Articles Posted in Outside Counsel

A survey in 2008 of in-house counsel in Central and Eastern Europe, conducted by the Forbes Institute with Martindale-Hubble International, asked respondents to rank 13 reasons for “removing a law firm from a preferred provider list.” That is not the same, perhaps, as firing a law firm absolutely, but in European legal departments – partial to panels – it is pretty close (See my post of Feb. 19, 2007: fire law firms with 8 references and my article.).

The litany of reasons offers nothing new, but three of them diverge from what one might expect. “Not maintaining confidentiality with your information” was the second most common reason chosen. “Not being treated as an important/priority client” came in 9th and “Key lawyers working with you leave their firm” was 11th. In the US, at least, client confidentiality is a given. The last two points are also unusual to hear stated.

A 2008 survey of in-house counsel in Central and Eastern Europe, conducted by the Forbes Institute with Martindale-Hubble International, has some data about the relatively low importance of interpersonal chemistry. “Personal relationship with lawyers/chemistry” ranked 10th out of 12 in terms of criteria for choosing external counsel. It ranked 7th out of 11 in terms of being retained after the first matter.

In short, whether or not you like the outside lawyer you hire (“good chemistry”) has much less influence than the skill set they bring. An outside lawyer whom you dislike is another matter, but given a neutral or positive attitude about a lawyer, the relationship is essentially that of a service provider. True, unlike a plumber who fixes your sink and whom you need never meet, counsel spend late nights and pressured moments with you. Still, chemistry is often over-rated.

“Overall demand for legal services dropped sharply in the fourth quarter of 2008, causing a further decline in law firm productivity. Firms participating in Hildebrandt’s Peer Monitor® reported Q4 negative demand growth of -6.6 percent, compared to Q4 2007, and negative productivity growth of -10.4 percent compared to Q4 2007.” This oblique statement comes from the Q4 ‘08 Executive Report issued Feb. 2, 2009 by Hildebrandt International.

The first sentence confounds me. What does it mean by “overall demand for legal services”? The next sentence refers to hours billed (obliquely, and see below), which expresses demand, but otherwise how do legal departments convey demand (or law firms recognize it) if not in requests for services that lead to amounts billed?

As to the drop off in billable hours, I assume that “negative productivity growth” means the firms in the study billed 10.4 percent fewer hours or dollars in the last quarter of 2008 than in the same quarter a year before. To that extent, doesn’t that mean the law departments that retained those firms paid the same amount less? If demand is down overall, legal department budgets should be declining.

“Recent European Lawyer research has found that, on average, the proportion of legal work retained in-house has grown from 42 per cent to 61 per cent over the past five years, and the results of the survey suggest this figure will continue to rise.” The article, which is in European Lawyer, April 2009 at 18, attributes the growth in the proportion of in-house work as “partly the result of technology that enhances the ability of legal departments to project-manage internally and to store and access the required know-how.”

An initial question asks how the proportion, and thus the claimed change, is calculated, a point I have raised before (See my post of Dec. 11, 2006: from the same survey in 2006, “the proportion of work that they send out has decreased from 50% in 2004 to just 36% in 2006, despite strong growth in many areas of legal work”; March 19, 2006: hours inside vs. outside in Canada; and June 10, 2007: odd aspects of numbers of matters sent outside.). Notional spend might underlie the estimate of proportions of work, but my doubts remain (See my post of Nov. 2, 2006 about DaimlerChrysler and notional rates.).

It mystifies me how the survey respondents quantified the shift in their make-buy balance for legal services (See my post of March 5, 2008: make-buy with 11 references.).

After a journalist, Amy Miller, called me to ask about Jeff Carr’s Litigation Value Challenge (See my post of May 13, 2009: process announced at SuperConference.) I wondered why the turnout was not greater among large firms. Several reasons occurred to me.

It could be that the bigger firms (a) do not feel that there is enough business to warrant taking part in such a crowded competition, (b) do not like the direction FMC is going with outside counsel so they won’t endorse it by competing, (c) do not feel the particular tranche(s) of work is sufficiently interesting/exciting to strive for, (d) do not want to be in the glare of the publicity generated by the process, (e) do not want rejection touted to the world, (f) suspect that the process is pre-determined as to its outcome (See my post of March 16, 2009: rigged competitions with 6 references.), or (g) have too many internal approval processes to overcome.

An article in the European Lawyer, April 2009 at 18, quotes Sandra Mulrain of Georgia-Pacific, now owned by Koch Industries. Referring to changes brought about by the bad economy, she explained a tougher attitude in legal department regarding retentions of outside counsel. “It’s no longer just a matter of need and volume. You have to have a real justification for using an outside firm.”

What is a “real justification”? That smacks of authorization being required from a more senior lawyer before you can ask a firm to do something (See my post of April 1, 2009: gating process.). Other requirements test for justification. For example, perhaps a client has to agree to bear the estimated costs of the external firm. Perhaps you have to obtain and get approval for a budget from the firm. Perhaps the firm must be a panel counsel (See my post of Feb. 14, 2009: demand management at Royal Bank of Canada.). Perhaps any spending on firms is on a very short leash (See my post of March 19, 2009: firms can’t spend much without approval.).

Gate-keeping steps such as these cool the ardor of someone who wants to hire a firm, slow down the process, and probably reduce fees paid.

The same survey that stimulated my ruminations on the meaning of “foreign law firm” (See my post of June 26, 2009: the term “foreign law firm”.) offers more data on those firms. According to Met. Corp. Counsel, Vol. 17, June 2009 at 11 (Marcus Linden), based on a survey population of 191 US legal departments, “The average number of U.S. law firms supervised was 38.6 firms per law department, and the average number of foreign firms was 18.9 per department.”

It surprises me that the US legal groups retain about one foreign firm for every domestic firm. I would have thought that domestic firms would significantly outnumber foreign. On the flip side, if a company does business globally and has only one or two firms per country, the number of foreign firms mounts rapidly.

Met. Corp. Counsel, Vol. 17, June 2009 at 11 (Marcus Linden) concludes that “lawyers are slow adopters of management technologies, with the greatest number of respondents still employing manual systems and paper invoices (40.8 percent).”

The survey of 191 in-house senior legal attorneys on which Linden relies found that 36.1 percent use a commercial e-billing system, 27.2 percent use spreadsheets, and 35.1 percent use “homegrown software solutions” (See my post of March 29, 2009: Access database used by one company; and June 9, 2009: SharePoint with 6 references.).

Before you agree that law departments are technology laggards, note that almost half the law departments in the survey (44.2%) support companies that earned less than $1 billion. Those departments support between one and six or seven attorneys, skewed toward the smaller end as are all size distributions, who thus may feel they need less fancy invoice software. The combination of a spreadsheet and information from accounts payable may well be enough for one-to-three lawyers (See my post of March 8, 2009: rely on A/P for spending figures.).

Asked to pick five techniques that a procurement group should advocate the legal group to follow, here are my choices. I am assuming a legal department of approximately 10 lawyers or more, which would likely mean a minimum of $5 million dollars spent on at least 30 law firms.

1. Prepare a table of expenditures for the past three years that show by law firm the fees and disbursements paid them during the previous three fiscal years by various subject matters (See my post of March 25, 2008: a spend-by-firm table.). The cutoff could be something like a minimum of $10,000 paid to a firm in two out of the three years.

2. Either draft guidelines for outside counsel or revise the existing one to keep up to date on such techniques as e-billing, discount levels, formats of bills, and incentive arrangements (See my post of July 11, 2008: guidelines for outside counsel with 16 references.).