Articles Posted in Outside Counsel

A survey of French law departments during the fall of 2010 asked whether they had put in place a panel of law firms and negotiated fee arrangement with those firms. From responses of 91 general counsel, two thirds of them had done so (69%). Convergence and discounts have become a common tactic around the world. Convergence is not a continuous process. From the following question, it is clear that few of the French law departments (17%) plan to reduce further the number of law firms with which they work.

The benchmark survey cited above was conducted by Helene Trink of Profit & Law together with Equiteam, an executive recruitment firm. They invited 475 general counsel (Directeurs juridiques d’enterprises) of which 100 responded. The cited data comes from page 10 of the report.

If one thing costs more than another, similar thing, that fact alone “turns on the neurons in the medial orbitofrontal cortex, an area of the brain associated with pleasure feelings.” Eduardo Porter, The Price of Everything: Solving the mystery of why we pay what we do (Portfolio/Penguin 2011) at 20, 253. Wine, for example, tastes about the same to average drinkers who are not told costs – they like the more expensive wines, when told, even if “prices” are assigned randomly!

The same attraction may hold with expensive law firms or lawyers (See my post of Feb. 17, 2008: research on wine extrapolated to costly firms; and Oct. 19, 2008: neuroscience predicts we will favor expensive firms.). Moreover, well-known firms, those with prestige cachet, also may excite that pleasure area of the brain. The conjunction of prestige and pleasure does not necessarily mean in-house counsel retain firms irrationally, since prestige often correlates to quality. But it does mean that a purely rational calculation of which firm to hire may be hijacked by primitive neural biases.

Georgetown University Law Center’s Center for the Study of the Legal Profession coordinated yet another highly successful conference last week. Among the wide-ranging presentations about trends in the delivery of corporate legal services that Professor Mitt Regan and his colleagues hosted, one featured Lisa Hart, the CEO of Acritas, who shared research data on why law departments retain specific law firms.

The leading reason, chosen by 77% of hundreds of general counsel surveyed, was “Expertise.” Not just brains, Hart stressed, but substantive legal depth. Next came “Service” at 44%, “Relationship” at 29%, “International” in the sense of offices around the world where it mattered at 15%, with “Business Savvy” and “Price” at 14% and 13% respectively at the end.

None of the findings shock and awe us but some points stand out. If the partner doesn’t know her stuff, all the icing doesn’t matter, by almost two to one. Delivery of good work product on time, on the mark and on the budget – Service – makes complete sense as grounds for feeling good about a firm. I am surprised at “International’s” high ranking, and it was the only one to rise over the past several years Hart mentioned, but the score may be due to Acritas’ selection of chief legal officers to survey more than the overall importance to law departments of global coverage. Knowledge of the business seems a bit low, but often external counsel are hired for what they know of the law, not the client. And, as usual, quality of legal service far outweighs economy of cost.

Paul Lippe, muse and master of Legal OnRamp, wrote a piece about the top ten ways to reduce legal costs. Number ten particularly inspired me to write.

“10) Make no small plans. Most cost-savings approaches in law amount to no more than tinkering—arguing whether two versus three associates should attend a deposition, insisting on fewer motions in a case, imposing rules for how expensive a hotel folks can stay at, negotiating the discount from 9 percent to 11 percent. The good news is that you can guarantee if you pursue those approaches you will show results. That’s the nature of metrics—focus on something, and you can show you improved it. But these results will be trivial, and mask the failure to make meaningful change.”

Paul is right that small tinkers make little differences. Rearranging deck chairs and all that. He then plunges in much deeper, and probably thereby sinks most general counsel:

Nat Slavin, co-founder of the Wicker Park Group, wrote extensively on his blog about the Wall Street Journal article (Feb. 23rd, page 1) on $1,000 an hour law firm partners. The article evidently disparaged such high priced legal talent, charging them with “taking advantage of companies.” Nat correctly pointed out that no one forces law departments to pay high rates; they do so because the very tiny number of partners who can bill at that level have earned that demand and respect. His full post is here.

When Nat sent me the link to his post, I wrote back with two observations and have one more. First, thousand-dollar partners are surrounded by a school of minor fish, but they charge time also. That is, you can’t get Chris Expert without a few associates and paralegals thrown in, because leverage means profit for Chris’s firm. To get undivided attention from a star, and only billings from him or her, is indeed a bargain.

Second, those stellar lawyers tend to be so much in demand that they rein in their own time, or at least I think they do. Like the adage, “If you want to get something done, ask a busy person,” partners with more work than time to do it tend to be more efficient. Others, I suspect, spend 15 minutes on the phone but put down 30 “because they know they are premium players.”

A paper on patent litigation in the semiconductor industry includes an unusual metric: “chip design firms enforce roughly 4 out of every 100 patents they own,” a rate described later as comparable for biotechnology firms but somewhat lower than for financial firms. The paper by Bronwyn Hall and Rosemary Ziedonis was delivered at the Searle Center – Legal and Regulatory Studies, Northwestern Univ. School of Law, Nov. 18, 2010, at 3. They studied 136 companies in the semiconductor industry over a 29-year period.

Such a benchmark would be hard to obtain from the law departments themselves but it is discoverable through hard work to link patent filing and patent litigation databases. As with all benchmarks, it gives a general counsel a framework to understand better something about his or her department, in this instance patent litigation brought by it and associated costs.

As I contemplated the enormity of DLAPiper, soon to top the law firm league tables of size, and other legal leviathans whose annual fees exceed $1 billion dollars, it struck me that many corporate clients can only aspire to such earnings. As a proof, in my 2010 benchmark report there were 374 participating law departments that reported their company’s revenues in 2009 as less than $1 billion. In other words, about 40 percent of the respondents, each of whom supports internal lawyers, were smaller than the largest law firms.

How much leverage do companies have over a law firm that earns more than they do? Are demands for alternative fees, discounts, and special offers addressed to deaf ears of giants? Those questions overstate what may be the more realistic point: an individual partner cares deeply about new clients and fees originated, so the matchup is more like company versus individual lawyer. That said, talk about a buyer’s market needs to take into account the relative economic clout of the players in the market.

My friend, Pete Benedetti of doeLegal passed on to me an interesting item. It will rankle general counsel. Legal Week reported that DLA Piper, soon to be the largest law firm in the world, has distributed to partners a 2011-2014 strategic plan that sets a minimum fee requirement for new clients.

What Pete sent says that “New clients will have to commit to a minimum annual legal spend with the firm, understood to be around €25,000 (£21,000) in the first year of instruction for clients of DLA Piper International where there is no potential conflict and €100,000 (£86,000) for those where there could be a conflict. The firm’s US arm is thought likely to implement a minimum billing threshold of $200,000 (£126,000) for all new clients.”

The minimum spend requirement is supposed to reduce the number of situations where DLA Piper finds itself “prevented from taking on large instructions after previously accepting smaller mandates.”

A fascinating categorization by Steven Johnson puts 200 of the most important innovations and scientific breakthroughs from the past 600 years into four categories. In his book, Where Good Ideas Come From – The Natural History of Innovation (Riverhead 2010) at 218 et seq., he breaks them into market-driven and non-market, then into individual efforts or network efforts by a group of people. The result is a two-by-two table.

Inspired, I resurrected twenty seminal innovations and managerial breakthroughs regarding internal legal departments and the law firms they use. My list, very roughly in chronological order, is absolutely a work in process. Some are too minor, I note, and few have a date of origination. At some point I may try to array them as arising within law departments or within law firms and perhaps at the same time place on second dimension of cost affecting or quality affecting, as I define those terms.

1. Creation of an internal legal function, perhaps in the United States for the earliest railroads, banks or insurance companies of the 1860’s (See my post of Oct. 24, 2008: historical references to management of legal departments with 7 references.).

“Twice a year, Pfizer gives each firm a report card – and then grades them on how well they take the feedback.” In roughly those words the general counsel of Pfizer, Amy Schulman, described the feedback her department’s 19 alliance law firms receive – and how they are graded on the way they take the feedback. Mind you, those fortunate firms “get a disproportionate share of her half-billion budget,” so they can quite well afford to put on a grateful face, welcome all criticisms, and earnestly vow to get better.

Even so, the risk of falsity, of smiling agreement outside but possibly seething disagreement inside, makes me wonder about the advisability of criticism coupled with an assessment of how well the firm takes the criticism. If what Schulman actually said (or meant) was that Pfizer watches to see whether the firm takes action to deal with a criticism, that would be fine – but a different blog post. To judge demeanor and receptivity to feedback on the spot honors acting ability more than genuine appreciation of dialogue and a desire for improvement. The quotes, from the Am. Lawyer, Jan. 2011 at 90, are not direct quotes of Schulman but are the editor’s choice of words so they may be misconstrued.