Articles Posted in Outside Counsel

An article quotes Susan Hackett, ACC’s general counsel, on “value-based” billing. Hackett says that “surveys show the average client laying out between 15% and 30% of their legal spending this way.” The Economist, July 24, 2010, at 72, does not elaborate, but I doubt very much that the figure is so high. Not if value-based billing excludes discounts.

If we had data from a representative sample of US legal departments, I would go all in that close to 90 percent of all fees paid by them to law firms are based on full or discounted hourly rates. Bills paid by law departments based on value delivered are rare exceptions that prove the rule.

I have had little to say over the years about malpractice (See my post of Nov. 8, 2009: malpractice of law firms with 8 references.). Mostly, it has seemed to me that companies with legal departments hire capable firms and professional negligence by them rarely happens. Perhaps my belief is quite mistaken.

An article in Law Practice, July/Aug. 2010 at 31, makes clear that law firms of all sizes, even large firms with more than 100 lawyers, “face more or less the same type and proportion of legal malpractice claims.”

A column chart shows four kinds of legal malpractice claims that are filed against large firms, based on data from 16,703 claims reported to LawPro between 1999 and 2009. “Intentional wrongdoing” as about 8 percent; “administrative errors” about 17 percent; “client relations errors” about 40 percent; and “substantive errors” about 35 percent. The chart and article do not indicate how many claims were made, only the allocation by the four types.

An Economist article, July 24, 2010, at 72, steps into the world of law firms billing by the hour. The final paragraph suggests that law firms lose much of their worked time because of their “tired and overworked attorneys who cannot keep track of every piece of work they do.” Sob (See my post of July 12, 2010: significant imperfections in time logged by outside lawyers.). To the rescue – but to the alarm of legal departments – comes software from a firm called Chrometa.

Chrometa’s software “automatically tracks a lawyer’s computer usage, showing how much time she has spent on which e-mail, document or spreadsheet.” I have my doubts, if only because software tells me how long readers spend on my blog pages, and sometimes it is quite clear that they have gone to lunch while the page was left up on their monitor. And what if the overworked lawyer uses double monitors?

One suggested role for an internal auditor of a legal department involves reviewing and monitoring legal invoices. A recent article from Compliance Week (July 7, 2010) by José Tabuena, senior vice president of governance and compliance with PhyServe Physician Services, recommends that the auditor consider “basic controls,” such as billing software, law firm guidelines, and competitive bids. It was Tabuena’s final idea that threw me: “periodically rotating the use of law firms to ensure efficient and effective representation.”

I reluctantly wrote about forced ranking law firms (See my post of June 30, 2010: drop the least effective law firms.), but “rotating firms” – presumably based on time in representation rather than merit – stinks.

The source of the quote came from the Jan. 2009 issue of the California Lawyer. “A survey by the Corporate Executive Board found that large-company spending on law firms grew by 49 percent between 2002 and 2005.” OK, ten percent a year during the boom years following a recession. It’s the next sentence that has been mis-used. “ And while non-law firm costs increased by 20 percent over the past 10 years, large law firms’ prices jumped almost 75 percent in the same period.”

A later quote by ACC asked no questions: “According to a recent issue of the California Bar Journal, a survey by the Corporate Executive Board found that “while non-law firm costs increased by 20 percent over the past 10 years, large law firms’ prices jumped almost 75 percent in the same period.” What size is a large firm? How was the survey conducted? Are “prices” standard rates or effective rates? What is the basis for the 20 percent increase figure? In short, how much should we accept from the quote?

By a year or so later, in an article published May 17, 2010 by Law.com, the author neither interrogated the supposed finding nor stuck to its wording. The author dropped the survey origins in favor of “a study,” zeroed in on “U.S. companies,” and generalized the large law firms’ prices to “legal costs.” The author [cited] “a study conducted by the Corporate Executive Board which found that costs to U.S. companies have risen 20 percent over the past decade. During the same time period, however, legal costs have risen 75 percent.”

Nobel laureate Kenneth Arrow said something about doctors that applies equally to lawyers: “[T]the value of information is frequently not known in any meaningful sense to the buyer; if, indeed, he knew enough to measure the value of information, he would know the information itself.” That trenchant shot by Arrow comes from the Harv. Bus. Rev., July/Aug. 2010 at 55.

Since one common reason to retain a firm is that they know more than you as an in-house lawyer about a particular legal issue, Arrow’s point means you probably can’t assess very precisely the prospective value of the firm’s services and counsel. Afterwards, possibly, the value the firm generated can be assessed in dollars but even that is often not the case. To pre-value a remedy for ignorance may be a fool’s errand.

Long ago I took the position that it belittles an in-house lawyer to have to obtain approval before retaining outside counsel. If you are mature enough as a lawyer to handle a legal problem, you should be mature enough to know when you need outside support and how to manage that firm (See my post of July 18, 2006: cost control through prior approvals to hire outside counsel.).

Maybe yes, maybe no. At Motorola, according to a panelist from its legal department who spoke at the SuperConference, “approval is required to open all new matters with outside counsel.” They view it as a healthy opportunity to assure themselves that the expense is justified. An intermediate position would be to require approval if the expected expenditure on the matter exceeds a certain threshold, something like approval levels for invoices.

Am. Legal Tech. Insider (#24) July 2010 summarizes findings from a survey by Smart WebParts of lawyers’ time recording practices. Four findings should perturb in-house lawyers who care about external costs.

It should disturb in-house lawyers who struggle to keep external costs from running away that “the average leakage (lawyers and other time keepers failing to report all billable time) ranges from $20,000 to $40,000 per person, per year.” What if firms plug the leaks and bill that time?

It should disturb in-house lawyers that law firm overhead for keeping time averages 3.1 hours per timekeeper month. Given the “mean billing rate of respondents was $438 per hour, this indicates an imputed cost of $16,294 per person, per year.” Doesn’t that administrative time finds its way, at least partly, into billed time?

Law firms can proclaim to the world their quality, experience and prestige by their lush offices, their massive size, and their stratospheric billing rates. Each of these attributes economists would characterize as a “signal.” A signal is easy to observe but costly to imitate and it conveys quality. So far on this blog, I have mostly referred to the signaling functions of law firms (See my post of May 1, 2006: quality conveyed in price; May 26, 2007: high prices suggest quality; Feb. 17, 2008: wine tasting experiment; Oct. 19, 2008: neuroscience evidence of quality equated with cost; and Feb. 6, 2009: hourly rates are a signaling device for firms.).

Law departments too can signal. “Look at the DNC well-known firm we have retained for this acquisition or to defend us in that litigation!” A firm high in the league tables tells the other side that the law department really means business. The fancy firm that represents you is not only patent but also costly, a classic message by signal (See my post of Aug. 10, 2009: tony firms as a signal.).

Moreover, law departments can spread their peacock tails in other ways. They can signal their quality when they bring in a big gun partner to serve as general counsel or if they publicize a major initiative or if they make the cover of a trade journal as “Law Department of the Year.”

What patterns do I see in the first year’s worth of monthly compilations of most interesting posts? (Email me rees@reesmorrison.com if you would like the entire 28-page collection.) It turns out that 39 of them have to do with relations with outside counsel. Because I did not consciously favor or omit any particular topics, I just let the idea chips fall where they may, it seems useful to understand this distribution.

1. I write more posts under the outside counsel category than any other category, by far.
2. Journalists and panelists talk more about controlling the costs of outside counsel than any other topic so I write more.