Articles Posted in Outside Counsel

A previous post discusses my concurrence with and dissent from some obstacles within law departments to improving outside counsel management (See my post of June 30, 2007.). Some reasons were not mentioned at all by that compilation.

Law firms, to put it bluntly, are flush. If they have as much work as they can handle, why should they care about pleadings by their clients for cost restraint. A second obstacle is the fear of inside lawyers to try something new, especially if there is a risk (See my posts of April 12, 2006 on risk aversion and personality styles; Oct. 18, 2005 generally on lawyer on risk aversion; Dec. 17, 2006 on Type I and II errors; and Aug. 27, 2005 on mutual blame as to why alternative fee arrangements not succeeding.). A third brake is the lack of palpable incentives for individual lawyers to reduce costs.

One other hurdle that should be recognized is a manifestation of the principal-agent problem (See my posts of Jan. 16, 2006 on the principal-agent split; May 16, 2006 on why individual lawyers don’t reduce costs; and Jan. 28, 2007 on agency theory.). Finally, the reality is that many law departments have needs for outside counsel that are sporadic and spread out, so there is difficulty having a critical mass of services need and thus gaining traction on cost control.

A document of the Corporate Executive Board lays out 13 obstacles within law departments to improving outside counsel management. They include several that I agree with. “Pressure to use expensive law firms as an ‘insurance policy’ for important matters” (See my post of May 23, 2007 on CYA.). “Reluctance to push on costs as it may alienate law firms” (See my post of July 30, 2005 on the fear of driving away good firms with cost niggling.). Three other obstacles have to do with insufficient internal headcount or budget to invest in cost-saving technology, and they are unobjectionable.

Three of the obstacles I question. “Difficulty switching firms due to long-standing relationships and loss of institutional knowledge” may be exaggerated (See my post of July 21, 2006 disputing the putative losses from transition to a new firm.). “Law firms lacking commercial understanding of the business” may have several interpretations. “Lack of small firms in the market capable of handling large or complex matters” the limitation for large matters that require many staff may have some validity but complexity is not beyond the scope of experienced partners in specialty boutiques (See my post of June 30, 2007 for comments on obstacles not on the list.).

One way to test whether discounted billing rates actually translate into savings is to compare the post-discount effective rate of a law firm to its pre-discount effective rate (See my post of June 13, 2006 for the definition of “effective billing rate.”). To do so take a representative selection of invoices from the law firm that has granted you a discount. Divide the total professional fees by the total professional hours as billed and you will know the effective billing rate.

If you then do the same calculation for a large sample of invoices after the discount has been granted, you will know or at least have an inkling whether the discount has lowered the firm’s effective rate.

Yes, all the matters are not the same in the pre- and post-discount bundles but if the billings are large enough, the figures should be representative, especially if the types of matters are fairly similar. Yes, billing rate increases may have taken effect, but you can reduce any invoices subject to higher rates by the higher rate percentage and then make the comparison (See my post of May 26, 2006 that derides discounts.).

A commonplace holds that, roughly speaking, 25 percent or fewer of a law department’s law firm’s account for 75 percent or more of all its billings. Likewise, 25 percent or fewer of a department’s matters account for 75 percent or more of its spending on external counsel during a year.

A third manifestation of Pareto’s venerable generalization (See my post of Sept. 4, 2005.) is that it may well be that 25 percent of fewer of the timekeepers on the matters of a particular client are responsible for 75 percent or more of the billable hours or the dollar value billed or both. This should hold true because to some degree the same lawyers are assigned to service the same client (See my post of Dec. 8, 2006 about core teams in law firms.).

To refine the ratio a bit more, I suspect that each of the above ratios are more like 20 percent to 80 percent, but the point is the same.

Any law department with electronic billing can break down its invoices by timekeeper level. The proliferation of timekeeping levels is remarkable.

The bare minimums of levels are in law firms that have partners, associates, and paralegals (or legal assistants) (See my post of June 7, 2006 on the difference between paralegal and legal assistant.). More elaborate gradations of timekeeper levels include senior associates, non-equity partners, and litigation support personnel.

Even beyond those additional timekeeper distinctions are summer associates, docketing clerks, senior partners, and several other mutations such as project managers (See my post of Aug. 22, 2006 for more on this role.).

By contributing author Brad Blickstein, Blickstein Group, on legal service providers:

As did many people (including Rees, who’s quoted in the article), I read with great interest the June 2007 Corporate Counsel article on Circuit City’s prompt payment plan, in which they outline their policy of requiring a 3% discount on all legal fees, based on the fact that they pay in 20 to 30 days.

It’s my guess that they’re still leaving money on the table, at least until they implement the e-billing program that they are “currently in the process of implementing.”

A fair number of US law departments keep lists of domestic preferred firms, which law firms they turn to unless there are extraordinary circumstances. Similar lists are much less common for firms that are based outside the US. According to Law Firm Inc., Vol. 5, May 2007, at 38-9, “Only a small number (15 percent) of U.S companies and divisions maintain a formal preferred list of overseas firms and/or lawyers. 29 percent have an informal preferred list and 30 percent have an informal list, while 26 percent do not maintain a list of firms or individual overseas legal service providers.”

This data came from an ALM survey of more than 200 “key corporate decision-makers involved in the purchasing of overseas legal services.” Almost half of the companies would be in the Fortune 1000 in terms of revenue.

Even when law departments claim they keep track of outside counsel, I would not be surprised if the lists are kept up very haphazardly, rarely pruned, not subjected to evaluations, and contain duplicates.

I have commented on associations of law firms that refer work among themselves and market collectively (See my posts of May 30, 2005 which names a dozen; Dec. 19, 2005 with more metrics; and Nov. 11, 2005 and skepticism on whether departments rely on such groups.). Some more associations have come to light.

According to Legal Week, May 25, 2006 at 38, there is a network called Consulegis, which has 93 member firms in 40 countries – more than 1,550 lawyers in all.

Another network is SEELegal, a group of like-minded firms in southeast Europe, which includes Albania, Bulgaria, Greece, Romania and other nearby countries. Another example of a regional association is an alliance of law firms across the continent of Africa, called Lex Africa. That group boasts 23 members from a number of countries.

The term “panel of law firms” is mostly used by European law departments (See my post of April 18, 2005 on the term and its American counterpart, “preferred provider.”). The smaller number of firms on a panel makes decisions as to which to instruct easier (See my post of Nov. 13, 2006 on decision paralysis.). In Australia, panels account for the most common method of selecting outside counsel (See my post of July 4, 2006.).

Sprinkled throughout this blawg are references to 11 law departments that have created panels of law firms (See my posts of Nov. 13, 2005 on RHM and its four firms; Feb. 15, 2006 on Daimler-Chrysler and Euronext.liffe; March 30, 2006 on Societe General and its 9 global firms and sub-panels; Nov. 19, 2005 on Serco; April 18, 2005 on Barclays and its 37 law firms; April 16, 2007 on General Electric with 62 panel firms; May 19, 2006 on the Nestles competition for a panel; March 3, 2007 on Pfizer and its products-liability panel; March 9, 2006 on ABN Amro and its employment law panel; and April 4, 2006 #3 on Heritage and savings – but see June 7, 2007 on the “dismal failure” of panels to bring benefits to law departments.).

Five huge law firms comprise the “Magic Circle,” the superordinant firms of London. With thousands of lawyers each and global footprints, it is not surprising that many posts on this blog refer to these impressive law firms. I wondered how many times its five members have made this blawq and for what reason. As detailed below, 21 posts refer to them, of which 13 have to do with a topic related to law department management and eight have to do with appointments to panels (See my post of Dec. 12, 2006 about how British companies disclose the results of their panel selections.).

Eversheds leads the pack by a good distance, with eight posts that refer to the firm (See my post of June 18, 2007 with references cited.). Moreover, among those posts, seven concern initiatives that may appeal to law departments and one is a panel selection. This is a firm with a progressive understanding of inside-outside relationships.

Allen & Overy has five mentions, two with a management perspective and three about panel decisions (See my posts of July 20, 2005 on its disclosure of its financials; Oct. 17, 2005 on its online banking capabilities; Nov. 19, 2005 on the firm being dropped from Serco’s panel; March 30, 2006 on its admission to Societe General’s panel; and May 9, 2007 on its role on Northrop-Grumman’s panel in Europe.).