Articles Posted in Outside Counsel

My hypothesis correlates size of law firm with average shortness of legal careers. The larger the law firm, the lower the average number of years out of law school of its lawyers. If you hire a 1,000 lawyer firm, all the associates on the matter and the relatively diminished input of the partner drops the average experience level. On the other end, if you hire a small firm, it is likely that a seasoned partner does a large part of the work. Large matters that require leverage should show such a “demographic” decline.

It would not be hard for a large law department to gather data that confirms or contradicts this hypothesis. A group of law departments could pool their data. The next step would be to test the correlation between average legal experience and cost or results. It would not surprise me if the average invoice size rises while the average biller experience drops.

If you follow the star partner, the sun may set. Most in-house counsel will be inclined to follow a well-respected partner who leaves one firm to join another. Few law firms fight that choice, I believe, because the leaders of the firm understand the underlying loyalty to a particular lawyer and that lawyer’s privileged position earned with the client.

The spoke in this wheel is research that finds that the performance of star professionals often declines sharply when they leave firms in which they flourished. This conclusion, from a book review in strategy+business, Winter 2010 at 94, makes the point that expert professionals – law firm partners being good examples, I submit – over-estimate their individual contributions to their success and under-estimate the support of the firm where they practice. They exaggerate their personal skills and devalue the team they are part of and that helped make them good (See my post of June 12, 2005: firms that hire partners expect the book of business to follow; July 14, 2005: being a top performer is situational; Feb. 1, 2007: peripatetic partners; Feb. 17, 2008: ill effects of churn among partners; Dec. 14, 2008: some “firings” of firms are “followings” of departing partners; and April 29, 2009: hire the firm or the partner.).

On the shores of legal management the latest wave of enthusiasm has many project management surfers. The skills required to estimate time to complete tasks, the best order of those tasks, the right people and tools in the right spots, all these are aspects of project management as I understand it. Books are appearing everywhere as well as courses and articles pitched at lawyers. Perhaps that cluster of tools and approaches is the Next Big Thing.

Meanwhile, despite my misgivings when law departments load RFPs with questions that end up making no difference, it seems useful to ask law firms about their investment in project management. More, ask them to give a real example from the past six months. If those responses help choose the better firm, logic suggests that in-house counsel also should learn more about the discipline.

Many companies officially adhere to a policy that “Only the law department may retain external counsel.” The rule generally honored, infractions still pop up here and there. What can a GC do?

Make sure there is a clearly-worded corporate policy easily obtained by everyone in the company.

Continually repeat and explain the policy to clients at all levels (See my post of Oct. 31, 2010: repeat key messages over and over and then again.).

Pareto optimality, roughly, describes a situation in which no one’s position can be improved without making someone else’s position worse. That definition comes from Stephen H. Kellert, Borrowed Knowledge: Chaos Theory and the Challenge of Learning Across Disciplines (Univ. Chic. 2008) at 161. If you contemplate a change in your guidelines for outside counsel, you have not reached Pareto optimality (theoretically) if no incumbent firm comes out worse off and some firms benefit.

A blunt rejoinder could be that this is nonsense, because the benefits and detriments to firms don’t dictate what a law department does. A practical objection would be that you can’t possibly figure all this out. Still, Pareto optimality describes a concept that has some force: you are in the best situation you can achieve (theoretically) if a change to help someone hurts someone else.

This view takes a very positivistic stance, that everything is measureable, almost utilitarian. It excludes some important values, like justice and equality, while giving more than full measure to technical analysis.

An RFP to 20 law firms sounds great – “proposals from that many will give us more insights, more leverage, stronger competition, and a better selection” – but the selection team has almost certainly overestimated its capacity tor manage all of the choices it needs to make(See my post of Nov. 13, 2006: decision difficulties when there are too many choices.). An article in strategy+bus., Winter 2010 at 65, offers a more precise critique. “Psychological studies have consistently shown that it’s very difficult to compare and contrast the attributes of more than about seven different things.”

The point is, if you compare 20 law firms on multiple attributes, including costs, expertise, bench, number of lawyers, diversity efforts, commitment to pro bono, and technology, your team will likely flounder, feel overwhelmed, and punt. The default choice that alleviates the overload of choices, the most familiar law firm or the name brand firm, will probably be selected.

All is not lost. Among the strategies available to cope with combinatorial overload, you can make a first cut based on a handful of most important criteria, you can winnow the number of firms that make it to the final round, you can allocate parts of the rating system to different members, or you can use various decision analysis tools to do some of the heavy lifting.

Payment to a law firm based on the value of what is at stake makes sense at times. An article in Law Practice, Nov./Dec. 2010 at 34, gives several examples of “price as a percentage of a dependent variable, such as an employment agreement, an acquisition or a real estate transaction.” Investment bankers have long worked on percentage fees.

Even if legal services in support of quantifiable activities or transactions – issuance of stock, repurchase of bonds, construction of a building, purchase or sale of goods could be other possibilities – did not have a specific monetary value, it would be fairly easy to create three or four broad categories of values. All severance agreements where the employee made less than $100,000 would be one price; all severance agreements where the employee made more than $100,000 but less than $300,000 would be another price.

A parting point: these arrangements need to anticipate what will be paid if the transaction does not complete.

An article in Law Practice, Nov./Dec. 2010 at 34, mentions several variations on the billable hour, including “daily, weekly and annual rates for individuals and teams.’ My vote against daily rates has already been cast, with later equivocation (See my post of June 5, 2007: daily rates for outside lawyers are not an effective technique; Nov. 24, 2007: sometimes appropriate to ask law firms to bill on a daily or half-daily rate; and May 23, 2007: daily rates for international arbitrators.). Even so, a bit of pondering produced several thoughts about daily rates.

They sound like “take-or-pay” arrangements, meaning the law department either takes (uses) the time of the person or team or pays for it anyway. But does that mean that the lawyers cannot work on other clients’ matters if they are paid exclusively by one?

Like mortgage rates, especially adjustable mortgage rates, the charge for the day, week, or month should decline because of volume, perhaps even by a formula. For an hour, Rees is $500; for a day he’s $3,800; and for a week, a bargain at $18,000. Are daily rates simply computed as discounts from standard hourly rates?

If you ask a law firm to propose a set fee to handle a future stream of your legal services, if they take into account the range of the possible mixes of those services, if they conjure up all the exceptional matters and cases they might handle, they will inflate their fee to cover themselves from volatility. Their fear of beta, the degree of flux of the future, drives up their fee, “just in case” (See my post of May 16, 2006: law firms also worry that clients will over-reach if they get a fixed fee.).

Contrariwise, to the degree you can shrink the firm’s perceived beta, the fee you negotiate will shrink (See my post of April 17, 2006: beta of a group of cases; April 27, 2006: beta and levels of risk; May 17, 2006: beta in the stock market as a concept; Feb. 19, 2007: standard deviations as measure of volatility; and May 8, 2007: alpha and beta figures for outside counsel rate increases.).

One way to abate beta is to state assumptions. Propose based on “No more than one SuperFund investigation during the two years” (See my post of Oct. 31, 2005: state boundary conditions.),

The Chairman of Shook, Hardy & Bacon, a 500-plus attorney firm with revenues of more than $1 billion, wrote about alternative fee arrangements (AFAs) in Law Practice, Nov./Dec. 2010 at 29. John Murphy noted that one-third of the firm’s revenue, notably in its litigation defense practice, comes from AFAs.

What made his piece notable, however, was not $300 million in AFAs but a point he did not think to emphasize. When asked whether clients are increasingly requesting alternatives to standard rates, Murphy agreed. But listen to his quote: “I would say that 100 percent of the time clients include a section in their RFPs that asks if responding law firms would consider an alternative means of billing their time.” (emphasis added)

How subservient, how groveling, how passive! “Would you deign merely to consider” suggests a power imbalance miles from “it’s a buyer’s world.” RFPs should boldly mandate: “Describe for us specifically three alternatives to charge us that do not depend on hours worked times standard or discounted rates.”