Articles Posted in Outside Counsel

Once a law department has converged its law firms and designated a handful of them as preferred counsel, entitled to certain kinds of work and volume over a period of time in return for beneficial fee arrangements and other investments, one can imagine these arrangements encrusting, like stalagmites, unwanted complacency.

Inside the company, lawyers could have a tendency to be easier on the preferred counsel, perhaps due to familiarity or the leverage the firms have. Inside counsel might not demand innovation and variation on how matters are handled, having become comfortable with the routine. Unwilling to rock the boat, they might acquiesce to sub-par performance and loosening responsiveness.

On the law firm side, with less apparent need to market, they might lose the spur of hunger. Acquiring institutional knowledge and hooks, embedding themselves in a comfortable relationship, firms can exhale and perhaps let high standards of quality or productivity slip.

A year has passed; law firms raise their billing rates by law school year. This puts paid to claims by law departments that they manage experience and costs. (See my post of Nov. 21, 2005 arguing that firms need to show productivity increases.)

Instead, what if law departments defined levels of experience by hours associates and partners have worked on matters of the kind they are hiring the lawyer to do? If during the year, the lawyer worked more than 500 hours, on matters important to the law department, the department would accept that lawyer raising his or her billing rate.

It’s absurd that the passage of 365 days should entitle a lawyer who has not worked during that time on matters that are important to a law department to rates six percent.

Law departments that conscientiously set and enforce matter budgets with their outside counsel fare better, I believe, in the struggle against creeping outside costs. (See my posts in 2005 of March 24 proposing an approach and Nov. 6 on Dominos.)

But, that being said, the pesky details of establishing and maintaining budgets must be observed. Let me list some of the details.

 The department should have one or two standard forms of budgets that its lawyers can provide to outside counsel. At least there should be a litigation budget form and a transactional matter form.

Fixed charges by law firms are not limited to entire matters ($30,000 to complete this leaseback) or groups of matters (all our product liability cases in Ohio in 2006). Rather, a set charge can apply for a particular stage of activity, such as due diligence in an acquisition or until a motion for summary judgment is filed in a law suit. A fixed fee could depend on accomplishing an activity, such as completing an EEOC charge, even where there may be further work afterwards on the employment claim.

One can also fashion a fixed fee for a period of time, such as a flat rate for the first 90 days of a lawsuit. (See my post of Nov. 6, 2005 on Wal-Mart.)

I believe that bidding a single lawsuit competitively presents more challenges, to both the law department and the bidding firms, than bidding a portfolio of cases over time (See my posts of Oct. 31, 2005 on the competitive bidding process and Nov. 8, 2005 on giving data on hours, not spending.). As an example, in 2001 Viacom chose from among 20 competing law firms the Venable firm to handle its prosecution work and be one of its top IP litigation firms.

Holding to such a belief, I was surprised to read that TXU Corporation’s Law Department “has adopted a policy that requires outside counsel to bid on any litigation costing $750,000 or more.” (IP Law & Bus., Vol. 5, Nov. 2005 at 22).

A point in an article about intellectual property work deserves attention (IP Law & Bus., Vol. 5, Nov. 2005 at 22). Based on a survey of Fortune 500 companies, “a new IP chief [lawyer] translates into new outside counsel less than a third of the time, or in five of 16 instances.”

I view that turnover rate, almost 30 percent in the year following the promotion of a new IP head lawyer, as quite high. After all, it is quite likely that at least one or two firms have been handling significant matters so long that replacing them makes little sense (But see my post of Aug. 14, 2005 about costs of transitions between firms.) It is also reasonable to assume that the first management decisions of a new head lawyer concern internal staffing and workflows, not outside counsel. For reasons like these, I wouldn’t be surprised if the disappearance of former lead firms and the appearance of new primary firms for IP work doesn’t reach far higher than a third after two or three years.

General counsel and heads of practices, be those areas environmental, bankruptcy, human resources, or IP, bring their own favorite law firms to the fore and ease out their predecessor’s favorites.

In a recent interview, the head of litigation for BellSouth (Henry Walker) shares his observation that “the faster the cases are resolved, the lower the outside counsel fees.” (From Jan. 2005 materials of ACC at 6, provided at a conference organized by the ABA Section of Business Law and ACC, Nov. 2005)

Nuisance or simple claims should be resolved faster, so part of this cycle time statistic says no more than that less merit equals less spending. Evidence of this is Walker’s comment that “resolutions for shorter cycle time cases are generally better ones for the company.”

What law departments need to calculate is spending per month, and see whether shortening the average cycle time reduces that normalized metric.

A good practice for law departments that negotiate with their law firms a fixed fee for handling certain work is to protect both sides with a collar. A typical collar might agree that if the actual fees of the law firm are more than 15 percent above the fixed-fee payment, the law department will absorb 50 percent of the excess. On the other side, if the actual fees come in 15 percent or more below the fixed fee, the law firm will rebate 50 percent.

By protections such as these collars, and their infinite permutations, both sides feel more comfortable that if the actual workload varies significantly from the projected workload, they will avoid rank injustice. To not be dogged by unfairness unleash collars.

A recent article explained that Cisco’s law department uses “the internet to cherry-pick the best from hundreds of different firms and then manage large, disparate teams of lawyers.” Legal Week, Vol. 7, Nov. 10, 2005 at 62.

A stark contrast to convergence, this technique of melding the best team from more than one law firm requires much more management by the law department and a higher degree of decision making. It could be another form of disintermediating law firms, but I suspect it will not become a trend. The politics and directional skills will be too demanding.

Wal-Mart announced its diversity initiative at a conference attended by representatives of its top 100 firms, reminding us of a law department’s power to bring together its key firms. If you want to announce e-billing, roll out budget forms, explain task-based billing, showcase promoted lawyers, explain your new guidelines, plead for cost savings, state vendors that all firms must use, or scrounge for new ideas, an open forum can accomplish much. The competitive juices flow freely.

Whether you pay for travel costs, time or both depends on many factors, but I believe that law firms which are committed to serving you should be willing to invest some of their own time and money in strengthening the relationships. No reimbursement or charges, that is, which may smoke out which of your firms are most dedicated to you.