Articles Posted in Outside Counsel

A cluster of ways of thinking needs to mesh for a law department to have confidence that a law firm will perform well under an alternative fee arrangement. Six come to mind

Data mining – to set the matter or phase fees reasonably accurately based on analyzed historical data from both the department and the firm (See my post of May 6, 2009: data mining by law departments and law firms with 10 references.).

Portfolio risk dispersion – to understand and accept that in a well-done AFA both firm and department quite often “lose out”: a windfall to one is a premium to the other (See my post of Nov. 6, 2005: flat fees at Wal-Mart; April 27, 2006: economic concept of beta; July 4, 2006: insurance coverage for a portfolio of matters on fixed fees; Dec. 3, 2006: large firms can take on large blocks of work; March 6, 2007: thoughts on portfolios in law department management; June 14, 2009 #4: portfolio theory and a few applications; and June 1, 2010: boundary conditions of AFAs.).

A comment in InsideCounsel, June 2010 at 57, triggered several thoughts. “The next real advance would be for firms to be able to test their bill against their client’s guidelines before submission and avoid the whole back and forth.”

A good idea, but it will encounter challenges. I suppose vendors of e-billing systems might license mini-versions that simply allow a law firm to pre-test its bill against what the software examines.

More problematic, however, is the willingness of a legal department to disclose to the firm what it looks for in bills. Would a general counsel want to make clear that no one may bill more than 10 hours a day? Yes, but the ways around that are many and a firm that finds one of its entries has been flagged could easily “correct” that. If most bills pass the tests of the software, how will law departments prove their ROI? Finally, e-billing rules don’t get anywhere near assessing whether the amount billed stands in reasonable proportion to the value delivered. The math checks and rule check-offs can be 100 percent right but the bill may still be either a bargain or a burglary.

At the recent SuperConference, several panels talked about alternatives to hourly billing. I strongly favor them, but there are some limitations on their applicability. Think of them as boundary conditions, and consider these half dozen.

 Small law departments with modest expenditures on outside counsel have little room to maneuver with AFAs.

 Lack of experience by the inside lawyer on a novel type of matter. For your first Hart-Scott-Rodino filing, you can’t comfortably agree to a fixed fee.

A survey by Sweet & Maxwell of finance directors at the top-100 UK law firms asked about financial threats the directors foresee. The most pressing was downward pressure on fees, but the second one deserves discussion.

“The second greatest threat identified was the potential cost overrun incurred on legal work paid for with a fixed fee,” according to Managing Partner, May 2010 at 8. That worry depresses me, for several reasons.

One reason is that it suggests that the top financial officers of these large and experienced firms place little faith in their partners’ abilities to project fees reasonably accurately. How experienced and good are the firms?

It is a risk that some collusion may occur between the inside lawyer responsible for approving the matter budget of a firm and the firm that submits the budget. Neither lawyer nor firm wants to look bad so a fatter budget serves both. But that pattern rolled up for the entire department bloats the departmental budget.

The built-in tension, however, is hard to suppress (See my post of March 24, 2005: what proportion of initial budgets from firms prove to be too high; Oct. 19, 2007: inherent tension between firm and department on budgets; June 11, 2008: matter budgets: inside accountability and the principal-agent tension; March 25, 2008: how to handle budgets from external counsel; March 29, 2009: problem of inflated budgets in anticipation of cuts; Nov. 3, 2009: twists and turns when GCs assess accuracy of budgets; and Nov. 21, 2008: performance in relation to budgets should determine whether a panel firm gets more work.).

Some ideas for you to consider if you want to reduce the incidence and severity of budget manipulation:

Predominantly, the in-house counsel I speak with like and respect the partners they retain. They do not, by any stretch of the imagination, believe that lots of partners “out there” can do just as well for the same or lower cost. “Jones knows our company, works really hard for us, pays attention to costs, and values the long-time relationship we have had.” That is what I hear. Were it otherwise, in-house counsel stop sending work to Jones.

In fact, when a general counsel tries to cut firms from the roster, there is inevitably pushback. If you like and trust someone, you find it hard to imagine recreating that sense of shared objectives, quality and commitment. Firms are not interchangeable functions, fungible and abstract; they are friends and professional colleagues you rely on and like (See my post of Oct. 4, 2005: myth that firms hold about themselves; Nov. 8, 2005: myth of “buyers’ market” for high-end legal services; Feb. 12, 2006: not a buyers’ market in many countries; Aug. 24, 2006: many law firms are viewed as fungible; April 8, 2007: market recognizes differential value propositions; April 20, 2008: not the market envisioned by economists; July 30, 2008: exaggerated finding on “commodity firms”; and Nov. 17, 2008: neither buyers nor sellers are seen as fungible.).

Work may be routine but a person who toils yellow pad to yellow pad with you is not at all a commodity (See my post of Sept. 13, 2006: commodity legal work with 5 references.).

Speaking on a panel at the SuperConference, Steve Williams of the General Counsel Roundtable displayed a dashboard for legal departments. One of the items on it was scores by law firms from evaluations they complete on the department. Law firms grade their clients? On this man-bites-dog view of the world, Williams said that “we have lots of clients who do it.”

The idea is interesting and would have merit if a range of firms completed it, if they did so honestly, and if legal departments took effective action based on the comments. But I have my doubts about all “ifs” of that scenario (See my post of Sept. 21, 2009: why partners may evade requests for candid feedback to their clients; and April 25, 2009: part of the ACC Value Commitment.).

Where there are Requests for Proposals there should be bidders’ conference calls. Yes, they should be a best practice (See my post of March 18, 2007: basics of teleconferences for bidders; May 21, 2007: auctions and call-ins; Nov. 30, 2007: ten tips for better competitive bids; Aug. 13, 2008: good practices for competitive bids; Jan. 28, 2010: administrators can orchestrate conference calls; and April 19, 2010: reasons for silence when firms dial in.).

After bidding firms have had an opportunity to read the RFP and collect questions they would like to ask, host a teleconference for all the bidders. During it they can all hear the same answers to questions and ask follow-up questions. No one obtains privileged information though sidebar conversations.

Another advantage is that a bidder’s conference makes better use of your lawyers’ time, since they answer questions once and are done, rather than having to field the same question from different firms.

A gutsy law department could say, for new matters familiar to it and a trusted law firm, “We will pay you what we think each month’s work was worth AND we will explicitly state why we gave it that value.”

Would law firms daringly accept those terms? They should, because it pushes law departments to define value and firms will be able to calibrate their investments of time and staff accordingly.

The final part of the arrangement would be for the law department to say:

The Second Annual Law Department Operations Survey at 9, lists 16 initiatives that administrators in large US legal departments ranked by effectiveness. At the top, selected by seven out of ten, is “Use less expensive attorneys (i.e., regional firms).” Many ideas lurk inside that initiative as stated.

Legal skills are distributed throughout the country, far from the major “canyon” cities (See my post of April 8, 2009: regional law firms with 8 references.).

Many kinds of services for which external counsel are needed are not brain surgery (See my post of March 13, 2007: complexity with 4 references; and Dec. 27, 2008: complexity of legal practice with 20 references.).