Articles Posted in Outside Counsel

The proper ratio is 1.34 current (incumbent) firms to 1 new hopeful.

Seriously, no research or survey data has come to my attention that answers the question. To say, “It depends,” is glaringly obvious and obviously useless. Even to list some of the considerations adds nothing to what experienced in-house counsel already know.

My precise ratio is silly but still my point is sound. The arguments for inviting somewhat more incumbents than newcomers are that (1) devils known are better than devils unknown, (2) you still want a horse race and legitimate contenders who feel they have a shot at the prize (See my post of Sept. 3, 2006 on the false perception of fixed selection processes.), (3) you are damning yourself and your management of outside counsel if you jettison most of your currently-serving firms, and (4) it takes more time and effort to learn about firms that are unknown to you.

Many law firms who compete against incumbent firms for work presume that the fix is in (But see my post of Feb. 15, 2006 on two European firms that changed panel firms.). Those in the saddle will likely keep riding, while newcomers eat dust (See my post of May 19, 2006 on Nestlé’s competitive review; and Jan. 27, 2006 about how the endowment effect may help incumbent firms.).

It is natural that familiarity breeds content[ment] but all is far from lost for the pretenders to the throne. The law departments I have consulted to and the competitive bid processes I am aware of have been quite consistently open-minded about new firms. Else, why would the department subject itself to the labor and upset of the contest? The choices are not largely predetermined, wired.

Outside counsel managers also know that they can re-assign cases to new firms without undue inefficiencies (See my post of July 21, 2006 disputing the putative losses from transition to a new firm.).

Well, not completely. Tax may have a loophole.

Otherwise, it is an accepted practice ideal for the law department to vet all law firms and retain them on matters. A looser leash finds the law department hiring a firm but letting that firm’s lawyers and the internal clients deal with each other directly. An even more diluted control means the law department approves certain firms for certain uses, but leaves it to internal clients to go to those firms as needed.

I favor stout law department control of outside counsel relations. To that end, a major US corporation has this authority etched in the corporate by-laws. “All provision of legal services advice shall go through the Office of the General Counsel.” Do you suppose a lawyer drafted that by-law?

It’s one thing to impose on law firms all kinds of requirements that aim to make them better integrated with the law department and more cost-effective (See my post of June 13, 2006 on designation of core staff; Aug. 22, 2006 on requiring project managers; June 15, 2006 about the use of lower-cost associates; and July 5, 2006 on interventions in law firm management generally.). It is quite another thing to bring the key lawyers together from your key law firms and talk through with them what you expect under what circumstances.

You might try to come to a mutual understanding with your key firms of when detailed legal research is needed, and how to communicate, budget and conduct it. You could set some parameters around oral advice, informal written advice such as e-mails, and formal memoranda of law. All of these topics further the goals of staff use and supplier development.

For more on management of core staff in law firms see my posts of 2005: Nov. 8 on the number of timekeepers on a matter; Sept. 5 on Citigroup’s views; Nov. 15 on timekeepers per firm; and Nov. 21 on staffing profiles; as well as March 28, 2006 about a rule of thumb of one lawyer and one paralegal tracking time; and June 13, 2006 about the vital role of key staff matter.

I’m out on a limb on this, but the view is important. InsideCounsel July 2006 at 52 discusses the results of 407 law department lawyers who indicated whether their department “fired or planned to fire” one of their law firms in 2006. In bold print, the magazine proclaimed: 34 percent!

Wait a numerically-challenged minute! The average department in this survey had 31 lawyers, so at a plausible benchmark of five lawyers per billion dollars of revenue, assume the average department was in a $6 billion company.

Based on my consulting projects, a rough rule of thumb may be that companies of that size pay 25-40 US law firms per billion dollars of revenue, which means that average department perhaps paid around 200 law firms.

You are driving through the rear-view mirror when your law department manages outside counsel principally though review of their bills. Steering is chronically late, and musty, dusty invoices further fog the mirror (See my post of Oct. 31, 2005 on real-time bill information through JennerNet; and May 19, 2006 on why law departments don’t cotton to it.).

Back to my heading metaphor. The iceberg lies in wait if you let your law firms bill slowly. You could be in for a titanic shock, especially when it comes time to accrue for unpaid legal expenses (See my post of Aug. 24, 2005 on the agony of accrual.). A cold-blooded department might refuse to pay for any time recorded glacially late, such as more than 60 days before the invoice date.

Years ago, GE’s law department pulled the rods out on the “Manhattan project.” The project exploded the company’s use of costly Wall Street law firms, and the evocative phrase has come to stand for the notion of equivalent capability, for less, in regional or smaller law firms. Big city, big firms sport big staffs, big rates. Hinterland firms pare all of that down goes the thinking in favor of regional law firms (See my post of Jan, 3, 2006 about favoring regional firms; March 12, 2006 about global, international, regional and local firms; and Aug. 21, 2005 on differences in billing rates between firms.).

More harsh is the sentiment at the heart of this view: much law firm talent is fungible. Any number of lawyers can handle the meat-and-potatoes needs of law departments. And experience teaches that only the infrequent thorny legal matter pricks deeply enough to justify a hemorrhage of legal fees on white shoe firms.

The notion is often bandied about that law departments should collect from their outside counsel in electronic format the documents counsel produce. Then the law department can use those documents on its own or distribute them to other firms and thereby keep costs down. Often espoused; rarely implemented – but why?

Work product repositories from outside counsel flounder that for the same reasons that internal management projects whither away (See my posts of March 16, 2006 regarding the difficulty of internal efforts for retirees.). Oddly, the effort to compile external documents should be easier because no one need make any decisions and a general counsel can delegate the task to a paralegal.

These well-intentioned projects languish because someone must retrieve a useful document, get it to the law firm, and the law firm must make use of it for there to be any gain. Each step in that chain diminishes the likelihood that it will happen, with the net effect that the promise rarely materializes.

What would be the result if a law firm asked its lawyers to charge their time not at a single hourly rate (say, $400 per hour) but at three levels. At the lowest level, where the service was simple or inefficient or travel, perhaps the rate would be 20 percent less ($320 an hour). The typical rate, for work in the comfortable sweet spot of the lawyer, would be at the standard rate. For work over the weekend, rushed, or demanding special teamwork research or creativity, the rate would be 20 percent above ($480).

Set aside the logistical impediment of time and billing systems, the inevitable subjectivity on the part of the billers, and the complication of bill review that might result. Tiered billing would at least attempt to bring costs closer to client value. The data would also be illuminating. Does the department see the value of work the same way its law firm’s lawyers do? Why not try this with a primary firm for a quarter?

The American Lawyer, Aug. 2006 at 115, released the results of a massive poll of mid-level associates at major US law firms. For 66 percent of the associates there is an official billable hour requirement. Now, human nature being what it is and ambitious associates being what they are, won’t those associates – not to mention partners who may face the same edicts – do everything they can to ring the billable hour bell? Maybe add an hour here, and stick in 0.5 there, and the call was perhaps 30 minutes instead of 20….

Another 15 percent of the associates reported laboring under informal requirements for billable hours. Formal versus informal probably leads to the same temptation to pad hours.

If your law department retains a firm that pushes its lawyers to meet requirements like these, why can’t you ask for total hours billed during the time period any lawyers who work on your matters?