Articles Posted in Outside Counsel

Law departments can hire local firms in different countries, they can hire a large firm with foreign offices, or they can turn to a law firm that belongs to an association that has international members. A report three years ago by one of the largest of such associations, Lex Mundi, listed eleven other groups – not surprisingly, all of whom lagged Lex Mundi among a group of international law departments in name recognition.

The eleven, in descending order of recognition levels, were AM LF Association, Interlaw, Interlex, Meritas, Pacific Rim Advisory, State Capital, Multilaw, TAGLaw, US LF Group, Terralex, and World Law Group.

For major matters such as class action defenses, acquisitions of public companies, and significant SEC filings, the top lawyer – the chief legal officer – typically approves which law firm to hire.

But when a 2002 study commissioned by Lex Mundi (conducted by Altman Weil) reported that in an international group of law departments 92 percent of “chief legal officers or general counsel select or direct the selection process of outside counsel” my inner skeptic twitched.

In law departments with more than, say, 20 lawyers, the head litigator or IP lawyer or employment lawyer often hires firms without consulting the general counsel. For the largest portion of work done by outside counsel matters little to the top lawyer.

A 2002 study commissioned by Lex Mundi (conducted by Altman Weil) found among an international group of law departments that “one-third of all respondents maintain a list of approved outside counsel for work performed domestically.” Unsurprising, but to what end?

No one has compared legal spending as a percent of revenue across a group of law departments that have an approved counsel list to the same metrics for a comparable group that maintains no list. Until we know whether a list helps manage costs, we can only surmise.

I believe it is necessary for well-managed departments to identify firms that will be expected to handle certain kinds of matters, absent unusual circumstance. To be sufficient, however, the department needs to enforce the use of only approved counsel; it needs to review the list periodically; it needs to prune the list; and it still needs to deploy cost-control strategies with the approved firms.

In 18 years of consulting to hundreds of law departments, I have yet to see a formal statement of rules to determine whether a law firm is in conflict with the company. The common coin enjoins law suits brought against the company retaining a firm. Beyond that, I suspect that constitutional-like statements of principles, if even those, come into play. For example, is every adversarial proceeding a law suit? What about filing a bankruptcy claim against a subsidiary? How recently must a law firm have represented a company to conflict it out? What if the conflict-creating partner has left the firm recently? Can the firm represent a potential litigant and then withdraw if a summons and complaint is filed?

I am no expert in the area of conflicts. [See my post of May 1, 2005 (5) on Freivogel and conflicts.] I suspect that conflicts are almost always situationally-defined and law departments operate on contingency principles. For that reason, when it comes to determining conflict situations, they are not civil law but common law.

Does it make sense to hire only partners? Here’s a man bites dog tale. The General Counsel of a small insurance company, with four corporate lawyers and a larger number of claims staff, stated publicly that her policy was to retain the services only of law firm partners. Partners only?

For most law departments, this recipe would taste terrible. Economics would sour it. If, however, you primarily seek experienced counsel from the lawyers you hire (frontal lobes), rather than an extra resource (arms and legs), she has made the right decision; turn to a busy veteran partner for cost-effective legal advice.

Here’s what to do to start analyzing your outside counsel spending. In a spreadsheet, list down the first column all the law firms you paid during the past three years. Next, create a column for each area of law that has significant outside counsel spending: litigation, patent and trademark, finance and SEC, commercial contracts, regulatory – whatever are your company’s costly areas. Enter the amount you paid a firm for an area of law it serviced. In the column to the immediate right of each area of law, show how many matters the firm handled. Sort the data in descending order of total payments to the law firms.

If you have that three-year data, you have a pretty good picture of your spending, and you can begin to analyze of how well you are concentrating your spending, evaluating law firms, selecting firms, and managing them.

A recent item made the point that the burn rate tends to soar in the period just before trial. [www.mondaq.com/article/asp?articleid=31137&hotopic=1] If a law department insists on budgets from its litigation firms, Russell Barron of Foley & Lardner urges the responsible in-house lawyer to ask for more frequent budget updates during the final frantic march to the courthouse. All-nighters, precautionary research, dragooned staff, fatigue and stress all contribute to the concluding bubble of expense.

An article in the ABA Journal (May 2005 at pg. 30) quotes the managing partner of Reed Smith, who “can foresee a time when there will be 30 or 40 major international law firms that are working with most of the major business organizations in the world and in most of the major markets.” That would be dreadful. [See my post of April 18, 2005 on behemoth firms.]

Firm size correlates with billing rates. [See my post of March 29, 2005 regarding convergence and law-firm costs.] Gargantuan firms with huge overhead will always leave room for nimble, less expensive firms. Conflicts of interest, too, will hamstring the Godzillas, unless they monkey around with the rules.

Forty five Chief Legal Officers located in Europe were asked by Altman Weil, the Association of Corporate Counsel and the Practical Law Company “What is the single most innovative practice proposed or used by your outside counsel in the last twelve months?”

The most common answer was “none” — only 10 even named an innovative practice, such as “e-learning compliance tool,” “document management” (far from the madding crowd!) and the radical “volume fee reductions” (Innovative?  What does this say about the law department?).

The sad truth: law firms don’t rock the boat, they don’t feel the need to try new ways of serving their law department clients.  Sadder still: law departments do not insist on creativity or reward it or experiment with it.

A question on a recent survey asked “Have you fired or are you considering firing, (sic) one of your law firms this year?” Fifty-four percent of the respondents answered “yes.” 

As I thought about this finding, published by Altman Weil, the Association of Corporate Counsel and the Practical Law Company based on responses by “45 Chief Legal Officers located in Europe,” I paused long at the ambiguity of “fired.”  Firing’s a dramatic ax, a climactic severing of a relationship, the reasons for which the survey found to be equally “cost management issues” or “quality of legal work.”  I suspect those were choices from a list.)

Is this factoid surprising; is it legitimate?  How ephemeral and subjective is “considering” firing a firm for being costly or incompetent?  None of us ever consider, for example, chucking our job.  How much was the fired firm paid in the previous 12 months?  Could it be the small fry got fried?  What lawyers say that the X firm was too expensive, when the truth is that the new GC favored Y firm?  Can you fire one partner but keep working with another partner in the same firm?  The pseudo-statistic melts in the firing.