Articles Posted in Outside Counsel

Consultant Jeffrey Brandt in Law Tech. News, Nov. 2010, at 30, gives three reasons why Richard Susskind’s message of change is “finally hitting the windshield of firm leaders.” Metaphorically in synch, my reaction to each is to squash his impressions.

“Law firms no longer can control how they will interact with their clients.” I think Brandt means that in-house counsel instruct law firms much more these days so law firms have lost their edge. To a point, I agree. I do not agree that law firms have lost control. For the largest say in how they provide services, law firms remain very much in the saddle. They choose the staff, they decide on the order and level of work, they shape the strategy, and they produce deliverables. Only at the edges and only with constant exertion do in-house lawyers alter the traditional flow law-firm-determined work.

Second, “the kinds and types of work that is viewed as commodity is expanding.”. Always, I counter, legal services have shifted down the spectrum from bespoke and creative to standardized and commoditized to the eventual point where the work doesn’t even need lawyers. Title searches, notarization, much of workers’ comp, and ISDA agreements come to mind. He cites e-discovery services as molting in this way. Brandt does not intend to say that the pace of this familiar transition is picking up, I suspect. If he makes much of a process underway for years and years, then we are at no inflection point.

One threat law departments always raise when the discussion turns to whether clients should be able to retain lawyers on their own – “Manager X might hire his golf club buddy.” I wonder about this worry, since Manager X has a bottom line to protect, and if golf buddy over-charges or under-delivers, Manager X may end up finding professional fulfillment elsewhere.

Granted, Manager X may not be able to evaluate the value delivered by golf buddy as well as an in-house lawyer might, but inexperience presents a different objection than cronyism. After all, in-house counsel themselves are not immune from favoritism (See my post of Oct. 5, 2010: some ideas for how to base retentions on merit.).

Law departments that converge – significantly shrink the number of law firms used – can take pending cases away from the firms that don’t make the short list or they can bar in-house counsel from giving them more. The former raises transition fears; the latter stretches out the payoff of convergence and may increase fees. Some law departments have engineered wholesale transfers of cases to the new firms. If you let firms handle cases to conclusion even while they know they will get no more work from you, it would not surprise anyone that bills might increase. You certainly can’t kick off the better rates, discounts, or other benefits offered by the new panel firms.

Of course, where a non-panel firm handles a number of cases, a general counsel can decide on a mix of the two choices. I lean toward transferring cases to the new firms, all but those on the eve of trial, and obliging the new firm to cap the investment they will make in coming up to speed.

At first blush, it makes sense that in major litigation a law department might unleash one firm to fight tooth and nail and coax another firm to sing soothingly, calm the savage beast, and seek common ground for settlement. I have myself suggested the advantages of such a good-cop bad-cop approach, but not for several years on these pages (See my post of Oct. 20, 2005: a firm to pursue settlement; July 21, 2006: team with resolution counsel; and Aug. 2, 2006 #3: parallel settlement counsel.).

The Jekyll and Hyde style makes rare appearances, I’ll wager, and for good reason. Here are some of the drawbacks.

Cost, since the settlers have to be in tune with the attackers, and the reverse, which runs up fees;

The IBA Daily News, Oct. 5, 2010 at 1, quoted a panelist from a major New York firm on his firm’s view of discounts. “We look at hourly rates subject to discounts on highly leveraged work. So on an antitrust investigation with one partner and 20 associates, we would heavily discount the associates’ rates,” he said.

Indeed. Hordes of newbies invites discounts, if not complete write offs. The quoted speaker states the obvious.

But if clients believe that an individual partner, working solo on a matter, charges too much, a request for a discount could well be in the offing. The value to the client drives the severity of the discount requested. If the partner resists and accepts the potential loss of the client, that is the prerogative of the partner and the partner’s firm. That’s the way a market works.

As reported in Corp. Counsel, Nov. 2010 at 18, about British Airways, “70 percent of the London-based airline’s legal work is conducted under fixed fees.” If you have historical data, if you bundle enough work on prospect, and if you craft the process and arrangement intelligently, you can enjoy the benefits of both predictable spend and a different service paradigm.

Maria de Cunha, BA’s general counsel, said on a panel that “[Fixed fee arrangements] require having invested time in a firm and that they’ve invested time in you, as both sides need to know what they’re getting for their money.” True, familiarity helps, but law departments can still strike mutually fair deals with firms they have never retained.

When I give presentations on outside-counsel cost control methods, I often commend law departments that do not pay full rates for first- and second-year associates. A hand usually shoots up and the person asks “But how will the next generation of lawyers learn?” My response is that shareholder dollars should not go to training law firm lawyers.

On-the-job, on-the-tab training for junior associates should not be a concern of corporations trying to compete. If you want value from your law firms, pay only for the work of those who can deliver it – their productivity and quality today adjusted for price – and let the firms worry about how they will keep their pipeline of talent flowing tomorrow.

Maybe my math is wrong, but Royal Dutch Shell appears to have uncapped a gusher for eight law firms. A paragraph in Corp. Counsel, Nov. 2010 at 18, states that the 800-lawyer in-house team recently “cut its list of outside firms from 60 to just eight.”

If we apply the rough rule of thumb of $600,000 per inside lawyer spent on external counsel, that pegs Shell at about $480 million externally. Earlier, it quotes the general counsel as saying that the energy giant spends half its total legal budget on outside counsel. Given that Shell’s worldwide revenue was about $458 billion in 2009, at total legal spending as a percentage of revenue of 0.20% (a plausible figure for such a huge company), an estimate of $900 million in total legal spending seems quite conceivable and around half of that comes to a figure close to the $480 million estimated above.

What is virtually impossible to conceive is that eight firms divide a Fort Knoxian pie of roughly that value, that they average a stratospheric $50+ million a year ifrom Shell! How can a law firm that barrels along with in that munificence hold itself out as independent?

Maybe my math is wrong, but Royal Dutch Shell appears to have uncapped a gusher for eight law firms. A paragraph in Corp. Counsel, Nov. 2010 at 18, states that the 800-lawyer in-house team recently “cut its list of outside firms from 60 to just eight.”

If we apply the rough rule of thumb of $600,000 per inside lawyer spent on external counsel, that pegs Shell at about $480 million externally. Earlier, it quotes the general counsel as saying that the energy giant spends half its total legal budget on outside counsel. Given that Shell’s worldwide revenue was about $458 billion in 2009, at total legal spending as a percentage of revenue of 0.20% (a plausible figure for such a huge company), an estimate of $900 million in total legal spending seems quite conceivable and around half of that comes to a figure close to the $480 million estimated above.

What is virtually impossible to conceive is that eight firms divide a Fort Knoxian pie of roughly that value, that they average a stratospheric $50+ million a year ifrom Shell! How can a law firm that barrels along with in that munificence hold itself out as independent?

Recently, the general counsel of two different legal departments have described their departments’ practice to send law firms an engagement letter for each matter. I scratch my head and wonder how that benefits the department (See my post of Feb. 20, 2007: engagement letters with 5 references.). Scratching in vain, I recommend doing away with the tradition.

To abolish engagement letters is not to abolish the obligation to send the partner documents and matter-specific information. Outside counsel must have what they need to do the job. Email and scanned documents can often and easily do that. What’s abolished is the template letter – inevitably revised by individuals and practice groups – with its standard recitation of expectations and obligations, all of which should be covered by outside counsel guidelines. If your department has a “master service agreement” in place with a law firm, viz., an outside counsel guideline agreed to by the firm, there should be no need for any other formal correspondence of retention.

Pedant and word-junkie that I am, my final chirp is that law firms send engagement letters, law departments send retention letters. The two terms are muddled completely.