Articles Posted in Outside Counsel

It sounds so simple: “Let’s get discounts from our law firms!” What all that request sets in train, however, may not occur to a general counsel.

The partner at the law firm requested to discount its rates may have to obtain approval from a management committee. The new rates may implicate a most-favored nation agreement with another client (See my posts of Nov. 21, 2005 on MFN agreements.). The firm’s accounting department must be able to handle the discounts, either by reductions in hourly rates or by applying the discount to the total bill amount. Realization rates drop and the partner must be able to defend that (See my post of Dec. 11, 2006 on the illogic of discounts.) and persuade good associates to work on the discounted matters.

On the company and law department’s side, an e-billing system may have to accommodate the discounts, as might matter management system. Someone has to track whether the promised discounts are adhered to and actually materialize (See my post of Dec. 18, 2006 on tracking improper bills.). The accounts payable system at the company must also be able to handle the new arrangement.

When a number of law firms propose to handle one or more matters of a law department, through a competitive-bid process, it can be a challenge to choose among the firms. Usually the firms answer a number of questions, some of which are objective – number of lawyers, diversity percentages – and some of which are subjective – how will you work with our law department, what is your experience with this type of matter.

One method to help in the process is to create an evaluation scale for each question, say from one to five, where each point on the scale has a pre-defined description. Then, the reviewers can look at each proposal and pick what point value the firm should get based on the evaluation scale.

A further step is to weight each of the questions that are scored according to how important the answers to it are to the law department. Not every piece of the response is equally important in the final decision (See my post of Sept. 3, 2006 on competitive bids.).

A general counsel at a FTSE 100 company told the authors of an article in legalweek.com, November 27, 2006 of receiving more than 30 updates on Three Rivers [an important House of Lords decision], “but not a single one told them what the impacts might be for his company.”

As evidenced by this anecdote, the sheer volume of legal updates that flow into law departments is awesome. Law firms woke up to the idea of marketing at the same time that desktop publishing and e-mail made it much easier to publish and deliver a steady stream of updates to clients. Even so, lawyers in companies most deeply appreciate news updates that go beyond noting a change or issue to outlining the practical steps that the law department should take in response.

Allow me to be hard-nosed. No law department should have the slightest compunction about not paying for the training of associates at law firms. Especially is this true given the horrendous turnover rates of associates; the department often does not receive a return on its training investment. Yes, yes, if all law departments boycotted all training of associates, where would the next generation of lawyers come from?

One answer comes from the olden days when partners built into their billing rates the cost of the associates they employed – but did not bill. Were we to return to that by-gone practice, we might see much lower leverage and much less over-billing by associates.

Ellen Metzger, the general counsel of MacKay Shields, a registered investment advisor for institutional investors, makes a provocative remark in top of mind, Vol. 5, 2006 by Kirkpatrick & Lockhart Nicholson Graham at 12. Metzger says: “Don’t insult the professionalism of the lawyer’s firm by referring them a project and then telling them to spend no more than a certain number of hours addressing it.” Such an overbearing oversight, she argues, subverts the outside lawyers’ professionalism.

I disagree with this view. It is completely proper for an in-house lawyer, instructing external counsel, to give them a clear direction on how much money (which means hours) to devote to an issue. Few legal questions justify “leave no stone unturned.” And the inside lawyer can best assess the costs that deservedly should be incurred compared to the likely benefits of the legal services.

A compromise approach makes sense. Once some agreed-to number of hours has been worked or fees incurred, the law firm should deliver a status report or some feedback and get the go-ahead to do more. Why should outside counsel have carte blanche? Once the hours have been put in by the firm, it is much harder to redress (See my post of May 1, 2006 about casual review of bills.). A primary responsibility of in-house counsel is to manage outside fees – so tell firms your cost expectations!

According to top of mind, Vol. 5, 2006 by Kirkpatrick & Lockhart Nicholson Graham at 10, ADVO, a $1.5 billion direct mailer, has only a single in-house lawyer: Vice President, Legal Affairs, David Hennessey.

At revenue approaching two billion dollars, a US company typically houses three-to-eight lawyers. Evidently, management of ADVO has decided that the primary role of its sole corporate lawyer is to filter nearly all legal questions and services and have the sole lawyer in the company direct them to outside law firms. This structural model works, but admits no simple judgment as to its relative efficacy.

The model allows great flexibility in finding the right lawyer for a particular matter and makes legal costs almost completely variable (See my post of Feb. 18, 2006 on fixed and variable costs of legal services.). It keeps outside counsel competing for the favor of your work. It minimizes the complications of employees. It allows internal clients to work directly with law firms, with no mediation by a law department.

After a British law department selects a panel (See my post of April 18, 2005 on the term “panel.”) it lets the world know. US departments who choose primary firms, by distinction, tend toward reticence. Why the cross-Atlantic divide?

In the US, DuPont has famously marketed its Primary Law Firms (PLF). It praises them, publicizes them, and advertises them. Most departments keep their convergence results quiet.

I think that if a firm is identified as one of a select group of converged firms, it has a greater incentive to perform well lest it be embarrassed if dropped thereafter (See my post Jan. 27, 2006 about the endowment effect.). Counterbalancing this argument for disclosure is that the law department may be more reluctant to admit that it made mistake and to dump a firm.

Sample this tasty morsel from the Delhi! Squabbles between companies and their law firms over costs erupt everywhere!

Brihan Mumbai Electric Supply & Transport Undertaking (BEST) has terminated its legal consultant, the solicitors Crawford Bayley & Co, and contested the payment to them of no less an amount than Rs 141 lakh (close to 1.5 crore).

Intrigued, I learned that a lakh equals 100,000 Indian Rupees, and that the amount at issue is about US $315,000. Meanwhile, the article reports that BEST has “as many as 20 legal officers,” which I presume to mean law department staff or lawyers.

There are a baker’s dozen ways to analyze your law firms’ invoices described in my recent article in Legal Times, Vol. 29, Nov. 26, 2006.

The article suggests eight calculations you can do with the invoices of a single law firm and five more calculations based on invoices from several firms. Most law departments do very little with their invoice information, aside from collecting it and reporting on it, so this article presents some useful and new techniques to develop keener insights.

Based on 165 responses to their survey this fall, Altman Weil and LexisNexis Martindale-Hubble produced data on ten criteria those law departments apply when they evaluate their outside counsel. From the 2006 Law Department Metrics Benchmarking Survey (at pg. 230) the five most important evaluative criteria are reported as “results” (25%), “knowledge/expertise” (20%), “responsiveness” and “cost” (both at 15%), and “understands business” (13%).

Another five criteria are judged much less important than the primary five: “creativity” (6%), “diversity” and “partnering capabilities” (both 2%), “technology” (1%) and “other” (less than 1%).

Because the percentages add to 100, it appears that the question asked the departments to rank the ten criteria. That only a quarter of the companies ranked results most important may be because sometimes the outside law firm is not asked to achieve a result. An opinion or a draft of an acquisition agreement, where the deal craters, produces no result in the same way that a resolved law suit does. “Responsiveness” is not always a desideratum if that term really means timeliness; outside counsel, after all, can’t move faster than the client. “Understands business” has multiple meanings. It could mean to some respondents the degree to which outside counsel understand how the client makes money. Or it could mean how well outside counsel understands what positions the client would take.