Articles Posted in Outside Counsel

A paper written by Jeff Hodge for Bridgeway, Legal Spend Management: An International Perspective, states at page 13 “since invoices in the EU are considered tax documents, the invoice reviewor cannot adjust them. Any adjustment to an invoice must be made using credit (or debit) notes which are then tied to the original invoice.” This adds some considerable complexity for matter management systems as well as for in-house lawyers who review bills.

It also imposes a layer of value-less document generation and communication back and forth.

This blog has often referred to the fully loaded cost per hour of corporate attorneys. It has also from post to post provided data on the effective hourly rate of law-firm partners and associates. More recent data came as to the latter from Law Practice, July/August 2012 at 46, which provides metrics from the Lexis Firm Insight website. Those metrics say that “median effective hourly rate for partners has declined from $394 in 2009 to $378 in 2011.” The median effective hourly rate for associates has declined from $243 in 2009 to $235 in 2011. Thus, over two years, a drop in outside counsel rates of nearly five percent in nominal dollars.

If it is roughly true that for every partner hour charged there is an associate hour (See my post of Feb. 4, 2007: partner time to other timekeepers’ time.), then in 2011 the combination of those two levels would result in close to a $307 hourly effective rate for outside counsel. Compare that figure to $191 per fully loaded attorney hour for 212 law departments in the United States from the latest data in the General Counsel Metrics benchmark survey. The gap is sizeable, $307 an hour is 60% higher than $191 an hour.

What is even more interesting to me is that the same source suggests that 1,600 chargeable hours is typical pace for lawyers at private law firms. If the law-department fully loaded cost were calculated not on 1,800 hours but on the lower 1,600 of law firms, the internal cost would rise 11% to $212. The difference between that higher cost per hour inside and the $307 external cost, is approximately 45% (See my post of Feb. 17, 2008: 1,850 assumed internal chargeable hours may be too high.).

An article in Law Practice, July/August 2012 at 40, describes “15 proven profitability techniques” for today’s law firms. Two of them raised my eyebrows and should do the same for general counsel.

Under the technique “unbundle operating costs from case related expenses,” the author writes that “clients should be asked to prepay anticipated major cost items, such as expert witness fees, deposition expenses, extensive travel and other case-related costs.” Law departments generally accept being billed directly for some major disbursements, notably expert witness fees, but to be asked to pay for travel expenses, and especially to pay them in advance, should meet stiff resistance (See my post of April 18, 2005: e-billing vendors paid directly by law departments; July 31, 2006: national vendors selected by a law department; Feb. 11, 2007: direct billings to the law department by vendors; Feb. 14, 2007: data on disbursements paid firms or charged through directly; Nov. 29, 2009: direct billings by law firms for disbursements should be considered outside costs; March 12, 2012: benchmark metrics influence by direct payments to vendors.).

Under the technique “New systems, methods and technology” comes this contentious recommendation “Bill appropriately for form documents. You must be paid for development efforts, and it is both reasonable and proper to charge based on what the document is worth to the client, not for the few minutes it takes you to pull it from the computer.” To the contrary, law departments do not subscribe to value billing along these lines. You should not pay for the development time of a form document, whether or not it is available to the firm in software. Others have paid for the firm’s learning curve. Now, the form is an expected enabler, not a profit center.

In Law Practice, July/August 2012 at 14, a law firm consultant describes a “client scorecard.” With it, your law firms might rate you on five categories: “level of cooperation”; “how enjoyable your work is”; how profitable your work is; your relative ability to pay the firm’s fees; and one category one about referrals that is irrelevant to law departments.

Just because your department buys legal services does not mean you can act miserably and niggardly toward the law firms you retain. The evaluations go to this. The first two boil down to “nice to work with.” The next two go to economics. Since companies that sustain a law department can pay legal fees, “ability to pay” has little meaning. Thus, these five categories really boil down to whether your lawyers are for likable, your work is interesting, and your services needed make the firm money. A sensible assessment by firms and a sensible objective for your department.

The legal fees paid by Goldman Sachs in defense of a former board member were almost three-quarters of $30 million; Procter & Gamble picked up the balance. From the same article in the NY Times, June 19, 2012, at B1, Morgan Stanley paid $4 million in the defense of one of its employees accused of insider trading, CA (formerly Computer Associates) paid $15 million, and Enron absorbed a gargantuan $70 million plus. Some of these expenses may be recovered eventually from the employee or insurance.

Companies incur such expenses because their by-laws require them to indemnify board members’ and officers’ legal fees for conduct that occurred while acting on behalf of the company. If the legal fees are charged to the legal budget, then, like the legal fees incurred by independent counsel to the board, they could swamp the GC’s ship that year (See my post of July 25, 2005: costs of Boards retaining independent counsel; and July 25, 2007: payment by a company of Board members’ fees of outside counsel.).

If the legal fees are not applied against the law department’s budget, then total legal spending by the department, such as in response to a benchmark survey, is to that extent significantly understated.

A piece in Met. Corp. Counsel, June 2012 at 16, cites a survey published in December of 2011 by the New Jersey Law Journal. The sentence with the citation says that “54% of law firms have clients who will not pay for the work of first-and second-year associates.” The partner at Gibbons PC who wrote this then goes on to explain the firm’s Apprenticeship Program.

This blog has noted several times the distaste of some general counsel for first-year associates, but not the extension to second years (See my post of May 30, 2005: hiring only partners; Nov. 8, 2005: minimum experience levels for associates; Nov. 19, 2005: USF&G uses only partners; Feb. 8, 2006: no charge by first years; April 30, 2006: no payments for first-year associates; May 11, 2007: such policies re associates; and Nov. 19, 2007: dilemma if law departments ban billing by junior associates.).

A presentation by the President of doeLEGAL, Tom Russo, addressed how to design what he calls litigation spend architecture. On a slide having to do with how to start a matter you have assigned to outside counsel, Russo recommends, “Within five days – outside firm must file [an] Assignment Acknowledgement form.”

I did not hear Russo speak so I do not know whether he embellished or qualified this bullet point, but I have not heard of a requirement by legal departments that outside counsel formally acknowledge that they have been retained. These days, an e-mail should be quite sufficient and that a form does no more than create make-work on both sides.

If you are interested in the full presentation, please write Scott Miller of doeLEGAL.

CPR, the International Institute for Conflict Prevention and Resolution, is a non-profit initiative of general counsel, law firms and legal academics “whose mission it is to install alternative dispute resolution (ADR) into the main stream of legal practice.” CPR has a National Task Force on Diversity. That task force has produced an ADR diversity audit, available from CPR’s website “which companies can use to analyze how their legal work is being performed” by “professional women and minorities in settlement negotiations, arbitration and litigation by outside law firms.”

This note comes from Alternatives, March 2012 at 77. This is the second diversity-tracking package I have come across (See my post of Jan. 9, 2012: Trakit software.).

It is always easier to predict exciting revolutions, sturm und drang, a brave new world, such as in the relations between law departments and the law firms they retain. Seers get invited to conferences, enjoy their names in headlines, relish being quoted – and they might even, sometimes, be prescient. But after the failure of Lehman Brothers threw the U.S. economy into cardiac arrest, despite many forecasts of upheaval in the corporate legal industry, the following years didn’t witness heart-stopping change.

I invite your comments here or by email regarding in the National Law Journal, contrarian to its core. It leads with stable benchmarks and then offers four broad reasons why a much quieter period followed than had been trumpeted.

Inspired by an article in the Economist, June 9, 2012 at 83, on using McDonalds Big Macs to compare international productivity trends and improve on purchase power parity (PPP), I imagined a counterpart for legal services rendered to corporations.

Ten general counsel in each of ten developed nations agree to contribute data. They estimate the fees and disbursements paid a representative, good quality law firm in their country through completion of a (a) single-plaintiff employment discrimination case, (b) lease of a standard office suite in the capital, (c) routine securities filing for a publicly traded company, and (d) a cash purchase agreement of a small company. The goal would be to collect estimates of ordinary, common-as-Big Mac legal services. Combined, that data would permit an index of corporate legal services for each country.

The other piece of data would be the salary plus bonus of a typical law firm lawyer who has been practicing five years. That data would be the equivalent of what McDonalds pays its employees.