Articles Posted in Outside Counsel

When is it unfair for law departments to force changes on the operations of law firms they retain? This is the third of a series of posts on this question (See my posts of Jan. 10, 2008 on legitimate requests by legal departments of all law firms; and Jan. 10, 2008 on requests that are fair only for primary law firms.).

If a law department demands too much from a law firm, the firm can decline to represent it (See my posts of Nov. 27, 2007 about law firms dropping large clients; and Dec. 19, 2006 on the tradeoff between tight management and the quality of law firm advice.). The marketplace will sort out what’s asked for that is beyond the pale. Moreover, general counsel are often loathe to provoke their trusted firms with what the general counsel perceive as niggling or unjustified demands (See my posts of Oct. 4, 2005 about loyalty; and July 30, 2005 about fear of losing the department’s favored firms.).

Even so, law departments keep pushing the frontier of intervention in law firm operations further and further. Some of the impositions, I feel, have gone too far. My own catalogue of instances where law departments ask too much includes the following dozen plus.

Many law firms routinely give billing-rate discounts, but what is the best or most common practiced for telling clients about their savings on the invoice?

Some firms simply reduce the billing rates of the lawyers who work on the client’s matters and send in the bill without self-promoting fuss and bother. Aggressive or thoughtless in-house counsel might overlook the built-in discount and take a unilateral discount.

More commonly, firms state somewhere on the invoice that the amount sought excludes the discount of five percent or whatever. They may or may not state the amount of the discount.

An earlier post discussed interventions by law departments in law-firm operations where the requirements are well founded and reasonable (See my post of Jan. 10, 2008.). Beyond what seems fair for law departments to ask of all their firms, this post considers requirements by law departments that seem to me fair for them to impose only on law firms that consistently handle significant amounts of work for them.

As with the previous list, the following compilation could be much longer.

1. Provide training beyond firm-standard CLE events (See my post of July 21, 2005.).

That law departments intervene all the time in their firm’s internal operations is obvious (See my post of Dec. 21, 2005 with five examples and four references; and July 5, 2006 with six examples and eight references.). What is not obvious is where to draw the line.

This post begins a three-part series on what services law departments should receive from all their law firms in the normal course of dealings. A second post today considers the services a law department has the right to insist on from their primary law firms (Part II) while the series closes with those services law departments should not expect from their law firms because they are over-reaching (Part III). Thus the series moves upwards from modest and acceptable expectations to undeserved impositions that significantly impinge on the management prerogatives of law-firm partners.

Normal-course interventions in how law firms run themselves go beyond fundamentals such as prompt invoices with appropriate information, avoidance of conflicts of interest, best efforts, and other the customary behavior of legal professionals. Many of these standard expectations are enshrined in outside counsel guidelines (See my post of Dec. 17, 2007 on outside counsel guidelines.). Here are a half dozen, but I could probably double or triple the list.

Law departments require in their outside counsel guidelines that firms charge them no more than the firms’ “actual costs” of photocopies, faxes, messengers and other internal costs. That limit sounds definitive, but it is nearly impossible for law firms to calculate the actual cost of any of those tasks. To ask, “What is the fully-loaded costs of binding a brief?” is to bare the absurdity of the question.

What law departments want is to eliminate surcharges by law firms, premiums of some deliberate amount or percentage on top of whatever the cost may be of a task. One solution is to ask your key firms to describe in writing how they calculate the internal costs charged to you

“The theory of transaction cost economics (TCE) provides insight into when firms should perform a task internally versus when it is more economical to outsource a task. TCE advises against outsourcing when the firm is at risk of becoming dependent on a supplier because the supplier either has or develops specific assets (such as information and ordering systems) that the firm needs and does not itself possess.”

That quote from Cal. Mgt. Rev., Vol. 49, Summer 2007 at 51 (emphasis in original), made me wonder how often TCE would argue against use of law firms, because a law firm can develop “specific assets” (people, procedures and software) that the law department retaining it lacks. That, in fact, is the reason why in-house counsel retain law firms – to draw on expertise and assets not available inside.

“TCE also advises against outsourcing in situations of uncertainty, such as when the firm cannot adequately judge whether the supplier is performing as promised or when it cannot clearly specify what it wants in terms of outcomes.”

Let’s create a term. Each time a lawyer in a law department asks a partner in a law firm (a firm, for simplicity) to handle a matter, when that particular lawyer has never instructed that firm before, let’s call it a “first instruction.” Thereafter, if that same lawyer asks the same firm to do something else, by definition it is no longer a first instruction. Another lawyer in the department, however, might retain the same firm on a matter and that would also be a first instruction if the lawyer had not previously engaged that firm.

My hypothesis is that during a year, the number of first instructions by a typical law department is a very small proportion of all the matters sent by the department to a firm. Most in-house lawyers have a handful of preferred firms and they stick with them (See my post of March 6, 2007 about loyalty to firms.). I would not be surprised, in fact, if less than five percent of matters were new instructions. Most of the new instructions, I suspect, would be by the general counsel or another senior lawyer.

This advice may sound corny or ineffective to some general counsel, but to others – those who face a hemorrhage of payments to a firm for a period of weeks or months – it is at least a tool to consider.

Request your primary firm on a very expensive matter to submit a bill each Monday for the work done the previous week. That speed may be difficult for the firm because some lawyers are dilatory in submitting their time sheets, but the goal is to have a sense of expenditures that is more real time than far back in time (See my posts of May 19, 2006 about real-time access to billing records; and Aug. 26, 2005 about typical delays when firms bill.).

Previously I took a position in support of billing rates frozen for the duration of major matters (See my post of Dec.17, 2007.). With such an arrangement, a law department would like to know how much savings might be projected from that technique.

Based on historical figures, law firms typically expect to raise their billing rates at least five percent annually. If the law firm you select, the one that agreed to freeze its rates, has projected a plausible budget for the next year, it is easy to multiply the budgeted amount by the five percent increase that can be anticipated. Hence, if the budget projected for 2008 is $250,000, the savings would be $12,500 ($250,000 x 0.5%). The calculation is a bit more complicated if the firm’s rate increases take effect later in 2008, but the math is similar.

An article in GC Mid-Atlantic, Sept. 2007 at 15, reviews the usual reasons given for the durability of billing by the hour (See my post of Oct. 26, 2005 for my own article on the topic.). The author, my former partner Dan DiLucchio of Altman Weil, makes a point that I haven’t seen.

He writes that “studies of consumer behavior indicate that people don’t need to know they got the best deal, just that they didn’t pay more than the next person.” If a general counsel pays law firm partner X $800 an hour and believes that X charges everyone the same exhorbitant rate, then the general counsel may grumble but find psychological comfort in the shared misery. If the general counsel negotiates an alternative billing arrangement with partner X, the calm of comparability disappears.