Articles Posted in Outside Counsel

Does the size of a law department correlate with the number of lawyers in the major firms that law department retains? I hypothesize that the bigger the department the larger the law firms it pays the most. In other words, for a group of law departments, find out from each of them the average number of lawyers in the five law firms the department paid the most last year. Then run a correlation of that group of averages against the number of lawyers in each department (See my post of April 5 and May 10, 2005 on correlation and Jan. 14, 2007 on the amount of variance in an independent variable explained by correlation.).

The reason for this correlation is that large law departments, who usually support large companies, are more likely to bump into big or novel legal issues. Both kinds of issues call for specialized expertise or ample boots on the ground. This is another reason why there is some turnover of law firms: companies outgrow law firms that do not match them in resources and knowledge.

For law firms to charge out its lawyers on a daily rate, sometimes called a per diem, is not an arrangement much talked about. Why?

Per diems could be like blended billing rates (See my post of June 13, 2006 on blended rates compared to effective billing rates.) in that the cost is known in advance. If a law firm were to tell a client that its third year associates bill at $2,700 a day, regardless of how many hours they work, wouldn’t that make budgeting easier?

The sensible answer is not to go with per diems. Barring huge matters or cases, a law department will not want one or more of its outside lawyers to be devoted solely to its matters. Ebbs and flows of work would guarantee some false billing. Per diems harbor the danger of any block bill: at what point can and should an associate or partner charge the full per diem rate?

Emerson Electric Co.’s legal department often needs advice about shipping regulations. One of its law firms, Bryan Cave, developed software that runs on its website. The program asks the Emerson Electric lawyers who use it a number of questions about the regulatory situation and then produces either an answer or a suggestion that the attorney call Bryan Cave for further advice.

As described in InsideCounsel, June 2007 at 63, the law firm has developed such rules-based software to give advice on other areas, such as insider trading (See my post of March 24, 2005 on if-then, rule-based document assembly software.). The article ends with a broad statement: “Many other firms are offering their clients similar KM solutions, often at no cost to the client.”

In 2006, the winner of the Financial Times Innovative Lawyers contest was Addleshaw Goddard. That UK law firm produces “an employment channel — a 24-hour-a-day online television feed that allows clients to train and educate their staff on important aspects of personnel and employment law.” No more about the high-tech legal delivery is described in Fin. Times, Feb. 6, 2007 at 7, but that snippet is impressive enough.

When law department lawyers try to distinguish one large law firm from the next, it may well be that outstanding creativity like Addleshaw’s, coupled with effective implementation, win the trophy. Usually, however, law departments who invite law firms to strut their stuff lament the lack of innovation (See my posts of May 4, 2005; Sept. 10, 2005; and Feb. 11, 2007 on the lack of creativity by law firms; March 11, 2007 and fixed-fee arrangements; about; May 3, 2007 about thinking outside the bun for RFPs; Oct. 30, 2005 #3 and May 16, 2006 with some survey data; and July 21, 2005 on the low value law departments place on law firm creativity.).

About 80 years ago, a linguist named Zipf found that “the” — the most used English word — occurred about twice as often as “of” (second place), about three times as often as “and” (third) and so on. Others have found similar relationships between the size and frequency of earthquakes and many other natural and artificial phenomena. Brand preferences and spending habits of consumers, according to the NY Times, May 21, 2007 at B3, also exhibit a similar pattern (See my posts of Nov. 13, 2005 on power laws; and Oct. 24, 2005 as they apply to law departments.).

If Zipf’s Law were to apply to law departments and the firms they retain for specialized legal services, law departments might be expected to spend about 53 percent of their outside counsel budget in a given legal-service area on their top choice firm, 20 percent on their second choice firm, 13 percent on the third, and 7 percent on the fourth.

It seems plausible that large law departments, over a period of years, spend in specialty areas of advice roughly in accordance with this ubiquitous and long-established formula.

From the Canadian Corporate Counsel Association survey of its members for the 2007 In-House Corporate Counsel Barometer, at 28, comes this quote in connection with how many law firm departments have terminated a law firm in the past year. “Three in ten in-house corporate counsel work in organizations that have terminated a law firm(s) in the past year.”

I note in passing, once again, the infrequency with which law departments fire law firms (See my post of Feb. 19, 2007 and references cited.).

One methodological distortion about statistics on terminations of law firms lurks in this survey. Large law departments, as compared to smaller departments, are more likely to have fired a law firm, for the simple reason that bigger departments hire more law firms. Because this survey draws its conclusions based on individual respondents, not on law departments, it is possible that more than one lawyer from the same large law departments completed the survey. This methodological flaw suggests that the actual number of law departments that have recently fired a firm is lower than the 30 percent figure.

From the Canadian Corporate Counsel Association survey of its members for the 2007 In-House Corporate Counsel Barometer, at 25, comes data on considerations law department lawyers have regarding the choice of outside counsel. The usual desiderata lead the list, such as responsiveness, specialization, depth of experience, and existing relationships. Three unusual considerations deserve comment.

“The consistency of a law firm’s performance between offices, departments and lawyers” ranks number five among the nine survey choices. It taps into an important point: does a law firm deliver a consistent level of good quality across locations and levels?

Further down, at number seven on the ranking, is “access to a law firm’s premier lawyers.” My first thought is that such access ought to be infrequent, and that there is a high cost to the time of the top lawyer. My second was that a law department needs to match the sophistication of its legal needs to the capabilities of preeminent lawyers.

I don’t think so.

What matters is whether the particular lawyer or set of lawyers retained can accomplish what the law department needs that the department is willing to pay. If the expected (and eventually, the actual) price is acceptable, then whether the firm produces gushing bonanzas each year or scrapes away just above insolvency matters not a jot (See my post of May 18, 2007 on profits per partner and intelligence; Nov. 24, 2005 on intervention by law departments in law firm operations; and July 20, 2005 on transparency of law firm profitability.).

It is possible, even likely, that high profits per partner alert law departments to expensive billing practices. Generally, like costly perfumes, expensiveness signals prestige and quality (See my post of May 23, 2007 on prestige of law firms.).

When law departments place all their work in an area with a single firm for a period of time, or when departments ask for law firms to hold their billing rates constant, or when departments choose a panel of firms for certain services, the departments decide the period of the commitment.

It is rare to see one less than one year because it takes both the law department and the law firms some time to settle in to the new arrangement. Less than one year make little sense unless the law department decided to transition its pending matters immediately (See my posts of Aug. 14, 2005 on the costs of transferring matters underway; July 21, 2006 on points to the contrary; and Sept. 3, 2006 and Dec. 4, 2006 generally on the transition of pending matters.).

More commonly, in my experience as a consultant, the law department and its law firm agree to an 18-month term.

In the Canadian Corporate Counsel Association survey of its members for the 2007 In-House Corporate Counsel Barometer, at 12, one question asked the respondents to check as many as apply of 10 cost-saving measures their law department had implemented over the previous two years. Below are quoted the choices with the percentages of the 722 respondents who selected it in parentheses.

Brought more in-house (58%), require less service from outside counsel (58%), assigning work to appropriate people (44%), impose cost restrictions on outside law firms (30%), alternate fee arrangements with preferred firms (25%), changed law firms (25%), emphasis on RFPs — drive for efficiencies (14%), consolidation (14%), reduce the size of internal staff (11%), put it to offer (9%), and other (3%).

What stands out from these results are that law departments strongly favored shifting work to save costs rather than tightening the fiscal screws on law firms. Cost and fee techniques ranked fourth and fifth on the list. Ask yourself also whether the choices regarding RFPs, consolidations and putting worked out for offer (tender) are mutually exclusive.