Articles Posted in Outside Counsel

Having consulted on quite a few RFP processes by law departments, I appreciate the novelty and the wisdom of a comment made by a website designer. Asked whether she responds to RFPs, she writes “If we’re excited about the project, then yes, we will. But, we’ll have a lot of questions for you, first. We prefer to work with clients who want to work with NotLimited specifically and we use our own questionnaires to define project proposals.”

Similarly, law firms ought to send to law departments questions that help clarify how the attributes of the firm would benefit the department as well as to deepen the information known to the firm.

Each year the ACC/Serengeti Managing Outside Counsel Survey collects data on how much participating legal departments spend on outside counsel. The median for 2008 was $1.2 million. Thus, of the 390 participants last year who provided data for the previous year, the middle figure, when all their spending figures were stacked from highest spend to lowest, was $1.2 million.

Additionally, the ACC Docket, May 2010 at 12, gives the corresponding figures for the previous six years: 2007 – $1 million; 2006: $1.1 million; 2005 – $1.8 million; 2004 – $1.3 million; 2003 – $1.6 million; and 2002 – $1.2 million. The full report extends the series (at 53) back to 2001 – $1.1 million and 2000 – $1.1 million.

Three observations:

If a general counsel decided to drop a set number or percentage of the law firms used that were paid more than a de minimis amount, that would encourage better evaluations of firms. In-house lawyers would also more credibly tell the firms they use that the firms must stay on their toes.

Forced-ranking and lopping off the lowest few might also lead to some gaming if lawyers retain a firm only to drop them. The compromise might be for a general counsel to unleash this effort every few years, to clear out the undergrowth.

My previous posts on this controversial practice all pertain to stack ranking employees (See my post of May 4, 2005 decrying forced rankings; Nov. 14, 2005: arguments in favor of forced ranking; April 27, 2006: forced rankings of staff; Dec. 1, 2006 #3: research findings on forced ranking; Oct. 12, 2006: if turnover is low, forced ranking makes even less sense; Sept. 21, 2008: line managers are unwilling to differentiate among their reports on evaluations; and April 24, 2009: nine-box grid and forced ranking.).

The American Lawyer, June 2010 at 15, exposes the plight of King & Spalding in the aftermath of a seeming triumph in an international arbitration. The arbitration awarded the firm’s client (one Waguih Siag) $133 million. Siag settled for less, pocketed $80 million, and “decamped to the French Riviera without paying King & Spalding a dime.”

It turns out that K&S’s contingency fee “called for Siag to give his lawyers an extra 1 percent of the award for every $50,000 in costs the firm advanced to him, beyond the first $500,000.” According to Siag, the law firm must have advanced more than $4.5 million in costs because its share of the recovery exceeds 80 percent, more than $106 million.

This is a stunning example of how a large law firm can use an alternative billing method – absorbing out-of-pocket costs on behalf of a client in exchange for a larger contingent fee – to increase revenue. It is also a stark example, perhaps, of taking advantage of asymmetric knowledge. And, what corporate client needs third party litigation funders if huge law firms are willing to invest such sums (See my post of May 21, 2009: lawsuit financing by groups with 8 references.)?

General Electric’s Brackett Denniston and Alex Dimitrief updated the chapter on billing in Bob Haig’s Successful Partnering series. In one section (14-37) they note that “At GE, we now require our law firms to preface their monthly statements with a table that specifies precisely where a matter stands vis-à-vis the overall budget and expressly affords law firms an opportunity to address any related issues before a firm busts its budget.”

I strongly endorse the requirement that the billing partner add a paragraph at the top of the bill. A table even more clearly tells the numbers. The paragraph should state the two or three activities covered by the bill period that drove the major portion of the fees, the important benefits delivered, and the status against budget (See my post of Feb. 21, 2007: standardized formats for bills.). With that summary, much of the difficulty of deciphering and uncoding the pages of time records that follow will be reduced. The lawyer who reviews the invoice will be much better able to decide whether the value delivered matches the fees charged.

I have opposed surcharges by law firms for staff (attorneys and paralegals) they hire for specific projects (See my post of Feb. 16, 2007: American Lawyer survey of law firms on markups of contract attorneys; Feb. 18, 2007: NY State Bar opinion; March 11, 2007: arguments for marked-up expenses of temps; and Dec. 9, 2008: contract lawyers for litigation review – high markups and low productivity.).

General Electric also prohibits markups, at least based on what Brackett Denniston and Alex Dimitrief wrote when they updated the chapter on billing in Bob Haig’s Successful Partnering series.

“We believe that, absent an express agreement to the contrary, a firm should bill a client only the costs incurred by a firm in retaining contract attorneys plus associated overhead (such as off-site office space specially rented to house the team of contract lawyers).” This limitation on overhead top-offs, I submit, should apply to all expenses and disbursements by firms: no additional costs.

I doubt that in-house counsel decide to retain law firms because of inducements firms offer such as secondments and access to knowledge databases. Yet that is precisely what a recent report from Eversheds found, however.

“Law firm of the 21st century: The clients’ revolution,” is based on questions asked of 130 general counsel. Almost two thirds of them reported “receiving better value for money since the credit crisis” because of such “value-add services. (or ‘freebies’)”.

As an aside, when clients clamor for better value, they want the fees paid for legal services to match the business results more closely, not to be based on lawyer inputs measured by hours. Value from law firms only peripherally has to do with the two examples given of sweeteners or others such as technological assistance, free CLE training, 24-hour hotlines, or legal updates delivered on extranets.

A survey of French legal departments by Hélène Trink and an executive search firm asked a group of general counsel about their plans in 2010 to pursue alternative fee arrangements (modalitiés alternatives de facturation). Of the 81 general counsel who responded, 18 percent said that hourly billing was sufficient; 44 percent said they already had AFAs in place; and 38 percent said they were contemplating additional forms of non-hourly billing.

The next question dug deeper into the specific AFAs under consideration (respondents could choose more than one). The most common alternative, by far was fixed fees (Forfeit, 79%) followed by tiered discounts based on annual fees (Remise sur Chiffre d’Affaires annuel, 50%). I do not view discounts as altering the economic incentives of firms to bill as many hours as they can.

The remaining choices were results-based payment (Honoraire de résultat, 32%), annual retainers (Abonnement, 14%), and other (Autre, 11%). An annual retainer can mean nothing more than the method and timing of payment, hardly a shift away from hourly billing.

Eversheds, the globe-straddling UK firm, has published “Law firm of the 21st century: The clients’ revolution.” Based on questions asked of 130 general counsel and 80 law firm partners, Eversheds concludes that the “current balance of power in the client-lawyer relationship is now with the clients.”

What they mean by the shift in balance of power is unclear. At page 5 they give one clue. “Many managing partners have recognised that they are becoming primarily service providers and that their previously dominant role at the centre of the client-lawyer relationship has irrevocably altered.” The once-mighty law firm partner now kow-tows to an inside lawyer who funnels the firm’s thoughts and work product to the ultimate client, a business executive. (Yet the report refers repeatedly to “the client” as the general counsel, not a business executive or the company as a whole.)

Another interpretation is that law firms are perceived as just another group of vendors, on a par with copier repairmen. There are lots of firms, all about the same, and it’s a buyer’s market. Partly the dozen-page report attributes this shift to “the increasing power and importance of General Counsel.”

“A typical work flow process might include receipt of the invoice by a billing coordinator, initial automated and manual review against law department billing policies, invoice scanning and matter management system update, routing to the responsible attorney for approval, notification of the business unit, and electronic feed to accounts payable with an ability to hold back payment on only those portions of legal bills that are ‘out of policy.’”

This path of a law firm bill come from West’s Successful Partnering between Inside and Outside Counsel, its chapter 14 on billing as updated by Brackett Denniston and Alex Dimitrief of General Electric. It is hardly a typical path. It assumes a large department [“a billing coordinator”] with industrial-grade software [“automated review” and “scanning” and “matter management system”]. It assumes a paperless system, but oddly that some bills at least arrive in hardcopy. It assumes that business units learn about individual bills [“notification of the business unit”]. Finally, the transmittal of data to accounts payable is assumed to be electronic [“electronic feed to accounts payable’”].

How invoices are handled varies enormously. This version is GE’s, not that of a typical small legal department. Further, there is no mention of the common practice of coding the bill with an account number and other information. There is also no mention of outside counsel guidelines except to the extent that mandates memorialized in them might be embodied in the “review against law department billing policies.”