Articles Posted in Outside Counsel

In August 2002, Michael Boutout, writing for the National Association of Insurance Litigation Management (NAILM) – is it actually pronounced “nail ‘em”?, cited a “recent poll conducted of more than 100 insurance defense firms.”  These law firms “felt they were consistently getting the short end of the stick when they entered into relationships for litigation management.”  So much for partnering [See my posting of May 1, 2005 taking partnering to task.]

“Litigation management” in this context covers all the ways insurance carriers have tried to reduce costs of their retained counsel, such as guidelines, task code billing, auditing, benchmarks, unbundling, expense strictures, and other stratagems. Boutout noted that “more than 90 percent of these firms recognized a serious decline in relationships due to [litigation management].”  The piece did not further explain these survey findings – www.irmi.com/Expert/Articles/2002/Boutot08.aspx.

Many law departments have toyed with improvements to their billing processing that allow them to pay invoices quickly.  In return for receiving payment within five days, or some other time shorter than the customary 30-45 days, law firms supposedly discount their fees by two, three or four percent.

Other than during a firm’s end-of-year paroxysm of collecting all it can, quick payment means relatively little to firms.  They grant the discount to keep the client, not because they make it up on the interest from the quicker-arriving funds.  And this leaves to one side the obvious fact that prompt payment discounts do not change the economic forces driving a law firm’s billing amounts.  [See my April 18, 2005 post on law firm compensation systems.] 

A white paper by Allegient Systems dated Sept. 2001 (www.allegientsystems.com) states data for five years of its reviewing outside counsel bills.  In the most recent year (2000), the firm reviewed 271,200 invoices totaling $648.3 million dollars (fees plus disbursements).   The net savings the company claimed came to $70.4 million.

With the stated cost of all that reviewing and processing being $13.6 million, the return on investment for the law departments was $5.19 saved to $1 spent. 

I cite these numbers to ask three questions: (1) Don’t law firms learn fairly quickly how to comply with the rules and scrutiny of such a system, so the savings the next year – ceteris paribus – will ecline?  (2) Of the “savings” identified by the system, what percentage of them did the law department enforce, or is that figure the actual reduction in amounts paid on all the invoices?  (3) How did the vendor charge for its services, $13.6 million (for example, based on savings, invoices reviewed, hours worked, or on some other basis)?

Corporate law departments that confront a conflicts situation with outside counsel should turn to Freivogel on Conflicts at www.freivogelonconflicts.com/new_page_36.htm. Each of the seven situations discussed by Freivogel sounds very plausible; here are five:

(1) a boutique you retain insists on your waiving in advance any conflicts that might arise after the current matter ends;

(2) a firm you currently use has sued a one of your subsidiaries [periodically send your firms an updated list of corporate affiliates];

The curmudgeon in me chafes at the over-use of “partnering.”  Law firms and law departments cuddlying up and sharing goals and scratching each other’s synergistic backs causes tears to well up at conferences and in fawning articles – but I have doubts.  So does an article in MIT Sloan Mgt. Review (Spring 2005 at pg. 75) entitled “The Dark Side of Close Relationships.”

“Relationships that appear to be doing well are often the most vulnerable to the forces of destruction that are quietly building,” the article intones.  It describes how these destructive forces build: short run benefits work at cross purposes to long-run strength (for example, discounted fees by the firm repel the best associates); strong, trusting relationships spawn cheating (the go-to firm starts cutting quality or over-billing the credulous law department); and unique processes and adaptations bring rigidity (for example, the vaunted extranet stunts other useful technology links).

To keep Luke Skywalker Department from the Dark Side, the authors suggest several precautions, including (1) evaluating older relationships (a possibility is changing relationship partners every few years); (2) develop backups – which puts pressure on efforts to converge law firms; (3) “take mutual hostages”, such as investments in joint training, joint hiring, knowledge management, and shared paralegals such that firm and department will lose if the partnering relationship sours; and (4) establish common goals, such as balanced scorecard metrics.

During a recent web conference hosted by Foley & Lardner, Litigation Counsel of Cummins, Miguel Rivera, shared his experiences with budgeting.  Cummins has selected regional counsel, one counsel for each of 12 regions, and their relationship partners sit each quarter with Rivera and the Cummins lawyer responsible for the firm’s cases.  The firm breaks the budget for each case it is handling into phases.

Quarterly revisions together with face-to-face meetings keep the budget period to a reasonably predictable and manageable length.  Law departments shouldn’t expect semi-annual budgets, let alone annual budgets, to shed much light on reality.  Keep budgets to the foreseeable, near-term future – quarterly makes good sense – and you will stay on the road to cost-control success

Recent research has found that “lawyer compensation and client billing practices are inextricably connected.”  This quote from a brief summary of a paper presented by Huseyin Leblebici (Univ. of Illinois, Champaign Urbana) at a 2003 conference run by the Clifford Chance Centre for the Management of Professional Services Firms (Said Business School, Oxford – www.sbs.ox.ac.uk), points us to a little discussed tactic.

If you want to change the billing culture of one of your law firms, you must grapple with the way the firm compensates its partners and associates.  I have not heard of a law department that peered this far into the bowels of billing (although I know of a pharmaceutical company that toyed with limiting the profit margin of its primary law firms), but the quest makes sense.  If, for example, the distribution of a partner depends mostly on individual fees collected, a law department stands little chance of setting up fixed fee arrangements with that partner, for the reason that they emphasize profitability, not profligacy.

Many British companies have selected “panels,” small groups of firms that handle a company’s legal work in certain areas, such as commercial, litigation, environmental, or human resources.  For example, the British bank, Barclays, has 37 law firms on its UK-based panels.

According to an article in the Financial Times (April 14, 2005), “a position on such a panel guarantees a certain amount of work and so is highly prized by law firms.”

US law departments that narrow their list of preferred counsel, this country’s panel equivalent, do not typically guarantee those firms any volume of fees.  But if the work comes to the department, the firms enjoy something akin to a right of first refusal.

Legal departments that follow the Pied Piper of convergence, that stop using many law firms and funnel more work to the remaining firms, inevitably find themselves attracted to larger law firms.  Larger firms can handle a broader array of services and dig deep into the specialty depths of their lawyers.

Recent research by Hildebrandt International found that two law firms have 3,000 or more lawyers; four firms boast 2,000 to 3,000 lawyers; and 24 have 1,000 to 2,000.  Of these firms, which are increasingly hard to identify as citizens of a particular home country, 16 are primarily US; 6

In my experience as a consultant, lawyers in law departments do not say, “Let’s hire X firm because it is one of the 30 largest firms in the world.”  They say, “Let’s hire Y partner, who happens to be at one of the 30 largest, but it’s Y’s experience, style, and brains we want – not the brontosaurus behind her.”  Yet steroidal firms keep bulking up, so law departments must be hiring them.

It’s just not caught on, the admirable notion of evaluating outside law firms.  It seems very worthwhile, certainly to consultants, to formally assess the performance of law firms, but the law departments of our country have never acquired the taste. 

There are several reasons for the reluctance.  Often, a particular law firm is only used by one lawyer, so no collective evaluation is possible.  Second, law firms do not stay the same.  Associates come and go; offices open and close; partners move into different areas.  What’s the use of evaluating a moving target?  Third, some of the evaluators do not use another law firm against which they can make a comparison of performance.

Finally, even if a law department perseveres, it must still act on the evaluations for the effort to have been worthwhile.  We all know how difficult it is to convey critical evaluations, and this drawback dogs evaluations.  My hunch is also that law departments are unwilling to put candid comments in writing, let alone in a database, lest its secrets somehow slip out and cause embarrassment.