Articles Posted in Outside Counsel

A phrase from a treatise furrowed my brow: “Although in-house legal departments are in competition with law firms, legal departments still remain the primary purchasers of outside legal services, and their purchasing options have improved dramatically.”.

Abstractly considered, the statement by Janet Langford Kelly, Susan Sneider and Kelly Fox, “The Relationship Between the Legal Department and the Corporation,” in Successful Partnering Between Inside and Outside Counsel (Robert Haig, Ed.) Vol. 1, Chapter 16 at 16-53, may hold true. The legal services sought by a corporate client may be a zero sum game: the more done inside, the less outside, and the reverse. Thus, competition.

Yet that is not how most in-house lawyers think of outside counsel – as predators stalking their jobs. It gives pause for someone who thinks of partnering as a close, trusting and non-competitive relationship. (See my post of March 15, 2009: trust outside counsel in front of clients.).

Hourly billing rates of outside counsel cover this blog like spring pollen, as they settle everywhere you look, increase dramatically once a year, and cause some general counsel to suffer allergic reactions. References to rates being plentiful, it took a while to assemble my posts other than seven previously composted as metaposts about blended rates, discounts, effective billing rates, rate freezes, most-favored-nation terms, billing and rate increases (See my post of Dec. 5, 2005: blended billing rates with 7 references fees; Nov. 26, 2006: discounts with 15 references; March 9, 2009: effective billing rates with 9 references; Feb. 9, 2009: rate freezes with 8 references; April 30, 2009: MFN impositions with 8 posts; April 30, 2009: billing rate data of partners with 14 posts; and Dec. 5, 2008: rate increases by firms with 18 references.).

To vary the billing rates for the same lawyer, depending on circumstances, presents opportunities as great as the logistics are difficult (See my post of Oct. 22, 2006: multiple billing rates – inside vs. outside; Jan. 13, 2006: rates that vary according to value delivered; May 14, 2006: rates according to value; March 12, 2006: billing rate differentials by lawyer within the same class year; May 26, 2006: conditional billing rates; July 19, 2007: administrative hassles when partners seek dispensations from standard rates; and June 10, 2007: committees that must agree to rate changes by partners.).

Several posts offer information about the relationship between the number of lawyers in a firm and its billing rates (See my post of Sept. 10, 2005: rates correlated to size of firm; Dec. 28, 2006: differentials between partner and associate rates; 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; and Sept. 12, 2008: Burger King and lower-cost regional firms.).

Don’t even whisper the following thought to your law firms!

What if a general counsel were to abolish review of most invoices and re-direct the time thereby saved into approvals of weekly business plans by law, real-time calls and input, and other forms of on-the-scenes oversight of what law firms do?

After all, the amounts reduced from bills are miniscule (See my post of March 8, 2009: write offs and bill reductions with 8 references and one metapost.).

Magazines and conferences relish headlines about dissatisfaction by general counsel with their law firms, but a recent survey by Robert Half Legal of 150 attorneys “among the largest corporations in the United States and Canada” undermines those complaints. As reported in The Lawyers Competitive Edge, Vol. 11, March 2009 at 12, a solid 31 percent of the in-house lawyers answered that they are “Very satisfied and 63 percent are “Satisfied” ” with their law firms’ “ability to understand clients’ business needs.” I assume “ability” translates into better client service.

Obiter dicta on the methodology of this survey: “All respondents have at least three years of experience in the legal field.” It surprises me that Robert Half specifically notes this, because rarely do law departments hire attorneys with less than three years of experience.

We who contemplate management of outside counsel focus hugely on total amounts paid, overlooking the importance and insights of the regularity of spending during a matter’s life. How much a department spends each month on a matter I define as the burn rate.

Burn rate analyses shed light on volatility and indirectly on drivers of costs. When significant events happen in a matter, the burn rate leaves a tell-tale singe (See my post of Aug. 31, 2005: importance of burn rates; Sept. 5, 2005: further on defense costs and amounts at risk; March 20, 2006: burn rate calculations and cycle time; May 20, 2005: burn rate jumps during trial; March 20, 2008: data shared between law departments allows comparison of burn rates; and June 25, 2006: match budgets to burn rates.).

Burn rates also highlight dormancy periods (See my post of April 17, 2007: percentage of dormancy months; Oct. 25, 2007: dormant cases; April 17, 2007: inactive cases; and Aug. 1, 2006: dormancy as a performance metric.).

… “so, there’s got to be better firms than them out there,” assessed the GC, based on the recent performance of one of the company’s primary law firms.

The last six years have been a sellers’ market, evidenced by law firms’ steady and dramatic raising of their billing rates. During this period, firms have been so busy (and often so focused on their own advancement, e.g., opening an office in China), that many service errors must have occurred on existing clients’ work. And in some cases, these firms have luxuriated in such overflowing economics that they’ve even taken some important clients (your company?) for granted.

If you’re not getting A+ work from your A-list law firm providers, then you should initiate some changes. A few ideas: (a) Gather and summarize your evaluation of each primary provider, including specifics about what they’ve done well and where they’ve slipped, invite in their lead partners for a little get-together and have them later reply formally as to how they are going to rectify the situation in the future; (b) If their response to your issues are not met with changed performance in a reasonable amount of time, start marginalizing their role by spinning off work to other law firms (and telling them when you do it); (c) If this still doesn’t do the trick, issue an RFP and swap out any B+ firms for the A-players you deserve.

“ … as opposed to [our primary law firm’s] approach of having a meeting with six people just to debate the issue,” contended the General Counsel.

While this General Counsel is facetiously overstating the situation (or, maybe not), how can a law department ensure efficient delivery of advice as opposed to the legal group-grope described above?

Some ideas: (a) Tell the law firm that legal “answers” should in most cases be delivered by an individual attorney, even if prior consultation with others in the firm are appropriate; (b) Where cross-disciplinary considerations are required to solve a legal issue, ask the firm to provide attorneys who possess familiarly with both, or all, of the disciplines, e.g., know both contract law and the client’s industry; (c) Set a rule that no matter how many of the firm’s attorneys are in any meeting, a limit of only two will be paid for.

Quite a few posts here tell something about typical charge-out rates of outside counsel (See my post of April 8, 2005: compare billing rates of your key firms to peer firms; Sept. 5, 2005: European law departments at about $220 an hour; Sept. 10, 2005: rates of top three firms; Jan. 16, 2006: some billing rate comparisons; Dec. 11, 2007: UK partner rates; Dec. 31, 2006: cost of living and partner rates; Feb. 21, 2008: a UK figure of about $151 an hour; Nov. 16, 2008: quartile rates for firms; and Jan. 16, 2009: possible gap of 30% between inside and outside costs per hour.).

More specifically, a series of posts have offered typical rates paid for US firms at intervals over several years (See my post of July 30, 2005: data on US partner and associate rates; 65 percent of partners bill between $235 and $474 per hour; Nov. 16, 2005: $190 an hour; Aug. 14, 2006: estimate of $270 an hour for effective rate; Sept. 25, 2006: average of $185 an hour according to survey; and Feb. 23, 2008: median rate of $225 an hour.).

The series of figures hardly allows a confident extrapolation, but a possible figure for 2009 looks to be in the range of $250-$280 an hour.

For once I side with law firms: most-favored-nation agreements (MFNs) are unfair, ineffective, meaningless, and unenforceable.

Otherwise, they make sense.

My entreaty on most-favored nation agreements seeks multilateral disarmament. Do away with them! General counsel should not ask for and law firms should not agree to fictitious arrangements whereby firms promise to bestow their “best rates” on the general counsel’s matters (See my post of Oct. 30, 2005: MFNs as quixotic quicksand; Nov. 21, 2005: MFNs – from problematic to impossible; Jan. 25, 2006: difficulties with MFNs; Nov. 13, 2006: MFNs only apply to hourly rates; July 19, 2007: administrative obstacles when partners seek to grant rate dispensations include MFN commitments; Oct. 31, 2007: one of ten bad practices for cost control; Jan. 20, 2008: PDF of my article on most-favored nation agreements; and March 20, 2008: if legal groups shared data, they could better enforce MFNs.).

Of the 33 covenants, 21 of them are ho-hum, sporadically rolled out, always paid lip service to, and modestly adhered to in most law department-law firm relationships. Guidelines for outside counsel (and perhaps some engagement letters from law firms) state most of the covenantial desiderata. Of the remaining group, none are novel, and yet any one of them would be significant, but only if the client or the law firm carries them out in good faith and diligently over a period of time. Most of them are aspirational, honored far more in the breach.

As a client, we will:

1. “Use value-based terms to reward success and efficiency.” This hoary exhortation can be significant if law departments move significantly away from hourly billing and discounts to hourly bills, but it has been talked to death. Do not hold your breath.