Articles Posted in Outside Counsel

“Firms in which two thirds of their large corporate clients are in a long-term relations on average charge $4.07 less per hour for partners and $1.60 less per hour for associates than firms in which only one-third of their large corporate clients are in the long-term relations.” Laura Empson, ed., Managing the Modern Law Firm: New Challenges New Perspectives (Oxford Univ. Press 2007) at 105.

However, the chapter goes on to state that the firms more than make up for the lower rates with higher volume and lower transaction (marketing costs). The authors were careful to rule out other possible explanations of this seeming paradox. It all sounds like the proverbial win-win.

Dan Williams of t-Mobile earns a big thanks for telling me about the so-called Laffey Matrix. The matrix is a table of hourly rates for outside attorneys and paralegals prepared by the Civil Division of the United States Attorney’s Office for the District of Columbia. The rates are intended to be used in cases where a “fee-shifting” statute permits the prevailing party to recover “reasonable” attorney’s fees.

I look at the Laffey Matrix as a guideline for general counsel to reasonable hourly rates for external counsel. Begun in 1983 by a district court decision involving a plaintiff named Laffey, the matrix gives rates for 20+ year lawyers, 11-19 year lawyers, 8-10 years and two more brackets. Each year the US Attorney’s Office adjusts the rates according to changes in the cost of living as measured by the Consumer Price Index in Washington-Baltimore.

For June 1, 2008 to May 31, 2009, the top rate is $465 an hour, then for 11-19 years is $410 an hour and so forth down the chart. Perhaps other US Attorney’s Offices calculate equivalent rates for their cities.

Thinking about fixed fees the other day with a law firm’s Executive Director, I thought of a funnel for fee estimates. The funnel starts early in a matter with the law firm giving a broad but reasonable range for what it thinks its fees might be. Thereafter, at intervals determined by time passing or events happening, the funnel narrows and the firm tightens the range of its fee estimate because it knows more about its incurred costs and its future costs. What is at work is a variant of Bayesian statistics.

The range amount might increase, but the difference between the low estimate and the high estimate should shrink down the funnel. In other words, the estimate might rise from $400,000 plus or minus $50,000 to $500,000 plus or minus $30,000 (See my post of May 21, 2007: matter budgets with 9 references.).

“Firms with partners who sit on the boards of directors of corporations that are not their clients are able to charge a higher price than firms without these types of ties.” The authors who pointed out this correlation (Brian Uzzi, Ryon Lancaster and Shannon Dunlap) write in Laura Empson, ed., Managing The Modern Law Firm: New Challenges New Perspectives (Oxford Univ. Press 2007) at 92, from the perspective of embeddedness theory. “In contrast to conventional economic approaches to firm behaviour, which argue for efficient markets and faceless one-shot relationships, embeddedness refers to the fact that the players in an economic transaction do not exist in a vacuum, but rather in a system of social relationships” (at 94). One social relationship for a law firm is Board membership.

The authors analyzed data about billing rates and other factors in light of the number of partners who sit on the boards of companies that are not their clients. The benefit they gain, according to the authors, is that they provide unique information about how boards of directors make decisions about hiring outside counsel, giving law firms an advantage in the marketplace with corporations who are their clients.”

Three authors (Brian Uzzi, Ryon Lancaster and Shannon Dunlap) present tabular data in Laura Empson, ed., Managing The Modern Law Firm: New Challenges New Perspectives (Oxford Univ. Press 2007) at 99. The table shows data for five groups of 133 law firms during 1989-95 organized into quintiles by number of lawyers. For each quintile of size, a column shows the average number of in-house attorneys at their major clients based on National Law Journal league tables.

Starting with the largest quintile, the in-house client average was 53.3 attorneys; the next quintile down had clients with an average of 43.9 attorneys; then up to 49.3; followed by down to 43.5 and the smallest quintile of firms had clients with the smallest average, 34.4 attorneys. The F-statistic for those attorney averages was 5.32. A fairly steady decline, which suggests the intuitive circumstance that bigger law departments retain bigger law firms.

If I were a general counsel, when I look at billing rate increases of my favored incumbent firms (See my post of April 16, 2009: incumbent firms with 11 references.), I would want to see two trends. One trend should be a lower pace of rate changes than in general for my pool of firms (See my post of March 23, 2007: moments in statistics to describe different measures of variance.).

The second pattern I would look for is whether the rate increases by the much-used lawyers at that firm are less than the increases for others in the firm. That implies there is no lock-step rate increase in the firm and I am getting the considered regard my loyalty deserves.

Across the table, if I were the responsible partner at one of those go-to firms, I would argue the opposite effect. If my lawyers have invested time to understand the client and become more skilled regarding its legal issues and more knowledgeable about its business, then since their productivity and effectiveness have probably increased, their rates could increase FASTER than for other clients.

General counsel may feel besieged by solicitors – a pun lurks there on the English term for non-litigation lawyers and the common meaning of those who solicit. One view, however, is that “In many firms, regardless of size or reach, the ratio of rainmakers is low, estimated by firm leaders at 8-12% of all lawyers in the firm.” That is the claim by Deborah McMurray in her chapter in E. Leigh Dance, Bright Ideas: Insights from Legal Luminaries Worldwide (Mill City Press 2009) at 146.

I started thinking. General counsel may feel themselves preyed upon by partners who yearn for their business, but in fact only a small portion of partners try to do so. Although to be more precise, the term “rainmaker” implies a partner who is successful at selling more work; others, and perhaps many more than the approximately 10 percent estimated to be rainmakers, may aspire to sell, but only be “droplet makers” at best (See my post of Feb. 20, 2009: cross-selling by law firm partners with 7 references.). The bombardment of general counsel may feel like a flood.

“I like in-house lawyers to stick to their side of the deal. It is simply unfair when the client expects you and your team to jump to a teleconference on a Sunday, and then pays your bills several months later and after many reminders. It is disrespectful.”

Partners feel their travails. All nighters. Teams assembled quickly. Sudden changes in deadlines or long periods of inactivity. Conflicting instructions, the aggravation of task-based billing, travel late at night, cold pizza in conference rooms, indecisiveness, and endless delays on planes.

The hair-tearing and ulcers of law firm lawyers stick in their minds, but are probably not divulged to clients. In-house managers may be contentedly unaware. Bruno Cova, the former general counsel of Fiat, writing in E. Leigh Dance, Bright Ideas: Insights from Legal Luminaries Worldwide (Mill City Press 2009) at 51, www.BrightIdeasGlobalLaw.com, who is quoted, makes the point of fairness; you need to empathize with the difficulties perceived by put-upon, on-call lawyers at the firms you retain.

The gigantic law firms that circled the globe always talk about how valuable they are in a huge transaction that requires lawyers to combine from multiple countries. Of course, there are huge deals that require legal advice in many countries, and of course when there is a blue moon it would be an advantage to have one law the firm that combines and coordinates all that knowledge. But, like the apocryphal bet-the-company lawsuit, sightings are few and far between – once in a blue moon.

Legal departments only rarely get sufficient benefit from girdle-the-globe firms on more local matters to offset their higher overhead and rates (See my post of Feb. 28, 2006: bet-the-company litigation, rare but often cited; Jan. 18, 2009: lawsuits don’t account for much stock volatility; and June 17, 2009: operational and financial risks are deemed much more worrisome.).

Saul Ewing, a Philadelphia-based firm, launched its “cost certainty commitment” in June 2009. Many law firms have agreed to work on various types of matters for a fixed fee, but I cite this particular one because of the publicity surrounding it and because of its specificity. A partner describes the firm’s first two “packaged alternative fee arrangements” in Legal Strat. Rev., Summer 2009 at 7.

Saul Ewing started with (1) “due diligence work for potential mergers and acquisitions” as well as (2) “administrative hearings before the Pennsylvania Insurance Department.” Research by the firm had shown that the firm handles many matters like these, the hours required were fairly predictable, the services could be described and systematized, and there was sufficient market demand.

To complement what this one firm has done, general counsel need to push more of their firms to establish flat rate work – accurately described and based on data analysis research – and then to publicize the initiative (See my post of March 1, 2008: fixed or flat fees with 36 references.).