Articles Posted in Outside Counsel

The US law firm now called Howrey a few years ago agreed to defend Chinese cellphone battery maker BYD Co. in a patent infringement suit. The law firm agreed to discount its hours in return for a bonus if a good verdict or settlement was reached. When the case settled in 2005 before going to trial, for “less than the value of one day’s production” at the defendant’s battery plant, Howrey was awarded its bonus.

According to the Nat. L.J., Vol. 29, July 16, 2007 at 10, the bonus included a “celebratory trip to China” and a million dollars, “which bumped the firm’s revenue from the case 50% higher than it would’ve been with plain old billable hours.”

This is a fine example of a performance-based incentive award. I couldn’t help but wonder, however, why the example is over two years old and Howrey can’t boast of more recent successes.

At RBC Financial Group (part of the Royal Bank of Canada), the law department uses an internal survey to ask its lawyers to rate on a scale of one to 100 the performance of the firms they use. The numeric ratings matter, “but the most useful information is often the anecdotal comments provided in the survey responses.”

Moreover, as described in LEXPERT, Vol. 8, July/Aug. 2007 at 64 by Richard Brzakala, law firm manager at RBC Financial Group, the law department has moved away from the traditional RFP structure and inquiries. Now they send out a “questionnaire” that includes such questions as “What distinguishes your firms culture from the competition?”, “What are your most successful partnering arrangements/experiences?,” and “Describe any successes involving innovation in the areas of law you have requested to do work for RBC.”

The questionnaire assumes that each firm can deliver first-class legal services and therefore does not ask as much as traditional RFPs do about staff and firm experience. The inquiry also shifts from quantitative information, such as billing rates, to qualitative responses.

Rick MacKenzie, and associate general counsel at BMO Financial Group in Canada, offers some insight about how his bank intends to reduce outside counsel expenses by 10 and 15 percent over three years. As described in LEXPERT, Vol. 8, July/Aug. 2007 at 63, the bank’s new procurement system takes advantage of customized software developed in-house.

“Anyone within the organization who needs to purchase legal services must pick from an online list of preferred suppliers — firms that offer a wide range of legal services — or a secondary list of approved suppliers — usually more specialized firms. Purchases of more than $5,000 must be approved electronically by the legal department. If anyone tries to buy outside legal services without going through the electronics store, the law firm will not get paid — a powerful incentive for everyone to cooperate.”

This system keeps an eye on expensive uses of outside counsel yet gives clients the right to buy de minimis amounts of outside guidance (See my post of Oct. 1, 2006 on one department’s limit of four hours a month.).

GC Mid-Atlantic, July 2007 at 19, mentions that “recently, Wal-Mart Inc. reportedly required that its top 100 firms include at least one woman and one minority attorney among the top five attorneys handling the giant corporation’s legal business.” E-billing software makes it easy for law departments to track compliance with such requests.

The thrust of the article focuses not on how to monitor diversity bon on whether such quotas and scrutiny are actually illegal in that they may violate Title VII of the Civil Rights Act. In the view of some people, both the law departments that mandate and the law firms that comply are vulnerable to discrimination charges.

One of the difficulties with alternative fee arrangements is that early in a matter it isn’t possible to foresee future events and craft a fee arrangement that complements what is likely to happen. Who can know enough about the other side, the court, the issues, and the external actors who will appear?

For this reason, sometimes law departments agreed to pay on an hourly-fee basis for an initial period, perhaps 30 or 60 days, and then negotiate something other than hourly billing. The initial period, often referred to as “early case assessment,” covers basic fact investigation, preliminary strategy sessions, budgets, and familiarization with each other (See my post of Jan. 4, 2006 on early case assessment.). Both sides thereafter have a better understanding of what will be involved and costs.

The problem then becomes whether the law department has any realistic leverage once it starts to negotiate alternative fee arrangements (See my post of July 21, 2006 disputing the putative losses from transitioning ongoing work to another law firm.).

Some people argue that smaller law firms are more receptive to alternative fee arrangements than are very large firms. Let’s look at both sides in that debate.

Very large law firms are more likely to have extensive experience, even in a highly specialized area of law, so they know more about likely costs and timeframes. They also have a plenitude of lawyers, a.k.a. bench strength, which can absorb ebbs and flows of work. Larger firms also have more capacity to absorb financial risks or wait for cash flow to come through a bonus arrangement. More than small firms, they usually have invested in document management systems, knowledge retrieval and other forms of professional support that increase efficiency.

Some pressures work against large firms when they consider alternative fees, including corporation-like controls over alternative billing (See my post of July 19, 2007 on administrative approvals.), a tangle of potential conflicts of interest (See my post of Nov. 13,k 2005 and four references cited.), and a higher cost structure than similarly-located smaller firms (See my post of Oct. 23, 2005 about size of law firm correlating with overhead costs.).

When Daniel Churay joined YTC Worldwide, a $10 billion trucking company, in 2003 the law department head 722 law firms working for it. Quoted in a profile in the Nat’l L.J., Vol. 29, July 9, 2007 at 8, Churay gave a neat spin to the essence of convergence: “we are not into vendor management, we are into talent management, so we now have 11 relationship firms that we treat as an extension of our staff.”

From 722 firms to 11 relationship firms is dramatic, but the YTC Worldwide law department does more. “We review individual lawyers who work a lot of hours just as if they were an employee. Some firms have offices here in our offices.” That is a particularly enmeshed form of partnering.

As a result of these transformations, the trucking company has dropped its outside spending by $6 million a year.

From a recent, large-scale survey, reported in Inside Counsel, July 2007 at 61, I have little to quarrel with about the top four factors law departments chose on why they select the law firms they select: “quality of work” and “responsiveness” were tied at the top followed by “creative solutions.” I explored creative solutions earlier (See my post of July 19, 2007.). “Billing rates,” at number four, is reasonable, but the five factors below them trouble me.

“Provides preventive counseling” was ranked fifth, which seems strange (See my posts of July 14, 2005 and Dec. 19, 2005 on training clients.). Many outside counsel do not interact much with client employees who are not lawyers, and therefore have little opportunity to train and counsel to avoid problems. Preventive lawyering encroaches on the sweet-spot of inside counsel.

The sixth-ranked choice, “multiple practice areas,” puzzles me. Perhaps in-house counsel think that a multi-disciplinary group helps in large transactions. Perhaps there is latent desire for cross selling? Or is this an oblique proxy for size of law firm?

When asked in a survey, reported in Inside Counsel, July 2007 at 61, which of nine choices are the most important factors in their selecting outside counsel, the 862 responding in-house counsel put “quality of work” and “responsiveness” as the top two, equally ranked, factors. What caught my eye was the third factor listed, “creative solutions.”

Other surveys have ranked creativity in outside counsel much lower (See my post of May 28, 2007 on law firm creativity and eight references cited.)

Obviously, a firm that a law department has worked with before can have demonstrated creativity. The hard case is the challenge to a firm to demonstrate creativity in advance. Creativity, some might say, shows up during a transaction or lawsuit, but may not have much of an opportunity at the proposal stage.

Law firm partners, especially those in very large firms, often cannot act unilaterally when they seek to work out the economic terms for how they will represent a law department. At least five gatekeepers may put up their hand to stop or alter a deal.

Partners may have to run a conflict check (See my post of July 16, 2007 on law firm conflicts of interest and references cited.) but as far as the billing arrangements go, the only “conflict” I can think of might be related to a most-favored nation commitment (See my posts of Oct. 30, 2005; Nov. 21, 2005; and Jan. 25, 2006 on difficulties with MFNs.). Law department managers hear the line “We can’t concede those terms or we’d have to do it for many other clients.”

Sometimes partners have to obtain approval from a new matter committee or a committee or partner who vets deviations from the firm’s standard billing rates (See my post of June 10, 2007 regarding alternative billing arrangements.).