Articles Posted in Outside Counsel

Among the many ways that corporate managers of outside counsel decide which lawyer to retain, the in-person interview is probably the most effective (See my post of Nov. 24, 2007: coaches on how to interview; Feb. 8, 2006: a good question to ask; Jan. 1, 2006: behavioral interviews; Jan. 16, 2006: length of questions and answers; Aug. 10, 2007: Exelon’s RFPs and extensive interviews; Aug. 4, 2007: bifurcated interviews of associates and partners; and April 7, 2006: interviewers should look beyond looks.).

Before they trigger such a meeting, however, an in-house lawyer might like to see what the potential advisor looks and acts like. The legal network that Martindale Hubbell has announced it will launch in 2008 plans to allow lawyers and their firms to put up videos. Indeed, the company will help them create the videos.

More on the upcoming online network is in Met. Corp. Counsel, April 2008, at 52, or from Ralph Calistri (See my post of April 10, 2006: listen to oral arguments of potential counsel.).

A survey crossed my desk that asked general counsel to rate the importance to them, when they decide to hire a law firm, of 19 factors. Yes, 19. The last one on the list is “Ethical infrastructure (e.g., ethics committees).”

I have worked with hundreds of law departments and not once have I heard an in-house lawyer mention the ethical infrastructure of the firms they use or are considering using. No one is even aware of law firm ethical structures and practices. No one gives any thought to whether or to what degree that mysterious element makes any difference in retaining a firm or sticking with it. Conflicts of interest are dealt with head on.

Like law firms being family friendly, diverse, culturally hip, environmentally aware, IT savvy, or pro pro bono, these characteristics of law firms are recognized and honored by law departments more in the breach (and in surveys).

This is a depressing and admittedly cynical view, but let me float the idea. Law firm partners spend much of their time thinking how to increase their revenue. Certainly, they practice law and care about those who pay their bills, but close behind they care about how to milk more fees from current and new clients.

Law departments, by contrast, have part-time managers of outside counsel. Law department lawyers spend the largest portion of their time focused on giving legal counsel. They incidentally manage outside counsel and often have little individual incentive to reign in costs (See my post of June 30, 2007: lack of individual incentives for cost control.).

At bottom, therefore, firms and departments exhibit an imbalanced focus on money. Where many people outside focus on increasing money, relatively few people inside – and only part of the time and reluctantly at that – focus on holding the line.

When an in-house lawyer needs to retain a law firm, the simplifying assumption outsiders make is that many firms of equivalent ability are available to vie for the privilege. Something close to a perfect market exists: many willing buyers transact with many willing sellers and economists are charmed.

Down on earth, however, in-house managers of external counsel often end up feeling hemmed in, without much choice or room to maneuver regarding external counsel.

Conflicts of interest knock some of the potential firms out of the running (See my posts of July 16, 2007: 19 references collected to that date; Nov. 7, 2007: competitive bids and conflicts; Nov. 22, 2007: conflict waivers given in advance; Nov. 27, 2007: when law firms fire clients; Dec. 17, 2007: clients are becoming more hard-nosed; Feb. 17, 2008: a team of academics at a firm; and Feb. 17, 2008: ill-effects of partners changing firms.)

Richard A. Hall founded and is President/CEO of LexTech, Inc., a legal information consulting company. According to a post April 3, 2008 on Faikah’s Blog, Hall developed a task-based billing model built on extensive statistical analysis of hundreds of litigated civil matters. This would have been a precursor of the Uniform Task Based Billing System (UTBMS).

More interesting to me is the statement that in 1994 Hall invented linguistic modeling software which automatically reads, applies budget codes, budget codes and analyzes legal bill content. The software sounds wonderful, but I haven’t heard of such a capability in actual use (See my post of March 23, 2006: linguistic analysis software for knowledge management.). Humans have to look at bills of law firms if there is to be thoughtful review.

An anecdote by a general counsel in the ACC Docket, Vol. 26, April 2008 at 101, left a burr under my saddle. Barry Nagler, the General Counsel of Hasbro, endorsed client referrals as one of a law firm’s most effective marketing tools. Then the article adds: “Having a law firm’s client call Nagler with a personal recommendation was the type of ‘marketing’ that he could appreciate.”

Mercy me.

If I were a general counsel, I would not want unsolicited calls from another general counsel touting the capabilities of some law firm.

For this post, keep in mind your primary law firm. If its average standard rate is $400 per hour with a gross margin of 35 percent, the firm makes a profit of $140 each hour. The 10-percent discount ($40 per hour) you request reduces that profit by nearly 30 percent. Hence, the firm needs 40 percent more fee volume to earn the same total profit it would have enjoyed without the discount. Legal Week, Vol. 9, Dec 6, 2007 at 26, explains this dynamic.

Here is an example. If the firm logged 100 hours at standard rates, it would bill $40,000 and earn a profit of $14,000. If the firm discounts its $400 an hour rate by 10 percent to $360 an hour, it would bill $36,000 and earn a profit of $10,000, which is $4,000 less. To recoup that lost profit, the firm would need to bill approximately 140 hours at the same 10 percent discount level ($360 per hour times 140 hours at 28.5% margin) = $14,364.

You might easily obtain from one of your primary law firms a discount on its standard hourly rates of, let us say, five percent. You could pat yourself on the back.

A few months later, the firm might raise its billing rates by, let’s say, an average of eight percent. Your discount is a candle blown away by the rate increase.

For this reason, you might want to think about having the law firm agree to freeze the billing rates of its key lawyers for the duration of the matter or two years, whichever comes sooner (See my post of Dec. 17, 2007: freezing billing rates for the duration of a matter.). Effectively, you then obtain a discount because of the foregone billing rate increase.

Lexakos recently released the results of its Chief Legal Officer 2008 Strategic Planning Survey of more than 100 chief legal officers. According to the press release by Rick Wolf, Lexakos’ founder, “only 21% trust outside counsel to manage costs and choose the best alternatives for document review.” A bit more than one half of the respondents “do not believe outside counsel has a vested interest in devising cost-effective document review strategies.” Doubts by in-house lawyers about external counsel’s fiscal responsibility on litigation support are not the only manifestations of mistrust.

Other areas of wariness surface from time to time (See my posts of Feb. 8, 2006 and Feb. 16, 2006: hourly rates of associates; May 11, 2007: inexperienced associates, and references cited; Nov. 13, 2007: uncertainty of legal fees; March 9, 2007: scant use of paralegals; Jan. 25, 2006: annual rate increases; Feb. 16, 2006 and May 18, 2007: net income per partner; and Dec. 16, 2007: average profit margins.).

The press particularly makes much of suspicions by law departments about law-firm bill padding. This common eruption spills out lava about how often firms that inflate their bills (See my posts of Sept. 17, 2006: high rates of padding; Aug. 26, 2006: perception that firms pad bills; July 17, 2007: trend in such perceptions; Nov. 13, 2007: weaknesses of hourly billing; July 16, 2006: law departments slam law firms; and July 19, 2007: law firms ignore the cost of outside counsel services.). Departments especially worry about extra hours tucked into bills if law firms impose minimum chargeable hour requirements (See my posts of Nov. 2, 2006 and Aug. 22, 2006.).

For some matters that are very sophisticated, give some thought to a radical alternative for your billing arrangement. Agree with the partner whose work you want most on the matter to pay that partner a reasonably significant premium on his or her standard rate for time worked on the matter. For example, 25 to 30 percent might be appropriate.

What you giveth, you also taketh away. The tradeoff is that no associates may charge time to the client on that matter. The purpose of this structure is to avoid training younger associates where little value comes to the client (See my post of March 15, 2006: shibboleth of institutional knowledge, yet high turnover rates; Dec. 17, 2006: obligation of law departments to train associates.) and to give the key partner an incentive to spend more time on the matter. Most partners are very busy and they will not over-bill time.

Even if this idea has merit, nothing about it addresses the logistical complexities of changing billing rates either at the law firm or with the law department’s billing system.