Articles Posted in Outside Counsel

Even though the responsible in-house lawyer has approved a budget by a law firm handling a matter, there remains the possibility of the law firm wanting to revise the budget.  Here are some ideas for analyzing budget modifications.

Thoughtful budgets should state the most important assumptions grounding the budget.  What events, in other words, cause the budget to be what it is.  Modifications to the budget, presumably, arise from a circumstance that was not covered by the assumptions.  A law department could track the accuracy of the assumptions made by a law firm, rather than focusing entirely on the budgeted spending.  All things being equal, a firm that consistently takes into account most of the likely occurrences that buffet a budget brings more value – and more realistic budgets – than a firm that overlooks foreseeable events.

For major matters, the law firm might state not only the assumptions, but also their range of variance.  Of the total budget, a given assumption could change the range from 5 to 10 percent, that assumption is less of a cost driver than another assumption that has a range of 30 to 50 percent variability.  Thus, to pay closest attention to the events that might cause the largest swings in a budget, have firms give key assumptions and their the range of variance.

If a legal department faces less than $500,000 of spending for the foreseeable future, covering a cluster of related legal work, it doesn’t make sense to undergo a competitive bid among law firms to handle that work.  It takes time and effort to consummate a competitive bid.  The outcome may well be traumatic for several law firms, upsetting long-standing relations.  For the reason that any change brings risk, unknowns enter the process and make it less desirable.  One can always be second-guessed for deviating from the status quo. 

For all these reasons, set against the likelihood that your savings would be on the order of 10 to 15 percent of the fees, I propose the approximate threshold stated above.

Since most invoices from law firms are based on hourly billing rates, corporate law departments should consider studying the rates they are paying. 

Take the five law firms you paid the most in the past year.  From each of them record the hourly billing rate of the five lawyers who billed the most hours, keeping in mind that you want data from several different matters.  Compare those billing rates to average billing rates as provided by third-party surveys.  Although not precise, this analysis can at least show you where your preferred firms stand in terms of their hourly billing rates. 

ACCA/Serengetti’s 2004 Managing Outside Counsel Survey states (page 10 of the Executive Summary) “law firm responses to requests for competitive bids remain at a low level, an average of less than two responses for each request for proposals.”  A stunning finding, from my experience.

I have helped six law departments conduct a total of eight large-scale competitive bids.  With each, at least six law firms received the RFP and four or five of them responded.  If the law departments providing data to the ACCA/Serengetti survey were representative, and if they sent their RFPs to an array of firms, I cannot understand why they received on average fewer than two proposals.  Now, if they sent the RFP on average to three firms, the small reply rate makes sense.

Firms eagerly seek opportunities to compete for work, especially sizeable bundles of work.  Law departments always know a handful or more of capable firms that could handle the department’s work.  Put the two facts together and the response rates to a well-run RFP process ought to be well over half of the recipients.

The Federal Deposit Insurance Corp. (FDIC) uses a “Non-Litigation/Transactional Budget Form” [FDIC 5000/26 (11-00)].  Its two pages ask firms serving the FDIC for fee rates by timekeeper, a description of the matter, and a breakout of fees and expenses by “action”.  Actions include research, review, negotiation, drafting, advice & consultation, non-judicial foreclosure, and other.  Quite straightforward.

What caught my eye was the fine print at the bottom of the second page.  Under the heading, “Disclosure of Estimated Reporting Burden,” the form advises that the “Public reporting burden for this collection of information is estimated to average 0.5 hours per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed and completing and reviewing the collection of information.” (emphasis in original)

This Orwellian government pronouncement – plain English translators would write: “It should take an average of 0.5 hours to complete this form, including….” – makes me laugh.  Thirty minutes for everything associated with describing a new matter and establishing its budget.  That can’t be correct, because completing IRS Form 1040 takes only 0.67 hours!

One of your major law firms has announced that it is merging with another firm.  Your first reaction might be, “Why did I read about the merger, instead of being advised in advance?”  Let that flicker die down, and consider two other questions.

The first call should go to the relationship partner, to find out how he or she foresees the merger affecting service to your company.  Will that person remain?  Will that person have control or influence over the associates and paralegals who have been doing the work?  Will the office locations remain?  Will the economic arrangements hold?

The next question should concern conflicts of interest that might scratch the finish on the existing relationship because of the other firm’s clients. At the simple level, the conflicts search will look for direct competitors; the next level considers issue preclusion.  Worst case, the client of the other firm prevails on a conflicts debate and you end up no longer represented.

The Wilmington-tsunami – the convergence initiatives that reduce the number of law firms retained by a law department, which DuPont so skillfully publicized – has an almost inevitable side effect: leaving higher cost firms. 

If a law department chooses to find a single firm to handle matters in an area of law, say environmental, it will be tugged toward retaining a larger firm than if it stayed with several providers.  The siren song of a firm that can handle the spectrum of environmental needs favors larger firms, which – all things being equal – charge higher hourly rates.  The higher rates follow from more infrastructure, layers of management, higher compensation expectations, and larger matters.

On the other side of the ledger, larger firms can price services lower than can smaller firms because they can spread the risk over more matters and can accommodate more changes in how they handles matters, such as with technology, systems, delegation, and hiring.

The law office of Vincent DiCarlo posted a short piece entitled “how to reduce the high cost of litigation” (www.dicarlolaw.com).  All the advice mows down the weeds of excess litigation costs, but a few seemed especially cutting edge. 

On the bugaboo of wasteful staffing, DiCarlo offers a rule of thumb: “If you have more than one lawyer and one paralegal regularly working on your case, and the litigation is unlikely to result in a judgment of more than half a million dollars, you should ask your lawyer about staffing.”  Sounds like good guidance to me.  I wonder if anyone has looked at total billers in relation to the plausible judgment range; does two per half million dollars or so sound plausible?

Use customized arbitration clauses, says DiCarlo, and explains clearly in two pages why they are so flexible and effective. 

The problem with budgets prepared by law firms for a specific matter is that the law firm will quite commonly (and naturally) budget high.  The firm gains nothing if it submits a lean budget and later has to explain why costs rose above the budget. 

Theoretically, in-house counsel can pry into a somewhat padded budget with a gimlet eye and reduce it, but that causes ill feelings and no inside lawyer looks forward to that operation.

Here’s the modest proposal – three actually.  Have two firms, each capable of doing good work, submit budgets for new matters and go with the lowest.  Over time, assuming no collusion by the firms, you can judge results and have some assurance that the selected budget was the more appropriate.

During a year, the total number of law firms a law department paid matters less than the concentration of its spending.  If a department moves from 200 law firms to 100 law firms but distributes its spending evenly among those 100, it has missed an opportunity to improve.  If the department converges from 200 law firms to 150, but pays the five firms paid the most 75 percent of its spending, then it has an opportunity to explore with those firms alternatives to hourly billing and other cost-saving efforts.  The key idea is not convergence but rather concentration.

When seeking to control outside counsel costs, a misguided step is certainly step-wise rate reductions.  With such a reduction scheme, a law department gets larger rate reductions the more it spends on a law firm.  It sounds plausible as you are getting volume discounts at increasing levels.  The disadvantage is that the law department may find itself pressured to give work to a firm in order to reach higher discount levels, rather than because the firm will do the best job on the matter.  Discounted rates on of average quality work gains nothing.