Articles Posted in Outside Counsel

A development in the future, according to Law Tech. News, Feb. 2008, at 30, will be “business intelligence … used to develop pricing and alternative fees” (See my posts of Jan. 25, 2007: business intelligence and data mining; May 17, 2006: a definition of it; and March 23, 2006: compared to knowledge management software.). The consultant who makes this prediction, Larry Bodine, cites as an example Bryan Cave, which has used software from Redwood Analytics to customize its fees and help clients better understand what they get for their money.

The particular instance he cited was a real estate lawyer who used software’s modeling tools for pricing and staffing, as well as historical data of the firm, to see if Bryan Cave could charge real estate clients based on the square footage of their projects. “He found that while there was risk of under-pricing [the fees charged for work on] large buildings, the deal volume in small buildings offset the risk, making per-square-foot pricing possible.” This is a bellwether for how law firms can creatively and effectively price their services.

The Corporate Counsel Network invited me to pull together some of my recommendations for law departments on how to do better with requests for proposals. I did so ten days ago and here is a link to the seven-minute podcast.

For more information on the podcast or the Corporate Counsel Network, run by Broc Romanek, email Julie Hoffman at the Net.

During each of the three years 2004-06, the hourly rates of US outside counsel increased on average 5.6 percent. Specifically, they rose 6 percent in 2006, 5.2 percent in 2005, and 5.7 percent in 2004, according to the 2007 ACC/Serengeti Managing Outside Counsel Survey. The report dryly notes that “in-house counsel have consistently underestimated the increase in hourly rates for the coming year” (See my post of Nov. 24, 2005: rate hikes tied to increases in the Consumer Price Index.).

It is not clear from the brief mention of these facts in the ACC Docket, Vol. 26, Jan./Feb. 2008 at 20, whether these increases are in official billing rates or effective billing rates (See my post of Feb. 23, 2008: unbalanced focus on high billing rates.).

The 2007 ALM Research Survey Report on Billing Rates & Practices summarizes data from 5,058 law-firm respondents. From this group, which I assume to be reasonably representative of law firms in the United States that are not large, the average billing rate was $240 an hour and the median rate was $225 an hour.

Amid all the breast-beating and hair-pulling about stratospheric billing rates – $1,000 an hour by the top handful of star partners at the most prestigious law firms – it is a tonic to see that most of the country’s lawyers have remained fiscally modest (See my post of April 8, 2007: broadside against boosts in billing rates.).

The report also notes that the “average required billable hours for small and mid-size firms for partners was 1,701 and for associates was 1,755” (See my posts of Feb. 17, 2008: assumption of 1,850 hours as standard; and Feb. 23, 2008: annual average increases in rates.).

So-called “block billing” happens when a lawyer in a law firm consolidates more than one task into a time sheet description and states the number of hours billed for the entire block. Law departments do not like block billing because the reviewing lawyer cannot tell how much task individual components of that time entry took to complete. Most outside counsel guidelines prohibit block billing.

It is useful to consider some examples of the range of block billings. I am indebted to Karen Boyd, Esq. for these examples.

Block billed (awful): Draft email to opposing counsel re schedule for Morrison deposition; legal research on preliminary injunction factors, draft legal section of PI opposition; work on invalidity claim chart for Lemmelson reference. 8.7 hours.

An off-hand remark by a partner, quoted in Of Counsel, Vol. 27, Feb. 2008 at 3, snapped me to attention. Kevin Newsom was describing his having been hired to handle a case for the Governor of Alabama that will be argued in the Supreme Court. Newsom remarked: “The best marketing I can do is to work myself silly on that case and do as good a job as I can.”

Aha! Big bills = big success = big book of business! One of the perverse drivers of legal costs is exactly this: If you log hour after hour and spend wads of your client’s money and do well, another client may hire you. The incentive is to work yourself silly – bill huge numbers of hours – and reap the rewards of marketing by referral. The first client, the one with the humongous bill, pays for your marketing.

The legal department of Britain’s Sainsbury recently chose a panel of 11 law firms to serve for an initial three-year period. Previously, the department had informal relationships with around 20 law firms. The department invited thirty firms to compete for places on the roster. According to Legal Week, Vol. 10, Jan. 24, 2008 at 4, the law department expects to spend approximately was £13 million ($25 million) on external counsel.

The article also mentions that head of legal Nick Grant said his department “plans to hold a conference between its advisors and its in-house team in an effort to push for a higher level of collaboration and sharing of best practice.” I have previously commended such gatherings and suggested topics for them (See my posts of Dec. 3, 2005: Wal-Mart’s conference for its key law firms; June 19, 2006: another discussion; and Dec. 10, 2007: suggestions.).

A white paper published by Blackberry, which was distributed at LegalTechNY, draws on data from a consultancy’s survey about what keeps clients satisfied and what dissatisfies them. The Blackberry report states (at 3) that the number one reason why clients fire law firms is the firms’ lack of responsiveness.

I find that hard to believe. The law departments that I’ve worked with, which admittedly are generally large law departments, feel that outside counsel get back to them with acceptable promptness, but where they fall short is the level of legal analysis they provide. It’s the quality of legal thinking and craftsmanship that sinks them, not some four-day delay before they call back. Anyone can set up systems to assure prompt feedback, but no one can systematize or fake intelligence and thoughtfulness.

The 2007 gross revenue of Latham & Watkins was just over $2 billion. As reported in the Wall St. J., Feb. 11, 2008 at B2, its profit per partner reached $2.27 million. Skadden Arps might also breach the $2 billion mark. At $2 billion in revenue, a law firm would not be on the Fortune 500 list, where company number 500 is a bit above $3 billion in revenue, but not that far off.

Consider that the majority of law departments in the United States have five or fewer lawyers (See my post of Feb. 9, 2008: 60% smaller than 5 lawyers.). That group of departments probably spends less than $3 million each year on outside counsel, since a typical level is about $600,000 per lawyer spent on outside counsel. Suppose at most one-third of that spend goes to the firm with the most fees, that firm – if it were a twice-billionaire firm – would get from that client .05 percent of its revenue (See my post of Dec. 4, 2006: nothing speaks louder than money.).

What miniscule client can push around a massive law firm that is so big and so profitable?

Churn among partners in AM Law 200 firms has been significant, and the consequences to law departments can be pernicious. The Client Advisory of Hildebrandt International and Citi Private Bank, Jan. 2008 at 7, states that during the seven-year period (2000-2006) “52 percent of new partners [were] ‘home grown’ and 48 percent [were] laterals” (See my posts of March 11, 2007: increased lateral mobility among partners; and Feb. 1, 2007: mobility of partners.).

When partners move from one firm to another, the clients they serve may suffer. Much institutional knowledge, if there ever was much (See my post of March 15, 2006: the shibboleth.), goes down the drain. New conflict-of-interest tangles may ensnare clients and partners. Different policies about terms of service may complicate the previous financial arrangements. The partner in the new firm may not be able to command associates and support that were as good as those at the prior firm (See my post of July 14, 2005: being a top performer is situational.). A partner’s departure may destabilize a firm that has served a company well for years.