Articles Posted in Outside Counsel

Humans can do it only laboriously, but the sleuths in e-billing software can easily spot where a law firm lawyer has billed unreasonably high hours during the same day across multiple matters. If four in-house counsel each review the same month’s bills from four different matters handled by the same firm, the lawyers won’t be able to spot that on a single day Attorney A billed six hours on each of the four matters. Not to worry, however, because e-billing software can report such an egregious abuse.

Generally, such exaggerated billings result from formula billing – every letter is a minimum of one hour, or some such standard. Law departments should not permit formula billing unless they have negotiated a fixed-fee arrangement, which, ironically, is formula billing writ large (See my post of May 24, 2006 on unit billing.).

Some research done for a consulting client disclosed a clear trend for average partner rates to rise as the size of law firms increases. Specifically, as firm size increases by 100 lawyers, the average partner rate per hour increases by $13.

Let’s apply this correlation. Assume the average partner billing rate of a 400-lawyer firm is $500. An 800-lawyer firm’s average partner rate, since the firm is 400 lawyers larger, would be predicted by the model to add four times $13 to the first firm’s rate: $552 an hour (See my post of Oct. 23, 2005 on greater overhead in larger firms.).

Law departments can do this calculation for their own set of law firms (See my post of July 23, 2007 on the downside of convergence.). The results may push you to rethink your mix of law firms.

If you ask three or four firms to propose their approach, staffing and budget for a new matter, each firm being capable of handling the work and each firm knowing their competitors for the work, you will save outside-counsel fees just for doing that (See my post of Aug. 5, 2007 about how to prove savings from a fixed fee arrangement.). The competition will reduce your costs.

Each firm is likely to temper its billing enthusiasm because it wants to get the work and not have a peer snatch it away. That competitiveness plus market discipline, without anything more, will reduce fees over time because if nothing else were to change, the firm you select has at least some sense of accountability to its budget estimate.

No way, cynics might respond; law firms blow through budget estimates without a moment’s pause or embarrassment. Possibly, but a firm that cares about building the breadth and depth of its services to a law department over time does not as lightly run roughshod over its recently-submitted budget. And, a disciplined law department that observes nothing material to have changed the budget, can hold the law firm to its forecasted amount.

Here is a challenge for all law departments: strive to have at least 25 percent of your law firm spending be on some basis other than hourly billing (or discounts from hourly billing). Previous posts have mentioned several methods (See my posts of May 24, 2006 about unit billing; Nov. 17, 2006 on alternative fee arrangements generally; and Oct. 10, 2006 with additional comments.). Another method, holdbacks, can work for large and small departments (See my post of Sept. 18, 2007 on holdbacks.).

True, large law departments might have the volume and consistency of work to be more amenable to alternative billing arrangements (See my post of July 25, 2007) and the difficulty of negotiating billing deals early on exists for everyone (See my post of July 27, 2007), but I think the 25 percent goal is completely achievable for every law department.

To have non-employees (or their software) scour bills of your law firms for reductions makes for a poor practice (See my post of Dec. 3, 2006 for my arguments on this assertion and references cited.), yet many bill auditors make a living doing exactly that (See my post of Dec. 4, 2006 on this cottage industry.). A mystery to me, it is, and not just because the auditors have an incentive to find allegedly improper billing practices.

Even employees, if charged with responsibility to comb through invoices, will go too far to find improprieties.

My mantra is to devote time before the law firms bill – manage what they do before they do it and bill time – and you needn’t be so scrupulous about reviewing daily entries on bills.

At a recent conference, a partner at Kirkland & Ellis discussed how best to select local counsel. She made a number of good points but I thought I would emphasize three of them.

First, the lawyer you select needs to have sufficient proficiency in English for them to be able to understand your instructions and to communicate clear and useful guidance. The only way to test the level of English command is to speak at length by phone or in-person.

She also noted that you may not want a senior partner. In many foreign law firms, if a major US company calls, the opportunity automatically falls to the senior partner with the most clout. Quite possibly, however, the lawyer who is most likely to speak English well and handle your matters competently is younger, so you may need to search for someone other than the name partner.

Ideally, you want your law firms to submit proposed budgets and your in-house responsible attorney to critique them. You want the in-house lawyer to try to drive the law firm’s costs to the lowest level commensurate with responsible representation. To expect that discipline by your lawyer, it is clear to me, inevitably triggers a tension.

The conflict arises because the in-house lawyer does not want to establish a budget which, if exceeded, puts that lawyer in a bad light. Accordingly, an almost inevitable, yet tacit, collusion occurs whereby it is in the interest of the law firm to propose a high budget and come in below as well as for the lawyer to approve a high budget and come in below.

A partial remedy is to aggregate each individual lawyer’s budgets into someone’s larger practice group budget, but the same conflict of interest exists at the higher level. Even a general counsel likes to propose a generous expected budget and beat it.

Terry Crum, a director at Deloitte Touche, is quoted in Law Firm Inc., Vol. 5, Sept. 2007 at 27, on the subject of savings by law departments from their e-billing systems. Crum says that with e-billing “a client can save 15-18 percent of its outside counsel spend.”

No way, Crum! First, almost no law department imposes e-billing on all its law firms. If 70-80 percent of all invoice amounts filter through the software, that is pretty good. But you would have to save 25 or 30 percent off that portion to achieve Crum’s overall estimate. Second, most law departments have tried at least a few things to cut outside counsel spending, so the savings he estimates would have to come on top.

If a law department counts as savings the reduced time required of its lawyers and staff to process invoices, that is a legitimate savings – assuming data backs up the estimates – but those savings should not count toward reduced outside counsel expenses.

A piece in the Harvard Bus. Rev., Vol. 85, Sept. 2007 at 77, explains several good ideas for when an inside lawyer negotiates terms of a representation with a law-firm partner.

Share information and encourage reciprocity. After you explain the ground rules – “I will start and you will follow suit.” – share some information and interests incrementally. Observe whether the partner opens up in a similar style.

Second, negotiate multiple issues simultaneously, which means you should put all the issues on the table at once. Otherwise, when you negotiate one issue at a time, each one seems the most critical and you can hit a log jam.

Many law departments insist that an internal business client review the bills of outside counsel for that client’s matters. Someone in the law department will also review the bills, but since the cost is a business cost and will likely be charged back to the client by the law department (See my post of May 31, 2006 on charge backs.), a client should have some accountability.

What makes this common-sense notion difficult in real life is that the law department may have to spend much time getting bills to the right clients and then bird-dogging them for their approvals. One solution to this administrative and logistical annoyance is to appoint one or more client gatekeepers. The gatekeeper is charged with directing the bills properly and getting back the sign-offs in time.

The obvious next question is, how do you get a good gatekeeper and keep that person and how many gatekeepers do you need for your clients? Stay tuned.