Articles Posted in Outside Counsel

In a previous post I discussed retroactive discounts based on dollar volume of billings (See my post of Aug. 8, 2006.) Given a sufficient number of cases a law firm might be asked to handle on a tiered-rate basis, the client and the firm might develop a taxonomy, a way to classify the cases such that different billing rates would apply for different kinds of cases.

For all cases classified as humdrum, the discount might be 15 percent; if moderately difficult the firm’s discount might be twelve percent off its standard rates. For cases classified as difficult, a firm might agree to only a five percent discount.

A firm could agree with a department that on New Jersey cases the firm grants a higher or lower discount. Or, on cases that seek more than $1 million in damages or that are brought by a particular firm, the firm grants a lower discount. The permutations are endless. The point is that discounts need not be based only on dollar volume.

With more than a dollop of cynicism and an appreciation for irony, consider how law firms are from Mercury and law departments from Pluto:

Alternative billing means premiums to firms, cost-saving to departments

Associates are profit centers to firms, low-value bill-boosters to departments

I am already on record in opposition to outside counsel guidelines, on the grounds that they have not been proven effective (See my post of Aug. 1, 2006.). Not that I would recommend law departments to discard them entirely, but that they should keep the guidelines basic and not have them serve as the bulwark of their defense against cost incursions.

Does it make a difference to have the managing partner of its major firms certify each year that the firm is in compliance with the department’s outside counsel guidelines? That partner has no true accountability, no skin in the game, because if a law department is dissatisfied with the firm’s performance it will stop using it. It does not fine the managing partner or threaten her with indictment. If guidelines be nugatory, certification is chimerical.

Newsworthy these days are the gargantuan efforts by large law departments to spray RFPs to dozens of law firms. The widely cast net aims at many of the incumbent firms of the law department and pulls in some new firms. The logistics, administrative efforts, time, and cost match the expansive scope of the RFP dragnet.

By contrast (and to trawl for more metaphors), a law department might hurl a few harpoons. Pick the three or four law firms who serve you the most, tell them the dollar savings you need to achieve, and let them respond. They have the most at stake – but only if your law department is genuine in its willingness to walk away from them – and they have the best knowledge of the legal work you will need. This targeted technique demands more of high-level lawyers than does the labor-intensive RFP method, but it might well bring home the richest haul.

Law departments overlook a fundamental inequity when they compare proposals from law firms on their discounts from standard rates. The unfairness is that lower cost firms cut disproportionately more, or have smaller margins, when they grant the same percentage discount as does a big city firm that starts out with much higher rates. It’s akin to a regressive tax. This phenomenon partly explains why large law firms win disproportionately more competitive proposals.

If a law department wants to be aggressive in its cost saving, it should say that certain services are worth $275 an hour, no more. Then percentage discounts off standard hourly rates will fade out and the absolute value of work will come more to the fore.

Many law departments review law firm proposals to grant increasing, step-wise reductions in rates. Give us more work and we will agree deeper cuts. For example, if the actual hours of work by the firm during a year multiplied by the firm’s rates amounts to $3 million plus, the firm’s discount will deepen one percent per million for any services above $2 million.

More dramatically, firms propose retroactive rate reductions. For example, assume the same $2 million projected level of services by the law firm. If the actual work done exceeds that amount by $1 million or more, a higher discount will take effect for ALL work done during the 12 month period – that is, the increased discount will apply retroactively to the preceding work.

The retroactive feature strongly encourages a law department to funnel more work to that firm so that the department can reap the savings on earlier work.

I have written about the arbitrage opportunities for multi-office law firms (See my post of June 15, 2006 on the use of associates from lower-cost cities.). In a proposal, rather than state discounts from rates, an aggressive and confident law firm might commit to billing rates by year out of law school that are five percent below the next highest bidder’s average billing rate for each class year.

This would be dramatic, clear and compelling for the law department. From its side, “This firm knows it’s lower cost and it’s willing to back up its claim on that point.”

Dream on, Rees. What law firm executive team would run what it perceives to be such a risky gauntlet?

During a consulting project over a decade ago, I prepared a compendious resource book. It contained a wealth of aids to help inside counsel know when to retain outside counsel and what tools to select to best manage them.

I have not seen other examples of such a compilation, but still believe the idea has merit. Especially for large departments, it helps to compile policies about outside counsel and even forms, guidelines, and other resources that can be thrown into the fray. The department will achieve more consistency and will more easily train its lawyers in the art of partner management.

We all know the litany from the classic guidelines for outside counsel. They lay down like tablets from on high a department’s expectations for ethical and effective staffing, billing, reporting, and management of matters handled by outside counsel.

What none of us know is whether those guidelines have effect. No one has studied comparable law departments, of which one group uses guidelines and the other dispenses with them. This is the kind of empirical research (See my post of Oct. 23, 2005 about the dearth of academic, empirical research; July 4, 2006 on lack of data; and Aug. 1, 2006 on natural experiments.), that we so sorely need in the law department industry.

My personal view is that outside counsel guidelines make very little difference for a law department’s budget numbers.

A partner who by experience and personality litigates adroitly may not be equally adept at settlement discussions. If not, a law department might consider parallel tracks: the one partner campaigns like Sherman on the judicial field while a partner at another firm negotiates like Kissinger to reach a resolution that both sides can accept.

Yes, one can imagine problems of conflicting messages, increased costs and tripping over each other, but the divergent tactics may make it worthwhile. Both partners need to be sensitive to the developments of the other, and they should avoid competing with each other before the client.