Articles Posted in Outside Counsel

Two of my friends, Bruce Heintz and Nat Slavin, both experts in interviewing corporate law departments and clients, reacted to my post on client interviews on behalf of law firms (See my post May 19, 2011: pros and cons of partners or consultants.). I have merged and shortened their comments and avoided individual attribution.

Both consultants strongly disagreed with my comment that consultants might not know much about the business of the client being interviewed. They both stressed that professional preparation for such interviews dictates that they bone up extensively on the client. They might, indeed, better understand the industry and its environment than would law firm partners. Moreover, “We, as consultants actually have a much broader experience in interacting with business and tend to know about a multitude of industries than does the typical law firm partner.”

There was also disagreement with my view that a consultant might “aggregate” or “conceal” the specifics learned in interviews. One of them, particularly, takes great pains to “relay all of the law department’s concerns, with specific attribution, back to those individuals at the firm who can take remedial action.” He then added: “In contrast, after a busy partner of the firm completes his/her interviews (possibly scattered over a long period of time), the ‘message’ to the correct recipient partners may get shortchanged.” The other chimed in: “A partner has inexperience, little training and no systematic approach or methodology to delivering the information, and also has biases that come through. They also don’t have accountability to deliver clear and precise messages that an outsider does.”

A speaker at a customer conference for users of a leading e-billing system gave some data about questions law firms asked when their invoice had been rejected. The leading cause of a question was the rules that had been invoked (about 20%), followed by “manual return,” unapproved billing rates (about 15% each), and invalid timekeepers. Block billing, math errors, and duplicate invoices made up the remainder.

What this data says to me is that law firms should make their e-billing rules explicit to their law firms. Tell them what you expect and try to drive down the number of rejections thereafter based on violated rules (See my post of Nov. 6, 2009: reports that out inside lawyers who flout e-billing rules; June 1, 2010: firms should test invoices against e-billing rules before submitting them; and June 4, 2009: e-billing rules with 6 references.).

Back in the day, there was a moderate amount of talk about and acclaim for discounts on law firms bills automatically applied when the company paid quickly. A common combination was about two percent if a bill were paid within a week.

You don’t hear about cost control by prompt payment discounts, and I think I know some of the reasons why. In the first place, law firms routinely grant discounts of five percent or more just for the asking, so the glare of deeper discounts washes out the paltry two percent. Another nail in the coffin has been the difficulty accounts payable has had with compliance; you can promise five days but if the average check cycle is 45 days, good luck. Nor did the interest accrued of the deferred payments prevent early payment discounts from sliding into extremis.

Maybe it became complicated to rush payments and then sometimes have to rewind a part of it, or perhaps general counsel had the sneaking suspicion that promptness led to rubber stamping – any “savings” were wiped out by the lack of invoice review.

If a general counsel normalizes the hourly rates charged be various law firms – an effective-billing rate calculation – it is almost always calculated at the firm level. Take a pile of firm’s bills and divide their total by lawyer hours. A variation, and one that can produce significantly different effective rates, does the same calculation but within types of matters. Look at IP-related bills, or M&A bills, or the employment-related bills. Variations by the firm in staffing and managing matters in different substantive areas can create widely different numbers. By the way, your fully-loaded internal cost probably differs as dramatically by practice area.

For background on effective billing rates, my first metapost is available (See my post of March 9, 2009: effective billing rates with 9 references.).

Since then several other posts pertain to effective rates (See my post of May 22, 2009: total hours of legal work per unit of revenue; Sept. 1, 2009: effective billing rates adjusted for cost of living; Oct. 11, 2009: some differences in costs between firms and departments; Nov. 25, 2009: adjust discounts by effective billing rates; April 21, 2011: cautions when departments compare internal to external billing rates; and May 29, 2011: effective rates and trimmed means.).

At a customer conference for users of a leading e-billing system, one speaker gave some data about inquiries from law firms about invoice processing. That category of inquiries, by the way, accounted for the most calls (about a third), with invoice rejection accounting for about a quarter more.

Of the processing questions, predominantly they regarded either submission or status. In fact, 65 percent of those inquiries fell under those two, followed by 10 percent each for invoice deletion, appeals and payment inquiry.

I mention this data because a law department should focus training of its law firms on these frequently asked topics.

To calculate the effective billing rate of a law firm, divide the amounts of several of its representative invoices by the number of lawyer hours charged under the invoices. Law departments calculate that figure sometimes to compare it to their own fully-loaded cost per lawyer hour. The range for U.S. law departments can be something like $350 an hour outside and $215 an hour inside.

One problem, however, arises from including the law firm your department paid the most during the period. That firm may well have handled your biggest law suit or largest acquisition. Cost discipline may have been less and the firm was probably large and therefore expensive.

At the other end of the scale, your department might use a one-person firm to handle very simple kinds of specialized work, or hyper-efficient boutiques to handle workers comp questions. The effective billing rates of those lower-end providers will be as unrepresentative of your normal effective rate paid as the top-of-the-line rates for the largest matter.

You can’t declare “mission accomplished” when your law firms agree to freeze their billing rates. The reason you can’t is that firms may end up with more senior lawyer time on similar matters than before the rates froze. In fact, that shift upward may be likely since for the same reason you have tightened the belt – budget constraints due to business falloff — at the law firm work may be less plentiful. The senior lawyers hoard work to plump up their own chargeable hours and handle more of the work at their higher, albeit frozen, rates. True, rates did not go up; false, fees held even or declined.

A panelist from Baxter Laboratories recently shared with the audience that the law department requests an early case assessment at the 180-day mark. Baxter’s period between receipt of the complaint and receipt of the law firm’s assessment – six months – is longer than the more usual 30- or 45-day periods. Baxter feels a month allows too little time to gather documents and interview people and think carefully about the case.

That criticism is well-founded, I suspect. Still, six months feels like too long on the other side. Perhaps the best practice would be to choose and ECA due date based on the type of case (See my post of June 10, 2008: firm hired solely for ECA; Aug. 5, 2008: millions saved at GE by early case assessment and resolution; Feb. 4, 2009: different use of term “Early Case Assessment”; Nov. 25, 2009: “Well-done ECA uncovers 80% of what you will ever know”; and Feb. 23, 2008: early case assessment with 8 references.).

For years I have urged law departments that negotiate fixed fees with a firm to insist on monthly bills nevertheless. The law department wants to be able to review staffing, the order of tasks undertaken, levels and composition of lawyers assigned, and other intelligence from invoices. Furthermore, when it comes time to renew the set-fee agreement or perhaps to choose another firm, the basic data of tasks, hours and staff provides a backbone of understanding. It is much easier to describe the potential workload when you have historical data.

A speaker on a recent panel jolted my self-satisfied belief. He said “If we still ask for hours, we’re still in that domain – drop hours and focus on value.” In other words, if you make the decision that a certain fee for certain work delivers appropriate value, then abandon the Tayloristic approach of time records and minutiae. Value is value, not hours.

A good point, but not good enough. You need to have a grasp on what was done and by whom so that you can review and report on activities accomplished and so that you can extend such an arrangement based on credible descriptive metrics.

An astute observer of the legal scene remarked during a recent presentation that “the best marketing tool of a law firm is its invoice.” What he views as enhancing a firm’s image is the value of being shown that a partner has written off time so that you see tangibly that the firm recognizes and strives for cost efficiency.

Plausible, as far as it goes, but a law department with sharper fangs might wish good management and staffing had obviated the need to lop off time in the first place. What about other bills where the partner was not so conscientious? What about self-discipline by the timekeepers in the first place? Defects discovered and fixed don’t make customers feel all that impressed.