Articles Posted in Outside Counsel

A piece in Managing Ptr., July-Aug. 2010 at 49, explains how a major British law firm places its clients into a 2 x 2 portfolio matrix. The matrix sorts clients by attractiveness, which means either to strategically invest in them or simply maintain them, and by whether the firm has a competitive advantage relative to other law firms in serving them. The implication is that the firm will drop or stop investing in the less attractive clients or those that seek non-strategic services of the firm.

If law firms actually prune such clients, we should stop thinking of convergence as being driven solely by aggressive law departments. If law firms deliberately end some representations or milk them as cash cows, then the much touted reduction in the number of law firms retained by law departments represents a winnowing process at both ends of buyer and seller.

I doubt that individual partners in law firms willingly surrender any amount of work for any client so that this is more of a theoretical possibility than an actual cause of reductions in the rolls of clients.

A panel of five general counsel, written about in Strategies, June 2010 at 19, proclaimed the death of traditional techniques to find outside counsel in a particular area or to validate a referral. “All five general counsel agreed that Google searches and a robust online presence have essentially replaced legal guides and directories.”

Online information stays more current than hardcopies. Nor is it focused into a particular style like a bound, physical directory. Search terminology is unlimited, whereas a published taxonomy necessarily constrains any guideline or directory (See my post of April 4, 2008: will legal directories diminish the value of inside counsel.). Print can’t keep up with digital in terms of flexibility, speed, and customization.

Sharp Legal Brands – Global Elite (2009) from Acritas at 37, summarizes some of the results of a question about procurement’s involvement when a law department selects law firms. Notably, in most of Asia, involvement of procurement is significantly higher than in the rest of the world, Japan excluded.

Second, Europe and its law departments march with procurement considerably more than in North America. Third, there are differences between industries that are quite significant. For example banking clients use procurement quite a bit more than do manufacturing clients

These findings add to my commentary about legal departments and the support they obtain from the sourcing function. I have previously collected blog posts on that topic (See my post of March 1, 2008: procurement with 17 references.) and have accumulated several more since then (See my post of Aug. 15, 2008: four uses of procurement by law departments; May 22, 2009: specialized blogs on procurement/sourcing; July 4, 2009: seven suggestions for sourcing and procurement to get legal on-board; Aug. 10, 2009: eight myths procurement professionals harbor about US legal departments; Oct. 7, 2009: procurement may bring negotiating skills to the table; Dec. 6, 2009: procurement needs to team with the legal group; and April 13, 2010: procurement stays away if your costs are under control but they can help on ancillary services.).

Managers of law departments take it on faith that alternative fee arrangements (billing terms other than straight hourly, AKA AFAs) at least result in better value for money spent if not reduce total external expenditures. Perhaps that credo is illusory.

According to Managing Ptr., July-Aug. 2010 at 14, and an international survey of law firms by Kerma Partners, “The majority of firms view AFAs as being just about as profitable (within a 10% variance in either direction) than (sic) hourly fee arrangements. One-third deem AFAs to be less profitable by between 10% and 25%, and only 8% deem AFAs as being at least 10% more profitable than hourly fees.”

Law firms should know about their own profitability, so these findings should douse some of the cost-saving claims put forth for AFAs.

It is frustrating to lack consensus on such a basic fact as the percentage of fees billed by law firms that are not based on hourly rates, i.e., alternative fee arrangements. AFAs incite a huge amount of publicity, but definitions of it vary, measurements use different methodologies, and interpretations rely on ideology more than mathematics. AFA foxes elude the benchmark riders.

Another batch of numbers arrived recently. Kerma Partners surveyed UK, US and European law firms with 25-300 partners. They wrote in Managing Ptr., July-Aug. 2010 at 14, that “A third of respondents estimate that 26-50% of their work is now on an AFA basis, while another third estimate this to be 11-25%.” The final third must use AFA’s for 10% of their bills or less.

This finding moves around quite a bit. The article doesn’t define the term “alternative fee arrangement” as used in the survey. It does not hint at differences between law firm practices in the three very different regions; the size distribution of the law firms isn’t mentioned. It never considers whether the “estimates” come close to reality or not. We can tell nothing about whether a few kinds of services account for most of the AFA deals or whether they apply across the board.

Sharp Legal Brands – Global Elite (2009) from Acritas at 28,listed eight key service attributes of law firms and asked its hundreds of respondents to rank them. Around 3,000 GCs and other senior buyers of legal services weighed in and by a clear margin, the least important of the service attributes pertain to cost. (Pricing is still important but that term deals more with alternative fee structures and value for money.)

These law departments steadfastly and clearly rate as significantly more important a firm’s speediness, clarity of message, familiarity with the client, and other non-cost behaviors. Better a fair price for good service than a good price for fair service.

One chart in the excellent report by Acritas, Sharp Legal Brands – Global Elite (2009) at 26, gives scores from 12 industries for their law departments’ satisfaction with their most-used firm. The data includes both the average score and the standard deviation of the scores for each industry. What impressed me is that the average scores across nearly all of the industries are remarkably similar, that is, within .1 of the midpoint score. This suggests to me that no matter how variable industries are in their legal intensity, overall satisfaction is remarkably similar.

The standard deviations, however, vary considerably more, which as the report indicates suggests disparate satisfaction levels across industries. The report does not interpret this curious finding (See my post of Aug. 10, 2009: standard deviation with 9 references.).

One of the questions covered by Acritas in its thoughtful Sharp Legal Brands – Global Elite (2009) at 18 is “What does the term ‘value for money’ mean to you?” They analyzed the answers to the open-ended question from 476 respondents out of “1,000 interviews with the largest and most influential law firm clients across the globe.”

Of the five definitions given the most frequently, only two of them explicitly referred to the amount paid the law firm. One refers to the efficiency of the service as determined by delivery on time. Two others emphasize the quality of the service. In other words, the monetary part of the value assessment was less common than promptness and excellence (See my post of Aug. 21, 2009: value compared to fees paid with 22 references; and Oct. 21, 2009: law firms and the value they deliver with 24 references and one metapost).

Sharp Legal Brands – Global Elite (2009) from Acritas at 1 contains a scatterplot that shows the “average hourly rate for partner at Most Used Firm.” The median of those rates is around $510 an hour. That figure may be informative as far as it goes but it seems quite likely to me that the most used firm is the one paid the most during a year and that firm is likely to be representing the company in significant litigation. In major litigation, while cost does factor in, companies are less sensitive to the billing practices of firms who defend them from enormous liabilities. Or the highest-paid firm might have billed heavily for its work on a major acquisition, which again pays less attention to the size of legal fees.

If the “Most Used Firm” were the firm that is most commonly turned to, however, the results might be more representative of partner rates at firms generally paid. The most commonly used firm, as compared to the firm paid the most money would have a lower average hourly rate for its partners. Were this ambiguity resolved, it would make quite a bit of difference in how we interpret the median hourly rate.