Articles Posted in Outside Counsel

Gary Ruff, general counsel of Tenet Healthcare, makes some comments in Corp. Bd. Mbr., Vol. 12, 2nd Quarter 2009 at 42, about the new attitude of law firms in response to the economic doldrums. Ruff says that “They’re willing to consider a variety of fee arrangements, as long as it’s a win-win situation for the client and the firm.”

If we pierce the doublespeak, that sentence means law firms will grudgingly “consider” something other than cost-plus – very costly plus based on wads of billable hours – if the alternative wins for them, such as small reductions but the probability of bonuses. (See my post of May 11, 2008: monthly retainer fees are win-win arrangements.). “Win-win” leaves me cynical and sardonic. When it comes to money, it is a zero sum game between buyer and seller; the less the department saves, the more the firm gets.

My article just came out in the National Law Journal, June 12, 2009, on incumbent law firms. I defined them as firms that (i) have represented you for several years (ii) in multiple matters (iii) for significant fees. I think five years of representation is a minimum to be anointed an incumbent. The matters need to cover a significant range of work in an area of law, as measured against the total number and fees in that area. As to the significance of fees, they ought to be material to the client year after year and there will likely be a relationship partner at the firm (See my post of July 26, 2008: relationship partners with 8 references.).

Those three factors define incumbency: extended time of use, large range of services, and major amounts of money. Your incumbents are your primary firms. Most legal departments larger than five lawyers but less than twenty lawyers have teamed with only a handful of incumbent firms. Over a period of two-to-four years, incumbents are likely collectively to account for well more than half of the total fees paid by the department.

Put this in your pipe and smoke it. Let’s assume a law firm is handling several matters at the same time for a law department. Let’s assume they agree that periodically, perhaps every fifth month, the firm describes for each matter what it did but not its hours, rates, or amount of the bill. It submits, therefore, its time sheet entries and a summary of what it did during the month and how that benefited the client.

The legal department decides what it wil pay for that month’s work.

Rinse and repeat. Keep this going long enough to test whether it works for both sides (See my post of Nov. 11, 2007: imbalance between fees and value delivered; Nov. 28, 2007: partly blame for this falls on legal department; and Feb. 4, 2007 on the difficulty of stating a dollar value for what a firm accomplishes.).

Maybe the rumors of the death of online auctions for outside counsel are premature. It has been reported that Dell, at least its European legal function, is conducting a review of its external counsel “by purely electronic means according to a set of strict rules.” This from Corp. Counsel, Vol. 16, June 2009 at 57, which informs us on the next page that BT Group PLC has “kicked off a sweeping review of its outside legal providers, piloting an eBay style online auction for its real estate roster as part of the process” (See my post of May 21, 2007: auctions with 7 references.).

General counsel may cringe and jeer; procurement may applaud and cheer.

“If just a handful of legal departments within the Fortune 500 were to agree to use a publicly available law-firm evaluation system, it would be a tremendous resource that would benefit everyone who hires outside counsel.” Jeff Carr, the hyperactive general counsel of FMC Technologies, writes this in the ACC Docket, Vol. 27, May 2009 at 70, and envisions outside counsel benefiting from “terrific feedback” and legal departments benefiting from “honest, credible opinions.” Carr has pushed the idea of collective and public law-firm ratings for more than five years (See my post of July 21, 2005: Zagat ratings of firms on a website; and March 20, 2008: benefits of shared evaluations.).

Without giving odds on whether such a collective activity will ever get off the ground, here are some thoughts of the data in such a system:

Partner data. The comments would have to be specific to a lawyer in a firm, I believe. For nearly all matters except the largest, it is an individual partner who makes the difference. That being true, it is still possible to aggregate all comments about partners in a firm, but that would be like aggregating reviews of different dishes at a restaurant into a single restaurant evaluation.

From a panel I moderated at the SuperConference, two thoughtful questions arose. How important is it that the law department have worked extensively with the law firm that provides a seconded lawyer? The consensus view of the panelists was that some kind of closeness greatly increases the chances that the temporary placement will thrive.

Second, how do you resolve conflicts of interest if the seconded lawyer continues to work on other matters for the law firm? This risk is an argument for all-in commitment, five days a week, said the panelists. Either that, or erect a clean wall between the secondee and other matters handled by the firm and be sure the client is comfortable with the arrangement (See my post of July 17, 2008: secondment with 12 references; and Jan. 23, 2008: secondments.).

Advertising agencies are being pushed to adopt value billing instead of hourly billing, according to The Economist, May 16, 2009 at 72. Coca-Cola has started a “value-based” compensation system for its advertisers. Under the new system, Coke guarantees to cover advertising agencies’ costs, plus a bonus of up to 30 percent that depends on a number of metrics. Procter & Gamble has also ditched hourly fees in favor of performance-related fees for 12 of its brands.

The article explains that “Billable hours have been the standard way of doing things since the 1970s.” The shift may take a while. “Some agency executives are skeptical about being paid for value, because it is so subjective. They interpret talk about value as code for cost-cutting.” The article also states that some creative firms “are trying to develop new ways to capture the value their work can create.” Where have we heard similar comments?

The swirl of controversy is the same as in the legal industry. In fact, the article points this out as it notes that “some accounting, consulting and law firms are also scrapping the billable hour, often at the request of their clients.” My view, unpopular in some quarters, is that the legal shift will take many years and even then value-billing will account for only a modest portion of amounts billed.

For your next competitive bid, ask the firms to submit two proposals. The second one should be blinded, the name of the firm and all information identifying the firm being concealed.

I hear you muttering, “You are crazy, Rees!” But think of the gross impressions and prejudices lawyers have of some firms.

Certainly some important information, such as lawyer bios and matters handled, cannot be redacted. But significant parts of a proposal could be submitted anonymously and the reviewers would be less likely to be improperly influenced by the aura of a particular firm. If the response reviewers don’t know whether the proposal comes from Cravath, Swaine & Moore or from Afew, Lawyers & Paralegals, they won’t fall prey to the affect heuristic whereby preconceived value judgments interfere with assessments (See my post of March 15 ,2009: seven cognitive biases; May 14, 2006: fundamental attribution error; July 10, 2007: fundamental attribution bias; and Nov. 21, 2008: value attribution distorts perceptions.).

The percentage of a department’s fees paid to its top law firms is one common way to describe law firm concentration. For example, 75 percent of a department’s fees went to 10 percent of its firms (See my post of May 3, 2006: at UPS, 25 core law firms represented more than 80 percent of its costs; Jan. 21, 2008: two firms paid the most; March 13, 2007: for 201 companies in 2005, the median number of law firms that were paid three-quarters of all outside counsel payments was 11 firms; and April 18, 2009: confusing data on concentration of spending.).

Convergence increases this clustering; clustering, however, can occur even with the opposite of convergence (See my post of Feb. 16, 2008: convergence with 26 references; and March 24, 2005: concerning concentration over convergence.).

An untested index of concentration compares the number of matters for which a firm was retained against its rank by number of matters (See my post of May 28, 2009: the h-index and concentration of matters.).

Among the many ways managers decide which firm or lawyer to retain, the in-person interview is probably the most effective. As with interviews of prospective hires, many techniques help those managers do a better job (See my post of Nov. 24, 2007: coaches on how to interview; Feb. 8, 2006: a good question to ask; Jan. 16, 2006: length of questions and answers; Aug. 10, 2007: Exelon’s RFPs and extensive interviews; Aug. 4, 2007: bifurcated interviews of associates and partners; May 7, 2008: Union Pacific Railroad’s interview process; and April 7, 2006: interviewers should look beyond looks.).

The derogatory term for some elaborate versions of interviews is a beauty contest (See my post of Dec. 21, 2008: beauty parades with 8 references cited.). Law firms disparage competitive interviews with variations on that term, such as dog-and-pony shows. In-house, interviews is the term of choice.

For more on this topic, see my BLOOK on outside counsel management.