Articles Posted in Outside Counsel

The Texas Lawyer, Vol. 21, Dec. 5, 2005 contains a long description of Pfizer’s P3 process (Pfizer Partnering Program) to select a panel of product liability litigation firms. One of the Pfizer lawyers commented that P3’s goal was to “totally eliminate subjectivity” from the process. The view was to “make them [the law firms] show off for you, and measure the quality of the individual players … by a reasoned assessment of objective markers.”

It can’t be done. It is not possible to rely only on objective measurable characteristics to choose firms for work more sophisticated than the lowest-level, completely rate-driven commodity service (See my post of May 19, 2006 on BP and the 30 factors it uses.). It is possible to score responses of law firms on a scale, but that scoring is inherently subjective. The selection of law firms depends on a gestalt, a combination of objective and subjective factors that a human mind juggles.

When a law firm is selected to handle a large amount of legal work on a fixed fee, the firm has a wonderful opportunity to conform its internal management practices to the new situation. Yet we don’t hear about such rethinking and innovations in how firms staff fixed-fee matters, train people who work on them, compensate partners, develop knowledge tools, redesign facilities, or alter incentives.

Law departments ought to ask in their RFPs what law firms will do differently if they are selected to handle a block of work on a fixed fee over time. Law firms ought to take the initiative and distinguish their proposals by outlining their progressive thinking. Odd it is that silence enfolds this opportunity.

“Across the country, firms have continued the aggressive pursuit of individual partners, groups of partners, and whole practice groups, sometimes offering substantial bonuses and other incentives to entice partners to relocate from competitive firms.” The Client Advisory, March 2007 of Hildebrandt and Citigroup Private Bank at 4, points out this turbulence and adds: “According to American Lawyer Media’s Lateral Report [Am. Lawyer, Feb. 2007 at 106], there were 2,153 lateral partner moves among AmLaw 200 firms during the one-year period of October 2, 2005 through September 30, 2006.” Worsening matters, “associate attrition is currently at record levels in US firms, with an annual turnover of about 20% a year…” (at 9).

The notion of partnering between a firm and a law department pales if the partners and associates don’t stay put. Too, a revolving door of partners may account for some of the “firings” of law firms (See my post of Feb. 19, 2007 on the sloppily used term.) and there will be less accretion of institutional knowledge of a client at firms that see partners come and go (See my post of March 15, 2006 questioning such knowledge’s applicability.).

The Client Advisory, March 2007 of Hildebrandt and Citigroup Private Bank at 2, concludes that cost control measures by law departments are having an effect. It discusses “declining realization rates among the 30 most profitable firms in the country and relatively flat realization rates among other firms.” The finding continued the downward tick of 2005 and, according to the report “may signal increasing discounts in response to client pressures or, in some instances, clients insisting on multiple-year rate schedules.”

On average among the large US firms, billing rates have been rising 5-7 percent a year. Hence, a law department that insists that its firms hold their billing rates constant for two years has extracted a 5-7 percent discount in the second year.

Just as associates who have high targets for billable hours ought to concern general counsel, so too should similar pressures on paralegals (See my post of Nov. 2, 2006 about percentages of firms that set 2,000 associate hours as the goal; Oct. 20, 2005 about whether law departments should ask for total hours billed by associates.). Even if paralegal time is billed at only $100 an hour and up, bill inflation is a risk.

Data from the 2005 Utilization Survey by the International Paralegal Managers Association (IPMA) came from 59 US law firms, and gives some understanding of this situation.

At the 1500 to 1599 hour level, 21 firms set that as the billable requirement. At 1600-1799, 34 percent of the firms set their requirement. Only a single firm each jacked up the requirements to 1800-2000 or more than 2,000 hours. From this information, there is ample cause for concern that paralegals bill with a heavy pen as they face the daunting prospect of recording so many hours to clients’ accounts.

Not only should law department managers lose a little sleep if their key law firms impose billable hour requirements on paralegals (See my post of March 9, 2007 on such requirements), they should also fret if the lawyers they retain do not make effective use of paralegals. The 2005 Utilization Survey by the International Paralegal Managers Association (IPMA) obtained data from 59 US law firms and gives some worrisome metrics.

One question (clumsily) asked “When attorneys in your organization may NOT properly utilize paralegals, why not?” The respondents could choose more than one of the ten choices. Several of the frequently-chosen explanations should bother law departments that are intent on cost control. Three are based on ignorance or mistrust: “Attorneys do not know what paralegals can do for them,” “Attorneys are not comfortable delegating work to paralegals,” and “Attorneys do not understand the value of paralegals.” Between 50 and 65 percent of the respondents selected those explanations.

Two others offend cost control desires: “Attorneys are delegating paralegal tasks to other attorneys or to law clerks” and “Attorneys hesitate to delegate work to paralegals to ensure that they meet their own billable goals.” The last two reasons are awful (and 71% checked the first, while 53% checked the second), because the client is paying attorney rates for paralegal work.

Mark Chandler, the general counsel of Cisco Systems, intoned this at Northwestern School of Law’s 34th Annual Securities Regulation Institute. Chandler thundered decline ahead for large US law firms, with their current business model, in part because their hoarding of legal information is doomed. He believes that “the networking of computers [the Internet] is transforming the nature of knowledge accumulation and distribution.” He believes that large law firms, many of which are enormously profitable and all of which rely on billable hours, block access to legal information.

The availability and cost of much of that legal information will drop dramatically in coming years. Chandler predicts that information technology will enable some legal service providers to “standardize services to meet clients’ cost management and predictability needs where very good is good enough.” He cites as a leading-edge example Tax Almanac, “which uses wiki to create sophisticated, easily-searchable on-line discussions, and ultimately counseling, by tax professionals on a variety of topics.” His other examples include fixed-fee work for patent work (citing Intel, GE, and his own company), consolidation of corporate secretarial duties with a single firm (citing Cisco), and contract processing (See my post of June 16, 2006 on Cisco’s contracts approach.).

Chandler gives too much credit to technology, I believe, and not enough to the willingness of some law firms to develop innovative methods of providing legal counsel at lower or fixed costs. But I agree with him that information wants to be free, and that legal information will become a commodity. The experienced human judgment, however, which applies all that digitized and searchable information to the particular facts presented by a human client, will always be highly valued.

One way to combat the cost creep that comes from converging to large law firms is to look for smaller firms that join together to propose on work. So long as one of the firms assumes the lead role, the law department can get the best of all worlds: lower cost structure and better quality with the same administrative burden.

To permit joint bids may mean that the law department has to give proposers more time to negotiate such arrangements. It may make evaluation of proposals more complicated. It may create a different kind of uncertainty about coordination and performance — but the dollars saved can be piled high.

Data collected by Altman Weil, reported in InsideCounsel, Feb. 2007 at 58, pushes back at the prevailing sense that e-billing is sweeping through law departments. The piece does not explain the survey’s population, but only 13 percent of the law departments who responded use an “e-billing system allowing outside counsel to submit legal invoices electronically.” Thus, close to seven out of eight departments have no e-billing capabilities.

Of those relatively few departments that have e-billing software or a service provider, consider the percentage of outside counsel fees they processed that way: 25 percent or less of fees handled by e-billing was checked off by 22 percent of the departments; 26-50 percent of fees was right for 11 percent of the departments; 51-75 percent was for 28 percent; and 76-100 percent was 39 percent. Thus, enforcement of e-billing was selective even among the adopters of the technology.

For its “Management Report 2006,” Team Factors Ltd., working together with the Corporate Lawyers Association of New Zealand, collected data from 102 New Zealand corporations. In a summary of the report (at 7) appears this disturbing statement: “Only 21% of respondents considered their lead law firm ‘clearly better’ than its nearest and best competitor. The remainder considered that other firms could do most or all of the legal work equally well as their current firm.” That percentage seems to be an indictment of most law firms. But I think not.

If the comparison is between the lead law firm and the law firm closest to it in reputation and ability (“its nearest and best competitor”), then by definition there is unlikely to be a gaping difference. If you move down a level to compare a particular lead partner to that partner’s clone at another firm, the same would hold true. Even so the trauma of change is so high that few lawyers in law departments would abandon their lead law firm unless another firm were substantially better (See my posts of Feb. 7, 2007 on some reasons for firing firms; and June 13, 2006 and Oct. 4, 2005 about loyalty to primary firms.).

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