Articles Posted in Outside Counsel

Why not encourage your incumbent firms, the ones you are comfortable with, to cross-sell into areas of service where they have not served you (See my post of Feb. 20, 2009: cross-selling by law firm partners with 7 references.)?

One way to encourage firms to expand their scope of services is for them to buy entrée with discounted rates. Language in your terms of engagement to effectuate that might include the following: “As an inducement for the Company to expand the range of legal services performed by the Firm, an additional five percent (5%) discount will apply to the fees generated by each of the following practices, provided that the amount of the fees generated by such practice exceeds $200,000 during the following 12-month period: Environmental or Bankruptcy.”

Both the firm and the legal department acknowledge the possibility of additional work and put a price tag on the law firm’s earning that right.

A consulting firm I know rewards its mid-level consultants quarterly if their utilization rates exceed a certain figure. It does so by giving them at the end of each quarter the percentage of their salary that is the same as the percentage they exceeded the utilization goal.

If a law firm did the same, general counsel should be perturbed. If the firm said to its associates “We expect you to bill 1800 hours, which is 450 hours a quarter. For every percentage that your billable hours in a quarter exceed 450, we will write you a check for that percentage of your base. If your base is $100,000 – $25,000 a quarter – and you bill 495 hours in a quarter (10% more than the bogey), you will get a check for $2,500 (10% of your base).”

I believe that any law firm that institutes such a program should inform all its clients about it, and that those clients should worry.

In any given matter, for any given requirement governed by your guidelines for outside counsel, the supervising attorney may properly decide to waive or modify the requirement. Law departments could state that option expressly before every requirement (“Unless otherwise modified or waived by the supervising attorney, the Firm must …..”) but that becomes cumbersome and lengthens the guidelines to no benefit. An alternative is to write a sentence at the start of the guidelines that recognizes the realities of individual, matter-specific decisions.

Of course, no general counsel wants supervising attorneys to blithely gut the agreement or create a patchwork of exceptions and modifications. That extreme aside, don’t engorge your guidelines with lawyerly phrases repeating a right you already have (See my post of July 11, 2008: guidelines for outside counsel with 16 references.).

In an article in Strategies: The J. of Legal Marketing, Vol. 11, Aug. 2009 at 5, Susan Hackett of the ACC Hackett@acc.com says that law firms participating in the ACC Value Challenge seek to “turn two long-time in-house mantras on their head:”

“No one ever got fired for hiring [Insert Admired Firm]” is the first mantra. The ACC can’t overturn this deep psychological barrier by fiat or caucuses. The elite firms that enjoy this cachet, who by their reputation alone ward off evil from those who pay their fees, who have become brand names in the households of Directors, deserve their exalted rank. The value they are perceived to deliver transcends the economics of their fees (See my post of May 23, 2007: well-known firms hired to CYA.). It makes me wonder whether wannabe firms are flocking to this effort.

The second mantra, also suspect in ACC’s eyes, is “Hire the lawyer and not the firm.” I am on record that in-house lawyers mostly retain individual partners, not disembodied firms. A human brain and personality, not an abstract institution, makes the difference to clients, and correctly so. It’s a firm handshake and a firm brochure. Humans are high touch, firms out of touch. Only in very complex or large assignments might firm resources tip the scales against the partner focus.

In my ideal matter the law firm works on it under a fixed fee, so invoices are simple. Real life, however, mostly serves up hourly bills. Each monthly bill is like a layer in lasagna (See my post of Feb. 21, 2007: standardized formats of bills.). The good stuff (cheese, meat, sauce) should be the narrative at the start about the two or three tasks that took the most time during the month and their approximate cost.

More tasty stuff lies at the bottom of the layer with a table that shows each timekeeper, their billing rate, hours and total amount billed. The recap gives additional flavor (See my post of Sept. 28, 2008: the importance of a recap on an invoice.).

In between is the filler, the minutia of daily time entries, the tangle of pasta.

Chris Anderson, Free: The Future of a Radical Price (Hyperion 2009) at 80-83 explains the concept that what we pay for something usually includes more and more over time; the quality of what you buy today is greater than the same purchase several years ago. A quality-adjusted measurement of legal services over time would likely show a similar correlation between fees and additional depth of services covered. Today’s billion-dollar IPO probably deals with more legal issues than the equivalent sized offering 15 years ago.

Moreover, if we had historical data on the typical cost of common legal services in 1989, 1999, and today, I would not be surprised that the inflation-adjusted fees have stayed fairly stable. In other words, in constant 2009 dollars, the fees charged by law firms one and two decades ago for the equivalent of a $2 billion (in today’s dollars) acquisition, a moderately complex patent application, a 10-K report, or the lease of 50,000 square feet of manufacturing plant would be roughly in line. Learning curves support that hypothesis (See my post of March 11, 2009: experience curve with 9 references.).

A combination of the two ideas – enhanced quality and adjustment for inflation – might challenge the notion of ever-increasing legal costs. That said, total legal costs also climb because new laws pass that create more legal obligations and rights.

An unsung hero of invoices trails along at the end, the recap. Typically it lists in a table format each timekeeper who logged time during the invoice month, the number of those hours, and the billing rate of the timekeeper. A little multiplication leaves the final column that shows the total covered on the bill.

The usual recap sorts this data is alphabetically by the name of the timekeeper. An enhancement shows the percentage of the total billed by each person. More useful is a sort order by seniority of lawyer because the reviewer can get a sense of how the work distributed by level (partner, associate, paralegal, etc.). A variation would be for the recap to include a line for each level of timekeeper. The point is, give some thought to what you want your firms to provide in the billing recap.

A checklist for outside counsel guidelines recommends a protocol it describes as a “weekly billing summary.” The law firm must submit each week to the general counsel (!) and each lawyer responsible for a matter an informal summary of the week’s billings. The summary lists the names of the billers, their hourly rates, the number of hours billed, and the tasks performed. Graciously, it continues: “The law firm may revise the figures in this informal summary as necessary when creating the monthly invoice.”

Other than for a rare, very costly matter, it cannot be worthwhile to use either side’s time to trudge through this (See my post of May 19, 2006: why departments don’t care about real-time billing.). Some external lawyers do not turn in their time records quickly enough. Further, in-house counsel do not want to take their precious time looking at informal tote boards. They should attend mostly to what the firm plans to do and what timekeepers will work on those services. If you must permit hourly billing, let the bills come monthly after they have been scrubbed. If you feel you have to keep such close tabs on a firm, you have retained the wrong firm. Or you are a micro-managing control freak.

Other techniques can keep the managing attorney apprised of costs, such as notice every time $25,000 is incurred. Or, tell firms to notify the supervising attorney when one-half of the budget for a matter is reached and when three-quarters of the budget is reached.

Software exists which helps a litigator quantify the likelihood of various decisions and occurrences in a lawsuit and attach to them outcome amounts. Along with the software there are consultants who can advise litigants on decision-tree methodologies (See my post of June 17, 2009: decision tree software with 6 references.)

Even if your legal department does not want to invest that much time and energy, it can still ask outside counsel to lay out a branching assessment of what could happen in the coming months in a lawsuit. To attach budget estimates to those branches goes even farther. To top it off, ask for this analysis to be done within 60 days after a complaint is given to the law firm.

It is sound management for a legal department to insist that its primary firms designate a core group of lawyers who will bill most of the fees on a matter. That core-staff notion has ample intuitive appeal.

What’s needed are some operational guidelines. One way to establish a core team for a project is to anticipate the plausible billings on the matter and scale the size of the team to that figure. For example, if the matter is likely to cost $100,000 or less, a core team of one partner and one associate might be expected to bill 75 percent of the time on the matter. If the matter is likely to cost $250,000 to $500,000, the core team might reasonable expand by another associate or two and a paralegal. This approach to setting core staff dovetails nicely with obtaining budgets from firms.

By that kind of rough estimation scaled to budgeted fees, a department can more easily assess the staffing recommended by the law firm (See my post of July 17, 2008: core team II with 11 references and citations to 7 earlier.).