Articles Posted in Outside Counsel

Grab your abacus and try these assumptions. A lawyer whose full cost to the company is $200 an hour spends two hours a week reviewing law-firm invoices. That lawyer manages $520,000 of spend each year, so each week $10,000. From each week’s batch, based on my consulting experience from asking the question, that lawyer challenges 10 percent of the bills or billed amount, which means $1,000 a week.

The amount reduced? Let’s say generously, is half, without any more time or effort being expended on a call or report or delegation to someone else. That leaves the $1,000 worth of challenged (and presumably reduced) bill at $500, against a cost to the company of at least $400.

Hmmmm Scratch head. Puzzle.

I’m tired of hearing about BTCL.

You’d think from the press and pundits that make-or-break, do-or-die, all-in Texas hold ‘em litigation cases were a dime a dozen. They are not. They are once in a blue moon and so not the reason for law departments being blue about outside counsel costs being over the moon.

Ponder some data on federal securities class actions, the iconic high-risk lawsuit. According to data compiled by the Stanford Law School and Cornerstone Research, between 1998 and 2005, each year somewhat more than two percent of listed companies faced such a lawsuit (Wall St. J., Feb. 15, 2006 at A16). Moreover, defendants in those lawsuits were disproportionately Dow Jones Industrial Index, biotech or Nasdaq Internet Index companies. Another study, “Recent Trends in Securities Class Action Litigation” (NERA, July 2003), found that the annual rate of filings was 214 securities class actions during the 18 months after Sarbanes-Oxley became law, a rate just above the 208 filings per year between 1996 and 2001.

During a teleconference hosted by ACC’s Law Department Management, Litigation and Small Law Department committees, the Chief Litigation Counsel of American Express, Stuart Alderoty, explained his department’s budgeting practices. The law firms hired to represent Amex on a matter must submit a matter budget for the year (I do not know whether it is a 12-month budget or a budget until the end of the current fiscal year) along with a general description of the services expected to be provided.

An Amex lawyer must approve, reject, or modify the budget. The law firm can leave home without it, but without an agreed budget, Amex won’t pay any of its invoices (See my meta-post of Nov. 6, 2005 on outside counsel matter budgets.).

Formal Opinion 93-379 of the ABA Standing Committee on Ethics and Professional Responsibility presumably holds even now, a dozen years later. The Opinion concludes that the practice of billing more than one client for the same time is unreasonable and violates Rule 1.5(b) of the Rules of Professional Conduct.

Hooray, and all’s well in heaven. What bedevils me, and may render that statement of ethics nugatory, is the evident difficulty either client would have proving the double-billing transgression. No less than the billing partner might miss it, if the timekeeper records time to clients billed by different partners.

In its guidelines, a law department can mandate compliance with Opinion 93-379, but I recall a phrase from early in our judicial history, to the effect that “Justice Marshall has announced his decision, now let him enforce it!”

When law departments select a law firm to handle all their work of a certain kind at a fixed fee, the departments often establish performance metrics. These metrics might include average turnaround time (leases, for example), resolution statistics (litigation and EEOC charges), productivity (patent applications), and quality (zoning variances fully granted).

Eventually, law departments will insist on metrics that show how well the firm manages the staff members who contribute to those performance metrics. So-called “firm management metrics” could include practice expansion (more revenue in the areas of law drawn on by the fixed-fee arrangement), rates of partner promotion or recruitment (again, in the relevant practice area), lawyer turnover and retention rates, quality of the lawyers (education and experience), investments in technology (knowledge collections, document drafting), unbundling, and training (hours invested).

Easy to say: “set up fee bonuses or holdbacks for law firms helping on transactions, so they have some skin in the game.”

Hard to get around, however, is the likelihood that law firms lack leverage either way. In the words of the general counsel of Kewill Systems, “When a project goes wrong, it is rarely the lawyer’s fault, so I wouldn’t expect them to share the pain with us [a holdback on their fees]. So when a project goes right, why would I want to share the upside with them [a performance bonus]?” .

When a law firm submits budget on a matter, there may be a salutary effect on the matter’s cost, but would it be much use if the budget were simply a number; $300,000 for six months?

No.

The real insights from a budget, and therefore its ability to corral costs, come from its strategic overview and assumptions: what goal, what tasks in what order, and how will they be managed brings more potency than the mere budgeted number (See my posts of April 27, 2005 on how far out budgets should go, April 14, 2005 on adjustments to budgets and Nov. 6, 2005 questioning the effectiveness of budgets.).

These two law departments, both UK based and re-constituting their panels, chose an entirely new set of external counsel. That wholesale swap out puts the lie to contentions that incumbent firms, who presumably know the client, have the high upper hand. To the contrary, the in-place firms might have gotten the back of the hand because of complacency.

Many law firms, competing for work from a company that is not a client, fret that the incumbent firms are “wired.” In these two situations, at least, that suspicion was scotched.

To provide the historical data firms want to have for them to figure out what to bid, to prepare the RFP and choose the second round firms, to hold a due diligence session, to interview finalists and negotiate an acceptable arrangement – the game must be worth the candle.

A 500,000 lumen candle, so to speak, or brighter. Where anticipated fees for the desired time period are dimmer, it is lights out. Economics determines the switch: if you are going to save the expected 10 to 15 percent from the arrangement, you need a half million or more of spend to justify the exertion.

Roger Marks, the former general counsel of H2O Plus, writes in InsideCounsel, Feb. 2006 at 14 about how to select overseas firms. Nearly all his advice will help in-house lawyers, but I take exception to one statement Marks makes:

“One thing to remember when you are shopping for overseas counsel is that it’s a buyer’s market. There are many qualified firms in a particular city or country.”

No, no, no, say the law departments I encounter. Outside the major trading countries, and the largest city or two in them no less, the pickings are slim. If a law department hunts for capable lawyers (let alone law firms) in the rest of the world, the choices are more Hobson (any horse so long as it’s next to the stable door) or Ford (any color car you want as long as it’s black).