Articles Posted in Outside Counsel

From a recent survey of 191 in-house legal managers based in the U.S., we learn that “nearly three-fourths (73.1 percent) supervise one or more foreign firms.” This factoid from Met. Corp. Counsel, Vol. 17, June 2009 at 11 (by Marcus Linden) rests on the definition of a “foreign law firm.”

If the legal department of a US corporation retains the Berlin office of White & Case, does that not count as supervising a foreign firm? If the same department retains Clifford Chance’s New York office for a trans-Atlantic deal, is that a foreign firm (Clifford Chance writes on its website, “Our New York office traces its origins back to 1871 and ranks among the 15 largest in the city, according to Crain’s New York Business.”)?

My thoughts about a definition are that a legal department should count a “foreign law firm” if it (1) has the largest portion of its lawyers in a country other than the United States, (2) had its partner in charge of the matter in a non-US office, and (3) the matter substantially involves non-US legal issues and facts.

A fascinating chart about Fortune 250 law departments appears in a chapter of Laura Empson, ed., Managing The Modern Law Firm: New Challenges New Perspectives (Oxford Univ. Press 2007) at 92 (by Brian Uzzi, Ryon Lancaster and Shannon Dunlap). From 1992 to 1994, about 20 of the Fortune 250 had more than 60 lawyers (10 percent); from 1995 to 1997 the number crept up to about 40. Then, within the two years from 1998 to 2000 the number spiked to 100 – 40 percent of the largest 250 companies in the United States had 60+ attorneys, where the number vacillated the next two years between 80 and 120.

My supposition is that the rapid expansion in departments of such size resulted much more from mergers of companies and their legal teams than from organic headcount growth, or from a dramatic increase in legal volume or complexity (See my post of Jan. 16, 2009: layoffs after mergers with 9 references.). Some of the expansion may be due to lower-cost lawyers added in offices outside the US who swell the numbers (See my post of Sept. 21, 2005: arbitrage labor rates in different offices.).

It is common to read that law firms have merged, opened an office, or started a specialty area because of “client demand.” For sure, some general counsel may have urged a partner to do something to match the changing needs of that client, and perhaps eventually the firm obliged. But I doubt any frequency of cause and effect.

My vote goes to a more firm-centered, less client-service explanation. Firms make a strategic move, such as the above or bringing in a group of laterals, because the firms believe it will strengthen them in the market, the entire market, not because it will pleases the claimed clamoring of clients.

It sounds much better to implement an associate training program because “our clients have asked us to stay on the forefront of specialized legal training,” but only the decision makers can know if the real motivation was otherwise. It is high-minded, professional and accommodating to announce the new environmental conservation drive “in response to the many urgings we have had from our clients.” Who doesn’t admire the exemplary motivation and look past the grubbier possibilities?

I have suggested a de facto ladder of discounts for increasing volumes of fees (See my post of Aug. 8, 2006: tiered discounts from hourly rates.). A corollary of that technique would be for law departments to hold back increasing amounts as the volume of their invoices to a given firm on a matter rise (See my post of Feb. 12, 2009: hold-back arrangements with firms with 7 references.).

In other words, if the law department holds back 15 percent of the amount billed, and later distributes some, all, or more than the amount back amount based on outcome or performance, it would make sense for the law department to increase the percentage held back as fees rise.

This blog has covered the Call to Action of Rick Palmore (See my post of March 26, 2006: Palmore letter.). A chapter in Laura Empson, ed., Managing The Modern Law Firm: New Challenges New Perspectives (Oxford Univ. Press 2007) at 47 (by David Wilkins) cites two earlier efforts aimed at the same end as well as several articles that describe them.

“[T]here were two other initiatives by corporate counsel designed to press law firms to hire and promote more minority lawyers: a letter from the general counsel of Ford Motors in 1987 that was endorsed by dozens of major corporations and the American Bar Association, and a letter in 1996 from the general counsel of Bell South that was eventually signed by over 350 companies.”

Wilkins describes the two earlier initiatives and summarizes their effect: “neither produced lasting change” (See my post of July 17, 2007: why hasn’t the Call to Action achieved more.).

“According to the American Intellectual Property Law Association’s 2007 Report of the Economic Survey, the average billing rates for intellectual property attorneys at firms of greater than one hundred attorneys was more than 27% higher, on average, than at firms of less than twenty attorneys.” Vincent J. Allen, Dallas, Texas at Carstens & Cahoon passed on this finding on his Lone Star IP Blog on June 3, 2009. Thanks to Greg Bufithis of the Posse List for pointing this post out.

Billing rates and size correlate positively (See my post of Sept. 10, 2005: rates correlated to size of firm; Jan. 3, 2007: the effect of increased overhead on rates; March 24, 2007: overhead costs rise with size of firm; Oct. 25, 2007: correlation of rates to firm size.). The reasons include higher overhead at bigger firms; deeper pocket clients who will pay; signaling functions; better lawyers who can command higher fees; brand premium; status that accompanies high rates; complexity of legal problems presented. We need some empirical research.

I foresee tighter controls on law firms billing for telephone calls. Let me sketch a future state.

A law department might mandate that all calls to it go through a “routing number.” Anyone with access to that number will call it and enter the “matter code” and the number of the person to be called. Software records the caller’s number – and thus knows the timekeeper and billing rate. It records the person called – and thus knows the in-house counsel or other person called. It records the length of the call – and thus obviates the need to track and bill because completely detailed information is electronically available.

This sounds Orwellian, and full of kinks: sometimes there might be more than one person on the speaker phone or teleconference. Workarounds will develop to address problems. But a tracking system along these lines will create more information than now, and quite easily. And, all will be much easier with smart mobile phones. Entrepreneurs, bring it on!

A chapter in a recent book about law firm management discusses how firms develop new practices. In Laura Empson, ed., Managing The Modern Law Firm: New Challenges New Perspectives (Oxford Univ. Press 2007) at 77 (Heidi Gardner, Timothy Morris and Narasimhan Anand), the authors discuss building a practice after an initial period of experimentation. They note that “generally only partners who are already fairly powerful have access to clients for the purposes of experimentation.” Later, as casually they write about “leaning on trusting clients to try out novel ideas or methods” to incubate a practice group.

Do those clients know they are guinea pigs? That their fees are paying to teach firm lawyers about a new area or technique? What is the gain to the legal department from the expertise quarried by the firm? Should the law firm that experiments on a client offer the client discounted billing rates as it learns on the job and builds its fledgling capability? What if the experiment fails?

At least cross-selling proffers experience (See my post of April 2, 2009: pros and cons of cross selling.). The notion of self-serving “experimentation” disturbs me, unless as in medicine the patient gives informed consent.

My position has been that a general counsel has the right, even though the firm is working against a fee set in advance, to request records of timekeepers, hours, and rates (See my post of Sept. 13, 2006: still need to review bills.). Time recording goes on anyway in the firm, regardless of the set fee. But an argument for non-disclosure by a law firm has potency.

If the law department decides that a fee for a service is acceptable, why should the law department be entitled to know how the sausage was made? If a law firm manages to make a big profit on the representation, having taken a risk on a set fee, that’s no client’s concern. Also, part of the trade-off by a law firm for agreeing to a fixed fee is to be able to eliminate the hassle of detailed bills.

Still, if I were a general counsel, I would not want a firm to beseech me for additional money if a matter demands more work than they thought when they agreed to the fee if that firm has squirreled away some of my payments on very profitable matters. That situation assumes a portfolio of matters being handled by the firm. Additionally, I would want to know the economics of the services provided so that I can use that information if I need to find a replacement firm.

Corp. Bd. Mbr., Vol. 12, 2nd Quarter 2009 at 38, announces the results when 240 general counsel ranked “the best national law firms” for corporate legal work. As I studied the list, it seems clear that size of firm correlates to renown of firm for corporate and board-level legal advice.

Based on data about firm size from the NLJ 250 list, of the 25 US law firms with 900 lawyers or more, 11 made the list (44%). The average number of lawyers in the firms on the Corporate Board Member honor roll is 1,260 lawyers, the median is 974. A dozen firms on the NLJ 250 did not make it that had the median number or more. Conversely, 10 firms made the list despite not hitting the median, with Wachtell, Lipton at 202 lawyers being the firm most punching above its weight.

Bigger firms have more clients so more general counsel recognize their name. The firms on the honor roll have excellent talent and experience, absolutely, but size matters when a survey asks for votes. We also don’t know from the article anything about the 240 general counsel who responded. The larger their company, the more likely they have some experience with one or more of the massive corporate law firms. It isn’t even clear whether the 240 have recently and significantly used the firm or firms they selected.