Articles Posted in Outside Counsel

An American Lawyer survey in the fall of 2006 of the 200 largest US law firms uncovered the practice that “nearly one-third (31 percent), billed out their contract attorneys at more than a 200 percent markup.” Thus, a contract attorney for which the firm pays $40 an hour was billed by that group of firms more than $120 an hour. Nice work if you can sell it.

Law departments should attack such surcharges. Some overhead is appropriate, to be sure, because there are costs of finding, training, retaining, and managing contract lawyers. But for firms to double their margins on staff that the law department could retain at cost – which some portion of the firms did who only billed them at a 100 percent markup – is an unwarranted excess.

The Canadian Corporate Counsel Association (CCCA) surveyed its members for the 2005 In-House Corporate Counsel Barometer. It’s heavy weather to make sense out of the result, stated in Canadian Lawyer Inhouse, Vol. 2, Feb. 2007 at 28, that “38 per cent of those surveyed … said they or their organization have dealt with alternative billing structures.” The phrase “have dealt with” could mean almost anything, so the Barometer’s reading is, dare I say, cloudy.

The article continues with the comment that to make flat fees or budgets “more attractive to law firms” law departments “often guarantee a certain amount of business to law firms that offer reduced or fixed rates.” What, firms can’t be persuaded to provide legal services other than at hourly, standard rates unless the carrot is thick and red enough?

Only two advantages come to mind for law departments that assure a firm a minimum amount of business. One is that the firm graciously accedes to something other than standard full rates, while the second is that perhaps the law department then uses the firm more, and benefits of familiarity and transactional ease accrue.

Consulting Mag., Vol. 9, Jan./Feb. 2007 at 17, describes a lawsuit against PricewaterhouseCoopers, which case unearthed evidence that the accounting firm had obtained discounts from travel companies. That would have been fine, except PwC structured the discounts as backend rebates rather than front-end discounts, and pocketed the rebates.

Some large law firms might also be able to muscle in on similar kinds of savings from airline tickets or hotels, so law departments ought to confirm that they as clients obtain the benefits of those savings (See my post of June 15, 2005 about ethical obligations of law firms to pass along savings to clients.).

In project after project, I see that the disbursements charged clients by law firms hover around ten percent of the fees charged (See my post of Dec. 1, 2006 generally on disbursements and seven references cited.).

Consulting Mag., Vol. 9, Jan./Feb. 2007 at 17, presents data from 10 major consulting firms on client reimbursements as a percentage of sales. If sales are roughly the same as law firm professional fees and reimbursements equal what law firms consider disbursements (costs of travel, lodging, meals, etc.), then this data should be a ballpark guide for law departments as to what law firms pass through. The range for the consulting firms was between 2.9 percent for Hewitt and 12.0 percent for CRA International, the median was 8.2 percent, and the average was 7.4 percent.

Five conclusions follow from this generally comparable set of metrics: (1) my ten-percent rule-of-thumb for law firm disbursements is corroborated, but may be generous; (2) wide differences in expenses passed through, amounting to tens of thousands of dollars on large matters, are likely to be seen between equivalent law firms; (3) even the most miserly controls on out-of-pocket expenses still only whittle away at a small portion of the total costs of law firms; (4) to whatever extent your law department can wrap costs into fees, the law firm has an incentive to pinch its own pennies; and (5) bulk-purchase agreements with large vendors, which law firms in turn must use, can save money.

One of the questions in ACC’s Seventh Annual Chief Legal Officer Survey at 4, asked the 848 respondents to describe “any new or noteworthy initiatives implemented by your outside firms to improve the relationship with your law department.” The initiative checked most frequently was “Seminars/Training/CLE Sessions” at 21 percent of those who responded.

The notable aspect was that of 848 people who responded to the survey as a whole, 747 of them skipped this question. Sixteen different initiatives were listed by at least one person, but almost nine out of ten respondents had nothing to report! Same old same old, I guess, with nothing innovative done by their law firms, nothing that stood out. I hope that was false modesty or poor memory, not the utter absence of law-firm creativity or improvements.

ACC’s Seventh Annual Chief Legal Officer Survey at 3 lists 13 primary reasons why respondents fired a law firm. Cost (which includes improper billing), mishandling one or more critical matters, and lack of responsiveness, each accounted for seven to eight percent. Poor quality of work came in at 6.5 percent. The other reasons each fell below two percent: “preferred counsel at the firm no longer available; “firm could not provide the needed expertise”; “firm could not provide service in necessary jurisdictions”; and “lack of diversity.” All of these reasons together came to about 40 percent of the explanations.

A whopping 63 percent of the respondents selected “not applicable” as the reason they had fired a firm, and did not give any further guidance as to their reason under “other.” It may be that law departments stop using a particular firm not because of any gaffe or malpractice, but because another firm made a more attractive offer of service. Also noteworthy is that no one gave “conflicts of interest” as a reason they jettisoned a firm.

A recent survey gives some support for the heuristic that law departments five or fewer lawyers retain customarily about three primary firms for each inside lawyer. Data from ACC’s Seventh Annual Chief Legal Officer Survey at 2, shows that 85 percent of the respondents use 15 or fewer law firms “on a regular basis.” At page 9, the survey discloses that 80 percent of the respondents have law departments of five or fewer lawyers (one third of them were solo).

If we roughly assume this group of small law departments had on average three lawyers and used “on a regular basis” an average of nine firms, we can propose a working rule of thumb of three primary law firms per lawyer. We might further speculate that roughly half those firms handle litigation (since outside counsel spending on litigation accounts for about half a typical law department’s external spend), and the rest probably handle a specialty area such as environmental, employment, or intellectual property issues.

The wild card in this extrapolative exercise is the meaning of “work with on a regular basis.” Without a clear definition of that term, such as “accounts for 20 percent of your spend each year,” or “retained on more than five matters a year,” or “the go-to firm for our department whenever issues arise in an area of law,” the numbers are far from reliable.

The marketing blurb for a conference called “Managing and Leading an Effective In-house Legal Department” (organized by Falconbury) dropped into its list of all that attendees would learn the notion of “effective negotiation techniques.”

There is, I suppose, a small chance that ineffectual restrictions on law firm charges has to do with the shortcomings of in-house lawyers when it comes to negotiating with firms. But I doubt that; corporate buyers of substantial legal services have potent, well-recognized leverage that more than make up for mistakes at the bargaining table.

Rue another instance of “no good deed goes unpunished.” If a law department sees that a law firm has been very successful in representing companies in its industry, the law department might shy away (See my post of Oct. 29, 2005 and its disparagement of industry knowledge.). This paradoxical reaction comes about because there could be concerns about the firm’s capacity to take on more work – the lawyers are too busy — and some residual worries about conflicts of interest.

Some reservations might well up from a worry that the firm’s work will not be crafted uniquely for the client, but will be a cookie-cutter application from the other clients. Even the firm with the most breadth, the deepest bench, still has only one or two star lawyers and those luminaries can be buried with work.

Thus, success has its costs. Law departments might have mixed feelings about a firm with extensive background in an industry and strong demand from clients.

In the US, a handful of organizations purport to rate lawyers. According to the ABA J., Jan. 2007 at 27, the evaluators include Martindale-Hubbell, The Best Lawyers in America, Super Lawyers, Chambers USA (the colonial arm of Chambers and Partners in Britain), and the newcomer, Lawdragon. The article points out that some of the raters aim directly at in-house counsel, some at outside counsel – who are often in turn recommenders of counsel to their corporate clients, and some to consumers.

The Association of Corporate Counsel has found from 2001 to 2005 “that in-house lawyers look to these directories – online or in print – about 18 percent of the time in hiring lawyers.” I can’t say that anyone I have spoken to in law departments mentions evaluation directories, but if you really have no clue about bankruptcy lawyers in Butte, I suppose a directory might give you your first steer.