Articles Posted in Outside Counsel

Law departments like law firms that innovate to meet the department’s needs. As an example, KMWorld, Feb. 2012, at 10-11, describes one client that uses Littler Mendelson to mediate, settle and defend EEOC (Equal Employment Opportunity Commission) complaints. The client’s law department wanted a nationwide fixed price for that work. The law firm, which focuses on labor and employment law, scrutinized, altered and streamlined every step of how EEOC charges are handled and rolled out early in 2010 customized software to enable the new procedures. The software includes a dashboard to show counsel and clients an aggregated view of where the company stands on charges.

As described in the article, this exemplifies both innovation and teaming, including, I assume, some differences in how the company responds to charges. Even if Littler were to market the software capabilities for the benefit of other companies, the originating company will benefit from a flow of improvements. Many law departments could challenge their primary firms to redesign software, workflows, work management and resources to the benefit of the department.

Of the departments participating in ALM’s metrics survey last year, 68 provided data on how many law firms they had retained in 2010 and how many they had retained in 2009. Among that group, contrary to all the talk about dramatic reductions in the number of law firms retained, their aggregate number reported declined from 4,333 firms in total to 4,027 – a decrease of less than 10 percent. Looking deeper, 30 departments decreased their outside counsel rolls, 18 reported the same number of firms, and 17 increased. Obviously, even with the group that stayed the same, there could have been different firms retained but the same total number.

Another perspective is to calculate the law firms retained per billion dollars of revenue. For this group of law departments in the United States, the median was 12 law firms retained for each billion dollars of revenue. The overall data reflects 3.5 law firms retained for every in-house lawyer. To learn more about the Law Department Metrics Benchmark Survey of ALM Legal Intelligence, click here for ALM’s website.

Twenty-nine colleges or universities use the fixed fee retainer program of the National Center for Higher Education Risk Management (NCHERM). Corp. Counsel, Feb. F012 at 20, reports on this unusual arrangement where legal services are outsourced. The founder of NCHERM offers colleges legal advice, training programs and expert witness services for a flat fee.

The founder estimates that 50-to-60% of colleges and universities don’t have their own in-house lawyers (See my post of Aug. 28, 2005: trade group for university counsel; and April 8, 2007: first university patent department: University of Virginia’s.). The arrangement does not prohibit clients from retaining other law firms for specialized matters. There are plenty of rent-a-GC organizations but this is the first one I’ve run into that focuses on an industry segment and has grown so large.

TyMetrix has produced the “Litigation Rate Snapshot,” based on its LegalVIEW data warehouse of billing and matter information. Covering $15 billion in fees submitted by 147,000 individual U.S. billers, a table shows average rates paid associates and partners in five industry groups. For three of them (Finance, Investments and Banking; Manufacturing; and Retail), the increment from associate to partner rate is about $100 an hour.

For Insurance and Health Care, both rates are noticeably lower than those paid by the other industry groups and the associate-to-partner gap is half as much. Reversing that, for Technology and Telecommunications the average rates are considerably higher and the gap is nearly twice as much, $200.

Now, draw on some other metrics. In the Fifth Release of the GC Metrics benchmark survey, external spend as a percentage of revenue for Manufacturing (112 companies, about 60% US) is twice that of Retail (44 companies), yet the TyMetrix average litigation rates are nearly the same. Since litigation accounts for 50-70 percent of all external spend, these two streams of data suggest Manufacturing companies face twice as much litigation expense as Retail companies. That sounds right.

TyMetrix has produced an 8-page handout, the “Litigation Rate Snapshot,” based on its LegalVIEW data warehouse of billing and matter information. The full report covers $15 billion in fees submitted by 10,000 U.S. law firms and 147,000 individual billers. The total hours reached 39 million.

At the most aggregated level, therefore, the blended rate for all those fees and hours comes to $385 an hour. That rate reflects all write-offs and approvals, so the submitted blended hourly rate was somewhat higher. Since the counterpart figure for U.S. legal departments comes in just below $200, this appears to put an outside litigation hour at twice the cost of an inside hour.

“Most large law firms have far more lawyers than the availability of client work requires.” Ed Wesemann in the Edge International Communique asserts this.

Wesemann explains that “This is, in part, driven by the law school hiring programs that require firms to predict their staffing needs almost two years in advance. But an equal culprit is the fear by most law firms of having a client come to their door with an engagement and not having the people to do the work. New business is so difficult to obtain that, for many lawyers, the fear of not being able to perform it in an acceptable manner causes the firm to err on the side of excess capacity.” If Wesemann has correctly identified systemic over-staffing, it would seem logical for partners to more willingly explore alternative billing arrangements to keep the surplus labor at least somewhat occupied. Over-staffing breeds over-billing, law department managers should worry, because associates hungry for chargeability will likely rack up hours if given the opportunity.

The “European Briefings” supplement to the ACC Docket, Dec. 2011, at 12, describes how Procter & Gamble’s EMEA law department, 120 lawyers strong in two dozen locations, coped with regulations by the European Commission’s of chemical substances. The department worked closely with Allen & Overy on compliance with REACH, including swapping knowledge. As described, “Given the expertise of each, the legal department and the law firm implemented practices to ‘swap’ various legal and regulatory information and knowledge without charging a fee.”

This is a wonderful idea! In-house lawyers build up deep knowledge in specialized areas of law and practice. That experience has value to a law firm that represents other clients regarding that area. A mutual exchange of documents, checklists, contact names, case studies and other material can help both sides – law departments to contain costs and law firms to expand their knowledge and marketing.

An ad in Diversity & The Bar promotes a highly specialized database that can tell a general counsel how much the law department pays in fees to diverse lawyers. I took a look at the website and could not find out more than the ad explains. The ad mentions that TrakItPro “imports data from existing billing systems.” This is an interesting idea, with application beyond diversity: siphon off some data from a department’s matter management system, combine it with other data, and produce specialized reports and insights of more value.

The company that offers TrakItPro, FHGmedia Enterprises, appears to be a very principled, small and new organization intent on advancing the prospects of minority lawyers.

This term, new to me, appeared in a catalogue of books from MIT Press. Here is a definition from George Ainsley’s website.

“Picoeconomics (micro-micro-economics) explores the implications … that people (often) … discount the prospect of future rewards in a curve that is more deeply bowed than a “rational,” exponential curve. Over a range of delays from seconds to decades, there are pairs of alternative rewards such that subjects prefer the smaller, earlier reward over the larger, later alternative when delay to the smaller reward will be short, but prefer the larger, later reward when the smaller alternative will be more delayed, even though the time from the earlier to the later reward stays the same. The curves that fit the observed data best are hyperbolic, that is, show value as inversely proportional to delay.”

Ainslie originally discovered hyperbolic discounting as an aspect of a broader empirical principle, Herrnstein’s matching law. It’s not simply the size of a reward times the inverse of time until the reward – that would be an exponential function.

As companies do business in increasing numbers of countries, it follows that they will need to hire law firms in some of them. Convergence of firms – the deliberate use of dramatically fewer law firms – must then give way to de-convergence – a larger roster of firms retained. Likewise, if legal complexity has increased, which presents another consequence of globalization, it likely brings with it a need for more specialties and thus firms – another blow to convergence.

The shift upwards in absolute numbers of law firms retained does not necessarily entail a reduction in concentration of spend. A law department might well spend three out of every four of its dollars on outside counsel with the handful of firms it pays the most. It could retain dozens of additional firms and not shift that proportion. In the jargon of statistics, the tail grows longer as you de-converge, but the focus on a few key firms can stay just as strong (See my post of Nov. 20, 2006: linear relationship between number of firms retained and size of law department.).