Articles Posted in Outside Counsel

During the summer of 2005, Bottomline Technologies, the provider of eXchange, surveyed the Fortune 1000 companies and AM Best 200 insurers. Of the 1,892 individuals sent e-mail invitations to participate, more than 10 percent responded. Thomas Gaillard of Bottomline reported some of the results at ACC’s 2005 Annual Meeting.

The respondent law departments use law-firm performance data mostly to “award new work to high performers” (59% selected this response) and to “reduce the number of outside counsel” (47%). The least important uses of the performance data were to “help firms become more efficient (26%), “internal analysis only” (22%) and to “tie firm compensation to performance.”

It would be commendable if more law departments told their firms how the firms stack up against each other and how the firms should manage differently. That is partnering at a much higher level.

The UK is on the verge of allowing law firms to be bought by non-lawyer entities or to go public. Unfettered by any knowledge beyond that, let me extrapolate into the future with some questions.

With newfound wealth, will some partners chuck in the practice, and thereby weaken the firms? With quarterly results coming to dominate attention, will short term decisions slowly strangle successful firms, or will heightened attention to effective management make firms lean and fit? With ample capital, will firms diversify and invest, such as in knowledge management systems or hiring the better and brighter?

Will hostile tender offers launch for law firms? Will the public disclosure of income and profits boomerang by letting clients squeeze them more? (See my post of July 25, 2005 about Allen & Overy disclosing its financials.) Will larger capital pools let firms build practice aids (See my post of Oct. 31, 2005 on JennerNet.) or take more risk, for more potential reward, with billing other than on a cost-plus basis (See my posts of Aug. 27, 2005 about timid law firms and Oct. 26, 2005 on the longevity of hourly billing).

From a large, web-based survey conducted for LexisNexis Martindale-Hubble (Counsel to Counsel, Nov. 2005 at 17) came an interesting nuance. When law departments were selecting a new firm, they rated expertise, client service, reputation in that order, with fees and budgeting in sixth place — which in turn were more important than a firm’s geographic location “and other intangibles.”

Once a law firm is retained, the survey found, client service becomes the most important factor, passing expertise and also that fees and budgeting vault from sixth to third place. Thus, once in the door, law firms need to re-focus how they please law departments. For more on law departments evaluating outside counsel, see my posts of April 14, 2005 (difficulties), July 21, 2005 (data mining), and Aug. 31, 2005 (Royal Bank of Canada).

An article aimed at insurers (Claims Magazine, Oct. 2002 by Tewabe Joro Ayenew) speaks to insurance carriers handling large claims portfolios. But its lessons apply more broadly, and it unearths a provocative metric.

In brief, the article concludes that as to two common efforts – legal bill auditing by third parties and law departments seeking lower hourly rates – “neither approach is strategically sound.” “Not only has fee auditing created discord between insurers and their counsel, some state courts have held that it may violate attorney-client confidentiality.” I have wondered the same about e-billing auditors.

Instead, to lower the total cost of litigation, the article urges law departments to (1) promote collaboration with outside counsel, (2) implement case budgets, (3) pursue more sophisticated quantitative analysis of data, (4) evaluate the performance of outside counsel, and (5) invest in telecommunications technology.

As law departments put out to bid portfolios of legal services that can reach tens of millions of dollars, larger law firms – with the capacity, reach, infrastructure, and capital to handle boatloads of work – will be the odds on favorites to be chosen. Convergence efforts by clients, therefore, will justify mergers of firms. (See my post of May 1, 2005 on the dark side of partnering.)

What else? Conflicts of interest policies on both sides will need to soften (See my posts in 2005 of April 2 on merger conflicts, May 30 on conflicts policies, Aug. 5 about Foster-Wheeler using a single firm, and Oct. 23 on the frequency of disabling conflicts.).

Overhead costs will climb as law firms expand, and possibly be passed through to the law departments so intent on reducing costs (See my post of Oct. 23, 2005 about size correlating with overhead costs.).

A wary sentiment appears to prevail among senior in-house lawyers regarding use of law firms within networks of law firms (See my post of May 9, 2005 listing 12 networks.) If the law firm the law department has been using refers international work to a member of a network the referring firm belongs to, that is fine for the law department only if the referring firm knows the partner overseas and can vouch for the quality of the partner’s work.

Otherwise, membership in the network, on its own, does not secure the overseas firm the work. Law departments are as likely to find a firm on their own. That is the cautious sentiment.

As reported in the Economist (Vol. 377, Oct. 22, 2005 at 12), “Microsoft is among the companies most frequently sued for patent infringement: it is currently involved in 32 patent disputes, and spends close to $100m a year in legal costs.” (See my post of Nov. 3, 2005 where Microsoft has stated it saves 2-3% a year on legal costs because of e-billing.) The article did not say whether the $100 million was solely for litigation, or included other patent costs, but that seems the inference to be drawn.

This annual tribute will rise if the company carries out its plan to increase its patent filings each year by 50 percent, from 2,000 to 3,000 (See my post of Aug. 3, 2005 citing Brad Smith, the General Counsel.). For more on patent litigation expenses, see my posts in 2005 of March 29 (average of $2m per lawsuit), May 1 (costs of patent litigation, May 4 (Massachusetts data), May 4 (event studies of share price), and Aug. 24 (patentees winning more.)

This finding came from a survey of LexisNexis Martindale-Hubble (Counsel to Counsel, Nov. 2005 at 17) to which 635 in-house counsel responded, 461 of which were from the United States. The summary strongly suggests that the “matters” in which CEOs intrude are adversarial, such as law suits, regulatory proceedings, or investigations – “bet the company.” If so, the trumpeted statistics mute to a soft harp’s, since these high risk matters happen only rarely. If a legal hurricane hits, it is not surprising that the CEO steps into the decision on counsel. By implication, for the vast preponderance of matters, the GC or other lawyers make the decision.

Another survey announced that 40 percent of CEOs are involved in selection of outside counsel, but I challenged its ostensible finding (See my post of Oct. 23, 2005 on Dickstein Shapiro’s survey.).

A press release about the 2005 ACC/Serengeti survey of law departments mentioned that one of retention terms it asked law departments about was “minimum experience requirements for associates working on matters.”

I respect the survey for asking about this, but such a requirement strikes me as a blunderbuss approach. Doesn’t it push law firms to have more costly associates do tasks that a first or second year associate should do? (See my post of Nov. 8, 2005 about law departments hiring only experienced lawyers.) Isn’t it the responsibility of the billing partner to write off hours wasted by a novice lawyer?

Why is it that the so-called generalist lawyers who support a business unit tend to use outside counsel more sparingly than do specialist lawyers, such as intellectual property or employment/labor lawyers, who turn to them frequently?

Wouldn’t it be expected that if you’re a specialist, you should know your area of the law and not need recourse to a law firm partner? The Greek chorus answers: “Silly boy, specialty areas of law have arcane, fast-moving, and sophisticated questions, unlike the general practitioners who recommend the legal equivalent of an aspirin and a night’s rest.”

Many departments have a low-level tension between the heads of business-unit lawyers and specialists. Say the heads, “Why should we call in our specialists if they are merely conduits to expensive outside counsel?”