Articles Posted in Outside Counsel

Oracle describes in a release how the legal auditing firm of Stuart Maue Mitchell & James implemented Oracle BI to help it prepare reports for clients. What amazed me is the number of clients and the volume of invoices that firm has reportedly processed.

According to the press release, “The firm says that the new system supports over 2,500 users and manages the past three years’ worth of legal invoices, totaling over $300 million in fees and expenses.” Maybe the user figure is the capacity of the software, the number of in-house counsel who use it, or else it staggers me that so many law departments – mostly, I presume – have had bills audited by this one service provider. However, Stuart Maue cannot have reached the level of a third of a billion dollars of invoices audited unless it had either a few huge clients or quite a roster (See my posts of Jan. 10, 2006 about a bill auditor in a patent infringement case; Nov. 25, 2006 about auditors in the the Oxycontin litigation; and Dec. 4, 2006 about the cottage industry.).

An item in Legal Week, March 29, 2007 at 6, outlines changes in General Electric’s revamped procedure to select its US panel of advisors. A number of those changes deserve special mention.

GE shrank the total panel of 94 by 32 law firms, “ditching 44 firms and adding 12 new names to the roster.” It also dropped its notorious e-bidding process (See my posts of July 30, 2005; Sept. 4, 2005; Feb. 1, 2006; and March 12, 2006 – all on electronic bids and auctions.). Third, “Panel firms have pledged to offer GE alternative fee arrangements where possible and will provide a regular core team of lawyers.” In a final turn of the screw, GE has doubled the contract length, to four years, and required its firms to “renegotiate reduced fees halfway through the agreement.” Apparently billing rates are still the centerpiece of the selection criteria.

An item in Legal Week, March 22, 2007 at 3, mentions the claims handler for Lloyd’s of London, Xchanging Claims Services. The survey “is part of a wider initiative by the company to create a database that will be accessible to all members of Lloyds …” (See my post of Oct. 14, 2005 on collective action by law departments and the posts cited.).

For several years I have wondered why law departments don’t share information among themselves about what their firms charge them and the costs of comparable levels of legal services. The program of Xchanging appears to move in that direction of collective information exchange.

According to the 2006 ACC/Serengeti Managing Outside Counsel Survey, as highlighted in ACC Docket, April 2007 at 14, “average reported savings from using matter management systems was 11% of outside legal spending.” Amazing!, but true?

Questions tumble all over that factoid. What was the median figure? Of the “hundreds of ACC member law departments [that] share their experience” in the report, how many have a matter management system and of those how many reported on savings? What choices of ranges of savings did the respondents have or did they fill in a percentage? Were these net savings over the cost of licensing, installing, customizing and maintaining the system? How exactly does a matter management system lead to such stupendous savings? How did the respondents know the amount saved? Is “outside legal spending” synonymous with “spending on law firms”? Was the savings for one year or repeated year after year (See my post of May 14, 2005 on savings calculations.)?

To give some perspective, a Joe Normal law department in the US of a billion dollar company spends on the order of two million dollars a year on law firms. If that department could shave $220,000 off that amount (11% of $2 million), wouldn’t all law departments have licensed or created a system?

According to a survey by Butler Rubin Saltarelli & Boyd, reported by InsideCounsel, April 2007 at 54, the 162 readers of that magazine who responded online in May 2006 gave the edge to smaller law firms. When given the statement “Smaller law firms are more willing to explore alternative fee arrangements than larger firms,” 62 percent of the respondents checked “agree.” Of the remainder, 23 percent checked “disagree,” and 15 percent chose “neutral.”

The results would persuade me more if there had been some definition of “smaller law firms,” such as “firms with fewer than 25 lawyers,” and if the question had asked about actual fee arrangements entered into rather than fee arrangements “explored.” That is, if the question had been along the lines of “In the past 12 months, what percentage of your fees to firms of less than 25 lawyers were paid other than on an hourly basis or discounted hourly basis?” and then had the survey asked the same question of larger firms.

Having critiqued the methodology, let’s take the findings at face value: smaller firms are more willing to work outside the mainstream of hourly billing. One reason might be that partners in smaller firms are hungrier for corporate work and trade billing flexibility for being retained. Or such firms have looser controls over the billing practices of their partners (See my post of March 20, 2007 on executive committee approval.). Possibly, too, smaller firms – boutiques and specialist firms – understand better than large general practice firms what it takes to handle certain kinds of matters and can therefore price differently.

Susan Hackett, the general counsel of ACC, has recently thrown down the gauntlet: associates at elite law firms are paid way too much and sensibly outraged general counsel should spurn them and their profligate firms. She fulminates against the recent jump in associate pay and its tsunami effect on rates and therefore law department costs. She thinks it self evident that value doesn’t equal cost, and calls for law departments to vote with their feet.

With few exceptions, no one forces a general counsel to hire a firm that pays top dollar for its associations. It is irrelevant that the $165,000-a-year, wet-behind-the-legal-ears pup out earns Court of Appeals judges. Overgrown kids who can reverse dunk earn way more than their erstwhile inner-city teachers. Costs of elite law schools rise every year, but do college seniors boycott Yale, Harvard and Columbia? A BMW 745 may top $100,000 but have buyers sworn off? Maybe you can’t come out of a five star restaurant for under $150 a person, but have those elite restaurants closed for lack of business? The market expresses our values.

The market of aw department buyers perceive quality differences among law firms (or their partners) and sometimes perceive that top-shelf work is worth top dollar. The firms that have raised their pay scales are humming with work.

If many inside counsel could go to a web site and evaluate the performance of their outside counsel on matters, everyone in-house would benefit. Like Zagat ratings of restaurants, the collective experience of the crowd would boost everyone’s knowledge (See my post of July 21, 2005 for an early reference to this possibility.).

An article in Wired, March 2007 at 110, demolishes the idea, however, because so-called “crowdhackers” would game the system. It is almost certain that someone would figure out how to misleadingly pump up the evaluations of certain law firms. The analogies in the article come from fake reputations established on e-Bay, or artificial buzz created on such shared-rating sites as Digg and Reddit, or manipulated feedback scores on Netflix.

It would take too much monitoring of a law-firm evaluation site to make the effort worthwhile. Too much is at stake for law firms for them to remain pristinely uninvolved and not try to influence the ratings.

Diversity & The Bar, Vol. 9, March/April 2007 at 31, describes the NMLG as “an alliance of 16 certified and AV-rated, full-service minority-owned law firms.” Founded in 2003, its members include Miami-based Adorno & Yoss – “the largest certified minority-owned firm in the United States.” The firms are located in major metropolitan areas and bring together more than 500 attorneys.

The members of NMLG refer work to each other and sometimes team on projects (See my posts of Dec. 5, 2005 about virtual law firms; and May 30, 2005 and Dec. 19, 2005 about several international associations of law firms). What the certification process is that accredits these firms, I do not know.

Ben Heineman, in Corp. Counsel, Vol. 14, April 2007 at 87, maintains that law firms should understand the whole company that is their client and that ample material is available to tutor them. “There is a large amount of public information about corporations, if outside lawyers are willing to collect it and read it (without billing the time): from annual reports and proxy statements, to citizenship reports and Web sites, to analysts’ reports and newspaper and magazine articles.” (emphasis added)

Let’s translate Heineman’s no-charge assumption into dollars. Assume a $10 million-dollar-a-year client relationship and ten core lawyers at a firm who devote much of their chargeable time to that client. Any Fortune 1000 client has tens of thousands of pages written about it, from the sources Heineman cites as well as many others. Is it plausible for a law department to expect each of the core-team members to set aside two hours a week for reading about the client? If so, 10 lawyers multiplied by $300 an hour, for fifty weeks in a year amounts to a firm investment of $300,000, which is a quarter of a percent of revenue.

My stab at quantification may miss the mark widely or seem fanciful, but the point remains: how much free commitment should a reasonable law department expect from its primary firms?

When they put prospective matters out to competitive bid, such as all lawsuits in a certain region, most law departments exclude some kinds of matters from the scope of the services. For example, class actions might be outside the bundle.

Many law firms are intensely curious about the amount and kind of work that is withheld. They have a suspicion that the highest value work, the work that is not price sensitive, falls outside of the proposal process scope.

Realistically, law departments are better off keeping some unusual work out of the biddable pool if a fixed fee is sought, so that firms don’t pump up their bids to allow for the possibility of an unusual major matter (See my post of Oct. 31, 2005 about smoking out assumptions.). For all kinds of reasons, various considerations may lead a general counsel to turn to a firm other than the bid winner for a high-profile matter. Even so it is a good practice to assure the proposing law firms that the law department will consider them for the excluded work, although not give them a right of first refusal.