Articles Posted in Outside Counsel

Writing in Legal Week, Nov. 23, 2006 at 22, Derek Bedlow summarizes three years of surveys of FTSE 500 legal departments (See my post of Dec. 4, 2006 on the first part of Bedlow’s quote.): “the proportion of work that they send out has decreased from 50% in 2004 to just 36% in 2006, despite strong growth in many areas of legal work.” A one-third decrease in the “proportion of work” sent out means what?

What were the instructions in the survey for how law departments should estimate this figure? If they tried to estimate hours worked by the buyer lawyers (the department) and the seller lawyers (the firms), that would be an extremely broad gauge (See my posts of June 28, 2005 on the make or buy decision and the 40/60 split; and March 19, 2006 on hours inside vs. outside in Canada.).

If the measure were thought to be the number of matters handled inside versus outside, the metric loses most of its punch. One vast matter overpowers lots of small fry.

I would be surprised if they do. I think a relationship partner in a large law firm may let a general counsel of a primary client know somewhat beforehand that the merger is in the works or about to be consummated, but not seek approval. The conflict of interest research and determinations by the firms should suffice.

Early disclosure, even to a trusted client, presents some risk of a leak. It might also be hard to decide which clients to approach and how to characterize the merger’s effect on service to them. An experienced general counsel might have some observations about the reputation of the merger partner or the advantages – or disadvantages – of firm size and geographic scope, but one would be hard-pressed to imagine how comments on those topics by a single client would derail or clinch a merger that otherwise makes sense to the two firms.

There is so much demand to compare the costs of legal matters that different groups in the law department industry will gradually develop databases. E-billing vendors will consolidate data from their customers once they gain permission and figure out the kinds of matters that lend themselves to analysis. Procurement groups will swap information on billing rates and costs of matters.

Other sources of average-cost-per-matter metrics suggest themselves. The many organizations of general counsel could contribute their share (See my posts of Dec. 19, 2005 and Oct. 22, 2006 on groups for general counsel.). Law departments in an industry will band together to benchmark and share data on matter costs. Vendors of matter management systems will get into the act and compile the raw material of metrics. Then too, publications and surveys will hit upon ways to gather and pump out per-matter cost data. Finally, it seems reasonable that internet repositories will collect and provide data along the lines of social networks or wikis, like contributed ratings of books on Amazon. Even law firms might succumb eventually and disclose their internal figures: “Our 30 most recent environmental remediation cases averaged 26 months and $455,000.”

A law firm partner whose client asks for more hours of individual service than the partner wants to provide has no reason to discount hourly billing rates; indeed, has reason to raise them. The same argument regarding the fully-booked partner applies to the fully-booked associate – unless you really can squeeze blood from an over-worked turnip.

Odd, too, are the requests by even well-known, trophy clients for rate discounts, because those clients are more likely than less prominent companies to encounter up legal issues that are challenging, novel and that deserve the best thinking of the best lawyers. World-class talent doesn’t work for discounted, third-world wages.

Sheer volume of work offered by a law department has more plausibility as the basis for its seeking discounts, since more of the work might be delegated, better systems developed, and marketing costs lowered. The flaw in that logic may be that variety and challenge decline with if the large flows are of similar work (See my post of Sept. 16, 2006 on commodity work.).

Every year DuPont’s law department surveys its 38 or so Primary Law Firms. According to Met. Corp. Counsel, Feb. 2006 at 49, the survey has in the past gathered data or thoughts on topics such as diversity, invocation of ADR, and contributions to various initiatives. In 2006 DuPont sought feedback on about 10 objective measurements.

For any law department, a survey of its key law firms can generate informative data. Many potential questions come to mind, such as about cost savings measures other law departments have explored, internal training policies, software that might help the law department, and even questions about the performance of the law department (See my post of March 30, 2006 on whether the feedback would be candid.).

Frequently, law departments try to select and maintain a handful of lawyers at a firm to work on their matters. A core team makes sense, since its members and the law department lawyers develop familiarity and trust. Even so, a strictly-defined team poses problems when an emergency arises that demands more boots on the ground or specialization. What is the process to expand the team’s membership, if only temporarily or during a major project?

Some law departments have to accept the new timekeepers before their e-billing system approves their time. Other departments just want to be advised of the temporary newcomers. An alternative to a core team looks to see whether 80 percent of the hours or value is billed by 20 percent of the firm’s timekeepers who work on the client’s matters.

Law firms that have served a company for a while fulsomely tout their “knowledge of the company.” Law departments that favor a firm always point out how the firm “knows our company and our people.” Indeed, and all to the good, perhaps.

The nagging doubt has to do with whether familiarity breeds contempt, or its less virulent cousins rigiidy and complacency (See my post of Dec. 16, 2005 on partnering and risks of complacency.). The rigidity cloud comes down to whether close familiarity blocks creative thinking: “We can’t imagine doing it differently.” Complacency pillows both sides in a comfortable status quo. Then too, years of embeddedness may blur the lines for a law firm between rendering legal and business advice. I even wonder whether historical ties with a law firm stunt the development of in-house talent: “X partner always handles this work, so why should I bother to learn it.”

Entrenched law firms, in other words, may not be an unmitigated blessing (See my post of Feb. 15, 2005 about incumbent disadvantages.).

If a general counsel wants to assess how well the lawyers in the department manage outside counsel, answer these questions:

Relative to peers or some other benchmark, how frequently does a particular lawyer call upon outside counsel? When measured, this rough figure amounts to outside spend per individual in-house lawyer. Usually only one or two lawyers review and approve the largest amount of external fees. Obviously, the general counsel must take into account the responsibilities of the lawyer such as that litigators are commonly promiscuous users of law firms.

What are the effective billing rates of the law firms used by that lawyer and what has the trend year over year been (See my post of June 13, 2006 on blended billing rates and effective billing rates.)?

Bucking the tide of convergence (See my post of April 2, 2006 on the Wilmington wave.), those law departments that try to match the cost/quality proposition of a law firm to a particular matter face one obvious difficulty. It may be very difficult to determine early on whether a new matter will present unusual difficulties that warrant a higher-price, more-skilled law firm. Just as early case assessment cannot always spot the right path forward in the early months of a law suit, so too the decision of this horse for that course may prove after the fact to have been off the track.

If so, law departments must come to terms with the possible decision around the bend to transfer a matter to either a more sophisticated law firm or to a capable, lower-cost firm (See my post of July 21, 2006 disputing the putative cost from transitioning a matter to a new firm.).

A third alternative, recognized by some, is to unite two law firms on the matter: one for its expensive brains, the other for its cheaper brawn (See my post of Dec. 3, 2006 on various meanings of “virtual” as applied to law firms.).

A few companies in America have such name recognition that almost any law firm squirms and sweats to be able to represent them. The larger the law firm, though, the less even a headline client softens their billing policies though a smaller firm will still covet a prestige client and jump through hoops.

The sophistication of the legal work given to a firm may sound like an inducement, but it may have the opposite effect on billing terms. If you ask for services of the most specialized lawyers, you are unlikely to get fee discounts and alternative arrangements (See my post of Feb. 12, 2006 about the bargaining power of the few acceptable firms in several capital cities.). Why should busy experts bend, unless they can delegate?

There may be a slight advantage to being a brand new client, but I doubt that it is more than a tremor.