Articles Posted in Outside Counsel

Although it would be preferable for a law department that installs an e-billing system to push nearly all of its law firms into compliance with the system, such a comprehensive effort will take much time. Aside from the time and effort, it may not yield that much incremental information and savings (See my post of Feb. 21, 2007 on e-billing vexations of law firms.). Every law firm will add increases somewhat the demands on the person who administers the e-billing system.

An intermediate position is for a law department to require its handful or two of law firms that bill the most to submit their bills electronically. For many law departments a dozen or so law firms will account for the largest portion of the bills submitted during the year. This hybrid, partial solution may offend those who seek comprehensive purity, but it is a pragmatic balancing of interests.

Exelon’s law department puts law firms in competition for its business “by sending out RFPs every three years.” According to InsideCounsel, Aug. 2007, at 51, firms seeking the utility’s nod answer a questionnaire and “submit to an extensive interview with the law department’s leadership team.” The primary goal of the law department, according to the article, is to choose firms that offer the deepest rate discounts.

Several points deserve emphasis about Exelon’s practices. A three-year time commitment by a law firm is quite lengthy (See my post of April 16, 2007 on GE and a four-year term.). The amount of time that senior lawyers in the department must spend on this process, given the number of areas of law in which they might be selecting firms, is significant (See my post of Aug. 4, 2007 about bifurcated interviews of associates and partners.). Finally, given all this investment of time and resources, could the law department not seek financial terms more effective than mere discounts (See my post of Nov. 26, 2006 and 18 references to rate discounts.)?

For some matters that require outside counsel, one law firm doesn’t have all the horsepower you need. For example, after a series of major lawsuits were filed against it starting in 2003, Johnson & Johnson created a blended trial team. As described in the Nat. L.J., Vol. 29, July 16, 2007 at S4, J&J created a virtual team of an antitrust expert, a senior partner at one large firm, and a litigation star, a senior partner at a second, equally prestigious, firm.

Expect some friction and competition from the virtual firm’s members if they are of that pedigree. But if you can manage the prancing stallions, you can get good results from the virtual law firm (See my post of Dec. 5, 2005 on Cisco and its virtual firms; Jan. 4, 2006 on Halliburton; June 5, 2006 on why virtual firms are not more common; Nov. 6, 2006 on virtual law firms during a crisis; March 4, 2007 regarding Chevron’s views; and Dec. 3, 2006 on five nuances of the term “virtual law firms.”).

A down-and-dirty tracking system for outside counsel costs would enable a general counsel in a small department to track and report on fundamental information using nothing more than Excel. The data to be tracked would be law firm, matter type, internal client, invoice amount, and date of service.

Five or six fields of information, that’s all it would take. In a spreadsheet that tracks law firms down the left-most column and the other fields across the top, you would have at very low cost a basic picture of what is spent on outside counsel. Some law departments might want to elaborate and track corporate cost centers and responsible in-house attorney.

Pivot tables and sorting can handle as much reporting as is needed, and graphics capabilities are plentiful. A home-grown database can’t compare with the fine matter management systems out there, but for some limited purposes, this simple spreadsheet will do.

An ALM survey in May of 2006 (coupled with interviews in early 2007) looks at how US companies select international outside counsel. Of 17 tools and resources the participants could select to explain how they identify and select outside counsel in another country (pg. 13), six of the top eight were referrals. Referrals from outside counsel in the US dominated the selection list, since 87 percent of the participants chose it. Other referrals came from outside counsel in the overseas region (63%), in-house lawyers in the US (56%), in-house lawyers at other companies (45%), in-house lawyers oversees (34%), and company management (32%).

Since firm interviews, the fourth most commonly selected choice really take place after the law department has identified a potential firm, the only top-eight method of identifying firms was “firm’s website.” That method came in second at 66 percent. To shout out the point, therefore, marketing internationally is all about word of mouth.

A study conducted by ALM in May of 2006 (released in the Spring of 2007) looks at how US companies select international outside counsel. The study gathered survey responses from 219 senior lawyers and many of them participated in interviews six months later. Somewhat over half of the companies had revenues in excess of $1 billion but a quarter of them had revenue of less than $100 million. This mix of large and small companies makes a difference because the smaller the company the less likely it is to need overseas counsel.

One chart (pg. 6) shows that 42 percent of the respondents had fewer than five matters that required hiring outside counsel in another country in the past 12 months. Another 29 percent hired outside counsel for five and 10 matters in the past 12 months.

The survey indicates later that 67 percent of the matters involved patent or trademark issues so the results overstate the demand for international law firms to handle significant litigation or transactional matters. Many patent and trademark retentions are required by national laws, but the firm does relatively little substantive legal work. With that caveat, the data suggest to me that the need to find a firm oversees is for most US law departments very infrequent.

Here is a way to calculate and prove savings that are promised by a fixed-fee arrangement. Start with historical data for at least the past three years about spending in the area that will be handled for the fixed fee. With that data, it is easy to extrapolate expenditures for the period of time covered by the fixed fees. The difference between what would have been spent on an extrapolated basis and negotiated fixed payment represents the savings. For example, assume a law department spent in 2004 $1 million on some kind of legal representation, then in 2005 $2 million and in 2006 $3 million. On those amounts, the extrapolated spend for 2008 and 2009 would be $5 and $6 million, respectively, for a total of $11 million. If the winning firm’s proposal were to handle that representation for $10 million, the savings would be $1 million 9.1% of the otherwise expected expenditure.

To my mind, saving calculated this way is a much more provable and reliable figure than savings from discounts to hourly billing rates (See my post of Nov. 26, 2006 and 19 references cited on discounted billing rates.).

Often when I recommend a fixed-fee arrangement for a law department, someone will worry out loud that the law firm might shirk if it looks like the money will end before the matter. The quality or quantity of work may decline as the firm nears its fixed-fee ceiling. I disagree, and for three reasons.

First, if you have chosen a reputable law firm, it is full of capable, ambitious, and proud lawyers. By nature, training, and firm culture they strive to do well and it would be anathema to them to short-change a good client – the arrangement presumably has given the firm a fair amount of good work – just for dollars. After all, unless every lawyer is fully billable, there is no actual cash loss from written-off time. To cap the point, only the partners might feel the economic pinch; associates want to win at any cost.

A second reason is that the law firm presumably would like to re-enlist for a second round of legal services or cross-sell other services. If the first arrangement lost money, the firm will try to renegotiate more lucrative terms but in general if the bolus is large enough, it’s likely that the law firm wants to continue. No firm wants it known on the street that they did not succeed with the client.

Bait-and-switch is an ugly term for an unfortunate practice: the suave and senior partner stars at the competitive presentation, but if the firm is selected other lawyers actually work on the matter. Some law departments, those who favor core team (See my post of Dec. 8, 2006, 2007 and my recent article.) might try a variation.

Ask that the two or three associates who will work mostly on the matter present on their own. By that device, a law department can get a better sense of the interpersonal style, intellectual ability and experience of the lawyers who will account – presumably – for most of the hours billed.

Yes, certainly it is the partner or partners who bring the judgment and connections and experience, but they can have their say in a separate presentation. To bifurcate the levels is to gain a better understanding of the workhorses and to underline how important to the department is the core team of associates.

Six years ago, based on a survey they conducted, ACCA and Serengeti announced that 24.3 percent of in-house attorney time, on average, is spent managing outside counsel. That percentage seems much too high.

Many in-house lawyers serve in as generalist legal counsel for a business unit, and those lawyers do not turn often to outside counsel. Much of their work revolves around contracts and relatively simple legal issues pertaining to real estate, personnel, and marketing. Specialist lawyers, who handle IP, environmental, HR and other areas, have more frequent need for outside counsel (See my post of Nov. 8, 2005 on the irony of specialists using external lawyers more.), but they surely don’t spend on average 10 hours a week or so managing outside counsel (See my post of Nov. 8, 2005 about measuring total hours of legal advice rendered.).

Litigation managers certainly pull the average higher, but they only account for about one out of six to eight lawyers in a typical law department (See my post of Oct. 29, 2005.).