Articles Posted in Outside Counsel

Two years ago I catalogued ten reasons not to stoop to competitive selections of outside counsel (See my post of Oct. 10, 2008: reasons to oppose competitive bids.). Still strongly in favor of that method, I recognize that opponents might put forth additional reasons. Perhaps in a follow-up post I will counter-argue.

1. The process risks disclosure of too much sensitive information about the company’s external counsel spending and legal profile.

2. Responses from the firms, while proclaiming uniqueness, all sound about the same. Marketing polish has homogenized proposal material.

The always-stimulating newsletter of Laurence Simons reports that UK firm CMS Cameron McKenna has unveiled a “new marketing campaign [that] includes fixed fee options, discounts for placing all your legal work with the practice and, perhaps most frightening of the lot, an invitation to ‘pay what you think the work is worth’ (our apologies to readers of a nervous or sensitive disposition for highlighting this).”

The newsletter then hearkens back to the similar offer of the band Radiohead (See my post of Nov. 16, 2009: pay us what you think the music was worth.). The comparison is humorous but not really on point. The ultimate value billing is actually value paying, and both payors and payees should experiment with the technique.

In-house managers of outside counsel want as few lawyers as possible at a firm doing their work. The benefits of a core of dedicated lawyers are well known: familiarity, and competence, confidence. Work with a small group and you work more effectively (See my post of Aug. 8, 2006: core staff with 6 references; and July 17, 2008: core team with 11 references and citations to 7 earlier; and Dec. 27, 2008: timekeepers with 18 references.).

At the same time, with a pull from the opposition direction, legal departments face the need for continuity and new blood. Departments need bench strength at their primary firms so somehow the core team needs to admit newcomers. The tension boils down to the question of who pays for training backup lawyers so that they can fill the shoes of the core team members.

Ultimately, the law firm should bear most of that cost of training, not the client. Attrition is high at law firms and the client may never recover its investment.

Budgets of time – two months to complete the debt offering – may be less susceptible to gaming and slippage than budgets of cost – $85,000 to complete the debt offering. On the other hand, cost is more in the control of the firm than time.

The mean variance from all the initial budgets submitted by a firm over a period of time should be close to zero. Taken as a group, the amounts by which a firm exceeds the initial budget should equal the amounts by which it comes in under budget. Budgets should not be baselines simply for additions.

Budgets and their assessment should vary by the size of the total estimated spend. Thus, larger matters have larger budgets and the accuracy of budgets should be judged by the percentage of matters that end up within the range. For example, a $500,000 budget estimate might have a 5 percent collar of $25,000, so that if the firm completes the matter anywhere between $475,000 and $525,000, it has “hit the budget.” For more on matter budgets (See my post of May 21, 2007: matter budgets with 9 references; and May 31, 2010: padded budgets by outside counsel on matters with 7 references.).

It is too easy to adorn RFPs with questions that do not in the crunch make a palpable difference to the in-house counsel who evaluate the RFPs and choose firms. Experience, depth of talent, subjective impressions of quality, and cost structure easily and consistently push other considerations out of the ring.

Even so, as I read in the ABA J., Sept. 2010 at 27, about threats to the network security of law firms, the possibility came to me that law departments will start to ask about defensive measures taken by firms. A question to firms that receive RFPs about steps they have taken to protect the client’s data from hacker attacks might provide a basis at the margin for choosing one firm over another.

Although much touted, serious doubts exist in my mind about the efficacy of so-called institutional knowledge of law firms. I have no doubt that individual partners who work on a series of matters over several years with a company come to understand chunks of the company’s history, culture, senior leaders, and legal positions. Relationship partners particularly lay down relatively deep layers of knowledge (See my post of July 26, 2008: relationship partners with 8 references.). Likewise, core teams of lawyers will build up some familiarity as long as they continue to serve the client. The half-life of that knowledge is short (See my post of Aug. 8, 2006: core staff with 6 references; and July 17, 2008: core team with 11 references and citations to 7 earlier.).

These are, however, individual brains that store that experience and understanding; the law firm as an entity barely records or makes available the mostly tacit knowledge. If a handful of human beings possess the knowledge, not databases of systems in law firms or wider networks of staff, then a misleading image entrenches itself when we speak of firms’ institutional knowledge (See my post of March 15, 2006: the shibboleth; Dec. 6, 2006: retrograde effects of institutional knowledge; Feb. 1, 2007: claim of institutional knowledge at law firms, yet mobility, shift of practice, and retirement of partners; Feb. 6, 2007: RFP evaluations need to focus on actual staff, not amorphous firm knowledge; Feb. 17, 2008: loss when partners move from one firm to another; Nov. 19, 2009: transactional cost economics takes into account institutional knowledge;

In-house counsel, individually and as a department, accumulate vastly more institutional knowledge about the client than any law firm. That insight into and historical experience with the executives and historical path of the client constitutes the strongest value proposition for inside lawyers.

I am not trying to provoke. My logic is that partners may sense that the less effective a legal department, the more it needs outside legal assistance. Obviously, lack of internal capability in specialized areas of law results in more reliance on outside counsel. But even lack of internal operational effectiveness triggers a similar result, since lower internal productivity means less time for oversight of outside counsel, less opportunity to learn developments in the law, less capability to cope with surges of work, less of a stock of tools to serve clients.

Ineffectual, poorly-managed departments can cause what Ross Perot dubbed (for NAFTA) “the great sucking sound” of inhaling hours of outside counsel assistance. Beneficiaries of that need, why would a relationship partner want the client’s managerial fitness to improve?

A book review in the Admin. Sci. Q., Sept. 2003 at 525, praises Emmanuel Lazega, The collegial phenomenon: the social mechanisms of cooperation among peers in a corporate law partnership (Oxford 2001). The review raised the question for me of how sensible is it for lawyers in a legal department to think in terms of “the XYZ firm.” In-house counsel broadly and freely generalize – “the Morrison firm does this or that” – but using a term for lots of disparate parts may lead to erroneous thinking.

That unit of analysis, an entire law firm, may be far too broad. For example, if you reduce the number of law firms by half but triple the number of partners that your in-house counsel must deal with, that result erodes the presumed benefits of convergence. True, partners of the same firm should bill with/ consistent formats and methods, but that does not always hold true. A more insightful level of analysis might be the number of practice groups retained or even the number of partners paid. Firms are far from monolithic.

Corp. Counsel, June 2010 at 72, explains that Xerox farms out the work on its 1,000 patent applications to several law firms (See my post of Aug. 17, 2010: HP decides to move patent work in-house.). “When Xerox needs to pick a firm to handle a patent application, it looks at firms’ recent fees per event.” It is a plus for a firm to have charged the tech giant for fewer “events”.

This may mean that the company has set fixed prices or ranges of prices for various typical events in the patent-application process. Fewer events done by a firm, on average, translates to more efficiency and lower costs. For legal services that have well-known steps (events), costs and numbers of events start to converge over a number of matters. A law department can manage its expenditures through either method.

Investment bank fees and elite law firm fees share a trait: altitude. In fact, the British competition agency, the Office of Fair Trading, has started an investigation into investment bank fees for equity underwriting. The Economist, June 19, 2010 at 80, takes a look at the inquiry and offers some ideas about the fee resiliency of brand name firms in the US. Fees are high but not because there is collusion among law firms. Industry profits are too “lumpy” – irregular – for the market to be readily carved up. Nor are their risks taken higher than other firms’.

The explanation, according to the Economist, may lie partly with buyers. With one or two words replaced, this quote hits home: “Heads of big [law departments] have a habit of spending shareholders’ money a bit too freely when they want to [fill in the blank for defend major litigation or complete and acquisition].” That means, for significant legal representations, general counsel often pay over the odds.

Let’s switch another word or two from the article: “Like other professionals, [brand-name law firms] tend not to compete on price lest customers interpret fees as a sign of poor quality.” The need for the prestige firm is rare; the willingness to pay above top dollar if needed is common. Pure and simple, it’s a classic principle-agent problem of freely spending other people’s money in part for your own advantage.