Articles Posted in Outside Counsel

InsideCounsel, Jan. 2008 at 50, provides some data from the most recent law department survey of Altman Weil. The survey reports that “51.8% of outside fees go to the company’s top two firms” (See my post of March 24, 2005 on concentration of spending; and Dec. 17, 2007 on concentration efforts by law firms.).

This is not to say that the top-two law firms of a law department stay the same from year to year. A single large case may command huge sums for a firm during a year, but once that case ends, the firm slips back into the pack. Nor is it to say that the top-two firms ought to stay the same (See my post of Dec.16, 2005 on complacency as it afflicts incumbent firms; and Dec. 6, 2006 on retrograde effects of institutional knowledge.). All that said, most law departments have a small number of law firms that they regard as go-to firms for major undertakings.

The concept of Pareto’s Law shows up everywhere (See my post of June 27, 2007 on the law and an illustration.). If you look at the bills of the law firm you use the most over a six-month period, and sort the time billed on your matters by associates, paralegals, and partners, you will see it manifested. A few of those timekeepers will account for the largest portion of your bills, but there will be a long tail of occasional billers and those who only put in tiny dribs of time (See my post of Dec. 8, 2006 about core teams in law firms.).

It is the long-tail billers that should be the targets of your saving efforts. Sporadic, quick, drive-by billing cannot be efficient (See my post Nov. 6, 2007 on billing concentration.).

Law departments have at their disposal many variations on the old standby of rate discounts (See my posts of Aug. 4, 2007 with a discount and a success-based arrangement; and Oct. 29, 2007 on expectations.). I’ve collected some ideas and associated posts.

1. Across-the-board discounts imposed on all law firms for a period (See my post of Nov. 11, 2007 where I criticize one-size-fits-all solutions.).

2. Discounts that increase as the amount of work done increases (tiered discounts) (See my posts of Aug. 8, 2006 on tiered discounts from hourly rates; and July 2, 2007 about percentage increases.).

Readers of this blog have seen a few blog posts on this topic, where law departments haughtily insist that their firms give them top-shelf billing rates, the “best you give any client.” Last November, for the New York Law Journal, I pulled together my thoughts on MFNs, as they are sometimes called, and published an article.Download mostfavored_nation.pdf

This is the first time I have uploaded a PDF file and inserted it into a post. Please let me know if it works and whether I should do the same with my other recent articles on aspects of how to effectively direct an in-house legal team.

You have narrowed the contenders for a piece of legal work. Each firm troops in a team to meet your staff and strut their stuff. Before that meeting, it is crucially important for the attendees from your law department to think about what they want to learn from the meeting. They need to set the agenda and stick to it. Much like vendor demonstrations of software (See my posts of Sept. 18, 2007 on several tips.), a presentation by a law firm needs to be managed.

You need to state the difficult questions and decide who will ask them. Someone needs to be sure the questions are answered sufficiently by the law firm. Someone needs to be sure all points are covered within the allotted time, and someone needs to be sure the firm gets back to the team with responses to unanswered questions. All of these steps should be addressed in a script.

An article in LexPert, Vol. 9, Nov./Dec. 2007 at 61, claims that a “vast array of new positions is emerging.” In London there are “senior partners, junior partners, salaried partners [the US counterpart of non-equity partners], directors, counsel, professional support consultants, professional support lawyers, managing associates, junior associates and the list goes on.” A similar move is afoot on this side of the Atlantic (See my posts of June 27, 2007 on timekeepers other than partners; June 24, 2007 on project managers in law firms and references cited; and Oct. 21, 2005 on litigation support consultants in firms.).

Why does the proliferation of titles matter to law departments? On the good side, it may well be that firms are leveraging more effectively, having people of appropriate cost and background doing the right level of work. The proliferation of titles also tells law department managers more about the roles and relative value added of those who bill them than if they were lumped into broader bands of titles.

On the bad side, the many titles – and equally diverse billing rates – may make it harder to assess the appropriateness of bills submitted by firms. All those positions may also lure law firms into billing clients for services that should be covered by the billing rates of lawyers or absorbed by the firm.

The current general counsel of British Columbia Transmission Corp., John Irving, was previously the lead lawyer for CP Ships, Ltd., a company with legal needs in 88 countries. After Irving figured out in which of those countries CP Ships would need counsel, he “decided to limit the number of law firms used to two in each country – one generalist firm and one specializing in maritime law – negotiating volume discounts with each of these firms.”

This technique – a general firm and a specialist firm for your core legal competency in each important country – is described in LexPert, Vol. 9, Nov./Dec. 2007 at 61. Your department won’t win awards for convergence, but that is not important. You will serve your clients better with such a one-two punch (See my posts of Oct. 19, 2007; and Dec. 10, 2007 on how to find foreign firms.).

Since some law firms care about the profitability of individual clients, law departments ought to pay attention to that possibility. Legal Week, Vol. 9, Dec. 6, 2007 at 3, states that this year Lovells, the top 10 London City law firm, “went through a process of rankings its major clients by profitability” (See my post of Nov. 27, 2007 about law firms who fire clients.).

I assume the term “profitability” refers not to mere volume of business but to the margins Lovells maintained on its major clients (See my posts of Oct. 31, 2005 on low-ball fees that reduce profit; Feb. 24, 2007 on six drivers of law firm profitability; Nov. 24, 2005 about minimum levels of law-firm profitability; Feb. 16, 2006 and the importance of it; and July 20, 2005 about transparency of firm profitability.). If I were a general counsel, it would disturb me to rank high on such a list of profitability. Somewhat like effective billing rates (See my post of June 13, 2006 on effective billing rates.), every law department should want to be below the median (See my posts of Oct. 30, 2005; Nov. 21, 2005; and Jan. 25, 2006 on difficulties with on most-favored-nation rates.).

What would be the difference if a law firm were asked to submit a rolling budget on a sizeable matter at the end of each month? The budget would extend perhaps as far out as six months – longer than a typical budget covers – but this would be a Bayesian budget in that changes in circumstances would affect the probabilities (See my posts of Jan. 20, 2006 and June 16, 2007 about Bayesian statistics.). If each month the budget were accompanied by an explanation for why the overall budget has changed, the rolling analysis would be informative for in-house counsel for the immediate matter and for matters like it in the future.

With monthly revisions, there might be more chance for the inside managers to change activities and costs. The frequent revisiting of the budget would keep both the law firm and departmental lawyers conscious of costs and their drivers. The rolling budgets would also encourage roughly contemporaneous discussions of strategy and tactics.

A fundamental problem with any kind of organized selection of counsel – anything more disciplined than a senior lawyer picking up the phone and calling a known partner at a familiar firm – is that the process takes time. Say what you will, a competitive bid process adds time and distraction. Sugar coat the benefits of strategic sourcing howsoever, more people and their tools and steps complicate the simple telephone call. Praise fixed fees all you want, they are no instantaneous fix.

If given the choice, what lawyer in a law department willingly signs up for delay, questions, data collection, and coordination with others when they can just proceed as always? All processes take time, yet only with processes can you stem the tide of costs.