Articles Posted in Outside Counsel

“Independent internal investigations are very frustrating for management and in particular for general counsel. Not only can they not be involved, very often the outside lawyers are being paid out of the general counsel’s budget.” The quote is from Dan Bookin, an O’Melveny & Myers partner in Corp. Bd. Mbr., First Quarter 2011 at 61.

A law firm hired to conduct a sensitive investigation probably reports to a Board committee. That arrangement brings benefits (See my post of March 9, 2010 #4: independent counsel impresses regulators and preserves attorney-client privilege.). The rationale for the engagement of independent investigative counsel may be different from other reasons why directors hire their own counsel (See my post of Aug. 3, 2009: independent law firm serving a Board of Directors with 9 references.). In either case, the general counsel may be helpless to control free-wheeling spending that clobbers the law department’s budget.

A gathering of inside and outside counsel tackled some of the issues related to value by law firms in litigation, including Requests for Proposal sent to them. An article in the ACC Docket, May 2011 at 130, presented four criticisms, each of which motivated me to respond.

“Clients may use [RFPs] to leverage current relationship firms with the threat of sending the business elsewhere.” Yes, and what’s your point? An RFP process opens up competition for work, it tells incumbent firms not to feel entitled and complacent, and it “threatens” a change in where and how litigation services are done. Exactly, so why are law firms whining about this?

“Firms may not intend to do what they bid.” If at all common, this is a shocking admission of dishonesty. Deliberate deception destroys the value and credibility of RFPs. Any law department that concludes a law firm lied about what the level of service it would provide should fire the firm.

No, I say, although a purist would say yes.

In the 2011 supplement to Bob Haig’s Successful Partnering Between Inside and Outside Counsel, the Section 1:2 addition (at 4) mentions that “Enron’s principal outside counsel [Vinson & Elkins] in the year 2000 reported that seven percent of the firm’s revenue was derived from Enron.” The authors extend the point to note the issue “at what percentage of the firm’s revenue is the firm truly independent.”

When fees paid by a major client reach a sizable-enough level, firm management ought to be concerned, if only for the financial stability of the firm. Whether the general counsel of that client should worry, I doubt. I haven’t heard of a general counsel who frets that a primary firm paid millions of dollars might have lost some edge of objectivity because it is beholden (“tethered by tender”). That the firm is so reliant on the flow of fees it loses some at-a-distance professionalism and toughness – this doesn’t come up. Indeed, capture helps the capturer.

An article in the ACC Docket, May 2011 at 58, suggests that law departments might enlist some support when they negotiate fees with firms on major matters. As stated, “Consider whether to have your CFO meet with M&A counsel to discuss anticipated legal fees.” The authors suggest that the CFO might be more able to put the “hammer down” for cost controls.

The underlying assumption bothers me. If the general counsel can’t take a tough but fair stand on external counsel costs, if the responsible inside lawyer doesn’t know more than the CFO about incentives and drivers of cost and value to be delivered by a law firm, if the in-house legal team can’t craft a suitable billing arrangement, how can a finance person do better? It’s shades of procurement and “we can help you negotiate even if we know nothing about law.”

It was the pusillanimous tone, the tenor of the part on outside counsel expense, the obsequiousness assumed for in-house lawyers that bothered me. An article in the ACC Docket, May 2011 at 56, entitled “100 Issues to Clarify with Your M&A Counsel” sketches a two-lawyer department engaging outside counsel for a potential sale of the company. That’s a big deal, to be sure, but cost discipline doesn’t therefore evaporate.

The article hints at a competitive process by which the department selected M&A counsel (see issue 16 about bait and switch) so what perturbed me were the dozen issues under “Legal fees and expenses” that seemed to come into play only after the selection. The points covered make sense, but the subordinate, beseeching attitude may appeal to law firms but should repel law departments.

Here is one example. “Understand whether M&A counsel would consider discounting standard hourly rates.” Would consider?? How about: “Tell counsel the tiered discount rate they will grant.” Or another timid suggestion: “Understand whether M&A counsel would consider any alternative fee arrangements.” Why so mealy-mouthed? Why should the seller of services, commonly provided services, call the shots? Tell them one-third of their fee depends on your evaluation of their performance. Later in the listing: “Consider whether to have M&A counsel provide a forecast or budget for legal fees to be incurred …” No, stand up and decree “You will submit a bi-weekly budget in the form attached to this RFP.” And one more without boldness. “Discuss with M&A counsel whether it or the company should consider retaining temporary or contract attorneys as a way to reduce fees and expenses.” Stop groveling and parlaying! “You will use the X Agency for all temp lawyers and only temp lawyers will do document review.”

With all the hullaballoo about fees – discounts, fixed, blended, effective, contingent – we have overlooked a much more significant lever to shift costs: the law firm and its staffing and billing practices. A firm’s number of lawyers and its billing ethos go together; bigger firms have a bigger cars to move, so to speak, and therefore press harder on both the staffing and billing pedals.

I am gravitating toward the belief that law departments need to change firms, not fees, to really move the needle. Put metaphorically, a fixed-fee arrangement with an expensive firm is hoping the emu can high jump. Hourly billing by a frugal firm is not worrying about a hummingbird over-eating.

This is a far out idea, so you level-headed types can pass on by.

I unleashed the LinkedIn Labs app for maps on my own network of about 400 people. A nebula blazing with eight colors came back that showed, I think, each contact in my network and their connections to my other contacts. The size of their node indicates how many cross-over contacts I have as in where my contacts overlap. My node sits right in the middle. The map is quite beautiful although I am at a loss to understand why the software grouped people the way it did.

Now, here’s the futuristic part. If a law department tracked when its lawyers called upon any of its law firms, software such as this would vividly depict the law firms that serve the department broadly, the firms that assist only a single lawyer, and everything in between. Over a multi-year period, with color codes to match practice areas, the map of retentions might be insightful. If the thickness of the line corresponded to fees paid, or if the volume of each firm’s node did that – like cities on maps are scaled to their population, even more information would be displayed visually and graphically.

General counsel who are inclined to transfer matters and service arrangements handled by a partner who moves to another firm should think twice. That would be the advice of Boris Groysberg, Chasing Stars: The Myth of Talent and the Portability of Performance (Princeton Univ. 2010) at 8. Based on an exhaustive study of stellar equity-research analysts, Groysberg concludes that “exceptional performance is far less portable than is widely believed.”

The knowledge- and relationship-intensive role of a law firm partner who gives good advice and produces excellent legal services may be assumed to reside mostly in that persons head and personality. Not so, according to Groysberg, since “the exceptional performance of stars at their prior employer appears to have been more firm-specific – more dependent on the firm’s resources and capabilities – than is generally appreciated.” Groysberg would give more weight to the contribution of the law firm as a whole than to the partner as an individual.

Than Luu of the Public Law Research Institute published a very informative paper in 1995 on much touted “the litigation explosion” (See my post of May 14, 2005: other findings from Luu’s paper.). Among other points he debunked the unfounded claim about hundreds of billions spent each year on US tort litigation.

Additionally, in the course of his thoughtful and well researched paper, he mentions three cost-control steps that show the historical roots of methods often talked about today as fresh and innovative.

Budgets. In 1991, two decades ago, the Bank of Boston “created a formalized pre-approval process in which the law firm was required to estimate the cost of the services it was to provide for each matter. In terms of billing, the law firm was required to submit its bills monthly using the Bank’s format, noting each attorney and legal assistant by name, the hours of each timekeeper, and a detailed description of the services rendered. The bills were then compared with the estimates originally proposed by the law firm. If the law firm exceeded its proposed budget, the firm would not be paid.” (citations omitted)

“Would it kill you to say you’re sorry?” blazes the huge type at the top of the Taco Bell ad. Never naming the law firm, the ad starts “The law firm that brought false claims about our product quality and advertising integrity has voluntarily withdrawn their class action suit.” No payment by Taco Bell, no changes to products or ads, no settlement agreement. Vetted by the law department for sure, this is litigation prevention with a vengeance. A flame in a newspaper ad as a litigation management tool!

A decision by a judge makes in-house litigators feel good; a case dropped during months or years into the action makes them feel better; a withdrawal so humiliating inspires a trumpeting ad in the New York Times!

Here is the close of the ad. “As for the lawyers who brought this suit: You got it wrong, and you’re probably feeling pretty bad right about now. But you know what always helps? Saying to everyone, ‘I’m sorry.’ C’mon, you can do it!”