Articles Posted in Outside Counsel

Law department managers complain about the level of ignorance their outside firms suffer from regarding knowledge of the company. They gripe, but what can they do to raise the level? At a recent conference, I heard about a telecomm law department that invites its key law firms to gather and hear from business executives (See my post of April 25, 2009: one part of the ACC value commitment is to learn a client’s business and strategy.). That is an excellent tactic, but there are many others.

Many of the tools available to in-house lawyers for them to learn about their company’s business also benefit outside counsel (See my post of May 3, 2006: knowledge of the business with 7 references; and May 7, 2006: in-house training on financial literacy.).

Put your firm’s lawyers on appropriate distribution lists regarding business developments, include them in clippings from RSS feeds, invite them to listen to analysts’ calls, go to lunch with them (without being charged), send them books on the industry or leading companies, distribute annual reports, and generally share what’s happening in the company.

A beautiful brochure arrived in my mail from the International Legal Alliance Summit, to be held in Paris on June 23rd. The brochure explains that attendees can choose 30-minute one-to-one meetings with senior partners from distinguished international firms or with general counsel from various big companies. A box lists general counsel who came to previous Summits but does not state any that are going to attend this particular one. The registration fee is in the $1,200 to $1,700 range per person.

I continue to be amazed that general counsel would willingly endure as many as seven half-hour meetings in the morning and nine handshake-and-hellos in the afternoon with law firm partners (or service providers) who are eager to be hired.

I must be missing whatever it is that lures buyers to the den of sellers, such as compensation, a free trip to Paris, frequent flyer miles, the ego-boost of non-stop wooing, the a plaque at the gala award dinner afterwards. Yet, the business model has been around for at least three years, as has my wonderment (See my post of Oct. 2, 2008: speed dating opportunity.). If you are interested, write the Leaders League.

A piece in Met. Corp. Counsel, May 2011 at 30, points out advantages and disadvantages of fixed fees. One effect, according to Ashish Prasad, the CEO of Discovery Services,is subtle: “When negotiating a fixed fee, the client has an incentive to understate the complexity of the case.” Prasad cites Poonan Puri, “Taking Stock of Taking Stock,” 87 Cornell L. Rev. 99, 121 (Nov. 2001) in a footnote to this statement. If a law review article a decade ago wrote about this inclination to over-simplify a case to lower the fixed fee, then law firms must be alert to the risk. And, firms supposedly have experience with the case at hand, perhaps more than the law department’s lawyers. Their inclination to over-complicate the case may need a corrective!

Prasad also notes that clients push the scope of the work expected for a set fee – he uses the term “overextend” — and cites a LexisNexis survey as evidence. “One in five attorneys in private practice reported that their corporate clients overextended their flat-fee arrangements.” The LexisNexis State of the Legal Industry Survey (Fall 2009) at 23, drew on 350 lawyers in private practice. Note that 82 percent of the respondents did not identify this pattern.

Law departments readily agree to talk with someone from one of their law firms about the firm’s performance. Some law departments are asked by their law firms to speak with a consultant about the firm’s performance. What are the differences to a department between talking to the party of the first part and the third party?

With the partner, you don’t have to explain the background; with a consultant, there may be zero familiarity with acronyms, executives, business activities and history, or legal issues.

With the partner you may be reluctant to be too personal or too blunt; with a consultant who aggregates and conceals the specifics (sometimes), you can be direct.

I advocate budgets for “major matters” handled by outside counsel. “Major” turns on the amount likely to be spent in some period of time. It doesn’t make sense to require all practice areas in a law department to comply with the same threshold requirement for matter budgets (See my post of Nov. 11, 2007: criticizes one-size-fits-all solutions.). If you do, some groups will do too many and some not enough.

For litigation, lawsuits might trigger budgets if the expected spend is more than $250,000 a year whereas for the environmental group perhaps $50,000 in expected spending elevates a matter to “major.”

My basic suggestion is to set thresholds for practice groups that recognize their different spending patterns. Probably not more than 10 percent of all matters should be budgeted but those matters should account for something close to 75 percent of the spending by the group (See my post of March 4, 2008: examples of thresholds; and Sept. 13, 2010: budget variance will vary by total cost of the matter.). Not that you can easily or always tell in the early stages whether a matter will balloon into a major matter, but you can develop some tests and guidelines.

Budget accuracy drops exponentially I suspect; if you double the time period of the budget – maybe from six months to a year – the accuracy plummets to one-fourth as good. For that reason, require budgets only for a quarter or two ahead (See my post of April 27, 2005: budget no farther than your headlights; Oct. 22, 2008: budget for flexibility rather than strive for prediction; July 9, 2009: budget scenarios instead of single figures; Aug. 4, 2009: use a funnel metaphor for budgets; Aug. 25, 2009: accuracy degrades dramatically as the time extends; and Nov. 3, 2009: twists and turns when you test the accuracy of law firm budgets.).

Perhaps a better budget interval ignores the arbitrariness of the calendar and looks to stages and milestones. Historians have long recognized that decades or centuries have nothing to do with ongoing events, yet periodization appeals to many people. A time period like six months may be illogical but it is easier to adhere to than “through filing of the motion for summary judgment” or “first sit-down negotiation session.”

A second way to handle budgets that is not locked into the passage of time would be to set an expenditure amount and require a budget as your firm draws near to that amount. By this method a law department might request a budget every $100,000, and based on the burn rate – or the law firm’s projection of when it will exceed the $100,000 figure it is working under – it creates an obligation to prepare in a new budget.

With trepidation I cite an actual case, but the broader point about management of outside counsel encourages me, a lawyer manqué. You can read more in the 2011 supplement to Bob Haig’s Successful Partnering Between Inside and Outside Counsel, Section 9 at 96, about McQueen, Rains & Tresch, LLP v. Citgo Petroleum Corp., 2008 OK 66, 195 P.3d 35 (Okla.2008). “The Oklahoma Supreme Court recently held that liquidated damages provisions in fixed-fee, fixed-term agreements between lawyers and a sophisticated corporate client are enforceable under Oklahoma law.

It would be a bold law firm these days that requests a liquidated damages provision in a set-fee deal with a company, but perhaps that provision enables the law department to obtain better financial terms. I also wonder whether by definition a company with an internal law department would for this court’s purposes be deemed “sophisticated.”

In 2003, the general counsel of Captivate Network identified three ways that law firms could get his attention, including free CLE training and brand awareness. It was the third idea that I particularly noticed in the 2011 supplement to Bob Haig’s Successful Partnering Between Inside and Outside Counsel, Section 4 at note 4.10. A firm can “’Buy’ the corporation’s attention by making business introductions for the company.”

Its website explains that Captivate is a “media solutions company. Its digital programming and advertising network informs and entertains business professionals at work.” So, if a law firm introduced a company that hired Captivate, the general counsel would take note. This is like investment banks that like their legal department to direct work to law firms that refer them clients (See my post of April 26, 2006: also bankers and real estate brokers.). I noted that the six member management team listed on the website of Captivate does not include the general counsel.

Diversity asked about in RFPs was virtually irrelevant in selection decisions six years ago

The 2011 supplement to Bob Haig’s Successful Partnering Between Inside and Outside Counsel adds a footnote to Section 4 on Selection of Outside Counsel. It cites a 2004 study of in-house counsel by Kirkpatrick & Lockart (now K&L Gates). Regarding diversity in the firms they considered for selection, “the responding corporate counsel acknowledged that diversity was not a key factor when choosing outside counsel, with less than one-half of one percent of their decisions being explained by a firm’s diversity.” The footnote says the data is available at http://www.kl.com/TOM__brochure__2004/media/topofmind__all.pdf but that link does not work. I found a reference to the survey on the firm’s website. It summarized the findings: “In fact, racial diversity ranked below effective communication, working as a team, hourly rates, and working with enjoyable attorneys.

A survey by the same firm two years later seemed to find somewhat more influence (See my post of Jan. 30, 2006: three categories of diversity asked about, and rankings.). It appears still true, from my consulting projects, that diversity efforts and results, along with pro bono involvement, are asked about by law departments far more than the answers influence selections.

Corp. Counsel, April 2011 at 22, summarizes a recent panel discussion on alternative billing. Altria Client Services’ Murray Garnick, an Associate General Counsel, told the audience that “A firm is disguising hourly billing as value billing if it merely estimates the number of hours it would spend on a case and derives a flat fee from that.”

I disagree with Granick if his implication is that something devious or dishonorable happens if a fixed fee derives from an estimate of the amount of hours needed to accomplish the goal (resolution of a case). Estimated hours represent a solid basis for a flat fee. Moreover, a flat fee, however derived, differs enormously from hourly fees. The firm and the client have arrived at a mutually acceptable fee, and therefore value to the client, for services and the firm has an incentive to deliver on budget. No more time and materials, gone are the salad days of cost plus, both parties embark on a different paradigm: a major step toward efficiency and cost consciousness. The clock replaced by a price tag makes a huge difference, and it is irrelevant how the price came to be proposed.