Articles Posted in Outside Counsel

A thoughtful approach to the pricing of external legal services, dubbed “component pricing,” appears in the ACC Docket, Vol. 27, Oct. 2009 at 23. Johnson & Johnson developed the method. Its basic tenet is that unit pricing – a price for a demarcated task – leads to cost efficiencies.

At the forefront, the discovery process lends itself to component pricing. The article mentions costs per custodian (unless there are significant centralized data stores) as well as costs per gigabyte for database hosting, and costs per page for document review.

The authors note that “depositions of fact and expert witnesses are also logical components that include preparing for the depositions as well is actually taking or defending them.” They feel that motions are probably the least likely candidates in litigation for component pricing. They also recognize a component for “management” which is expressed as a percent of spending on the total components.

Rooting through a set of guidelines for outside counsel, I chanced upon several expenses of law firms that various legal department pronounced were not to be billed. Those included “extensive microfilming,” “continuing legal education seminars,” and “special publications.”

I did not realize anyone still microfilms. As to the last two, if a law firm hired for its legal expertise submitted expenses for CLE training and treatises, that takes a lot of moxie.

One tough-minded guideline likewise denied bills based on exigent circumstances: “There will be no premium or rate increase charged because of numbers of hours, size of project, urgency, extent of responsibility, difficulty, etc.” Just because a matter was big and hairy, unusual, or under tight deadlines didn’t justify topping off bills. Another niggardly department doesn’t want to be billed for “any periodic report of activities.” When it comes to being billed, status reports are verboten.

When managing a law firm’s work on a matter, one step is to choose the partner for your matter. Law departments take that right for granted these days.

It would be another step to limit how many paralegals, associates, and partners the firm may bill you on the matter. Law departments, at least as much as I’ve heard, do not exercise this form of staffing control (See my post of Dec. 27, 2008: timekeepers with 18 references.).

A another technique is to request from the responsible partner a list of the timekeepers on the matter and to treat other timekeepers less well, such as barring them or deeply discounting them. This core-staff approach has much to commend it (See my post of Aug. 8, 2006: core staff with 6 references; and July 17, 2008: core team II with 11 references and citations to 7 earlier.).

Why do law firms grant discounts that rise with the volume of fees paid them?

1. Decreases marketing and selling costs. If a law firm spends a certain percentage of its revenue on marketing, that percentage of the fees above a volume threshold represents a savings of no marketing costs. Revenue came with no selling expenses.

2. Grapples the client closer to you. The more touch points a firm’s lawyers have with lawyers and managers at a client, the stronger the attachment, and thus the greater likelihood of additional work. Volume arrangements encourage law departments to assign more work to a firm.

This cost-control measure caught my eye in the outside-counsel guidelines of one company and in the management style of another company’s legal team. It makes sense, to my way of thinking, to have the default method of communication be oral, since talking is much more flexible, quicker, resistant to over-staffing, inexpensive, and in the control of the responsible in-house lawyer. Counseling by conversation also brings partners into the discussion much more frequently.

A law firm might believe that it has to have a written record of the advice it gives, if for no other reason than to protect it from malpractice claims. But that precaution of the firm does not mean that the law department must fund it. Perhaps law firms and law departments can reach an agreement that partially waives malpractice rights of the department when advice is delivered orally?

Reflecting on the much-discussed gap between fees paid law firms and value delivered by them, I recalled my wife’s common statement: “Rees, you haven’t kept up with the costs of things.” Every time I gripe about something being expensive — a dinner out, movie, haircut, or pair of shoes — she points out that I don’t buy things very much and am not in touch with the expected price increases. The same psychological lag time might happen to lawyers who periodically review outside counsel invoices for services performed only from time to time.

Firms keep up to date on what to charge but a lawyer who hires them might not appreciate that increases are usual and everywhere. The cost of legal living goes up, not down. We remember the old days when the firm of Lake, Woebegon & Keillor billed us fees that were always lower than average.

Another quirk of value, ironically, is that high prices influence our opinion of value favorably (See my post of Jan. 2, 2009: higher prices push us to sense higher value.). If it’s expensive, it must be good.

Toiling on an article about the bedeviling issue of value from firms, I decided to pull together what I have written about the topic other than those in an earlier metapost (See my post of Aug. 21, 2009: value compared to fees paid with 22 references.). Much has been written here about general counsel griping as to insufficient value from law firms (See my post of Nov. 11, 2007: proclaimed imbalance between fees and value in UK firms; Nov. 22, 2007: prospective assessment of value is easier; July 17, 2008: law departments flail firms for inefficiency; and Aug. 10, 2009: “value for money” rating.).

The reasons for the criticism are varied (See my post of May 1, 2006: sometimes inside counsel know too little to assess value; Feb. 4, 2007: can’t put a dollar value on some matters; Oct. 29, 2007: inside lawyers do not like to assign value; Nov. 28, 2007: law departments bear some blame for gap; Sept. 21, 2009: even hard in bankruptcies to determine value of lawyers’ work; March 30, 2008: three bumps on the road to value pricing; June 1, 2009: value-based billing and changes at advertising agencies; July 4, 2009: clients set value; and July 5, 2009: “cost” compared to “value”.).

The value of some firms extends beyond costs and deliverables (See my post of June 20, 2008: achieve value for money; Aug. 28, 2009: Pfizer requests “value reports”; Sept. 12, 2008: value proposition of regional and local law firms; and Oct. 4, 2009: no one ever got fired for hiring [big name] firm.).

I like the idea of having a lawyer in the department oversee the relationship with a law firm that handles significant amounts of work (See my post of May 18, 2007: inside counterpart appointed for each major firm; Aug. 18, 2008: BT and its inside relationship partners for key firms; and July 8, 2009: pros and cons of a responsible lawyer in-house.). At first blush, you might want the general counsel to be the point person, but I think that is a mistake in departments of medium size and up. The general counsel has more important obligations than the smooth running of relationships with key firms.

How should you choose other lawyers for the role? It is a close call whether you want a coordinating counsel to be a lawyer who has worked extensively with the firm. In general, this makes sense because that lawyer knows more about the firm and its lawyers. The drawback is that the lawyer might lack objectivity.

The person needs to be senior enough to have gravitas and an ability to convey criticisms gracefully and effectively. Likewise, other lawyers in the department must trust that person to keep confidences.

Discount arrangements are common, according to law firms and departments (See my post of Dec. 31, 2008: 75% of law firms surveyed said clients request discounts; Oct. 11, 2009: law firms might offer discounts if given chance to work in new area; Jan. 2, 2009: oblique ways to grant discounts; Jan. 6, 2009: rebuttal to a misreading of my post on oblique methods; and March 5, 2009: “rack rates” are mythical.). In fact, despite having collected three metaposts a new crop has appeared (See my post of Nov. 26, 2006: discounts with 15 references; Jan. 21, 2008: 10 more posts with variations on discounts; and Dec. 26, 2008: third metapost on discounts, with 12 references.).

Variations on discount arrangements are endless (See my post of March 5, 2009: if matter half done, discount of 5%; April 5, 2009: higher discounts for lower-value work; April 9, 2009: discounts for volume at Aetna in 1994; April 11, 2009: PetSmart GC demands 30% discounts; June 26, 2009: volume-based discounts and holdbacks; Sept. 27, 2009: MFN status only for discounts based on volume; March 31, 2009 #3: discounts claimed not to affect longevity of client relationship; Sept. 21, 2009: in 2000, AT&T automatically discounted bills older than 30 days; and Sept. 27 2009: ways to account for discounts.).

Advantages and disadvantages of the various species of discounts are plentiful (See my post of Aug. 13, 2009: flaws in tiered discounts; March 20, 2009: six advantages of discounts; Oct. 12, 2009: comparison of volume discounts to hourly rate discounts; and Oct. 13, 2009: pros and cons of volume discounts compared to hourly discounts.).

Astonishingly, “Linklaters had 200 lawyers on secondment to clients last year—although the figure currently stands at 95.” Corp. Counsel, Vol. 16, Oct. 2009 at 80, offers this jaw-dropping figure and adds that “big finance firms such as Clifford Chance, Allen & Overy, and Linklaters often have dozens of secondees with banks at any one time.” What about secondees to non-banks?

My crystal ball predicts several consequences if many legal departments demanded platoons of secondees.

Some legal management metrics will quiver and lose some of the consensual certainty they now have about methodology, such as lawyers per billion and inside spending per lawyer. For both, how do you treat in your benchmark metrics a crew of secondees? Is a six-month secondment an outside counsel cost or an internal cost?