Articles Posted in Outside Counsel

A chapter in Robert L. Haig, Ed., Successful Partnering Between Inside and Outside Counsel (Thomson Reuters/West 2009 Supplement), Sec. 78:21.20, describes a long-term relationship between ServiceMaster and Hinshaw & Culbertson. In 2002, the company and the firm agreed that Hinshaw & Culbertson would handle work for a subsidiary based in Memphis. The law firm did not at that time have an office in Memphis. To satisfy the client, the firm agreed the lead partner would spend approximately two days per week in Memphis, at the firm’s expense.

If a portfolio of matters taken on by a law firm is sufficiently large, it is quite sensible for the firm to establish an office, or at least a regular and substantial presence, near its primary client’s executives (See my post of April 23, 2007: value of outside counsel proximity; and March 19, 2007: arrangement with distant firms on travel costs to match nearby counsel.).

For the same reasons that nearness matters for external counsel, co-location with key clients matters for internal counsel (See my post of Feb. 5, 2006: proximity; Feb. 12, 2006: proximity of lawyers on the same floor of a law department; July 31, 2005: general counsel who have their offices near their lawyers; June 7, 2006: dueling best practices about contiguous lawyers; Nov. 13, 2006: co-location with clients; Nov. 25, 2005: locations of corporate counsel; and June 20, 2008: GE and co-location of its Pacific lawyers.).

As described in the ACC Docket, Vol. 26, Nov. 2008 at 101, the core law firms of Pfizer – those that make up its P3 group – submit periodic “value reports.” In them firms “identify their respective contributions in the area of savings and benefit to the company.” That’s all it says in the article, so we must bate our breath.

Never one to bate, let me speculate. A law firm under pressure to state something about the savings they have allowed and the benefits they have generated would tilt toward the latter. Insights into tricky situations analyzed, clever solutions proposed, rapid responses turned around, transactions made possible, and risks avoided would appear aplenty. Other than discounts granted, showings of savings would be meager (See my post of Aug. 21, 2009: value compared to fees paid with 22 references.)? Then, what does Pfizer do with all these “value reports?

“Fixed fee arrangements are fundamentally flawed. As soon as you discuss them with the firm, the numbers increase to include the premium and contingency, and hey presto, you’re paying more than you should have in the first place.” This cynical generalization glowers out of Legal Strat. Rev., Summer 2009 at IV.

The assumption is that hourly billing was the preferred arrangement in the first place (“more than you should have”). That assumption in turn implies that the firm bills honestly and the legal department directs work and reviews bills effectively. The assumption in the statement is also that the firm takes on more risk when it charges a fixed fee so it feels entitled to a premium for taking on that risk. Moreover, neither side has addressed carve-outs, articulated assumptions, or other ways to take account of contingencies (See my post of March 1, 2008: fixed or flat fees with 36 references.).

Although the quote reflects what some general counsel may think, it doesn’t reflect well that they think. It feels to me analogous to the common complaint of law firms that “competitive bids are wired.”

“The accuracy of economic forecasts diminishes in months into the future.” William A. Sherden, The Fortune Sellers: The Big Business of Buying and Selling Predictions (John Wiley 1998) at 63, goes further: “The average forecast errors percentages for real GNP growth were 45 percent at the beginning of the year being forecasted and 60 percent six months in advance of the year being forecasted.” Forecasts decline in accuracy the farther they try to peer.

Likewise, the accuracy of case budgets degrade the farther out you ask law firms to forecast. How can in-house managers expect law firms to predict budgets for entire cases? Ask for the upcoming quarter on a rolling basis (See my post of April 27, 2005: budget no farther than your headlights; Aug. 4, 2009: use a funnel metaphor for budgets; Oct. 22, 2008: build for flexibility rather than strive for prediction; July 9, 2009: budget scenarios instead of single figures; and May 21, 2007: matter budgets with 9 references.).

“Corporate Executive Board research reveals that reducing legal staff can actually lead to considerable increased legal costs. Companies with fewer in-house lawyers tend to spend twice as much as their peers with more lawyers.” I suppose if a department is denuded, its client enterprise will pay more to outside counsel. But the vague use of “fewer” gives little guidance. The quote is from the Corporate Executive Board, April 10, 2009.

A second quote also troubled me. “The root of the problem is that contracted lawyers cost two to three times more than in-house lawyers, and companies invariably end up needing to use them for a variety of reasons, and usually on a very frequent basis. Legal work typically isn’t discretionary—try as they might, companies can’t avoid engaging a lawyer when a legal matter arises.”

The General Counsel Roundtable pays attention to its research, so I am surprised that it states that in-house lawyers cost one-third of what “contracted lawyers” cost. All the figures I have seen tell a different story. On a comparable hourly-cost basis, inside lawyers are in the $200 range and outside counsel are in the $300 range for effective rates, which is fifty percent more – far from 200 to 300 percent more.

A law department can hire two five-hundred lawyer firms for similar services, paying one an effective rate of $450 an hour and paying the other an effective rate of $300 an hour. The difference between the two firms’ costs on a per-hour basis is 50 percent.

But I doubt that the quality of the work or the results produced vary by anything like 50 percent. If quality varied that much and was perceptible, the lower quality firm would not last long on the roster of the law department (See my post of April 9, 2009: law firm quality with 25 references.).

More than a score of posts on this blog survey the interplay between the amount paid law firms and the perceived worth of the services paid for. Roughly half of the comments pertain to specific billing rates and amounts billed in light of the perceived value (See my post of Jan. 13, 2006: rates that vary according to value delivered; May 14, 2006: rates according to value; May 26, 2006: conditional billing rates; Aug. 20, 2006: value-based payments; Oct. 22, 2006: lower rates for lower value work; Nov. 11, 2007: fees paid compared to value received; Nov. 22, 2007: another view on the fees vs. value assessment; Feb. 4, 2007: difficulty of stating a dollar value for what a firm accomplishes; June 20, 2008: value for money paid to firms; Nov. 21, 2008: value-based payments; and April 5, 2009: higher discounts for lower value work.).

The other half of my previous posts address collateral and broader points (See my post of May 1, 2006: inexperienced inside lawyers can’t assess value of outside counsel; Nov. 28, 2007: blame for lack of value partly falls on legal department; July 17, 2008: criticisms of law firms for inefficiency; March 30, 2008: bumps on the road to value pricing; Sept. 12, 2008: value proposition of regional firms; Oct. 22, 2008: normal fees deserve normal quality; June 1, 2009: value-based billing and changes at advertising agencies; April 25, 2009: ACC Value Challenge; July 4, 2009: clients set value; July 5, 2009: “cost” compared to “value”; and Aug. 10, 2009: “value for money” rating.).

A citation in Robert Haig, Ed., Successful Partnering Between Inside and Outside Counsel(Thomson Reuters/West 2009 Supp.), Vol. 1, Chapter 4 at §4:3, left me perplexed. The article mentioned in that chapter, presumably approvingly, discusses bringing more legal work in-house. The author of that article, a former general counsel, wrote in May 2008 that “Some businesspeople use a rule of thumb … that the cost of doing something inside the company should be approximately one-third the cost of obtaining the services outside the company.”

If executives typically believe that internal lawyers cost approximately one-third of external law firms, they are mistaken. On a per-hour basis, $180 an hour inside fully loaded compared to $300 or so as an effective outside rate, the gap is more like 25 percent less rather than 33 percent less (See my post of March 5, 2008: make-buy with 11 references.).

Possibly the executives believe the inside lawyer should do the work more quickly than her outside counterpart. That speed differential might reach the one-third-of-outside level. Unfortunately, speediness is not likely for the specialized legal services and knowledge that trigger the use of outside counsel; the inside lawyer knows less than the lawyer hired. Still, the inside lawyer might be willing to take more legal risks, based on understanding the business better, which could compensation somewhat. Not likely, in my estimate. I think the rule of thumb is broken.

Pfizer, wielding its mighty P3 program, likes to squeeze from its preferred law firms higher discounts the more it uses them. “To effectively share in the benefits of economies of scale, we [Pfizer] implemented a tiered-volume discount structure, with the level of discounts increasing as firms receive higher volumes of business,” according to the ACC Docket, Vol. 26, Nov. 2008 at 97.

Opponents of tiered discounts suspect that such an agreement only pushes the client to spend more money with the firm, but does not encourage the firm to be more efficient. Worse, at the margins a department might choose a lawyer of not as good quality as is available because the nominal savings of increased discounts for that lawyer blind them. Worst, just because you get an additional five percent knocked off the bill for reaching the next tier up does not mean you needed the additional work done by the firm in the first place (“Look at all the money I saved at the sale, buying things I didn’t need!”). Tiered discounts perpetuate, or exacerbate, the shortcomings of hourly rate discounts (See my post of Aug. 8, 2006: tiered discounts from hourly rates; July 2, 2007: percentage increases in discounts; Nov. 22, 2006: step-wise discounts from standard rates for increased volumes of fees, retroactivity and exclusions; March 24, 2005: criticizes step discounts; and Nov. 27, 2005: firm might resist step increase if it triggers a rebate.).

A slim book sent me for review from Abacus Law humorously describes 35 dangerous myths lawyers in private practice might succumb to. Three of them, at least, pertain to services provide to legal departments. I have refashioned summaries of them below to clarify their importance to in-house attorneys, but essentially I draw from Judd Kessler, Gunter Enz, Michael Quade, Lawrence Kohn, Albert Barsocchnini, Thomas Hauck, and Brian Whitaker, Dangerous Law Practice Myths, Lies and Stupidity (Fortune House Publishers 2009).

Myth 5 emphasizes how much legal department managers of outside counsel want to be told “any time something happens on their matter, and attach every document that goes into their files” (See my post of Jan. 21, 2009: “we hate surprises”.).

Myth 8 points out that in-house lawyers do not like the meter ticking every moment outside counsel works for them: “Meters are good for taxicabs, but there are better alternatives for a law practice” (See my post of May 6, 2009: hourly billing discourages clients from calling.).