Articles Posted in Outside Counsel

An article about the law department at Cox Communications offers several benchmark tidbits. With 23,000 employees and 17 lawyers, it has one lawyer for every 1,353 employees (See my post of April 18, 2009: lawyers per 1,000 employees with 6 references.).

At $8.5 billion in revenue, it boasts only two lawyers per billion, which is quite low. Could its outlay on outside counsel be higher than peer law departments? But another number in ACC Docket, March 2010 at 90, particularly caught my eye.

The article says that the legal department works with more than 100 outside law firms. If all the in-house lawyers have some oversight responsibility for at least one of those firms, the average is close to six firms per lawyer. That comports with one other post that offered the metric of three primary firms per lawyer (See my post of Feb. 11, 2007: rule of thumb of three primary firms per in-house lawyer.).

It is fruitless to define value of legal services in advance (ex ante) because all we can do beforehand is trot out platitudes such as knowledgeable, responsive, creative, inexpensive, practical. Such unarguable, bland and Boy-Scout-motto desiderata help as much as when we try to define “beauty,” or “art”, let alone “the morally good life” or “obscenity.” Noble words but plebian insights.

By the way, if a firm does no more work the in-house lawyer may not have felt sufficient value was delivered. Or it might more innocently mean there was no further need for the services perceived to be provided by the partner.

Value is an ex ante proposition. If an in-house lawyer asks a particular partner to handle more work, then the in-house lawyer has decided that the partner’s firm had provided sufficient “value,” whatever value means in that situation. “Value” has a thousand manifestations and determinations so in the words of the philosopher Thomas Dewey “cash value” of is the only incontrovertible test. Pragmatism prevails: it reveals a definition of law firm value delivered only ex post.

Even if you have an agreement with a firm as to discounts, or even that its discount level goes up as you pay more, you should still check their invoices. Just because the firm shaves some fees doesn’t mean it was completely efficient or did all the right things at the right times.

The justification for discounts or ladders of discounts is volume; the justification for bill review remains slips in efficiency or direction. Discounts, after all, don’t change behavior; write offs of invoices should.

Four law professors believe that “Legal capacity insurance” comes to the fore as one of the benefits to a legal department of fashioning a long-term relationship with a law firm. This notion comes from an unpublished article (at 12), by Michele DeStafano Beardslee and three co-authors, presented at the Georgetown Conference on the Future of Law Firms. They write as if general counsel place value on a law firm’s capability to take on more work on short notice and that a partnering closeness makes such a stretch more likely.

I don’t agree with the first premise. Law departments do have surges of work, but they can manage a high tide every now and then in several ways that don’t include a key firm. Temporary staff, internal reassignments of work for a period, retention of another law firm, reallocation of work within incumbent firms, unbundling and offshoring, triage or change in how other demands are met, all these are ways to cope with an increased workload that don’t depend on a long-term relationship with a firm but hedge against surges of work.

Having heard about licensing terms that need to be FRAN (fair, reasonable, and non-discriminatory), I thought of Most Favored Nation terms. Law departments so routinely insist on MFN terms from their primary firms that the privilege has been diluted to meaninglessness and firms don’t really know how to comply (See my post of April 30, 2009: MFN impositions with 8 posts.).

Best Terms under the Conditions Known comes closer to FRAN. A sliding scale of rights granted by law firms more fairly suits the complexities of different clients with different styles, expectations, and in-house capabilities, not to mention volume, sophistication, and predictability of work.

LexisNexis Martindale-Hubble, in conjunction with the Forbes Institute, recently published a benchmarking report based on data from legal departments in Russia. One of the findings shows that legal departments obtain higher discounts for more routine work. In fact, the pattern was quite clear.

At page 6 the study reports that “respondents received on average a 12% discount with their external law firms for complex, high profile, non-recurring matters, a 13% discount for complex recurring matters, and a 14% discount on routine and commodity matters.”

Those discounts and the graduated increases sound quite similar to the tiered discounts that aggressive legal departments obtain in the United States and the UK.

Classical economics holds that if law firms charge more than what in-house lawyers are willing to pay, those fees will decline. If demand is less than supply, prices fall.

Absent a monopoly, and no law firm in the United States has a monopoly on any legal service, and absent proprietary knowledge or processes, and no law firm has a patent on any legal service, supply (cost of law firm services) should reach equilibrium with demand (legal services valued enough to be paid for by companies).

If this axiomatic economic reasoning applies, then the grumbling about the high costs of law firms and a systemic gap between what is paid and what is gotten is sound and fury signifying nothing. Demand matches supply, ergo no value gap exists. QED

Summarizing discussion points at a conference of the Iberian Lawyer’s In-House Club, the author wrote that general counsel “had been requesting a reduction in law firm rates for lower value work … but had not yet looked for deep discounts for the highest value work.” That quote, from Iberian Lawyer, Jan./Feb. 2010 at 13, puzzles me for several reasons.

First, rather than exact an extra pound of flesh for lower-value work, why don’t legal departments hire law firms that have lower cost structures?

Second, if in-house counsel can classify a matter early on as lower value and thus entitled to higher discounts, don’t they have the data, experience, and confidence to solicit fixed fee arrangements to such matters?

Thomas Dunlop, AVP Legal Services Operations, CNA Insurance, oversees CNA’s panel firms, litigation guideline and expense management, Legal Services operations, and legal vendor management and contracting.

To the point of this post, according to Corp. Counsel, March 2010 at 77-79, Dunlop manages “a 22-person centralized bill review unit.” CNA Insurance is certainly huge, an insurance giant with $8-9 billion in revenue a year and legal bills to match, but to have nearly two dozen people to review bills of outside counsel sounds like a misguided investment.

But then I am a fan of fixed fees that are fair and well thought out, where invoice review recedes into appropriate insignificance. Further, any of several e-billing packages can probably do much of what those 22 poor souls do.

“A quote given by a law firm that is well below the market expectation does not instill confidence either in the quality that may be ultimately offered, or the firm’s ability to foresee the potential issues that may arise.” A good quote from the Iberian Lawyer, Jan./Feb. 2010 at 25, it highlights two risks that legal departments perceive from a low-ball bid.

If several law firms of roughly comparable size (aka cost structure) propose to handle something and one of them falls considerably below the other amounts, it may be a reason to worry. The firm’s partners may plan to delegate work to lower cost associates and paralegals, with a risk that too much of that kind of decision will drop the level of service. . Alternatively, ignorance or inexperience could seduce partners into quoting too low a fee; if they can’t see what’s ahead, they can’t price realistically. Either way, in-house lawyers who try to square a very low bid with all the other higher bids might be made nervous

To counteract these risks, a legal department can impose staffing controls and ask piercing questions about a firm’s assumptions, thus blunting both fears.