Articles Posted in Outside Counsel

Some general counsel reject the suggestion that they charge back to clients the outside counsel payments made on their behalf. One reason for such reluctance is a fear that clients will then believe they have a right to say which law firm to use and how to manage the firm, to meddle in the management of cases, to pick and choose which associates and partners, as if even to sit second seat at trials.

Fear of clients meddling is misguided. In my experience, clients do not want to be so involved; at the same time they will sometimes want to know more about how the costs charged back to them were spent. Quite rightly, and these inquiries help to keep corporate attorneys on their toes, being careful stewards of their clients funds (See my post of July 31, 2006: try to charge back 100% of fees; Aug. 31, 2005: hypothetical bills sent to clients; Oct. 30, 2005: dissenting view on whether client charge backs create market discipline; May 31, 2006: charge backs to clients; Oct. 15, 2007: client gatekeeper for invoices; April 17, 2006: comments on accounting granularity; Nov. 10, 2007: approval levels can rise if clients review bills; and Feb. 27, 2008: 60% charged back at one law department.).

Authorization levels when lawyers review outside counsel bills are typically set by the financial department, not by the law department. I suppose a general counsel could lower the level, but that makes little sense. The invoice approval level should mean that only infrequently must a higher ranking in-house lawyer provide a second approval. What can that lawyer, remote from the fray, pick out of the fog of words?

Several previous posts address invoice approval and authorization levels (See my post of Aug. 21, 2005: routings and authorization of bills; Aug. 24, 2005: a bank’s authorization levels; April 26, 2006; rank and authorization level; May 18, 2007: back office costs of bill review; Oct. 15, 2007: client gatekeepers for bills; and Nov. 10, 2007: three-way sign-offs on invoices.).

Excerpt from Kirkland & Ellis’ brochure, “Partnering with Clients Through Legal Risk Sharing,” appeared on a slide at a recent webinar.

“In certain matters, we have taken part of our fee in equity or stock” (See my post of Jan. 18, 2009: share prices, event studies and litigation with 6 references.). That could turn out to be lucrative, if the market reacts to positive legal developments in a major lawsuit.

“Once the Kirkland partner is familiar with the background facts, he or she will submit a proposal to the firms SFA [special fee arrangement] Committee for guidance and approval.” The interpolation of such a committee drags out negotiations over fee arrangements (See my post of Nov. 6, 2007: time constraints on special fee arrangements; and Jan. 13, 2008: delay saps attractiveness of alternative fee arrangements.).

Among the National Law Journal’s “20 most influential general counsel in America” stands Robert Waterman, the general counsel of HCA Inc. (See my post of April 6, 2009: some observations on the list of 20 general counsel.). The short squib about him says that he cut HCA’s outside legal fees by 23.2 percent — some $42 million — between 2006 and 2008. That would mean HCA spent about $180 million in 2006 on outside counsel. I assume, but do not know, that 2006 saw external legal spending that was normal for HCA. Otherwise, if for example the resolution that year of a very expensive case or investigation dropped fees from a watershed year, Waterman’s feat is leaky.

Assuming a baseline of spend, the fee cuts came under Waterman in part because HCA agreed to policies to settle cases early and rely on more contract attorneys. Further, Waterman accomplished the drastic slash “through a combination of bonus structures for the in-house legal team, aggressive risk management and innovative fixed-fee arrangements. Since 2007, he has tied 60 percent of every lawyer’s bonus to tough legal fees goals.” What interests me about the final sentence is the direct connection between lower fees and higher bonuses at an individual level, not even at a practice group level.

Jon Bellis of Thomson’s Hildebrandt group, holding forth during a recent webinar, claimed that “A relatively small number of law departments have a written strategy for retaining, using and managing outside counsel (“OC”)(as opposed to an OC policy or billing guidelines …).” Such a strategy document “might include criteria for determining the balance of inside and outside work and resources, the hiring of additional inside lawyers, the retention of OC in the selection of OC.”

I have neither seen nor heard of an outside counsel strategy document. Outside counsel guidelines flock everywhere, but not the rara avis described (See my post of July 11, 2008: guidelines for outside counsel with 16 references.).

Survey data from 2006 through 2008 shows that during those three years the number of matters handled by law firms and the number of firms used in the United States has remained relatively stable, at medians of about 350 matters and 100 law firms, respectively.

The survey, from Thomson’s Hildebrandt group, suggests that its law department respondents, generally fairly big companies, retain external counsel on roughly 30 matters a month. If so, they average about three matters per firm per year. Note also that it is a wide spread of law firms, suggesting that convergence has barely made a difference (See my post of Dec. 11, 2006: quixotic descriptions of work sent outside; and June 10, 2007: odd aspects of numbers of matters sent outside.).

At the 5th Annual IP Counsel Forum, the COO of LexisNexis Examen presented data from a Martindale-Hubbell study on how corporate counsel distribute legal work to law firms. The pie chart had ten slices, each with a percentage. For example, Litigation at 37 percent presumably means that this research found that 37 percent of the fees paid to outside counsel were for litigation services.

Here are the remaining nine areas and their percentages: IP and Labor & Employment (11% each), M&A (9%), Securities (7%), Real Estate (6%), Tax and Environment (4% each), Bankruptcy (3%) and Other (8%).

Wouldn’t it make sense that the distribution of lawyers in large US law firms – the firms that provide most of the services to law depatments – should correspond to those percentages? By a further extension, the distribution of specialist lawyers inside companies should match to some degree those percentages, other than litigators – the most common area of law for outside counsel services.

In February 2004, Prof. Clayton Christenson of the Harvard Business School and Scott Anthony, a partner at Innosight published a white paper entitled “eLawforum: Transforming Legal Services.” On page 4 of a reprint of that article,a sentence casually throws law departments under the bus. “Most economists would argue that legal services should be outsourced because they’re not the core competence of corporations.”

Abstractly, or as an economist, that may be true, inasmuch as in an ideal world of business people, everything would be resolved between commercial agents and lawyers would be superfluous. In an ideal world.

But dare we note the cost element? Legal issues pop up, and inside lawyers who are productively busy cost less per hour than outside lawyers. So core competency yields to relative costs.

In-house attorneys gnash their teeth at partner rates that near the $1,000 mark, but those rates at least partially reflect specialization. As they become more experienced, specialists can more it readily recognize patterns and apply familiar tools so they are more efficient than generalists. Pattern recognition dramatically increases efficiency (See my post of Nov. 6, 2006: experts spot patterns; Nov. 26, 2006: memes are mental patterns; Dec. 16, 2005: ethnographers identify patterns in behavior; and March 27, 2009: pattern recognition as a cognitive bias.).

If one partner takes 90 minutes to solve a problem and charges $500 an hour, it is fair to the law department for the more specialized partner who takes 60 minutes (50% less time) to charge $700 an hour (40% more). If this generally prevails, then the best law firms, being those with the most experience, are the most cost competitive if staffing and work patterns are held constant.

In 2004, after eight rounds of a competitive bid run by eLawForum, Unocal chose Howrey to handle its entire environmental caseload through 2009 on a fixed fee. Litigation 2005 spells out the details of this arrangement. At the time, the average case took three year to resolve, cost $500,000 in legal fees, and resulted in resolution costs in the single digit millions of dollars. The General Counsel of Unocal at the time, Samuel Gillespie, estimated that “Unocal will save $160 million in legal fees and resolution costs for the 200 matters predicted to arise under the five-year contract.” Howrey and Unocal would split any savings if Howrey managed to bring in matters under the company’s cost target.

The article surveys the pros and cons of fixed fee arrangements. “General counsel worry that they’ll commit to paying a fixed fee for cases that might settle immediately or potential litigation that never materializes.” They fret that fixed fees might reduce the incentive for outside counsel to litigate vigorously. Law firms worried that clients might take advantage of their fixed fee and treat it as an “all-you-can-eat buffet.”

Advantages, however, do accrue to fixed fee arrangements. In-house lawyers can bring in outside counsel more often and earlier, which increases the chances for a quicker and cheaper resolution. Also, fixed fees “free outside lawyers from the need to press clients with their thoroughness.” Results count, not a willingness to invest late nights and weekends. Additionally, “Fixed fees eliminate the nagging suspicions that firms secretly relish their clients bad fortune.” The deals also provide a negotiating edge in settlements, because plaintiffs counsel knows legal costs are no longer a factor for the defendant. Finally, partners can staff matters as they see fit, including letting associates cut their teeth on real cases.