Articles Posted in Outside Counsel

“Deflationary billing” – a term to hearten general counsel – means hourly billing rates of law firms decline. A pipe dream, perhaps, because hourly rates are a powerful signaling device for law firms (See my post of Jan. 2, 2009: discounts might be granted obliquely; and Feb. 17, 2008: quality signaled by high prices.).

Meanwhile, since charge-out rates are sticky, at least push to have your favored law firms hold the line on future rate increases (See my post of Nov. 24, 2005: freeze rate increases; April 26, 2006: warm up to the idea of not freezing billing rates; March 11, 2007: rate freezes work like discounts; May 21, 2007: a funding alternative for disbursements; July 29, 2007: economist’s term of “rent”; Oct. 26, 2007: frozen rates asked for in RFPs; Dec. 17, 2007: freeze rates for the duration of a matter and effects on team size; and April 8, 2008: rate freeze might be better than discounts.).

If to fix a fee for somewhat complicated legal services is too difficult, such as a major lease negotiation, perhaps law firms should explore algorithmic pricing. To stay with the example (and to indulge in some fanciful speculation), the algorithm might be $50,000 multiplied by an index for square feet involved and further multiplied by the age of the building, all divided by the anticipated lease term.

OK, I hope you get my meaning. Algorithmic pricing is not fixed as in “Any lease re-negotiation is $74,000 in fees” but is fixed in that the components will vary but the formula stays the same to alculate the fee.

To reach a point where a law firm can rely on and advertise its algorithmic pricing, a firm will need to mine its internal data and figure out the cost drivers and the regression formula. It will need to know what aspects of the matter drive fees and to what degree. Sticking with our example, a driver might be the total square footage owned by the landlord or the landlord’s revenue. Another driver might be the type of use to be made of the leased space. A third could be the quality of the law firm representing the landlord. Each of these components – and all components – can be summarized as an index figure or some other variable in the algorithm.

Hourly rates increase year after year at most law firms. That does not necessarily mean that the amount the firm charges to do the same tasks increases at the same level. The firm might use lower-cost associates, write off time, use technology better, or have more skilled lawyers on the matter who take less time. For any of these reasons, rate increases may not translate into corresponding fee increases. (My definition of fees is the amount billed by the law firm.)

Similarly, the total outside counsel spending paid by a law department may increase in line with overall rate increases and may increase in line with matter fee increases, but not necessarily. Extraordinary legal events and the vagaries of timing cause fluctuations in outside counsel spending that are unpredictable and not causally related to either rate increases or fee increases.

A recent post describes four steps the Gap Inc. is taking to stem increases in legal fees (See my post of Jan. 22, 2009: plans, smaller firms, contract lawyers and offshoring.). From writing about those four steps, four thoughts occurred to me.

Each step takes time and effort and a law department has to stick with them over a long period of time to reap the benefits.

Second, it is impossible to figure out the return on investment of any single step because the whole system undergoes change and you can’t isolate the effects of one of the steps apart from the others.

Christian Liipfert wrote me about another contentious topic for outside counsel guidelines (See my post of Dec. 31, 2008: five hot buttons and a link to my article.): who owns the work product the lawyer creates?

I quote from his email: “If I hire a firm to do a memo on an issue for me, can they refer to that memo when doing a related project for someone else later? Is that permissible, either under copyright or under the professional duty of confidentiality?

I am a big proponent of knowledge management, both internally and externally. I do wonder, however, how law firms reconcile how they handle document management and brief libraries with their professional obligations. Briefs that are publicly available are one thing; confidential work product is something else.

One of the conditions JDS Uniphase mandates for its law firms are that they submit invoices every month “and should include all fees and expenses incurred through the 15th day prior to the date of the invoice.” On that schedule, a bill dated mid-month for the preceding month must cover all of that month’s time and expenses. Since I mostly consult only to law departments, I do not know whether most law firms can bill that promptly. It assumes that timekeepers put in their time fairly promptly and that the invoice generation and review process picks up its feet too.

The guidelines do not crack any disciplinary whip, unlike others I know that warn late billers that their overdue invoices may be rejected.

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I like the no-holds-barred mandate of a guideline for outside counsel, obligingly shared with me by the general counsel of JDS Uniphase, regarding software and hardware. “We must use technology to reduce expenses. Our team relies heavily on e-rooms, SharePoint, ftp sites, etc.”

Note the three technologies mentioned. E-rooms are cousins of extranets (See my post of April 8, 2008: extranets with 13 references.).

SharePoint is an application from Microsoft that enables online, multi-person collaboration. File Transfer Protocol (FTP) is a communications protocol governing the transfer of files from one computer to another over a network. I don’t know what an “ftp site” is but possibly it enables the protocol. I will add all these to my collected references to law department software (See my post of Feb. 9, 2008: law-department software applications with 59 references.).

On the first page of the JDS Uniphase guidelines for outside counsel gleams the distinctly un-lawyerly sentence “We hate surprises.” That dramatic and clear statement leads off two paragraphs about the utter importance of prompt and full communication between law firms and the law department (See my post of Aug. 15, 2008: case status reports as one suggestion.). No one likes surprises, and even with the best intentions the world throws everyone 12:00 to 6:00 curveballs (for those who don’t follow baseball, that is a curve that breaks down abruptly from noon to six). It’s best to inculcate full and fast disclosure.

If there is one hallmark of a trusting partner relationship, it is openness. As the same guidelines trenchantly say, “We will fail without superior and thoughtful communication with you.”

For more, see my blook on outside counsel management.

Many companies have a Code of Business Conduct, but until I reviewed the Guidelines For Professional Service Providers of JDS Uniphase, I had not connected such a code and a law department’s guidelines for outside counsel. The JDSU guidelines attach a copy of their Code of Business Conduct and enlist the company’s service providers, such as law firms, in the enforcement and prompt disclosure of any potential breaches of The Code. It makes sense, but that watchdog position conceivably puts law firms into some delicate situations, like the report-up-the-line requirements of Sarbanes-Oxley.

I can imagine a law department taking another step. It might insist that each of its outside law firms comply with the terms of the company’s Code of Conduct. There are too many issues and contingencies that would arise if a law department were to impose the corporate code on its law firms, even though law departments already impose in varying degrees in diversity, environmental sensitivity, pro bono and other areas.

In 2005, Robert Half Legal published its Future Law Office report on “Client Service: Challenges and Strategies.” The report mentions on page 6 ways to measure client satisfaction. Surveys are one, face-to-face interviews are another, and “joint checklist” are a third.

A joint checklist is a “customized checklist of value indicators. It should contain specific service points — for example, lawyer availability, project management approaches and billing structure.” The law department works with the law firm to define how the firm’s performance in each of the areas will be measured.

Although it requires upfront work, a mutual understanding as to what constitutes good performance sounds sensible for major relationships or matters. Like Service Level Agreements (SLA) between a law department and its clients, a value-indicator checklist clarifies terms, measures, and expectations (See my post of March 23, 2008: SLAs.)