Articles Posted in Outside Counsel

Legal Week Intelligence collected data from 317 UK companies, including 54 from the FTSE 100. “The average number of law firms used by the FTSE companies increased from eight to nine since 2003.” This surprising finding comes from Corp. Counsel, Vol. 16, April 2009 at 66. The number of law firms retained on the other side of the Atlantic is much higher (See my post of April 18, 2009: perhaps 50+ for departments the size of FTSE companies.).

The smallest three companies on the FTSE 100, which is an index defined by market capitalization, are approximately $1 billion, $6 billion and $10 billion in revenue, so all these companies are very large. Why are they not averaging well more than the reported nine external counsel? A possible explanation is that UK companies are more likely to narrow down to panels of law firms (See my post of June 18, 2007: law-firm panels with 13 references.). Since that metapost, more items here have discussed panels (See my post of Feb. 21, 2008: panel selection; Aug. 13, 2008: 8 tips on a panel review; July 27, 2008 #3: secondees expected from panel firms; Aug. 18, 2008: BT panel practices; Dec. 9, 2008: Abu Dhabi Commercial Bank’s panels; and April 2, 2009: HSBC’s panels.).

Even if panels reduce the number of firms used, less than ten on average for such large companies is strikingly low, considering that their total outside counsel spend is likely to be in the multiple millions.

Surveys report widely different figures for the number of law firms retained by large US law departments. A low-end metric comes from the ACC Docket, Vol. 27, April 2009 at 18, and the ACC/Serengeti Managing Outside Counsel Survey. That survey found that law departments with more than 10 lawyers used 20 law firms in the United States.

A trio of other surveys, however, makes the collective case for a much higher figure. Data from the past three years suggest five times as many firms used by large law departments (See my post of April 13, 2009: three-year run of about 100 US law firms used, at the median, per department.). That same survey series found in 2005 that in companies with more than $20 billion in revenue, the median department reported using 200 law firms (See my post of Aug. 21, 2005: issues about the absolute number of firms retained.). A third survey, conducted in 2005 and 2006, suggests that 4-10 lawyer departments retained 48 law firms and 11-25 lawyer departments retained 98 (See my post of Nov. 20, 2006: until 25 lawyers roughly every doubling of in-house size doubles the number of firm retained.).

In 2006, a survey of mostly large departments found that the median number of law firms that were paid three-quarters of all outside counsel payments was 11 firms (See my post of March 13, 2007: concentration of spend on firms.). Given the drop off in amounts paid per firm, the remaining quarter of payments might go to well more than 50 firms.

Your law department can get data that rates your primary law firms with regard to their policies and practices pertinent to lesbian, gay, bisexual, and transgender (LGBT) employees. The Human Rights Campaign administers the annual Corporate Equality Index (CEI), which rates law firms on a scale of zero to 100% based on six key criteria that define corporate social responsibility in this area of diversity.

“By 2008, 115 of the American Lawyer’s top 200 firms were rated, 62 of which earned a 100% rating, and an additional 45 firms scored 80% or better.” The article in Diversity & The Bar, Vol. 11, March-April 2009 at 22, quotes senior lawyers from Accenture, Constellation Energy, the Compass Group and Shell Oil who make use of the CEI ratings in various ways (See my post of March 17, 2006: gay and lesbian lawyers.).

Some law departments assign to each of their primary law firms a senior lawyer, one who should strive for better ways of working between department and firm, better connections across multiple users of the firm, fresh initiatives, pursuit of quality and value improvements.

To call that lawyer a “relationship manager” sounds too conciliatory, too unwilling to make hard calls, too nicey-nicey. Inside lawyers who look after a particular firm should not be striving particularly for smooth relationships, all fuzzy and warm; instead, their objective is to obtain solid value for the amount spent on legal services. The lawyer’s goal is not camaraderie of cross-buying (the counterpart of a law firm’s cross-selling) in the sense of using more lawyers at the firm (See my post of Feb. 20, 2009: cross-selling by law firm partners with 7 references.). No, the goal is to honcho costs and the risk is co-option.

If you hold in-house lawyers who oversee primary firms to a budget, that complicates the lawyer’s life significantly. Other lawyers in the department may also use the firm, which creates complexities for the in-house cost manager who doesn’t supervise them.

The law firms that have represented you for a while have a big edge over other law firms if you conduct a competitive bid that pits them against each other. The incumbent firms know more about your business, your matters, your personnel, your likes and dislikes. In the dark, for the most part, are the non-incumbents, ignorant of the volume of your work, unsure about your management philosophies, unaware of corporate history, behind the eight ball (See my post of Dec. 17, 2007: challenges faced by firms not familiar with you; Feb. 15, 2006: being an incumbent doesn’t guarantee selection; Nov. 14, 2005: different criteria for incumbents than for new firms; Feb. 6, 2007: new firm has ways to reveal chemistry; Jan. 27, 2006: incumbents try harder due to the endowment effect; Dec.16, 2005: complacency as it afflicts incumbent firms; Dec. 14, 2008: low rate of firing entrenched firms; March 31, 2009: RFP doesn’t necessarily mean disaffection with incumbents; April 9, 2009: in 50 competitions, incumbents won half the time.).

To redress these disadvantages of new firms, which I assume you want to do so that you can consider competitive newcomers hungry for your work, you can do some things to favor non-incumbents. Most fundamentally, tell them more and go out of your way to give them data and background information to come up to speed (See my post of Nov. 9, 2006: provide ample data in an RFP.). Perhaps you should host a special dial-in call just for the non-incumbents (See my post of Nov. 23, 2008: control the information free-for-all during the RFP process.). Or you might allow them to do interviews of your lawyers or some onsite due diligence. Toward the end of the competition, when you judge the final proposals, take into allowance the newcomers’ relative disadvantage.

Perhaps formal evaluations of outside counsel are lemons not worth the squeeze, lots of work, hard to do, a sour taste afterwards. After all, a lawyer who does not like the performance of a firm can stop giving it work. Why bother with the administrivia of written appraisals (See my post of April 15, 2009: six attributes to assess external counsel.)?

In theory, if evaluations accumulate suggestions for how a law firm can improve its performance, and if a meeting with that firm’s responsible partner conveys those opportunities directly, there could be a benefit from the formal effort. In practice, both “ifs” are problematic; comments are meager, meetings never take place, law firms suffer turnover, honest criticisms are seldom delivered.

In theory, evaluations of outside counsel should help in-house attorneys manage them better. In practice, who remembers comments, especially those made by other lawyers?

Not to be a zealot about the value of scoring RFP responses, I still advocate as part of the review that evaluators convert responses to comparative scores. If an evaluator reads all of the answers to the same question, one after the other, the evaluator should be able to rank them from best to worst, even if the single-question review is in isolation from the other questions, even if the question’s answer vary greatly in style and content, even if the evaluator is not well informed about the topic.

For example, consider a question about how the firm proposes to handle pending matters re-assigned to them from the current firm (See my post of Sept. 12, 2008: transfers of matters to new counsel with 8 references.).

If five law firms describe their approach and economics, a reader of their five answers back to back will be able to rank them from one to five. Such a ranking done for several questions, when you add up all the comparative scores from those questions, the aggregate scores create at least a platform for discussion of one view of the relative strengths of the firms. Another step is to weight those questions – and their scores – according to your sense of the questions’ relative importance to you (See my post of April 4, 2008: a better method to rank RFP responses.).

One technique general counsel should consider is to segment cases into broad tracks according to their risk and match each track to a set of management activities. Cases in the low oversight track – the majority of cases, which pose no material risks – are handled by outside law firms and receive minimal oversight by in-house lawyers; cases in an intermediate track – those with significance to the company – have more hands-on oversight from inside.

The relatively rare high-risk cases warrant extensive involvement internally, even to the point of attending depositions and taking part in the full range of litigation management activities. With a tiered approach to cases, resources should better match risks and the value obtained by the client (See my post of May 23, 2007: fees paid vary by the complexity of a patent application; Nov. 25, 2005: clear-cut value difference between types of similar matters; May 15, 2005: NLRB’s tiered system for handling charges; and Aug. 22, 2006: tiered rates for individual lawyers based on the difficulty of work.).

Try having your responsible in-house lawyers rate the performance of your major law firms, using a scale of 1 (Unacceptable), 2 (Mediocre), 3 (Good), 4 (Very Good) and 5 (Excellent) on six attributes. These come from FMC Technologies and you can view the form on Bruce McEwans thoughtful blog.

Understand goals

Expertise

Once your law department has selected a firm though a competitive bidding process, there still remains the chore of executing an agreement with the firm. The good news, however, is that the agreement should not take long to finish because you have appended the form of it to the second-round of your RFP process (See my post of March 30, 2008: RFP process with 22 references.).

Request that the finalist firms review it and let you know if they have any major issues. If a firm takes issue with some part, they must explain that in their final bid and you can take the suggested revision into account when you evaluate the finalists.