Articles Posted in Outside Counsel

More readers downloaded my article on value propositions than anything I have posted in my five years of blogging. If you missed it, here it is again.

Meanwhile, an ad by Grant Thornton made a light bulb go off. The ad shows a formula: “Service Quality/Fees = Value.” Sounds so simple, but it implies that a qualitative judgment (service quality) is divided by a quantitative number (fees). That doesn’t work. All you really have from the ad is a restatement of the truism that satisfaction in relation to what you pay equals perceived worth.

To do something mathematical and more objective, law departments as a group need to have standard, quantified rating systems for their lawyers to evaluate the contribution of their firms. Timeliness of 1 means “often late.” Timeliness of 2 means “at times late.” Timeliness of 3 means “gets work done on time.” And so on for each of five to seven common attributes.

That all economic transactions are costly in terms of finding, contracting with, and enforcing the arrangement we know from the seminal work of Ronald Coase, winner of the 1991 Nobel prize for economics. Finding the right price to pay among competing, comparable law firms has costs. Competitive bids might minimize those transaction costs in terms of the information obtained, but it still minimizes those costs to build an internal legal team.

This year’s Nobel Laureate, Oliver Williamson of Berkeley, extended the Coasian analysis of transaction costs to consider the complexity of the deal and institutional knowledge. He also “specified measurable attributes of transactions that would make them more or less amenable to being conducted on markets,” according to the Economist, Oct. 17, 2009 at 92. Decisions to provide legal services from inside the company or to procure them from outside fall into a transaction costs analysis (See my post of Aug. 9, 2009: transaction cost economics and five references; and Nov. 8, 2009: transaction costs of arbitration.).

Law departments can say they reject certain practices by law firms, but if no way exists to detect the improper behavior, why encrust your outside counsel guidelines with a toothless prohibition? A leading example of thundering against the wind is insistence on most favored nation status (See my post of April 30, 2009: MFN impositions with 8 posts.). How will a firm’s non-conformance with that mandate ever come to light?

Another example would be if a law department solemnly proclaims that “If research on a matter for us has application to other clients, only bill us our proportionate share.” How can the department detect and enforce that quixotic position? “No photocopying charged to us for your internal convenience,” sounds void for vagueness, not detectible, and therefore not detestable. Guidelines that inveigh against unenforceables just seem silly. What Simon & Garfunkel sang should apply to rules: “We speak of things that matter, with words that must be said,” is bill analysis worthwhile, is the core staff really dead?

A financial institution a few years ago told each lawyer who managed outside counsel to reduce by 10 percent the amount the lawyer had approved the previous year. That mandate makes little sense. Consider five unwanted consequences.

Frustration – in-house counsel may face more matters – and therefore more outside counsel spending – through no fault of their own. If the goal were expressed as a reduction in costs on a per matter basis, that makes a bit more sense.

Gaming – I would expect November and December to be low billing months for lawyers who fear they will fall short of their target and thus their bonus. Perhaps some kind of burn rate test would address such a drop off in that the general counsel could compare the last month or two of the year with the rolling average spend on outside counsel for the 9-10 months beforehand. A steep drop off would stand out and would be even stranger since law firms strive mightily to bill and collect toward the end of their fiscal year.

A recent post suggested six personality traits of lawyers that inhibit change (See my post of Nov. 12, 2009: six traits that inhibit change.). Andrew Davis of Exari left a good comment, and I thought I would stand “on the shoulders of giants.” Andrew wrote:

“Most in-house lawyers work in law firms before moving in-house. And I think their exposure to the billable hour has a big impact on their behavior. Billings have a huge impact on law firm revenues and on the careers of individual lawyers. This deters them from investing non-billable time today to become more efficient over the longer term. Even though, after a lawyer moves in-house, their day-to-day legal work is often no longer billable, I would argue that they have been trained to focus on just doing the work, rather than taking a step back to see if they could do it more productively.”

This formative period for most in-house counsel and its brainwashing to ignore productivity brings to mind another influence. Efficiency is not the goal at law school or as an associate; indeed, both reward working and reworking case digests or memoranda (respectively), exam outlines and research (respectively). Once inside, however, the efficiency of a lawyer wins the prize: deal with the major risks in the most direct way and move on to the next problem that hits your desk.

Eleven of my ruminations on the vexing issue of law firm value are laid out in my latest article, in the National Law Journal, Nov. 9, 2009 at 8. Click here to download

So much has been tossed about on value I thought I would try to set out some principles to see where people agree and disagree. Do you?

A no-increase-in-rates mandate for law firms does not have to be limited to the choice of whether the freeze is for one year or two. Many variations and combinations of the following ideas are conceivable.

1. If any lawyer works more than 500 hours for a company, the firm can raise that lawyer’s rates;
2. Only partners may raise their rates, or only senior associates – sometimes thought to be the best bargain among the various classes of timekeepers;

The band Radiohead lets fans download its music and pay whatever they wish – including nothing. Janet Moore janet@globalRainmaking.com mentions this method of pricing services in Strategies: J. of Legal Marketing, Vol. 11, Oct. 2009 at 10, and I played the tune in my head for a bit.

Some path-breaking, gutsy law firm may try this on a law department: “Pay us whatever you think the past month’s services were worth.” That loud approach would certainly force the supervising in-house attorney to listen to his conscience about what the month’s toil was worth. Surely, a Radiohead hit!

What do you think of this sentence in an article about alternative fee arrangements on the international scene? “[O]ne large European multinational paid a lump sum in exchange for three things: first, a hotline service from the multinational’s legal department to the firm; second, strategic support through brainstorming and planning; and third, handling commercial litigation involving less than a certain amount.” The quote comes from Strategies: J. of Legal Marketing, Vol. 11, Oct. 2009 at 8.

I suppose the hotline means some priority access to the firm’s leading lights. Not red phones on mahogany desks, but a commitment by the firm to answer or get back right away. The “strategic support” leaves me mystified, but intrigued. My guess is that the firm committed to helping the general counsel think through some internal management questions or remove some big-picture legal thorns.

The Royal Bank of Scotland (RBS), revisiting its coveted roster of preferred firms, designed a fast track. If an invited firm agrees quickly to the terms of the new agreement, which extends for three years and emphasizes fixed fees and rate reductions, they gain a spot as preferred counsel. Corp. Counsel, Vol. 16, Nov. 2009 at 61, explains that the expedited procedure “is believed to offer firms preferential treatment in return for early agreement on pricing terms.”

Here’s the zinger: “As part of this cost-cutting drive, RBS has asked applicants to drop fee levels by 10 percent from those set during the [previous] 2006 review.” Now, it may be that in 2006 rate levels were set for the entire period and were higher than 2006 rates but less than the expected increases. Even so, a roll-back by 10 percent of rates negotiated three years ago sounds drastic. If rates would have otherwise risen 3-4 percent a year, this aggressive cut means something like a five-year freeze (nothing for 2010, 2011, or 2012 and a 10% discount off already-lower-than-normal prevailing rates).