Articles Posted in Outside Counsel

An article in ManagingPartner, Vol. 7, Oct. 5, 2004, mentions a situation in which the law department of a major company invited six firms to visit headquarters for a day. Only two firms showed up. “The others couldn’t see the point in giving up of the day to come and talk about the relationship.” Shocking.

Law firms ought to regularly and gladly invest their time in strengthening their relationship with key law departments and their knowledge of those departments’ clients. By the same token, law departments ought to evaluate their key law firms in part on those firms’ willingness to invest in the ongoing relationship.

The law departments of 18 “local authorities” in the East Midlands of Britain created a partnership, operating under the name of EM Law Share, and appointed four external counsel. Legal Week, Vol. 8, April 27, 2006 at 4 discloses this unusual collective arrangement. Teaming together, these law departments can obtain better law firms at more favorable rates (See my posts of Oct. 14, 2005 about in-house lawyers and collective action.).

As a side note, one of the participating lawyers, Nigel Snape, is the chair of Solicitors in Local Government (See my post of Dec. 19, 2005 about in-house lawyer groups.).

According to a post on Allocature (May 31, 2006), “78.4% [don’t you love the precision?] of Australian in-house counsel do not track internal legal costs – therefore most costs are not passed back to other business units. Only 6% of Australian in-house counsel charge business units, and if they do, costs are generally based on estimate rather than on time actually spent.”

The finding comes from a survey of approximately 1,800 members of the Australian Corporate Lawyers Association. It’s clear that the post refers to inside lawyer time. It is misleading to say that “most costs are not passed back” for the reason that outside counsel costs probably are charged to clients.

Some law firms with multiple offices may set lower billing rates for lawyers in lower cost cities, especially if they pay lawyers in those cities less than they pay lawyers of the same level elsewhere. If so, a law department could arbitrage the rate differences and push the law firm to have as much work as possible done in the cheaper cities. The idea is akin to using lower-cost offshore personnel (See my posts in 2005 about offshoring of June 15 and May 20; sharing the savings with law departments (June 15), comparative costs (Sept. 27) and Jan. 27, 2006 about Mauritius.).

If there are rate differentials for equivalent lawyers within a firm, it could give larger firms a competitive advantage. It also conflicts the partners of a firm, who probably prefer to work with colleagues in the same office and who seek to maximize the revenue for which they receive credit.

A presentation by a lawyer from TD Bank Financial Group explains that the Group measures the value obtained from outside counsel by their rates, their efficiency, and their “file management,” which “is the single most important factor.”

File (matter) management concerns how a law firm staffs a matter and how work is distributed among those who work on the matter (See my posts of 2005: Aug. 21 on research into the use of paralegals; Nov. 8 on the number of timekeepers on a matter; Aug. 26 on measuring delegation to paralegals; Nov. 15 on timekeepers per firm; and March 28 about a rule of thumb of one lawyer and one paralegal tracking time on a matter.).

While I might mutter about giving “file management” pride of place among the techniques for delivering value, I certainly agree that who works on a matter and what role the person plays makes a huge

I erred; I have misused the term “blended billing rate.” In previous posts about that term I have noted the difference between law firms (Aug. 21, 2005), the unclear connection between it and cost reduction (Sept. 5, 2005), and its correlation to firm size (Sept. 10, 2005). In each post, I meant by the term the total of several bills from a law firm divided by the number of lawyer hours covered by the bills.

“Effective hourly rate” more accurately describes what I was referring to. That term takes into account everyone who charges time as well as any write-offs by the firm and reductions by the law department. “Blended billing rate” more commonly denominates a method of billing by which a law firm agrees to bill a set amount per hour for all of its lawyers, or for some level of lawyers, such as $210 an hour for all associates. Sorry.

Interviewed by Managing Intellectual Property, Feb. 2006, the legal affairs director of the Chinese company Haier offers another wrinkle on the old chestnut

At the initial stage of cooperation, because we do not know the counsel well, we would choose a law firm rather than the counsel, because the firm will ensure the quality of their work. If we find that the services of the lawyer or agent meets our requirements, and he or she subsequently changes firm, then we will consider instructing the new firm.

Makes sense to me. First the firm’s overall reputation seals the deal, but later, as the law department comes to respect and trust a particular partner at the firm, that partner becomes the linchpin – and the department’s loyalty attaches to the partner, not the firm (See my post of Oct. 4, 2005 about loyalty.).

The wrong question to ask at the start of a project is “should this project be done by inside or outside counsel?” according to co-authors the ACCA Docket, Vol. 18, May 2000 at 4 (Stephen J. Friedman and C. Evan Stewart). These two experienced general counsel assert that this is not the right question because almost any answer leads to inefficiencies.

The right questions, according to Friedman and Stewart, are “who is the best person to be responsible for this project” and “who should be on the team?” They argue for virtual teams, because “there is no reason not to have an inside lawyer in charge of a project, with outside lawyers working directly under him, or vice versa.”

If a law department and a law firm are joined at the hip (See my post of May 1, 2006 that challenges the notion of partnering.), the make-buy decision should be answered by a mix. In real life this blend is rare.

After a review of the usual-suspect techniques for outside cost control, two authors conclude with what they believe is the crucial driver: “the most important variable is the quality and experience of inside counsel,” ACCA Docket, Vol. 18, May 2000 at 4 (Stephen J. Friedman and C. Evan Stewart).

Note that the primum mobile is not systems but people (See my post of April 19, 2006 on why we like impersonal systems more than personal touch.). Note also that it calls for the high-quality veteran inside counsel to think in terms of management more than of the traditional practice of law; nor does it force fit a technique willy-nilly across the wide range of outside counsel retentions. And, in the end, notice that to apply this technique you need veteran lawyers within the company, each of whom is expert and well regarded in her field. Small wonder systems find favor!

My beef with billing-rate discounts is that law departments cannot know whether they are getting steak or mad cow disease. With discounts, if they be smaller plates, will some people just go back to the buffet more? Why should such a blunderbuss technique be esteemed so highly? If billing rates accurately reflect the abilities and experience of the lawyer (See my post of March 12, 2006 on differential billing rates.), what justification is there — other than volume of work — for a law department to request a cheaper price?

Fundamentally, to chisel a few hours off of the billing rate is to leave intact the essential cost-plus basis for law firm billing, with all of its perverse incentives.