter completely relied on hourly bills. If this is evidence of a sea change, you have to wade in a long way to cover your ankles.

A for/against feature in Lit. Mgt. Mag., fall 2011 at 52, presented one argument against fixed fees that is not often expressed. A claims manager for Merchants Insurance Group dislikes fixed fees for groups of matters because he wants to pay the right amount for each one: “Inherent in the AFA concept is the idea that we will over pay on some cases and under pay on others, but it will all work out in the end. Purposefully not trying to get it right on each individual case is unsettling.” [I do not think he meant a pun on settlement.]

I disagree. The goal is to pay an appropriate amount for good outcomes over the entire portfolio, which means you do not deal one by one with cases. No one is deliberately trying to be wrong on what is paid for litigation defense; they are trying to be economical with time and money and not sweat the small stuff.

I have used the term in my consulting projects for those matters that will NOT be included in the bundle of matters a firm agrees to handle on a fixed fee. So, for instance, class action lawsuits are carved out of the portfolios of litigation, or matters that involve Canadian law are carved out, or cases that go to trial (See my post of Sept. 10, 2005: exclude trials in fixed fee.)

A second use of the term came to my attention in Lit. Mgt. Mag., fall 2011 at 51. This new publication from the Council on Litigation Management described an alternative fee arrangement where it was “understood that occasionally a case would change during the course of litigation requiring a transition from a fixed ‘phased’ litigation budget to straight time and expense billing. This ability to carve out specific cases was essential …” Here the carve out happens because a particular matter changes during the course of its prosecution to something not covered by the fixed fee. Instead of being carved out ahead of time, the passage of time unveils the carve-out.

In the view of Jordan Furlong 30 months ago, for three reasons general counsel balk at making major changes against law firms (See my post of Feb. 19, 2009: seven reasons why law departments do not take dramatic action.)

1. General counsel are under-incentivized. This catch-all explanation adds nothing – the other reasons offered below drill down on incentives.
2. General counsel are overburdened by distracted bosses. If driven pillar to post with other demands, where’s the time to sharpen the pencil? If anything, you need law firms more than ever.

Reverse auctions, where law firms submit successively lower bids on a matter or group of matters, are far from taking over the retention world (See my post of Aug. 9, 2011: huge overstatement by Ariba employee.). Even so, at least four groups offer online capabilities to enable the process.

ELawForum for years conducted sourcing bids (See my post of April 9, 2009: mentions at least 50 online bidding processes.) although I have heard that its founder, John Henry, has shifted or expanded to financing lawsuits.

Paul deJong (See my post of Jan. 20, 2007: LegalBenchmarket of Paul deJong.) runs sourcing processes like this primarily in Europe.

I heard about Procurelaw.com and looked at its website. For members they can use “Legal Panel Manager” to help control and monitor the flow of work with their panel firms; “Go to Market” lets them source the right firm by sending their RFPs to qualified firms.

Here is the explanation offered by the website: “The site is confidential and protected by the highest level of on-line security available. All you have to do is register and the next time you need to instruct a law firm simply go on-line and complete our easy-to-follow request for proposal (RFP). The site will automatically generate a list of your panel members or the best qualified firms if you do not have a panel. You then have the option to screen out any unsuitable firms. The system will even take care of conflict checking. Those firms able to proceed will demonstrate their expertise, explain how they will undertake the matter and provide an indication of cost – allowing you to make an informed comparison. After reviewing their credentials, you appoint the firm of your choice.”

A glimpse of the future: In-house lawyers and their internal clients can access a portal run by a law firm that gathers large amounts of relevant information about potential deals. To be more specific, consider the site that the U.S. law firm ParkerPoe has assembled regarding Caribbean resort sites. The firm identified each resort site in the Caribbean and Central America and then “researched local development and zoning laws, public contracts, leases, and landlord/tenant agreements for dozens of countries.” Also assembled on the site, according to Law Tech. News, Aug. 2011 at 15, are lists of contracts in government and utilities … and local business leaders.” The firm pulls news feeds onto each site for key resort chains and hoteliers. In short, law departments can benefit from assembled law and business information with value added in many ways.

Law departments can make use of such enriched databases cum website cum legal material. Increasingly, value-added online sites sponsored by law firms will help law departments and their clients move ahead effectively.

Some law departments set guidelines for how many timekeepers they will permit to charge time to their matters. They want a core staff to account for most of the billings. De jure, the firm has to get permission to add more. De facto this requirement breaks down under pressure.

This cost- and quality-control method works much better when the services needed aren’t time sensitive. For example, not during the lathered gallop just before trial – more like the gentle canter of patent prep and prosecution or domain name conflicts. There is a difference between drive-by billers and crisis calls for all hands on deck.