Articles Posted in Outside Counsel

According to the European Company Lawyers Association website, “In the US there are about a dozen companies offering on line selection services of law firms. In Europe the choice is limited to London based First Law www.firstlaw.com and Legal BenchMarket International B.V. (“LBI”) www.legalbenchmarket.com in The Hague.”

The ECLA describes First Law as mainly active in the UK where it conducts an in-depth analysis of the legal aspects of the matter, assigns a professional agent (the case manager) who not only selects but also monitors the legal work from start to finish. Fees are generally paid by the law firm.

Legal BenchMarket is mainly active on the continent (> 15 countries). LBI does not divulge the identity of the client until the short list selection is complete, so that law firms submit bids on the work described in a Request For Proposal and cannot take into account the attractiveness of the client, hence there can be no “reputation billing” or low-ball bidding. Legal BenchMarket’s fee is always paid by the client and is a percentage of the realized savings against a pre-agreed benchmark.

As described in Met. Corp. Counsel, Feb. 2006 at 50, DuPont’s The EDGE is a “Web-based collaboration and knowledge management tool” the law department rolled out in early 2005. The EDGE has a variety of capabilities: (1) a resource center that contains information of general applicability to the key law firms DuPont uses and to its in-house lawyers; (2) practice-group sites; (3) sites dedicated to specific cases or groups of cases; and (4) sites devoted to specific programs, presumably such as diversity.

An extranet such as this one, with shared access by in-house and outside counsel, has much to commend it (See my post of Feb. 12, 2006 on extranets provided by law firms; Jan. 30, 2006 on ChevronTexaco’s extranet; Jan. 3, 2006 on Tyco’s; Oct. 21, 2005 on extranets used other than in litigation; Aug. 27, 2005 and some reservations about extranets; and June 27, 2006 that compares extranets to portals.).

People who study the outcomes of auctions, such as where several firms propose to handle a block of matters over time have coined a memorable term for a notorious outcome: the “winner’s curse.” In most auctions, the winner is cursed by having paid more than the economically optimal amount. After all, no one else was willing to offer as much, so the winner has probably overpaid (See my post of Feb. 4, 2006 #4 on auctions and the references cited.).

One way to lessen the curse of the winner is to allow a second round of bidding after the first round. Disclose all the bids – not who bid them. Each bidder who remains then calibrates its bid amount against all the others and may adjust its bid. Another way is to select highest bidder, who pays the amount of the second highest bid.

Accenture’s law department has followed up on its 2005 survey of the key law departments serving it. The latest survey delves into every aspect of diversity. I noted several points from an article about this effort, in Corp. Counsel, Vol. 14, Jan. 2007 at 20.

First, the survey runs to an unusual seven pages. In its detail, length, and scope of coverage, Accenture’s survey marks a high-water point of law-firm surveys (See my post of April 7, 2006 about law departments surveying their law firms.), but its length has drowned some firms.

The second point is that this survey has in it questions which I have not seen before: they regard the number of gay and lesbian lawyers within the firm. Third, Accenture fired a law department that refused to complete the survey’s 2005 version. Fourth, the legal administrator of the department met with at least 15 of the law firms to discuss their individual plans to increase diversity. Fifth, Accenture ranked its law firms on their diversity efforts using a red, yellow, and green scale. No law firm qualified as a green firm – one which has done an acceptable level of diversity improvement.

Two listings in ALM’s Focus Europe, Winter 2007 at 1, deserve consideration for what they say about how law departments might find and work with law firms outside the United States. In one listing, of the 25 highest-grossing firms in France, 7 of them are US-based (Baker & McKenzie, Cleary Gottlieb, Jones Day, Latham & Watkins, Shearman & Sterling, White & Case, and Willkie Farr) while another 5 are UK-based.

In the second listing, the 25 firms in France with the highest revenue per lawyer, 13 of them are US-based, 4 UK-based. Included in the US firms were six of the seven listed above – not Latham & Wakins – as well as Mayer Brown, Sullivan & Cromwell, Debevoise, Skadden, Gibson Dunn, Weil Gotshal, and Paul Hastings.

In other words, based on size and profitability, for legal work based on French law or in need of French presence, US law departments can – and indeed probably do – look to US firms. A similar pattern may hold in several of the countries where US companies do much of their business.

Data from well over 100 law firms on average partner billing rates and law firm size (See my post of June 6, 2006 about scatter-grams and trend lines.) disclosed a clear correlation between hourly rates and firm size. With the firms sorted by number of lawyers, a trend line on the data points of a scatter gram revealed the pattern. More specifically, the formula for the trend line describes – and lets someone calculate – what a typical law firm would have as average partner rates by different sizes of law firms. Each additional 100 lawyers raised the average partner rate $13.

A similar analysis of associate rates found a narrower rate spread. In other words there was less variability in the associate billing rates (a smaller standard deviation) and the trend line’s equation showed that each 100 additional lawyers meant a $7 increase in associate rates.

Here’s a man bites dog story from LSI newsletter: Ed. 33 – Dec. 2006. “Despite the ever increasing pay packages of many lawyers and a continuing growth in big firm profits, it seems that legal professionals may not be working as hard as they have been. According to a survey of 57 of the top 100 UK firms by PriceWaterhouseCoopers, the number of average chargeable hours worked by assistants [US: associates] fell by 3 per cent between 2005 and 2006.” (See my posts of Feb. 16, 2006 about net income per partner; Oct. 20, 2005 on whether to ask for data on billable hours; Nov. 2, 2006 on the worrisome aspects of firms with goals of 2,000+ hours; and Nov. 22, 2006 about the possibility that billable hour totals are exaggerated.).

Fewer hours logged did not improve job satisfaction. “Yet despite the drop in hours and increases in reward, attrition rates remained high. Over 40 per cent of the top 25 firms admitted to losing as many as a quarter of their 3-5 year pqe [post qualification experience] people every year.” High billable hour expectations and high turnover both cost law departments dearly.

It is often thought that a partner who bills at $600 an hour will accomplish a given task more quickly – and presumably more expertly – than an associate who bills at $300 an hour. The judgment and experience of the partner justifies the hourly rate that is twice as high. This assumption generally holds.

What doesn’t hold is a similar assumption for partners of the approximate same experience and firm size but in different cities and therefore who bill at different rates. Consider these instances. Partners N in a 100-lawyer New York City firm, D in a 100-lawyer Denver firm, and M in a comparable Memphis firm each worked on law review at a good school 25 years ago and each handles mostly large acquisitions and divestitures. Their standard billing rates are $800 an hour for N, $475 for D, and $350 for M.

If someone makes $300,000 in Manhattan but moves to Chicago, it takes only $148,709 to maintain the same buying power. So the cost of living is half as much and the partner billing rates reflect much of that gap. If the Manhattan partner moves to Memphis it takes only $122,635 to reach cost of living parity.

A number of surveys have examined what law departments feel are desirable law firm attributes (See my posts of Oct. 31, 2005 on European law departments and 11 attributes; Jan. 30, 2006 on Kirkpatrick Lockhart’s findings about 8 attributes; March 13, 2006 for LexisNexis Martindale-Hubble’s findings on 8 attributes; and Oct. 30, 2006 for 10 attributes according to respondents in the insurance industry.).

These four surveys asked about several similar attributes, but diverged on as many more attributes. Here is a breakdown of the 37 total attributes asked about by these surveys.

Every survey offered cost as a criterion, sometimes in two variations: “fees and budgets,” “value for money,” “cost,” “billing transparency,” and “hourly rates.”

Data I reviewed recently from a number of law firms disclosed that for every additional 100 lawyers in a firm, the average associate hourly billing rate rose $7.00. For every additional 100 lawyers in a firm, the average partner billing rate rose $13.00. That is, as law firms grow larger the average partner rate grows almost twice as fast as the average associate rate. There was more variability in the sample among partner rates — almost twice as much — as among associate rates.

What law departments should take from these findings is that (1) the larger the firm the higher the billing rates and (2) divergence shows up much more in the rates of partners (See my post of July 30, 2005 about data on US partner and associate rates.). Bear in mind, however, that stated billing rates are often not the same as effective billing rates.