Articles Posted in Outside Counsel

Recently, at a regional bank’s law department, the billing analyst estimated that 70 percent of the bank’s law firms send a bill monthly. I had thought before then that a higher proportion would hold, but she explained that (1) some firms make a practice of billing quarterly, (2) some firms bill at the end of a case or matter, (3) some firms carry over small amounts of work until the dollars in WIP warrant preparing a bill, and (4) some law firm partners are lazy, slow, or unconcerned about cash flow.

“Insurance defense firms typically have a vested interest in seeing that litigation is as costly as possible. Implicit collusion between defense firms and plaintiff firms is rampant, yet is nearly impossible to discover or prove. Litigation audit firms, and flat-fee billing helps to contain these costs.” This quote came form an online piece about insurance.

Hard-hitting, to broad-brush accuse insurance companies’ law firms of colluding with plaintiffs’ firms to keep spending high. I doubt the charge, let alone that it is “rampant.” Insurance companies have perhaps the best cost metrics of any industry and they have been holding down litigation costs for years. This finger pointing needs quotes, anecdotes aplenty, and data to persuade me.

Many law departments should go beyond the typical metrics of concentration of spending or convergence of law firms. A law firm usage map helps.

Look at the law firms that were in your top ten of spending for each or any of the past four years. List all the firms that were in the top 10, one per row, and the amounts paid them over the four years. Sort by the names on that list. Create a column for each year. Then, in Excel use colored bars to show each year in which each firm was in the top 10. One or two might have made the top 10 all four years. Another handful will have been in three of the four years, and so forth.

This map of consistent usage, the total spending on which firms may account for half or more of the department’s external spend during those years, graphically shows how consistently the department has turned to its primary law firms.

A recent study among a dozen U.S. law firms showed from a large set of invoices a 50 percent difference between them in blended billing rates. The study looked at nearly $3 million worth of invoices from the firms. It calculated each firm’s aggregate blended billing rate – adding up all the invoice amounts across multiple matters, including disbursements, and dividing that sum by the number of lawyer hours. (See my earlier post of today on the scarcity of paralegal hours in this set.)

The blended billing rates ranged from a high at one firm of about $340 per hour to a low of about $240, nearly 40 percent. With this wide range, it makes sense to pursue a policy of having good regional firms handle your work, reserving only the most sophisticated and exceptional work for the higher cost coastal firms.

A recent Hildebrandt study, part of a consulting project, found that partner time accounted for about half of all hours, associate time accounted for slightly less, and paralegal time a smidgen. The research on invoices from about a dozen large U.S. law firms included Of Counsel lawyers in “partners” and included all non-lawyer timekeepers in “paralegals.”

The shock from this law firm data is their total lack of leverage. These law firms, sending in total over two million dollars worth of invoices to a multinational, generally have two associates or more per partner and yet here partner time was more than the associate time.

This lack of delegation to paralegals is disturbing, from a law department cost-management standpoint. At a time when many law departments are trying to boost their ratios of paralegals, it is shocking to see their absence at law firms.

In 2001, Merrill Lynch used more than 1,000 law firms worldwide. By 2005, the law department had whittled that number down to fewer than 200 (one fifth or fewer in about four years!). Its top 20 firms today account for more than half its business. [See my posts of July 16, 2005 including convergence as one of three most common techniques, March 24, 2005 on concentration rather than convergence, March 29, 2005 and blended rate consequences of convergence, April 18, 2005 on the pressure to use larger firms.]

According to an interview of Rosemary Berkery, Merrill’s general counsel (Financial Times (May 5, 2005 at 9), the new agreements with firms, “promising more work in return for ‘better economics,’” saved Merrill in 2004 more than $16 million. That saving may be on an outside counsel spend of well over $100 million, but $16 here and $16 there and soon you’re talking ….

Law departments tend to exaggerate the rates at which they believe firms bill them, or at least to mis-state them. The top rates of senior partners stick in the mind, but the blended rate isn’t considered. Be sure to calculate the overall rates you are paying correctly.

A survey of 257 U.S. law firms in 21 major metropolitan areas finds that 65% of partners bill their time between $235 and $474 per hour. Approximately 20 percent of partners have billing rates of more than $500 per hour, which is an increase of nearly 5 percent over last year.

The national average for first-year associates is $167, while first-year associates in Chicago, Los Angeles, New York, San Francisco, and Washington, DC were billed out from between $190 to $259 per hour. www.helderassociates.com, 2005 as reported in Hildebrand Headlines (July 29, 2005).

I have recently worked with two global companies that want to pinch outside counsel fees. What holds them back, however, is a manifest fear of alienating their preferred law firms. These main brand companies’ top lawyers worry out loud that if they push to save a few percent on their outside counsel bills, the firms they really want representing them will walk.

I just can’t accept that this risk is worth worrying about. To the individual partner in charge of the relationship at one of the firms, this major, lucrative representation is far too important to walk away from.

There may be a very few law firms that say to brand name clients, “Pay our full freight, or ship off,” but I think it is rare. I recommend that law departments push for economies even from their prestige firms

For several years I have thought that law firms would grant their significant clients discounts of five to ten percent without batting an eyelash. Even more do I suspect this to be true after finding out that a large British firm, having disclosed its financials, battens on a profit margin of 36 percent. [See my post of July 20, 2005]

To my surprise then, when in a recent project we looked at the total fees paid to the 25 law firms paid the most, we found that a major company obtains an overall discount of a measly two percent. Two-thirds of its primary firms had granted no discount whatsoever during 2004. Were this law department to mandate a mere five percent across-their-board discount, it would save well over a million dollars. Not that I subscribe to discounts as the panacea for cost excesses, but the mathematics are quite simple.