Articles Posted in Outside Counsel

A previous post collected posts on tiered fee discounts and showed a breakeven analysis (See my post of Oct. 12, 2009: volume discounts on fees.). How are volume discounts and rate discounts operationally different? Six differences are listed below.

1. Volume discounts delay the benefit to the department; hourly rate discounts take effect on the first invoice.

2. Volume discounts require tracking by the department or the firm so they know when a higher discount starts; rate discounts require nothing from the legal department except monitoring that the discounts were given on each bill.

Research conducted in 2005 and 2009 by the Wellesley Hills Group “analyzed how purchasers of legal services and other professional services – representing US$1.7 billion in purchasing power – made their purchasing decisions.” A chart from the research reproduced in Prof’l. Legal Mgt. Week, 3rd Annual Issue 2009 at 46, lists 13 “methods buyers are very/somewhat likely to use to initially identify and learn more about professional service providers.”

“Referrals from Colleagues” led in frequency at 79 percent (See my post of Aug. 5, 2007: referrals dominated for finding ex-US firms.) followed by “Personal Recognition” at 75 percent. Recognition presumably covers partners than an in-house lawyer knows from school, prior jobs, and outside of work.

Then came “Presentations at Conferences” (62%), “Website” (58%) (See my post of Oct. 16, 2006: survey data on how law departments find law firms.) and “Internet Search” (55%) (See my post of Jan. 28, 2008: Google search is difficult way to find a lawyer.).

Here is a misunderstanding. David Galbenski, Unbound: How Entrepreneurship is Dramatically Transforming Legal Services Today (2009), has a chapter by an Eversheds partner, David Smith. Smith writes (at 27), “Some clients have their own finance people deal with our finance people to reach an understanding about the pricing model. This requires trust and partnering.”

I can’t envision a general counsel who would let someone from the CFO organization negotiate how the legal department pays a law firm for its services. My disbelief of this quote stems from the unlikeliness that any kind of service other than the most rudely basic can be priced on a financial formula.

I can imagine an exchange of data between finance staff and the development of models. But I cannot imagine an agreement reached by non-lawyers on how to price even moderately sophisticated legal services.

A general counsel can request from law firms a ladder of discounts that rise as the law department pays more fees. For example, 10 percent above a million dollars; 12.5 percent above $2 million; 15 percent above $3 million (See my post of Aug. 13, 2006: tiers based on something other than volume of fees paid; March 24, 2005: pressure to instruct inappropriately to reach higher tiers; Nov. 27, 2005: another view of stepwise reductions; Dec. 19, 2005: UTC experienced volume discounts eroding; Aug. 8, 2006: retroactive application of discount levels; Nov. 22, 2006: tiered discounts based on the amount of fees; July 2, 2007: percentage increases in discounts; Oct. 19, 2007: survey data on preferences for tiered discounts; Jan. 19, 2008: example from British Columbia Transmission; Nov. 21, 2008: relationship to convergence; and Aug. 13, 2009: no tiers on my pillow.).

Alternatively, a general counsel can request discounts based on a percentage reduction in every timekeeper’s billing rate (See my post of Jan. 21, 2008: 10 more posts with variations on discounts; and Dec. 26, 2008: third metapost on discounts, with 12 references.).

One question is whether and at what amount do the two methods result in equal savings. The permutations are infinite, but let’s take two simple examples. Obviously, a 10 percent haircut on individual billing rates saves the same amount as a 10 percent volume discount that starts at the first dollar. But if the volume discount kicks in at $1 million and rises to 15 percent at $2 million and above, the law department has to spend $4 million before the two forms of fee reduction save equal amounts (10% of $4MM=$400,000 as compared to 10% of $1-2MM=$100,000 plus 15% of $2-4MM=$300,000).

This post may roll the eyes of my law department readers, but give me a chance. Research by the Wellesley Hills Group appears in Prof’l. Legal Mgt. Week, 3rd Annual Issue 2009 at 47. The three most common errors of lawyers when they try to sell are “Did not listen to me,” “Did not understand my needs,” and “Did not respond to my requests in a timely manner.”

All three of those common blunders you as an in-house lawyer listening to the pitch can address and improve. Tell a non-stop talking partner who blowhards his way forward to stop talking! Tell him or her you need to make some clear points about your needs and you want them repeated to you. Second, start the session not with the partner extolling the firm’s virtues but with you laying out clearly what you want done and how. Third, if you need something by a date, set the deadline and enforce it. You will benefit if they follow your guidance.

This blog quoted one of my posts in full, and in a sidebar lists the “Top 17 litigation funds.” I presume the numbers that follow the names indicate the amount raised by each fund and I presume those estimates are in US dollars. One that is missing is Juridica.

1. Intellectual Ventures 400mm – 1bn
2. Coller IP Fund 200mm

“The amounts spent on outside counsel for litigation is much higher for a U.S. legal department versus a similarly sized international company.” That claim by Marcus Linden in Met. Corp. Counsel, Vol. 17, Sept. 2009 at 22, leaves several holes to be patched. I don’t doubt the essential point, but the statement needs several improvements for clarity.

It would be tighter if the international company does not do business in the United States in the same volume that the U.S. legal department’s company does. Otherwise, where a company is headquartered makes little difference to its exposure to lawsuits and attendant costs for business done in the United States.

Secondly, some of the statement’s looseness would be reduced if the two companies produce the same goods or services. Otherwise, size alone, as measured by employees or revenue, has little bearing on litigation vulnerability and expense.

An article in Harpers, Vol. 304 Oct. 2009 at 37, explains why investment bankers make so much money: “When you have only one chance to get it right, you tend to open up your wallet and pray,” writes Megan McArdle, and she applies this logic of client profligacy to the stratospheric economics of movie trailers, weddings, funerals, and college diploma. How she missed major legal matters I do not know.

One-shot deals like IPOs, secondary offerings, major acquisitions for business managers equivalent for general counsel of bet-the-company litigation, IPOs, defenses against marauding acquirers, Chapter 11 reorganizations, and European Commission competition inquiries. One-shot deals, unfamiliar, rife with unknown and potentially enormous consequences, career determining, mean that with one chance to get it right you think about legal fees like Rhett Butler: “Frankly, my dear, I don’t give a damn.” Bills of law firms are bagatelles.

I did not think that U.S. general counsel typically get out and visit their key law firms on any regular basis. Yet Marcus Linden, writing in Met. Corp. Counsel, Vol. 17, Sept. 2009 at 22, says that “a London-based GC can get out every year and meet with all her firms — developing great personal relationships that enable her to understand exactly what they’re doing for relative to their proportionate share of her companies legal spend. Her U.S. counterpart finds that the sheer number of firms makes it difficult to build similar relationships and to have his detailed knowledge of their activities.”

Linden had written earlier that he thinks comparable U.S. general counsel deal with three to four times more law firms, which makes visits more burdensome. He also notes how large the Us is compared to the more compact UK.

No doubt law firms try to get on the calendar of the chief legal officer of their key clients, but I do not think the reverse is true.