Four observations regarding management of outside counsel costs

Four points occurred to me as I listened to Karen Klein, General Counsel, Kayak.com, during the recent Ninth Annual SuperConference www.insidecounsel.com/superconference.

The first point was her observation that law firms should measure revenue on a per-employee basis, as does her company and many other companies. If law firms did so, they might take more steps to control their overhead costs, reflected inevitably in billing rates, according to Klein. For me, ignorant of the economics of law firms, it is an empirical question whether law firm effective rates rise as firms grow larger because of personnel increases or because of other factors, such as specialization, market recognition, and demand.

Second, Klein observed, tartly, rate freezes by law firms do not mean that if a lawyer moves to a new class year the lawyer’s rate increases. No, no, no: each lawyer sticks with the billing rate in effect for that lawyer during the previous year (See my post of Feb. 9, 2009: rate freezes with 8 references.).

Third, Klein listed “secondment” as one of the six “alternative fee arrangements” she considers. I hadn’t thought of secondment as a fee arrangement, but if the secondee bills at cost or at a discount from standard fees, Klein makes a good point (See my post of July 17, 2008: secondment with 12 references; and Jan. 23, 2008: secondment).

Finally, among Klein’s list of six alternative fee arrangements were “success fees” and “contingent fees.” What might be the difference between those fee arrangements? Maybe the definition of a success fee includes the idea that the legal department decides on the amount; a contingent fee results from a pre-set formula, such as one-third of the amount recovered or five percent of any difference between the settlement paid and $10 million.