Articles Posted in Outside Counsel

A slew of posts here have commented on the practice alleged to be reasonably common of law departments of banning junior associates from charging time to their matters (See my posts of Nov. 19, 2007; and May 11, 2007 with 14 references.). GC Mid-Atlantic, Sept. 2007 at 13, cites a survey by Altman Weil (with responses from 38 of the largest 200 law departments) that found “20 percent of respondents prohibit first- and second-year associates from working on all their matters, while more than half make the decision on a case-by-case basis.” Even though the methodology leaves doubts because of the 19 percent response rate and thus only 7 departments impose the absolute ban, let’s assume it to be directionally correct.

If a law department is comfortable precluding entire classes of associates, why wouldn’t that department remove from its matters any higher-level lawyers at the firm if the department feels that their contribution is not worth their billing rate? This voting-off-the-island happens, at times, but why not carry the logic of evaluation and dismissal to its logical conclusion: handpick who can work on your matters? Law firms will blanch.

A large insurance company I assisted put out for bid its future portfolio of certain cases. The firms that were invited to propose were given an opportunity to come to the law department and look through the files of pending cases that were similar to those to be covered by their bid. The due diligence took place at the law department in several conference rooms, where file folders, docket sheets and the responsible attorneys were available for review and discussion. The point was to familiarize the firms with the likely makeup of the expected cases.

This was a sound practice. Even with non-litigation matters, it could improve the proposal terms and amounts if the law firms have a chance to get their hands dirty on comparable matters (See my post of Nov. 30, 2007 for ten other solid ideas for competitive bids.).

“If, for instance, two law firms have an equivalent reputation and location, one study found that clients will not switch firms until the prices in the old firm are 34% higher than its competitors.” For a law firm trying to horn in on a competitor’s turf, that is a staggering economic gap. It also shows how price is not the driver for most law departments as to which firms they favor.

This research is reported in the J. Prof. Serv. Marketing, Vol. 3, 27-28 (1987) and Susan Samuelson, Law Firm Management: A Business Approach, Sec. 6.4.2.1 (Little, Brown 1992). Samuelson explains some of the factors affecting price insensitivity: “Specialized knowledge is willingly paid for; prices are difficult to compare; high cost is often viewed as a sign of superior quality; legal fees represent a small proportion of income; and switching costs are substantial.”

Translated to law-departmentspeak, that means “We will pay whatever the guru charges since we haven’t time nor interest to canvas other firms. Importantly, the brand-name firm/partner with the high price tag means the CEO will appreciate that we are getting the best talent and, given our budget, what difference does it make? Besides, it’s such a hassle to change firms.”

I do not counsel law departments to freeze billing rates of their law firms across the board (See my posts of Nov. 11, 2007 about broad-brush measures; and April 26, 2006 on billing-rate freezes imposed that way.). I do, however, feel that it is fair to ask a law firm that you have selected to handle a major matter to freeze the rates of the core lawyers who are working on that matter for its duration. Or perhaps for 18 months.

You build in a back-end discount then. The arrangement also gives the law firm a slight incentive to resolve the matter more promptly, before their normal rate increase takes effect and they lose that bump up. The firm might try to limit the size of its core team just a bit (See my post of Dec. 8, 2006 about core teams in law firms.), since its members will see their charge-out rate stay flat on that matter.

Back in March, Legal Times published my article on the exaggerated notion of how frequently law departments dispatch law firms (See my post of May 24, 2007 #2 with its URL to article, references and a style punctured by puns.).

Since that piece appeared, a number of posts have continued to blast away at the topic (See my posts of May 27, 2007 on some Canadian data; June 18, 2007 on more doomsday statistics from BTI; and July 16, 2007 about stopping work with a firm because of conflicts of interest.).

One other post has a man bites dog quality (See my post of Nov. 27, 2007 for the reverse: firms firing clients.).

About 10 years ago, Susan Samuelson, a professor at Boston University, published a very good book about law firm management. In Chapter 6 of Law Firm Management: A Business Approach (Little, Brown 1992) she discusses pricing legal services. In Section 6.2.2 she turns her attention to fixed-see billing. She expresses what may be a common sentiment of law firms: “When law firms give a fixed price, they are accepting more risk than when they bill on an hourly basis. Their fixed fee should be higher than their hourly fee in compensation for this risk.”

The error in this proposition regarding an assumption of premiums built into fixed fee’s lies in the fact that law firms operating under a fixed fee arrangement have the opportunity to make more money than on an hourly basis. If they can complete the task at less cost than the fee, the firm gets to keep a performance premium. Why should the premium only run one way?

My post of Aug.1, 2006 asked whether guidelines for outside counsel make much of a difference in the amounts spent by law departments. I suspect not, but others disagree. My friend Mike Roster, the former General Counsel of Golden West Financial Corporation and Stamford University, must have believed in their efficacy. He offered some comments on my post:

“When I was in private practice, I cringed to see the 20-plus page guidelines being sent by a given client. And then imagine a firm of over 500 or 1,000 attorneys and with 3,000 to 10,000 clients, all insisting on their own guidelines. And then you wonder why (a) law firm costs keep rising and (b) lawyers increasingly hate private practice? So when I became a GC, I insisted that our guidelines fit on a single page, which they did. And they covered it all.”

The evolution and elongation of outside counsel guidelines reminds me of how the LEDES “standard” for e-billing has similarly diverged over time in many directions.

Tony Williams, a consultant in Britain, has a view on concentration of clientele by large law firms. Quoted in Legal Week, Vol. 9, Nov. 2007 at 5, he states that “’Most big firms now rely on their top 50 to 100 clients for 50% of their work’”. His point is that the firms “are very jealously guarding these clients” and are concerned about new work that might trigger conflicts of interest. In his view, although general counsel in different industries care in different degrees about conflicts, “clients are being more hardnosed about conflicts.”

As to whether conflicts policies of law departments are tightening, I know of no quantitative research on that point, but I do know from consulting that general counsel are realists who understand the complexities of large firms, they want to retain strong firms, so they need to be pragmatic and flexible.

My other observation is that law departments ought to concentrate their spending on law firms – on the order of 75 percent of their spend going to 20 percent of their firms – and that this effort parallels, for similar reasons, the comparable effort of law firms to concentrate their client revenue list.

The legal department of General Motors (GM), which has promoted diversity among its law firms since 1993, has recently tugged on the wallets of its primary firms to keep the initiative progressing. Corp. Counsel, Vol. 14, Dec. 2007 at 19, reports that GM set firm-specific diversity goals for six of its more than 500 outside counsel. “If a firm fails to meet its target, GM will get an extra discount of about 1 percent of total billings.” An example of a goal is to increase the percentage of minority lawyers working on GM matters by a certain amount.

I am torn about this directive, but to explain my unease I will invoke the US tax code. Some people argue that taxes should be value free: our government needs to raise money, but it should not do so – to the extent possible – in a way that overtly promotes policies and political choices. Interest deductions for mortgage payments is one example since it favors home owners over renters. Similarly, some people argue that law departments should retain the best legal talent, not use the hiring of law firms to promote values of diversity demographics, environmental activism, pro bono enthusiasm, technological advancement, telecommuting, or otherwise.

A previous post counted how many times the seven highest-grossing law firms in the world had been referenced on this blog (See my post of Dec. 16, 2007.). Those firms are, in order, Clifford Chance, LinkLaters, Freshfields, Skadden Arps, DLA Piper, Allen & Overy, and Latham & Watkins.

Earning most of their fees from corporations, these magnificent seven firms grossed $13.3 billion dollars in 2007 and have enjoyed an average compound annual growth rate of nearly 13 percent every year since 2002! The average profit margin of these firms in 2007 is 41 percent.

Observation 1: The cost-cutting gyrations of law departments would seem to have had no discernible effect on these cash-register practices – the money just keeps pouring in.