Articles Posted in Outside Counsel

In late 2003, the Arizona Attorney published a roundtable discussion among six senior corporate lawyers (40 AZ Attorney 12 (Nov. 2003)). Asked whether he had ever fired outside counsel, the General Counsel of Dial Corporation said “yes” and explained. “The times we have faced a problem is when we have someone too low a level working on our case. And you feel like you’re not getting enough bang for your buck, so to speak, and then things aren’t moving along quickly enough.”

Like many issues of law department management, the golden mean holds true. Law departments do not want too much partner time; they don’t want too much junior associate time. They want Goldilocks, Esq. time, with judgment, experience, and a modest billing rate.

Big name clients, with their tens of millions of dollars spent on outside counsel, irresistibly lure large law firms. The moths want very much to fly where there are searing burn rates.

The celebrity corporations, however, want their candles to burn a long time and not be wasted. In fact, they trim the wick of law firm margins. They negotiate discounts, free services, flat fees, budgets and other cost reducers.

So the legal industry watches this smoldering dance of prestigious law firms with their expensive rates matching wits with cost-cutting, accomplished major law departments. It is a bonfire of the vanities.

A piece in Legal Week (Sept.8, 2005) discussed keeping secret the decisions by law departments on choosing panels in the U.K. It brought to mind the potency of law departments publicizing that they have selected a particular firm to handle a major area of work. Dupont even ran space ads praising its primary law firms. That marketing clout might be swapped by a savvy firm for additional concessions on the economics of the arrangements.

On the other hand, some law departments wish to keep very quiet their arrangements with law firms. In general, I favor publicity on both sides, in part because the arrangement will inevitably become public knowledge and because marketing publicity has cash value in negotiations with law firms.

A fascinating article in the September issue of the ABA Journal (pg. 53 et seq.) related this fact (pg. 54). The General Counsel of Cisco, Mark Chandler – who comes across in the article as a zealous, creative missionary for change in law department spending practices – wants to increase the percentage. Ambitiously, he wants the firms who represent Cisco on a fixed fee basis, assuming they continue to handle roughly the same amount of work, to lower their fees each year.

Chandler can’t push the fee rock up the hill on his own, but he is certainly acting on his beliefs and visibly proselytizing for more efficient practices from law firms. Other law departments ought to recognize the benefit to them if they lend a hand.

A columnist in Litigation Management (Summer 2003 at 46) www.lawexec.com wrote, somewhat tongue in cheek, about paying law firms based in part on the evaluations the firms received from the law department and its clients. “We’ll hold back a portion of invoices – say 20 percent – and then [the law firm] will get 0 percent to 200 percent of that amount [the held back portion] based on their grades.”

An exceptional performance, doubling the holdback amount of 20 percent, would mean the firm would get 120 percent of its invoice amount.

Don’t bite that tongue. The nugget of this idea – pay if satisfied with performance – has appeal.

Hildebrandt’s 2004 and 2005 U.S. Law Department Survey results for all participants show a 9% increase in billing rates for the top three billing firms over a two year period. The estimated rates increased from $298 to $325 an hour. The ratio of outside counsel spending as a percent of worldwide revenues increased 5% over the same year period (from 0.20% to 0.21%). The survey populations changed somewhat during the period, so neither pair of figure is exactly comparable.

What surprised me, knowing that outside counsel costs make up about 60 percent of a typical law department’s budget, was that total legal costs rose at half the rate of the departments’ key law firm’s rates. If you would like to know more about the Surveys, email my colleague, Lauren Chung.

We reviewed a slew of invoices for a law department, and found an overall discount rate of two percent, and most of that measly amount was due to one much-used firm that gave a ten percent discount. The sad story, we learned, was more complex.

Digging further, we discovered that some firms simply did not indicate on their bills that they were applying a discount, others wrote time off but did not treat that as a discount, and still others were billing on blended rates (with the implication being that the blended rate built in a discount – see my posts of July 30, and Aug. 21, 2005 on blended billing rates.)

One twist to add to this: if the law department regularly knocked something off bills, the discounts granted by the law firms, or none, would matter less.

For litigation, Duquesne Light uses a Pittsburgh firm, Tucker Arensberg, which handles the utility’s cases on a fixed-fee basis. The general counsel of Duquesne did not give details in the article that described the fee arrangement (GC Mid-Atlantic, Aug. 2005 at 32) but the fact that they have accomplished this deed is noteworthy.

Litigation is usually the most resistant to fixed fee arrangements, unless the law department excludes trials, because of the likelihood that one or two cases do not settle. The cost of trial and possibly appeals looms too threateningly for law firms. (See my post of March 12, 2005 on setting litigation reserves.)

Being listed as one of their 20 most frequently used law firms in America, according to the latest corporate counsel survey, probably boils down to size; the larger the firm, the more likely it is to be cited. This hypothesis makes sense because more law departments have an opportunity to use a firm that has a larger number of lawyers. And, the more clients choose a particular firm, the more the firm can add lawyers. Cause and effect work both ways.

The second reason for dominance of brand-name firms is the “Buy-IBM” effect. In the 60s and 70s, no IT staffer could be assaulted for having bought from the industry leader, IBM. Nowadays, a score of household-name law firms (when you reach Cher status, with a single name, you have made it – Cravath, Skadden, MOFO, S&C) serve as the unimpeachable IBMs for general counsel who fear being second-guessed.

Third, it would not surprise me to find that the most frequently cited firms are also geographically closest to the largest number of major corporations. A Denver-based firm will have a much harder time cracking the list than a New York firm.

The General Counsel of Citigroup, Michael Helfer, is on record that his law department “gets discounts from virtually all our law firms. We provide various incentives for higher discounts although we will not agree to provide a firm with a certain amount of business in return for a certain level of discount.” Fairly standard stuff, until Helfer continued (Nat. Law Journal, Aug. 2005, Supplement at 10):

“I believe the real action is not in rates and discounts … but in staffing patterns and risk/reward decisions.” Bravo!

Helfer appreciates that law firms will leave no stone unturned, using platoons of staff and driving fees sky-high; to win. Only inside counsel can say, “the reward – benefit to this company of reducing liability – is not large enough for the risk – your squadrons of staff and their spiraling fees.” Firms see only one case, whereas the law department oversees a portfolio of cases and wants to minimize overall spend. Helfer is spot on.