Articles Posted in Outside Counsel

I have always assumed that secondments apply only to associates. Barclays, however, upset my comfortable presumption since they recently obtained as a secondee a litigation partner from Simmons & Simmons. Corp. Counsel, Vol. 16, Aug. 2009 at 59, does give me a bit of comfort as it notes that this arrangement was “the first senior partner to take on a secondment.” The terms are not disclosed (See my post of July 17, 2008: secondment with 12 references; and Jan. 23, 2008: secondments with 8 references.). Actually, I uncovered another instance of a partner secondee (See my post of Feb. 12, 2009: lawyer served as seconded GC to Standard Chartered Bank.).

Since the last metapost on secondments I have accumulated ten more (See my post of Aug. 18, 2008: BT’s experience; Dec. 11, 2008: bring internal secondees to headquarters; May 23, 2008 #2: article on secondments in GC California; Oct. 12, 2008: mentions Bayer, GE, and Cisco having secondees; April 2, 2009: HSBC experience; June 4, 2009: familiarity and conflicts points; April 20, 2009 #1: Cardinal Health’s secondee at cost; May 6, 2009: secondment as an alternative fee arrangement; and July 20, 2009: ask in RFPs and scale secondments to fees.).

In my consulting projects, the first-round proposals in competitive bids for fixed fees to handle significant amounts of legal work have varied by fifty percent or more. Stated differently, comparable firms differ in their proposed amounts by upwards of fifty percent of the lowest amount bid. If that gap holds generally, law departments that do not solicit comparable bids from a group of firm might be as likely to pick a firm on the high end as on the low end of the presumed range. On average, the law department will, therefore, pay 25 percent more than the presumed low bid it never considered because it did not solicit competition.

Now, the low bid may have been unrealistic; the high bid may have been gouging. The point is that a priori mathematics suggests that competitive bids on their own could save 10-15 percent, which has been my experience (See my post of Aug. 15, 2008: competitive bids with 35 references.).

Is it possible with legal departments that the less you spend inside the more you spend outside? Not as a percentage of total spending, because that calculation must total 100 percent: if you spend 30 percent inside you must spend 70 percent outside. What I mean is the ratio between the fully-loaded cost per inside legal staff hour compared to the effective rate of all outside counsel (fees and disbursements).

My speculation is that with fewer or not as good resources inside – as reflected by their cost, which is mostly compensation – a company that is the equal of its peers and faces similar legal needs will have to pay more for better resources outside. Cheaper inside forces more expensive outside.

As part of a study conducted for a publication of CPA Global, reported in Legal Strat. Rev., Summer 2009 at V, respondents were asked an ultimate question: “how they would rate the ‘value for money’ they got from external legal spend on a scale from one (lowest) to 10 (highest).” In the event, the average ‘value for money’ score was six. The study also found that in “extremely specialist areas, when a large top 10 firm was used, the average ‘value for money score’ went up to an eight.”

For most work instructed to external counsel, therefore, these respondents were lukewarm about the match between fees paid and value gotten (See my post of July 4, 2009: direction from clients can heavily influence the value of what law firms deliver.).

The high levels of loyalty legal departments exhibit toward their primary law firms dispute this survey’s finding of only modest levels of satisfaction.

Peter Leeson, The Invisible Hook: The Hidden Economics of Pirates (Princeton Univ. 2009), especially 164-171, explains why pirate ships often had sailors who were both black and free, not slaves. In essence, the benefits of slaves onboard were dispersed among all the pirates while the costs were concentrated – a disgruntled slave who caused the capture and hanging of a pirate was for that poor soul a most concentrated cost.

Analogously, for an individual lawyer in a legal department, to conserve fees paid to outside counsel, to monitor a firm’s activities carefully, to pore over bills, and otherwise save money creates a dispersed benefit for that lawyer enjoyed by everyone in the department. Conscientious managers of external counsel share the public good of cost reduction with the free riders. The benefits spread thin.

But, if the matter blows up, the lawsuit is lost, the deal sinks because of a legal problem, the blame goes straight to the responsible lawyer. Everyone knows who was in charge of the transaction’s legal work and if there is failure or a blackeye, the repercussions to a career are real. The cost falls mostly on the individual lawyer. Hence, rare is the lawyer who risks walking the career plank for the collective good mostly of all the others.

Peter Leeson, The Invisible Hook: The Hidden Economics of Pirates (Princeton Univ. 2009) at 94, discusses the economist’s concept of signaling. “The key to a successful signal is that it must be more costly for some types of individuals to send than for others.” Customary reliance on expensive, big law firms tells the world that this is a general counsel to be reckoned with, a serious player, Ozymandius!

Certainly, big firms may house the skills needed to wrestle with complicated legal issues; by all means big firms have overseas offices to coordinate international aspects; obviously phalanxes of associates can charge into the breech, all resources the big firms can marshal. For an economist, the signaling comes from the big price tag of the big firm – general counsel with less stature and clout can’t keep up the with Joneses. “Look at me, I can and will afford the best” it signals to peers and adversaries (See my post of May 1, 2006: signaling function of standard rates; July 14, 2006: signaling function of plush offices.; Feb. 9, 2009: high rates signal for law firms; and Feb. 17, 2008: quality signaled by high prices.). This psychological message might explain to some degree why size of legal department correlates with size of law firm retained (See my post of July 31, 2009: larger departments retain larger firms.).

“Transaction costs are the costs of making exchanges – the time, effort, grief, and sometimes financial costs – associated with coming to an agreement with someone else.” The definition comes from Peter Leeson, The Invisible Hook: The Hidden Economics of Pirates (Princeton Univ. 2009) at 54, but his point extends to agreements with outside counsel “pirates.”

For example, hourly billing arrangements eliminate transaction costs that burden alternative fee arrangements; everyone understands the time-honored arrangement, no one has to hammer anything out. Bill review has an implicit set of understandings, starting with frequency and format, which negates any call for bespoke alternatives. Outside counsel guidelines pre-establish expectations, as do letters of engagement from law firms. Both documents reduce the costs of making exchanges.

These customs lessen transaction costs between inside and outside lawyers. Other techniques exist. The advantages of networks of law firms and of law firms with constellations of offices are that a law department deals only with one source and that reduces transaction costs. Panels of law firms (or any convergence program) reduce a legal department’s costs of reaching agreement. Stated differently, increased transaction costs – the effort to select a panel or reduce the number of firms retained – pays off in lower costs later.

It abuses both your legal department and the law firm to send an invitation to compete for work for which the firm is not a plausible contender. Your project team has to answer their questions, respond to their requests, keep track of the firm in the process, and eventually deliver the disappointing news.

The firm spins its wheels, some partner gets her hopes up, and eventually feels abused – “It was all a show, a rigged competition and we were strung along.” You are not doing them a favor or placating them.

I highlighted this point from humane and practical piece of advice from Robert Haig, Ed., Successful Partnering Between Inside and Outside Counsel(Thomson Reuters/West 2009 Supp.), Vol. 1, Chapter 5 at §5:12. Responses to RFPs are far from costless, on either side, and deserve judicious deployment.

If the lawyers in-house who retain outside counsel can choose whomever they want, it may turn out to be unusual for any of them to use the same counsel. With such divergence, evaluations of outside counsel will not be collective, they will be individualistic. Such a pattern of isolated assessment differs greatly from what Pfizer does as part of its P3 “Managing Performance” program.

As described in the ACC Docket, Vol. 26, Nov. 2008 at 96, “we [Pfizer’s legal department] have conducted a half-day session each January where Pfizer colleagues evaluate outside counsel’s performance over the prior year.”

When you bring people together to share their views on the performance of a law firm, you iron out subjective differences and develop more consistent ratings (See my post of May 12, 2009: pooled evaluations of inside lawyers.). Convergence makes this process much more palatable and fruitful (See my post of Dec. 27, 2008: additional posts on convergence with 11 references.).

Sometimes journalists write something that makes sense to them, but offer no evidence. A sentence to illustrate follows an explanation of “convergence” and gives a consequence of law firms that “begin to operate as long-term partners, offering cost efficiencies and improved service as a result of their wider knowledge.”

Sounds really good, until the denouement: “But, once firmly ensconced, some law firms were able, in turn, to begin charging higher rates for their insider knowledge.” That statement, in Legal Strat. Rev., Summer 2009 at 10, comes with no data, no empirical support, nothing. Higher rates than what the ensconced firms charge their other clients for lawyers at the same level? Higher rates than they did before they became long-term partners, after correcting for general increases in billing rates? Higher rates but less time charged?

In fact, earlier, better research found exactly to the contrary: firms that closely link themselves to a company charge lower rates (See my post of Aug. 5, 2009: partnered firms charge less per hour.).