Articles Posted in Outside Counsel

A piece in Corp. Counsel, Vol. 15, May 2008 at 71, states that law firms should propose set payments every month as an “alternative fee arrangement” for costly, multi-year cases. “This benefits the law firm during the valley times and the client during peak times, and overall is a win-win solution for both over the life of the litigation.”

Not necessarily so, Candide. Both sides benefit only if they have hit upon an amount to be paid each month that is fair. A monthly fee that is too peakish favors the firm; a fee too valleyish favors the department. No one can know early on the likely magnitude or timing of costs in a case. More fundamentally, it is not my impression that even payments make all that much difference to a law department.

I have a residual worry that monthly retainer payments make it too easy for the law department’s responsible counsel to pay little heed to the bill. It is a good practice to reconcile the amounts paid against the actual costs accrued by the law firm and perhaps adjust the amount of the payment for the future based on those costs. Even better, set the monthly amount every six months based on a budget submitted by the firm and reviewed by the in-house lawyer that details why the payment should be what they propose (See my post of April 27, 2005: budget only as far as your headlights reach.).

When Johnson & Johnson’s law department got its e-billing system up and running, the department benefited from the “reduction of confusion in payment,” according to Corp. Counsel, Vol. 15, May 2008 at 75. The law department finance manager estimated that the department “cut a good month out of the payment cycle.”

Now, inquiring minds want to know, why is it better for a law department to dispense its cash more speedily? Interest earned on the float isn’t the reason. A department gains nothing from invested funds that are later paid a law firm or vendor. A company may be able to conserve cash and earn some interest during the delayed period but not a law department.

To the contrary, shorter cycle times might help a law department if it has prompt-payment discounts from its firms (See my posts of Oct. 25, 2007: prompt-payment discounts are infrequent; May 4, 2005; Aug. 24, 2005; Aug. 27, 2005; Sept. 14, 2005; Oct. 14, 2005; and Oct. 15, 2005: prompt payment schemes; June 11, 2007: full review and end-of-year larger discount; and June 20, 2007 on prompt-payment discounts.).

I spotted in one major law firm’s engagement letter the following language: “Any rebates paid to the firm, based upon travel volume, are used to offset the direct costs assessed us by our independent travel agency.”

Doesn’t that statement dance around the obvious question, “What if the rebates are larger than the direct costs assessed you?” An in-house manager with a more suspicious mind might inquire whether the law firm offsets the direct costs before passing them through to the client (See my post of Feb. 14, 2007: are law firms passing through rebates?; and June 15, 2005: ethical obligations of law firms to pass along savings to clients).

How does a firm allocate the rebated sums among its clients – does this give a different nuance to “most favored nation”? Does a law firm have an obligation to maximize such rebates.

Counsel to Counsel, May 28 at 19, describes portions of the process Union Pacific Railroad’s environmental group went through to slash the number of outside counsel it uses. David Young, the railroad company’s general solicitor, started by writing approximately 80 law firms that had been representing his company for environmental services.

As the article puts it, he asked them “to assess their own value.” That is a new question for me: “Tell me how you add value to me, as a client, and why your contribution is more valuable than that of other firms” might be the form of the question. It would be quiet obvious which firms provide thoughtful and substantive answers.

Second, Young found that some law firms failed to respond at all (See my post of Nov. 23, 2007: send the post to the firm’s managing partner.). Third, “some submissions were so bad the firms were easily eliminated.”

In the course of describing the relationship between NEC Corp. of America and Duane Morris, a firm chosen through a drastic convergence process (See my post of May 5, 2008: from 130 to 5 firms), an article mentions that one of Duane Morris’s employment partners “works closely with the HR department of NEC, generally communicating with them, rather than the attorneys in Legal.” Counsel to Counsel, May 28 at 5, adds that the law firm works to replicate such direct client interaction on every matter.

The general counsel, Gerry Kenny, subscribes to this unmediated legal counsel. “Outside counsel’s ability to work directly with businesspeople helps differentiate the relationship.”

I am of two minds of removing in-house counsel from management of the work of outside counsel. I like the idea because it is more efficient, clients probably favor it, and the law department focuses on its core competency and most useful contributions. I don’t like the idea because why have a law department if clients can just call law firms directly, control over legal costs passes to clients, and responsibility for all legal activities of the company is diluted. If I were force to take a position, I would favor direct contact as the more cost efficient if no inside lawyer has much competency in the area of law.

The North American subsidiary of Japan’s NEC Corporation “whittled its list of law firms from 130 to five” and did so through a competitive process initiated with a Request for Proposal. Counsel to Counsel, May 28 at 4, offers no more about this convergence initiative. On a percentage basis, the casting off of 96 percent of the NEC Corp. of America’s firms is one of the most extreme reductions I have heard about (See my post of Feb. 16, 2008: 26 convergence posts collected.).

If more than one of the five fortunate firms was new to the company, the image I have is that of publicly-traded companies who must change either audit firms or audit partners (I am not sure which) every five years. Maybe companies ought to throw out all the bath water periodically.

In short order you can figure out the effective billing rate of your three or four go-to law firms (See my posts of June 13, 2006: comparison of blended and effective rates; and June 30, 2007: whether discounts save money.). In shorter order you can figure out the hourly rate your internal lawyers would have to charge clients for the law department to break even on its inside budget – the fully-loaded hourly rate (See my posts of Feb. 17, 2008: 1,850 hours as the right standard; and Feb. 25, 2008: hours wasted in a typical day.).

If your overall effective billing rate for you key firms is around $350 per hour and your fully-loaded internal rate is around $200, then the external cost of a lawyer hour is about 75 percent higher than the internal cost. Based on my consulting experience, however, if you were to calculate the effective rate you are paying for ALL your firms, the figure might drop closer to $300 an hour, which is 50 percent higher than the internal lawyer cost.

Let’s assume the 50 percent gap. Is this a plausible ratio between internal fixed and external variable lawyer costs per hour? Intuitively, something around a 33 percent gap makes sense to me if only because that is roughly the profit margin of a law firm; it is the partners’ profit.

We all know about how online sites match people according to various algorithms, and how software matches pre-meds to medical schools as well as new doctors to hospital-residency programs. The mathematician who created the original matching algorithm, University of California professor David Gale, just died.

Reading about Gale and his software, I fantasized about a system where law departments list what they would like of law firms for work of a defined kind and law firms list what capabilities they believe they have in that area of law. Both the firms and the departments could weight the attributes by relative importance. Professor Gales’ matching algorithm would then rank the law firms according to their fit with the desired attributes of the internal legal group.

OK, so there are some tiny blips in this fantasy… This blog has entertained other ideas that could make money for the creative person who implements them (See my post of Sept. 22, 2006: seven other entrepreneurial ideas and references cited.).

“Indian firms are not allowed to have more the 20 partners, cannot advertise their services via websites, and cannot even give someone a business card unless it has been specifically requested.” This quote comes from a recent article in the Economist. To test its accuracy, I searched for Luthra & Luthra, one of India’s biggest law firms, and sure enough the home screen thrusts at you a “Disclaimer & Confirmation” that reads:

“As per the rules of the Bar Council of India, we are not permitted to solicit work and advertise. By clicking on the icon below, the user acknowledges the following:” – basically that nothing on the website is selling the firm’s services. The constraints on the marketing visibility of Indian law firms, not to mention the drastic limitations on their size, must present difficulties for in-house lawyers in the United States who need to retain experienced and sophisticated local counsel.

Many observers believe that general counsel, when they retain a law firm for a high profile matter, pay little or no heed to the potential cost. In relation to the risks involved (to companies and to careers), a few hundred thousand dollars, or even a few million dollars, means little.

“As a result, there is an inverse relationship between the likelihood of negotiating an alternative free arrangement and the seriousness of the legal matter facing the company.” That is the bleak but pragmatic conclusion stated in Altman Weil’s Rep. to Legal Mgt., Vol. 35, Nov./Dec. 2007 at 1 (See my post of Feb. 28, 2006: bet-the-company litigation, rare but often cited.). I have sympathy for that conclusion, but think it also fair to point out that expensive, long-running matters at least offer more opportunities for experimentation on alternative fee arrangements – even if just for parts of the work – than do small, quick matters.