Articles Posted in Outside Counsel

A quote from the General Counsel Survey 2009 of Belgium-based consultants FrahanBlondé at 37 came from an exasperated general counsel: “They [law firms] have no idea how many of our products we have to sell to pay a bill of €100,000.” That lament started me calculating.

Given a company’s profit margin and cost of external counsel, what revenue per hour does it require to pay that firm? Turn to the back of the envelope. Take a blended rate of outside counsel at $350 an hour and a corporate profit margin of eight percent [The Motley Fool wrote in 2006 that “the average profit margin for corporate America over the last 25 years was approximately 8.3%.”] http://www.fool.com/investing/value/2006/03/01/the-profit-margin-paradigm.aspx

That means for each hour paid to that prototypical law firm, the company has to sell products or services worth something like $4,300 (See my post of May 24, 2005: legal spending as a percentage of profit margin; and May 23, 2007: profit per lawyer may be an under-utilized metric.).

A short note in an article troubled me: “firms house what is represented as an independent copying vendor … without disclosing to the client any financial interest that the firm may have in the vendor.” The article is in Lit. Mgt. Rep., Oct. 2009 at 4, by Rick Hauser, an invoice review attorney for an e-billing vendor.

I have speculated on law firms getting rebates from airlines and whether the clients who paid for the ticket benefit from the rebate (See my post of Feb. 14, 2007: back-end rebates from airlines but not passing them through perhaps.). For them to get rebates from copying services or some other kind of financial kickback is fine so long as clients who paid the full amount for copying share fairly in the recompense.

In Peer to Peer, an ILTA publication at 76, an article by Scott Wirtz swirtz@loeb.com mentions that “Sophisticated audit techniques can now detect a narrative that contains what is referred to as ‘block billing.” Block billing is one term to describe time records that jumble together activities under a total amount of hours (See my post of Feb. 23, 2008: different interpretations of block billing; and Sept. 18, 2006: some rules e-billing can enforce.). Those who review bills can’t penetrate a block and evaluate the time spent.

All sensible so far. But the example given is a time entry that contains “review” and “revise,” which the article says “must be shown as two separate time entries.”

That doesn’t make sense. For one reason, timekeepers will simply avoid multiple verbs: instead of “think about and write blog posts” they will put down “write blog post.” More fundamentally, what are the rules and algorithms that point the software to spot block billing? Not everyone puts in semicolons between activities: “think about blog; write post.” The sophistication of software that can deal with the complexities of language, and even worse sometimes of shorthand language, likely exceeds the economics and abilities of legal e-billing vendors.

On the law department side, several punctures let out a lot of UTBMS air in terms of fees. First, you need software to sort through the time entries and place them in their appropriate categories. Not every law department has that software or is willing to invest in it.

A bigger nail is that most law departments do not have enough similar matters to make meaningful comparisons on performance across law firms. Circumstances vary and the critical mass of data does not accumulate.

Lawyers in law firms are sometimes sloppy about accurately sub-dividing their time into code tasks and activities. A fair amount of activity is dumped into broad codes, but who in the law department can tell?

The chief corporate lawyer at Deutsche Lufthansa, Nicolai von Ruckteschell, went on record about law firms that serve his company and venture into alternative fees. According to him in the European Lawyer, Issue 91, Nov./Dec. 2009 at 35, “We have seen a bit of risk sharing, with a lot of firms giving a reduction of up to 20 per cent of the hourly rates, but then expecting a bonus at the end if the project is successful. That is what most firms are offering.”

For me, a discount that evaporates if the matter is successful is not a discount. It is deferred contingent billing. That doesn’t make it unattractive to legal departments but it also doesn’t make it a probable money-saver.

Gale force winds blow the message that legal departments should tourniquet various expenses charged by profligate law firms. A recent breeze from the opposite quarter, however, tells us that many firms do not frequently or routinely charge to clients expenses that sometimes blow clients away.

ILTA’s 2009 Technology Survey, at 19, lists 11 expenses and the percentage of law firms that said they often do not charge them to clients. Prominent examples include photocopies (14%), courier/delivery (21%), faxes (38%), and long distance charges (39%). Further, as shown on page 50, the larger the firm, the more likely it is to eat these expenses.

This data surprises me, because a disproportionate share of complaints about law firms focus on their disbursement expenses (See my post of Dec. 1, 2006: disbursements of law firms with 7 references.). If so many firms absorb these common expenses in their billing rates, maybe the squall should pass over or general counsel should snuff them out entirely, which is admittedly not a wind-wind solution.

One of the common steps to reduce the costs of outside counsel assumes that inside lawyers can segment matters into those that deserve high-priced talent, those that have more modest demands suitable for mid-tier firms, and those that bump along the bottom as commodity work for lower cost firms. If that threshing proves practical, it suggests that the legal department can push for alternatives to hourly billing, including unit costing, with some of the mid-range work and most of the lower-level work.

That being plausible, it further suggests that competitive bids and fixed fees for the simpler matters make sense. Matter segmentation, in other words, allows billing differentiation.

The knock on general counsel who reflexively call Prestige, Admired & Realcostly to gain cover if things go wrong goes might be called CYA Theory (See my post of Aug. 15, 2008: CYA and 6 references.).

Some truth there probably is to that theory, but another reason to pick up the phone to BigFirm is it can probably find someone faster than a smaller firm who knows more about the problem. Speed of response counts too, not just the billboard repute of the firm. Specialization and reputation go hand in hand, of course, so it makes sense that a general counsel under pressure, someone who needs guidance or a check for a tough call and needs it quickly, will favor the larger firm with its deeper, and more quickly available, knowledge base

When law firms apply for their fees to be paid by a bankruptcy court, they must disclose their attorney’s hourly billing rates. Those rates for 18 major US law firms are available in the Am. Lawyer, Feb. 2010 at 45, as median partner and associate rates as well as the individual rates of 21 high-billing partners.

A diligent beaver could assemble a comprehensive set of such rates and thereby create a comparative billing-rate service. We would have to know that partner rates in bankruptcy practices are in line with partner rates in other practices, but assuming they are, general counsel would have available detailed benchmarks. For example, they could see whether the rates charged them, and the “discounts from standard rates” that are so hard to confirm, are as represented (See my post of Aug. 4, 2009: Laffey matrix.). They could quantify the cost advantage of regional and local law firms.

When a legal department chooses a group of primary law firms and those firms offer deep-dish discounts, what happens if later on the department chooses a firm other than one of them to handle a major matter? Will that firm be yoked to the same discount schedule?

If not, if clients violate the notion of an implicit tradeoff of rate advantages for volume, being a primary firm becomes a lot less attractive, and cost savings ooze away.

Certainly, unusual situations justify a general counsel crossing up the preferred counsel on the panel and selecting a specialist firm. Or external pressures on the general counsel, such as an investment bank or a powerful director, at times outweigh the intention to stick with the handful of firms that conceded special rates and terms.