Articles Posted in Outside Counsel

It is arguable that law departments deserve discount levels like those granted to other clients of a firm where the discount is based solely on the volume of fees paid in a year. If your law department spends $2 million on a firm during a year, your department has the right to say, “We should get the best discount arrangement that you have granted any other company that spends $2 million on you.”

My gripes about most-favored nation demands (MFN) boil down to the impossibility that legal services are comparable by type of legal issue, need for partners, knowledge of the business, priority of the work, and other characteristics. Without equal circumstances, there is no justification for equal discounts (See my post of April 30, 2009: MFN impositions with 8 posts.).

But a dollar is a dollar, and perhaps – just perhaps, since I still don’t like discounts – one client who spends the same amount as you and has negotiated better rates ought to benefit you.

According to Christine Baker, inside counsel with Realogy Corporation , “Mistakes will not get [a law firm] fired. But lying about your mistakes or trying to shift blame will. Either act will destroy the relationship—the first immediately, the second gradually.” (emphasis in original)

Writing in Law Practice Mgt., Vol. 35, Sept./Oct. 2009 at 37, Baker makes a good point. No one is perfect; to err is human. It is how you own up to mistakes and show that you learned from them that earns you respect. It is covering up or pointing the finger wrongly at others that earns you the label, “our former lawyer.”

And, I should note what should be obvious, honesty is a virtue on both sides of the law firm – law department divide. In-house lawyers who acknowledge their own misjudgments will survive longer than those who try to evade accountability with prevarication and blame.

Some law departments negotiate fee arrangements with law firms whereby the department (a) pays upon the successful completion of the transaction and (b) pays a substantially reduced amount if the transaction does not go through. Commonly done with major acquisitions or divestitures, “busted” deal fees might knock a third or more off the fees the firm would have charged up to the point the deal fell through.

The delayed payment and success contingency mark these arrangements as alternatives to hourly billing done on the standard monthly billing, straight-up way. A firm that agrees to such broken deal payments, Boies Schiller & Flexner, enters into them with long-term clients, according to Law Practice Mgt., Vol. 35, Sept./Oct. 2009 at 35. Familiarity with each other makes sense in the context of these outcome-based fee reductions. Law departments can apply this concept more broadly, to a range of transactions.

Close to 40 posts on this blog have to do with discounts granted by law firms (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.). What I haven’t written about are the multitude of ways legal departments can manage the discounts once granted.

One method calculates the discount once the year has ended. The law firm then generates a credit for the coming year or remits the amount due to the department.

A second method contemplates such a reconciliation quarterly or semi-annually.

For law firms, the “Of Counsel” designation makes a difference, even though it can signify several different circumstances of the particular lawyer. For in-house lawyers, the differences are meaningless.

Of Counsel lawyers might not make capital contributions, but in-house counsel couldn’t care less.

Of Counsel tend to be senior lawyers, but in-house counsel should care only about value delivered in relation to billing rate, not years out of law school.

An article by the president of BTI Consulting, published in Strategies, Vol. 11, Sept. 2009 at 6, lists as one of “five new client priorities law firms can leverage to build business” a notion very strange to me and my clients: “Discussing alternative fees is more important than adopting alternative-fee arrangements.”

Did I read that correctly? Talk counts more than action? Yes, because “Clients place high value on a firm willing to simply open a discussion regarding alternative billing arrangements.”

Is this view cynical? Is this hypocritical of law firm partners? Is it sound advice to law firms? “Regardless of implementation, open discussions on alternative billing demonstrate a law firm’s understanding of the client. Wrong, completely wrong. Open discussions don’t reduce costs; changed behavior and smaller invoices reduce costs.

An article by the president of BTI Consulting, published in Strategies, Vol. 11, Sept. 2009 at 6, asserts that “the average company cut nine law firms – nearly 17 percent – from its current roster of legal service providers in 2009.” That means that the average fell from about 55 law firms to 46. A chart that accompanies the article confirms that that “number of law firms used” dropped during 2008-2009 dropped from two “primary” firms, 10 “secondary” firms, and 42 “all others” (total of 54) down to two primary, 9 secondary, and 34 all other (total of 45, a reduction of 9). I estimated the secondary and other figures.

Why didn’t the article explain what it means by “cut”? The term sounds deliberate, as if a firm had performed poorly. If a law department stops using a law firm, could it sometimes mean that the law firm completed the case or matter or merged with another firm?

What proportion of the legal department’s spend went to the law firms that were “cut”? If the typical law firm that was “cut” received $5,000 or less from a legal department, the sentence packs less of a punch than if the typical amount was multiples.

Several months ago I passed on what information was then available to me about the impressive efforts of the Belgian Post to transform its use of outside litigation counsel (See my post of March 12, 2009: tantalizing ideas.). At the Legal Week Corporate Counsel Forum last week, Dirk Tirez, the general counsel and corporate secretary of the company, spoke at length about the initiative. My notes supplement what I wrote before.

When Tirez took his position six years ago, the Belgian Post had about 3,000 lawsuits handled by 65 law firms. Now, nearly all the litigation defense is handled on fixed fees by two firms. The firms can earn performance bonuses for results obtained. The expenditure was nearly 100 million Euros when Tirez took over but the number of pending cases and amount of ongoing expenditures have both fallen drastically.

Tirez collects and analyzes all kinds of metrics. In part he does this to make decisions and in part so that he can explain to senior management the efforts undertaken to control costs with quality.

Even if solicited by a general counsel to offer candid feedback, for many reasons a relationship partner might only reluctantly and partially comment on the performance of a law department client. At least eight obstacles conspire two thwart useful observations, let alone recommendations. The partner might not:

1. wish to offend the people who will hear what seem to them to be critical comments.

2. disagree with the status quo or wish to rock the profitable boat.

Burrowing through some old files, I stumbled on notes I took at a Fulcrum conference that in May 2000 focused on partnering. Tom Brooks, then the administrator of what was then AT&T’s legal department, spoke about their efforts. My notes covered these actions.

AT&T sent an RFP process to 15-20 law firms in each of several geographic areas. AT&T required its firms to bill within 30 days or suffer a 10 percent discount. They locked in rates for 12 months or the duration of a lawsuit. A decade ago, according to my notes, AT&T obtained discounts that ranged from ten to thirty percent (30%!). Brooks said that “alternative billing did not really work, contrary to expectations. He also said that “small firms have been a very viable choice.” My final note was that bills went first to the finance organization where they were audited before going to the lawyers.

My take-away from this is that the tools of external cost control in use today are in many respects the same as those wielded a decade or more before. To be sure, e-billing, offshoring, virtual firms, and task codes were not available to AT&T at the start of this century, but in full play were competitive bids, convergence, discounts, outside counsel guidelines, prompt billing, and bill auditing. Change is gradual; in fact, I believe, new practices account for a smaller portion of managerial change among general counsel than does the broader diffusion and enhancement of pre-existing practices (See my post of Sept. 13, 2006: focus on common good practices, not novel “best practices”; Nov. 6, 2007: focus on execution more than on innovation; and July 11, 2008: execution-as-efficiency and execution-as-learning.).