Articles Posted in Outside Counsel

Summarized in ACC Docket, Vol. 25, May 2007 at 12, the 2006 ACC/Serengeti Managing Outside Counsel Survey compiles data from hundreds of ACC law departments. This year’s data reinforces my earlier comments on the predecessor survey (See my posts of Nov. 8, 2005 about law departments hiring only experienced lawyers; and Nov. 21, 2005 on imposing staffing models.).

According to the most recent results, “About 24% of law departments now require a minimum level of associate experience. The average level of associate experience required has leveled off at 5 years (up from 3 years in 2000).” This finding is most surprising.

Undeniably, law departments look askance at novice lawyers who sport high billing rates and high billable hour goals (See my post of Feb. 8, 2006 on more complaints about associate rates than partner rates; of April 30, 2006 on low worth ascribed to associates; Feb. 28, 2006 about complaints over associate compensation, Nov. 21, 2005 on imposed staffing profiles, May 30, 2005 about hiring only partners; Nov. 19, 2005 about USF&G using only partners; Nov. 8, 2005 on minimum experience requirements for associates and Feb. 4, 2007 on ratios; May 5, 2006 on “uncommitted associates“; Jan. 20, 2006 on the ratio between associate costs to firms and their revenue; Feb. 20, 2007 and March 11, 2007 on associate attrition rates.).

The 2006 ACC/Serengeti Managing Outside Counsel Survey compiles data from hundreds of ACC member law departments. More information and survey results are available from Rob Thomas, the report’s author.

As the latest report is summarized in ACC Docket, Vol. 25, May 2007 at 12, “about 25% of in-house counsel … issued at least one RFP to law firms during the past year.” In light of how many members of ACC are small law departments with modest external spending, that a quarter of the respondents sent out one or more RFPs seems impressive.

But the report takes a contrary perspective: “Comparing the total number of bid requests to the total number of law firms, there were on average fewer than three responses for every bid request issued.” By the way, in the two years since this metric was first reported (See my post of April 5, 2005 on the responses to this question in 2004), the average has increased. The low number of responses, speculates the report, may be “a reason why competitive bids are not more common.”

Back in 2005, Pitney Bowes began to study its outside legal spending. As reported in the Wall St. J., May 2, 2007, at B2, with assistance from its strategic sourcing group the legal department analyzed its matter-management system data and decided to change the economic basis on which it paid some of its law firms.

“Pitney Bowes is now using fixed-fee arrangements for employment matters, small M&A deals and real-estate work” said the director of strategic sourcing for the company who worked on this project – interesting that it is not someone from the law department who is quoted – and estimated “the company saves up to 15% on fixed-fee matters.”

As important as is the amount of savings projected from a fixed-fee arrangement, it is also important that the law department be able to prove the savings. Say the department has three years of spending data. It can extrapolate that data for the period of the fixed-price deal and show the difference, convincingly and clearly.

What the US conglomerate Tyco did broadly with Eversheds – retain the UK firm to handle all the company’s legal work across Europe – Northrop Grumman has done more narrowly with Allen & Overy and all its employment, benefits and incentives work.

According to Legal Week, March 8, 2007 at 5, the international defense giant assessed four firms and eventually chose A&O for an arrangement that will last two years and, “if successful, could be rolled out to other areas of work.”

This item on one mandate relates to previous forays on this blog into various aspects of other convergence arrangements (See my post of Oct. 23, 2005 about size correlating with overhead costs; May 19, 2006 regarding Nestle and how many firms it initially invited to bid; April 22, 2007 regarding Tyco and Eversheds; and Feb. 9, 2006 regarding British terms such as “mandate.”).

A short item by Ed Charlton, published in Law Practice, April 2007, argues that law departments that keep track of their outside-counsel invoices electronically can assure themselves that they pay each invoice only one time. That advantage makes sense, but Charlton makes too big a deal of it. “Storing the invoices in a central database eliminates duplicate payments, which is a common occurrence with outside attorneys who send monthly statements.”

Two points about the quote. No system can eliminate duplicate payments; gremlins, mistakes and novel circumstances will always bedevil us. It is the second point, however, that troubles me. Most law firms send monthly statements, so do law departments commonly pay the same invoice twice? It’s not a mistake, let alone a chronic problem, that I have heard about.

A study of French law departments, conducted by Juristes Associes in 2006, included almost 100 legal departments. Two-thirds of them departments acknowledged that they had changed law firms in the previous two years – which by the way means that one third stood pat for those two years. As the report summarized its findings: “Legal divisions seem to be relatively satisfied with the services rendered by their law firms” (See my post of Feb. 19, 2007 on firing firms in the US and references cited.).

When the legal departments have left firms, it was for the following reasons:

“Not responsive enough” (36%)

Those who invest in mutual funds are familiar with beta (the systematic return delivered by the market) and alpha (the extra return obtained because of a fund manager’s skill). The beta tide raises all boats, but some alpha captains still get into or out of the harbor faster than others.

If the law department industry had reliable, comprehensive data on the increase year-over-year in outside counsel effective rates (See my post of June 13, 2006 on effective rates.), we could call that the beta rate increase. Then, every general counsel could collect the same data for his or her department and determine the specific law department’s alpha cost. Ideally, for a general counsel ahead of the wave, alpha would be lower than beta; when better managed, a law department accedes to rate increases that are less than the industry average.

Bonuses of senior lawyers and benchmark standings could turn on the size of that negative difference between systemic, market-wide increases and particularized, departmental increases.

Survey results from BTI, published in Law Practice, April 2007, place “prestige” as the most important determinant of why law departments retain law firms.

Preposterous, I say. It cannot be denied that if all factors were equal, the better known firm, with the better reputation in the market, would probably get the call. But nothing is the same among top-tier law firms, and it is the quality of the partner or the partner’s relationship with senior lawyers and executives at the client that most influences the decision to retain.

After the decision is taken, as a convenient rationalization, a law department may say that it was the shining luster of the firm overall that seduced them. Self-evident, isn’t it, that there are a score or more of law firms in the country with larger-than-life renown, and there has to be other attributes that count for more in choosing among them. Its not prestige, its mostly the lead partner’s prowess.

Despite many law departments’ efforts to slash the number of law firms they retain (See my post of April 22, 2007 on Tyco International and references cited.), powerful forces push the other way.

For example, the more global the operations of a company, the more law firms are likely to be needed in those foreign markets (See my post of April 9, 2006 about different trends in the US and outside the US.). Legal and regulatory schemes have become more complex, which means law departments need the counsel of more specialists (See my post of March 17, 2007 on complexity in litigation and references cited.). Convergence often results in larger, more costly law firms (See my post of April 2, 2006 on this and other disappointments of convergence.).

Additionally, competitive law firms jostle themselves more and aggressively to be instructed by law departments and departments give some of them a try. As law departments grow larger, there are more voices calling out for firms they like. Finally, e-billing enables a law department to hire a wider array of firms since the software reduces the administrative hassles of invoice review (See my post of March 6, 2007 on the market penetration of e-billing systems.).

I recently reviewed a draft request for proposal (RFP) from a law department. It sought proposals for an area of law. One of its questions was along the lines of “Please give the name of three law firms that you believe are leaders in this area of work other than yourself.”

I recommended removal of the question. Yes, it could provide the law department with a form of peer review – assuming the law firms were honest, knew the relative strengths of their competitors, and shared the law department’s view of what makes a firm a “leader.” I doubted each of those assumptions would be accurate.

But I based my recommendation on basic fairness and my experience selling consulting services. It’s not fair in a country with the Fifth Amendment to ask service providers to boost competitors and thereby injure their own chances to be selected. It is not fair to ask service providers to compare themselves to other vendors of a like service.