Articles Posted in Outside Counsel

A study conducted this year by Commerce & Industry (C&I) and BDO Stoy Hayward obtained survey results from 171 UK member law departments. In the words of the report, “Many in-house counsel say the bills they receive from law firms bear little relation to the value of the services provided.”

How can in-house lawyers be so sure of the mismatch, unless they can put pounds to outputs, i.e., express in money the worth of what a law firm did? Who can say for advice rendered by a UK law firm on European Union antitrust restrictions “You charged us £18,500 but your insights were only worth £14,000.”? Or if a firm reviews and revises your Corporate Compliance Policy, who can assuredly say, “That £6,000 bill generated value for my company of £8,000.”?

Certainly no law firm can hazard more than a guess on the worth to a particular client at a particular time of its 10 paralegal hours, 20 associate hours, and 8 partner hours on a revision of a major sublease. For much that law firms do, value and cost are incommensurable.

Client-service teams at law firms benefit the law departments of those clients (See my post of Sept. 17, 2006 with two examples.) and departments should encourage their key law firms to set them up (See my post of July 19, 2007 on the rate-setting role of practice groups.). Law firms that invest time of client-service teams to keep up to speed with the business operations of their key clients will fare better (See my posts of May 2, 2007; and Dec. 8, 2006 about core teams in law firms.). As I see it, a core team does legal work; a client-service team also deliberately builds its knowledge of the client.

At a higher level, many law firms have established industry practice groups I am not sure that law department managers pay much attention to practice groups, unless those groups produce useful and timely information or unless in a competitive situation, the extra experience a group can demonstrate makes a difference. A team focused on a specific client draws closer than a team focused on a broad industry.

A survey this year by Commerce & Industry (C&I) and BDO Stoy Hayward obtained survey results from 171 UK member law departments, 43 percent of which had annual revenues of £1 billion or more. For the entire group, hourly billing accounted for two-thirds of their total annual legal spend on external counsel.

One question asked the respondents to rank six reasons why hourly billing finds such favor. Here are the reasons given, and the percentage of respondents who selected it:

“It is simple.” (56%)

A major bank’s law department deliberately refuses to complete surveys that ask for it to list the law firms it uses most. Law firms who represent the bank lobby to be listed, but the department has decided as a matter of policy not to oblige. Perhaps its policy rests on the belief that nothing good can come from disclosure, but the bank might miff a firm not listed or create more demand for its chosen counsel. Or perhaps the roster changes with enough frequency that any snapshot listing is sure to be out of date. Maybe the department does not want complacency to sap its primary firms. Maybe the policy interdicts all surveys.

Other law departments, by contrast, feel no compunctions about citing their go-to firms (See my posts of Sept. 21, 2005 on league tables; and Dec. 4, 2006 on Martindale-Hubble listings.). Some general counsel may believe that a stellar list of firms hired reflects well on the judgment and clout of the department (See my post of June 11, 2007 and 11 references cited about other forms of public relations undertaken by law departments.). Others may recognize that their honored law firms swell with pride and redouble their efforts on behalf of an appreciative client who praises them publicly.

I side with the disclosers.

At one large bank, all attorneys may approve the invoices that are their responsibility regardless of the amount of the invoice. Other law departments grant authority in step with the level of its lawyers (See my post of Sept. 17, 2005 #3 where over $100,000 requires AGC signoff; Aug. 24, 2005 and $10,000 limits for most lawyers; and April 26, 2006 about our fixation on approval levels by title.).

Accompanying the attorney review and approval for the bank mentioned is scrutiny – one hopes – by someone in finance and by a client representative whose unit will be charged for the bill. It makes sense to raise the lawyer authority level when there are two other employees who must also look at and signoff on bills.

Most law firms and law departments want an arbitration clause to govern should there be a dispute between them. The advantages are well-known.

Both sides, generally speaking, want the dispute kept quiet. Law firms generally like arbitration clauses because they think that arbitrators, who are lawyers, will be more sensitive to the need to make judgment calls and that a bad outcome doesn’t mean bad legal work. Arbitrations are theoretically cheaper and faster. Theoretically, because one downside of arbitration is that you are paying the arbitrator by the hour, and sometimes the process can drag on. But litigation can get out of control, too.

The downsides of arbitration are (from both sides) that you can’t compel attendance by third parties and the scope of discovery will probably be limited. But neither is usually a big issue with a legal malpractice claim – documents are few and available and there aren’t that many key witnesses, most of whom are the lawyers and the clients.

Good arguments stand behind the point that bonuses to law firms ought to correspond to the likeliness of the outcome and the value to the client of that outcome (See my posts of Aug. 4, 2007 on a litigation bonus; and Oct. 15, 2007 on suggestions.). To try to bring into alignment the incentive and its likelihood, law departments can ask law firms that are competing for the business to estimate the likelihood of various scenarios.

While far from irrefutable, at least if several experienced firms weigh in on the probabilities of a scenario, such as prevailing on a motion for summary judgment within 12 months, a law department can more rationally match incentives to the probabilities of their achievement. Over time, too, the law department will develop a better sense of these complementarities.

Several years ago, Sam Zell, the billionaire investor, created a captive law firm, Rosenberg & Liebentritt, to serve the legal needs of his affiliate companies, and exclusively their needs. According to InsideCounsel, July 2007 at 70, “the firm wasn’t allowed to do any work for anyone or any entity outside of Sam’s affiliates.” At its high point in 1999 the law firm had 35 lawyers. I heard about an idea along these lines a decade ago, when PacTel considered spinning off its law department. And many insurance companies have captive law firms. But this situation was different.

Zell disbanded it that year after spinning off much of his real estate portfolio yet kept employed four lawyers as his law department.

To choose a law firm through a competitive bidding process sounds admirable, but if a multi-defendant lawsuit presents the opportunity and if codefendants are at the same time selecting their counsel, a law department may not have the luxury of a competitive-bid process. Some of the law firms that might be very well able to represent you will be snatched up by other parties and conflicts of interest will eliminate them from the competition.

I doubt that law firms make a habit of turning down the first decent-lookin’ feller who asks them to dance.

On the other hand, in a lawsuit that names many companies in the same industry, opportunities exist for shared and joint representation, which can dramatically reduce the costs to the defendants who can take part.

Those who manage outside counsel often dislike success-based billing arrangements because they foresee that they will have to make a difficult decision at the end of the matter: what value do I put on the performance of the firm in relation to the outcome (See my post of Oct. 29, 2007 with data on the unpopularity of this billing method.)?

The outcome of the lawsuit, in terms of “success” for the company, might not lend itself to a clear conclusion as to benefit to the company (See my post of Aug. 1, 2006 on uncertain assessments of litigation.). Perhaps the unease of the responsible in-house arises because the decision of what to award must be comparative, and usually the arrangements are negotiated for unusual, important matters as to which the lawyer has had little experience. Perhaps the lawyer anticipates that the law firm is likely to be disappointed at the amount awarded it (See my post of Oct. 29, 2007 on dashed expectations of volume of work.). Maybe there are approvals internally and the need to defend the outcome and payment, especially if the bonus will be charged back. These reasons, and others, deter lawyers in companies from agreeing to success-bonus arrangements.

Likewise, imagine if a law firm dared to say to its client “pay us what you view the services were worth.” I fear that in-house counsel would be hugely uncomfortable if they were asked to make that decision. Whether they could do so would depend on their experience with like matters, but everyone would be blinkered and biased by their memory. Even more subtle, it would bring to the fore the difficulty of assessing the value of the legal service. Perhaps value delivered is like obscenity, and we all think we know it when we see it.