Articles Posted in Outside Counsel

Amidst all the hand-wringing and chest-beating about the “spiraling” cost of outside counsel, a broader perspective would recognize that “all industries that use highly educated labor have had to pay more for their major service providers.” The quote in the NY Rev. of Books, Feb. 24, 2011 at 41, comes from Robert Archibald and David Feldman, Why Does College Cost So Much (Oxford Univ.). College states in the reviewer’s words that “billings by law firms, dental offices, and financial services have rise at the same rate as college tuitions; personal attention by professionals can’t come cheaply.”

Law firms provide face-to-face, individualized, artisanal services. That kind of high-touch care and expertise comes at a cost, a steadily rising cost that exceeds the mundane increases of bread and sundries. If the legal profession has only kept pace with its professional, consultative peers, how much special pleading is justified? Legal advice at a sophisticated corporate level means inherently specific and bespoke counsel, with a price tag like comparable services. We are not alone.

Interviewing law firms recently about the effects on them of a major convergence effort, I heard one partner say “Out of every ten of these programs, five to six never get past the RFP stage.” Few companies that launch an RFP expedition ever actually reach land. “Companies want to reduce fees but in the end and for various reasons they never go forward,” complained the partner. A couple work the program but the rest start a big process that demands time and attention on both sides, but then fail to consummate. A major financial firm, for example, set in train huge efforts by 50 law firms but nothing happened.

Sometimes this happens, I’m sure, but such a high rate of aborted efforts? The projects I consult on carry through, but that may be in some part because of the fees paid, the deeper commitment to the process, or even possibly the consultant’s abilities. Otherwise, all that work on an RFP process, inside and outside, and nothing to show. If this perception of likely fizzle holds among law firms, then the failure to implement exacerbates the propensity of firms to suspect that a favored incumbent has already gotten the nod.

National coordinating counsel handle important tasks. They can help responses to document requests be responded to consistently. They can work with public relations to build a consistent picture for the public of a spate of suits. They can take similar positions in pleadings around the country and can assess the relative contributions of local counsel. They can shift lawyers and paralegals to brushfires as needed.

One of the contributions that I hadn’t realized is that coordinating counsel, alongside the inside lawyer in charge of a family of cases, can pick which ones to fight. With finite resources, law departments can only go to trial on the most likely winners and it helps to have an advisor knowledgeable enough of the range of lawsuits to advise on that call.

A recent article discusses the tensions between procurement (aka sourcing or purchasing) and legal. The sharpest sting comes at the end: most fundamentally Procurement threatens by “openly considering whether to maintain internal lawyers if an outside firm can do better quality work at a lower price.” You, inside lawyer, lose your job if an outside lawyer can do it cheaper and better and we, procurement, will actively search for those opportunities to supplant you.

A stark portrayal, perhaps correct in theory, but from my consulting experience the sourcing folks have gone nowhere near that apocalyptic vision. They are most grateful just to be included as advisors on competitive bidding processes or on evaluations of law firms. It would be a step much too far and treacherous for them to challenge the very jobs done by inside lawyers. Still, the creature with sharp teeth lies in wait as law firms can conceivably replace law departments.

Nathan Myhrvold wrote a fascinating article about what he calls invention capital. The former chief technology officer at Microsoft and now the CEO of Intellectual Vendors, a company based on patents and invention, lays out a remarkable agenda for change in the way he predicts patententable ideas and patents will be funded, commercialized, and enforced.

One small point in the Harvard Bus. Rev., March 2010 at 46, article is that “The number of court battles over patent infringement in the U.S. peaked in 2004 and has since declined.” He predicts further declines in that number.

Assume Myhrvold is correct. The remaining fewer lawsuits over patents may well cost more because other means of avoiding or resolving the dispute have failed. As hard cases make bad law, bad disputes make big bills. Average costs of those patent litigations that proceed might climb even while the total costs of patent litigation to law departments as a whole drop.

A piece in Corp. Counsel, Jan. 2011 at A2, expresses the views of a partner with the Butler Rubin firm. Under “fairness and integrity in billing” he describes and approves a rule that a mentor of his espoused. “If a client questioned a bill, he would tell the client to set the fee and he would abide by the client’s judgment in the matter.”

That acceptance of the client’s perception, where there is a dispute on value delivered, stands out as a wise deferral by the partner. For their part, clients – notably in-house lawyers who supervise outside counsel – should discuss that way to resolve disputes, before they occur. If that method of resolution is baked into the relationship, it is a step toward assuring that clients perceive legal services to be worth the fees they pay.

A supplement to Chapter 4 of Robert Haig’s Successful Partnering Between Inside and Outside Counsel (West) at 4.3 note 1, quotes an article from GC California Magazine (May 14, 2008). The article’s author, a former general counsel, wrote that “[s]ome businesspeople use a rule of thumb, based upon experience in other areas, that the cost of doing something inside the company should be approximately one-third the cost of obtaining the services outside the company.”

If that guideline holds, inside lawyers – at approximately $200 per hour fully loaded in US law departments – would be expected to use outside counsel who bill at something like $600 an hour (See my post of April 21, 2010: little change after inflation over several years in inside full costs; July 1, 2010: $214 an hour fully loaded.). Research shows that $350 an hour after discounts comes closer to the blended billing rate of outside counsel (See my post of June 2, 2010: CTTymetrix Real Rate Report.).

Put bluntly, for those who see the one-third rule as a baseline, either inside lawyers cost too much, outside lawyers bill too little per hour, or the economic relationship contravenes the rule of thumb.

At the Consero 2010 Corporate Counsel Forum, one panel put up a slide with data from the ACC Chief Legal Officer Survey in 2008. The slide showed a dozen outcomes desired by legal departments, which participants in the survey ranked in decreasing order of importance from 12 to 1, the least important. “Discounted fees” (8.7 average rating), “Increased responsiveness” (8.5), “Optimized staffing models” (8.4), and “Understanding of our business” (8.3) rose to the top of the chart.

The survey likely took place in the teeth of the economic collapse. In the last few months of 2008, with the upheaval in our economy and revenue collapsing, legal fees were top of mind so discounts – the easiest tourniquet to apply – came in first. Surprisingly, the next three concerns turn not on dollars but on quality of representation, although staffing models certainly affects the amount of bills also.

At the recent Consero 2010 Corporate Counsel Forum, the slides of one panel included material on how to select a preferred provider network. Included in the mock analysis of several incumbent law firms that hoped to be chosen were the number of full-time equivalent attorneys that had charged time to the company’s matters and the total number of attorney’s that had charged time. The slide then showed the result of dividing FTE attorneys by charging attorneys, called the “attorney efficiency ratio.”

Hence, a firm where two FTE attorneys charged time (presumably based on some average number of hours charged in a year, such as 1,900) but a total of 24 attorneys billed to the client’s matters, the attorney efficiency ratio was given as 0.09 (9%).

The ratio has merit to the extent that it focuses on whether a firm uses a core group of attorneys to perform most of the work. But the ratio suffers to the extent that a firm draws on specialists to contribute their part to analysis and solutions of legal problems.

One reason Rich Baer, the outspoken general counsel of Qwest Communications, disparages alternative fee arrangements (AFA’s) is that law firms might make more money than if they bill hourly. He discusses this point in Corp. Counsel, Dec. 2010 at 68, but I think Baer conflates two ideas. Law firm profits are not the same as law department costs.

It is quite plausible that a law department could pay a law firm less for the same quality and quantity of legal services under an AFA while the law firm at the same time increases its profits. The law firm’s revenue may decline, though that is not a given if its scope of work increases, but with improvements encouraged by the AFA the firm can add just as much to partners’ profit.