Articles Posted in Outside Counsel

As the term is typically used by members of a law department, can we define “primary law firm” (or variations such as “preferred counsel,” “key law firm”, “go-to firm,” “major law firm” and the like)? What makes a firm primary is typically the absolute amount paid to it during a year or over several years. The amount cut-off amount varies depending on the total spend of a law department so we should normalize the metric: a law firm is a primary law firm if it receives in a fiscal year more than 10 percent of the law department’s external spend.

A better definition would designate as a primary law firm one whose spend bulks that large over at least two years. With that longer time, the firm that works on a single large lawsuit or acquisition will less likely be deemed primary.

A different definition incorporates the idea that a firm that handles a very large portion of the work in a given practice area is a primary law firm. Listings of go-to firms by law departments come closer to primary law firms in this sense. Perhaps a cutoff should be that 50 percent or more of the spend in a fiscal year (or two years for the same reason explained above) for a practice area makes a firm a “primary law firm.”

For a general counsel, discounts from standard billing rates enjoy some evident advantages over other methods of managing external costs

1. A discount is easy to describe to fellow executives. “We knocked 10 percent off the firm’s rates” needs no further discussion.

2. It is easy to calculate the presumed savings. “Ten percent times $1.5 million in pre-discount fees means we saved $150,000.”

Among the cost-cutting ideas accumulated in the ACC Docket, Vol. 27, March 2009 at 47, here is a hard-nosed suggestion by someone: “When you’re calling your law firm with questions, make it clear that if the lawyer on the phone cannot answer the questions that you are posing and if he/she doesn’t know the right lawyer internally who can, then you are not interested in proceeding. You may also need to be clear that you want no memo or research to be initiated.”

This chokehold on research means you need to talk to experienced lawyers, probably partners. Your effective rate will rise, but so too will your effective use of your funds.

“When a new firm without local offices wants to do work for me, and I believe that there is a good fit, I ask that they internalize all costs and attorney time associated with travel as a condition of being retained. In other words, I get their agreement to treat them as if they are local counsel with local offices so I get the benefit of the same” (See my post of May 7, 2008: travel policies for outside counsel with 7 references.).

This tough-minded position is among the 75 cost-cutting ideas in the ACC Docket, Vol. 27, March 2009 at 45, and I think it has merit. The policy allows more firms to compete on an equal footing for your business.

Among the 75 cost-cutting ideas in the ACC Docket, Vol. 27, March 2009 at 42, is a method instituted by one contributor to the collection. “We have recently implemented additional billing guidelines. We continue to require monthly billing, but outside counsel must also obtain authorization to exceed $4,000 in a monthly billing period.”

Since that is only ten or so hours billed in a month, this tight leash is more a choke collar. I assume that $4,000 trigger level applies per matter and, obviously, you could set cap levels differently for various kinds of matters (See my post of March 4, 2008: spending minima for matter budgets; and March 25, 2008: a dozen thoughts about single-matter budgets.).

This imposition on law firms will require them to have a time and billing system that flags when a matter nears its cap. Conversely, the law department’s expense control software ought to have some way to nab violators. Both sides take on quite an administrative burden.

Ron Pol dislikes competitive bids. A diatribe against them in the ACC Docket, Vol. 27, March 2009 at 22, piles on 15 practices he claims take place and undermine the process’ benefits. One point reported “relatively often,” is that the losing firm never had a chance, because a favored firm had the inside position. Pol’s Point 9 has shades of Calvinism: “Pre-determination:”

“Firms report learning relatively often that a preferred firm has in effect already been selected; this makes a mockery of the process, and the organization conducting it.” All I can say, as I have before, is that a rigged RFP would be a waste of everyone’s time. More than that, however, I have not seen one during the two dozen competitive bids by law departments I have consulted on (See my post of Sept. 3, 2006: double entendre of fixed-price competitions; Oct. 29, 2006: unfounded belief that RFP processes are wired; Feb. 15, 2006: the incumbent’s advantage did not work out in two bids; Jan. 27, 2006 about how the endowment effect may help incumbent firms; Jan. 27, 2008: how to tell losing firms why they weren’t selected; Oct. 10, 2008: ten reasons to mistrust competitive bids.). Incumbent firms probably have an advantage, but that doesn’t stifle the competition and render it a charade.

Sheri Qualters of the National Law Journal, Feb. 25, 2009, summarizes an Altman Weil report, “What’s the Real Cost of Responding to RFPs?” That study pegs the outlay by law firms on RFPs at $35,000 to $65,000 per RFP, “or between 100 to 200 partner hours” (See my post of March 17, 2006: effort set in motion by RFPs; and Feb. 21, 2008: proposal generators.). Does this figure include the cost of non-partners who labor on RFPs?

The report also notes that the success rate for answering RFPs is 30 percent. In my consulting experience, RFPs go to more than three firms, and most of the recipients respond. I am surprised, therefore, that one out of three times the firms are successful. How did the law firms define “success”?

“Worse yet, ‘winning’ typically means being placed on a list of approved counsel with no guarantee of additional work,” the author, Charles Maddock, writes. “Most of the wins produce no income whatsoever, let alone personal contact with the firm.” How can Maddock assert that when one-third feel successful? If the firm is not on a panel, its odds of being retained dropped to nil. Besides, usually there is a presentation so some people from the law firm palaver with the selection team from the law department (See my post of Dec. 21, 2008: beauty contests with 8 references cited.).

“Post-tender debriefings,” in the New Zealand phrasing of Ron Pol from in the ACC Docket, Vol. 27, March 2009 at 22, make sense, but he feels that firms that took part in the competitive bidding process will likely be loath to suggest improvements if they detected a flawed process. Pol is right, but there is an alternative.

A consultant could find out about useful improvements as perceived by the law firms, and clothe their comments in anonymity. The law department would benefit for subsequent RFP processes and the losing firms might feel somewhat better if they can vent their disappointment (See my post of March 30, 2008: RFPs with 22 references.).

For more on the topic of RFPs, see my BLOOK on outside counsel management.

General counsel should focus on concentration of their external spend rather than on the number of firms paid (See my post of March 24, 2005: concentrate spending instead of converging law firms.). For example, a concentration target might be 75 percent of all spend to go to 10 percent of the law firms paid. Let’s call them the core group.

Such a metric on concentration invites a more sophisticated extension. We could take into account the size of the firms in the core group as measured by their number of lawyers. We could then calculate a metric on total lawyers in the core group. My hypothesis would be that the higher the number, the higher the effective rate paid.

Or we could simply calculate the effective billing rate of each of the firms in the core group and take the median (See my post of May 10, 2005: effective billing rates; Sept. 10, 2005: effective billing rates; Jan. 3, 2007: effective billing rates and law firm size; May 3, 2008: thoughts on effective billing rates; Nov. 16, 2008: low chargeable hours and rates; Feb. 23, 2008: question about data on rates; June 13, 2006: difference between blended and effective rates; June 19, 2006: unfair to compare average partner rates; and June 30, 2007: effective rates as a test whether discounts have any bite.). Neither concentration nor convergence avails as a cost cutter if bigger firms thereby waltz in with higher rates.

On March 8, 2009, the Augusta Chronicle reported on fees paid a law firm for its work on bond issuances.

The named firm earned $400,000 for its work on a $160 million water and sewer bond in 2004; $126,000 for a $19.6 million airport bond in 2005; $44,000 for a $44 million general obligation bond in 2006; and $100,000 for a $177 million utilities bond in 2007. The newspaper obtained the data from the Finance Department of Augusta through an open records request. If other cities disclosed their expenditures on bond counsel, it would not take much to create a national (or statewide) database by type and size of issuance, so each municipal issuer could benchmark its own fee arrangements.

Augusta’ total legal fees have been going up. Including the cost of the law department and fees charged by outside firms for work done for all city departments, the totals were $1.4 million in 2005 and $1.6 million in 2006. Total legal spend rose to $1.9 million in 2007 and nearly $2 million in 2008 (that year the in-house legal department cost about $748,000 and fees for outside attorneys totaled $1.1 million – note the 40.60 split of inside-to-outside spend).