Law Department Management Blog

A gathering of inside and outside counsel tackled some of the issues related to value by law firms in litigation, including Requests for Proposal sent to them. An article in the ACC Docket, May 2011 at 130, presented four criticisms, each of which motivated me to respond.

“Clients may use [RFPs] to leverage current relationship firms with the threat of sending the business elsewhere.” Yes, and what’s your point? An RFP process opens up competition for work, it tells incumbent firms not to feel entitled and complacent, and it “threatens” a change in where and how litigation services are done. Exactly, so why are law firms whining about this?

“Firms may not intend to do what they bid.” If at all common, this is a shocking admission of dishonesty. Deliberate deception destroys the value and credibility of RFPs. Any law department that concludes a law firm lied about what the level of service it would provide should fire the firm.

No, I say, although a purist would say yes.

In the 2011 supplement to Bob Haig’s Successful Partnering Between Inside and Outside Counsel, the Section 1:2 addition (at 4) mentions that “Enron’s principal outside counsel [Vinson & Elkins] in the year 2000 reported that seven percent of the firm’s revenue was derived from Enron.” The authors extend the point to note the issue “at what percentage of the firm’s revenue is the firm truly independent.”

When fees paid by a major client reach a sizable-enough level, firm management ought to be concerned, if only for the financial stability of the firm. Whether the general counsel of that client should worry, I doubt. I haven’t heard of a general counsel who frets that a primary firm paid millions of dollars might have lost some edge of objectivity because it is beholden (“tethered by tender”). That the firm is so reliant on the flow of fees it loses some at-a-distance professionalism and toughness – this doesn’t come up. Indeed, capture helps the capturer.

An article in the ACC Docket, May 2011 at 58, suggests that law departments might enlist some support when they negotiate fees with firms on major matters. As stated, “Consider whether to have your CFO meet with M&A counsel to discuss anticipated legal fees.” The authors suggest that the CFO might be more able to put the “hammer down” for cost controls.

The underlying assumption bothers me. If the general counsel can’t take a tough but fair stand on external counsel costs, if the responsible inside lawyer doesn’t know more than the CFO about incentives and drivers of cost and value to be delivered by a law firm, if the in-house legal team can’t craft a suitable billing arrangement, how can a finance person do better? It’s shades of procurement and “we can help you negotiate even if we know nothing about law.”

It was the pusillanimous tone, the tenor of the part on outside counsel expense, the obsequiousness assumed for in-house lawyers that bothered me. An article in the ACC Docket, May 2011 at 56, entitled “100 Issues to Clarify with Your M&A Counsel” sketches a two-lawyer department engaging outside counsel for a potential sale of the company. That’s a big deal, to be sure, but cost discipline doesn’t therefore evaporate.

The article hints at a competitive process by which the department selected M&A counsel (see issue 16 about bait and switch) so what perturbed me were the dozen issues under “Legal fees and expenses” that seemed to come into play only after the selection. The points covered make sense, but the subordinate, beseeching attitude may appeal to law firms but should repel law departments.

Here is one example. “Understand whether M&A counsel would consider discounting standard hourly rates.” Would consider?? How about: “Tell counsel the tiered discount rate they will grant.” Or another timid suggestion: “Understand whether M&A counsel would consider any alternative fee arrangements.” Why so mealy-mouthed? Why should the seller of services, commonly provided services, call the shots? Tell them one-third of their fee depends on your evaluation of their performance. Later in the listing: “Consider whether to have M&A counsel provide a forecast or budget for legal fees to be incurred …” No, stand up and decree “You will submit a bi-weekly budget in the form attached to this RFP.” And one more without boldness. “Discuss with M&A counsel whether it or the company should consider retaining temporary or contract attorneys as a way to reduce fees and expenses.” Stop groveling and parlaying! “You will use the X Agency for all temp lawyers and only temp lawyers will do document review.”

With all the hullaballoo about fees – discounts, fixed, blended, effective, contingent – we have overlooked a much more significant lever to shift costs: the law firm and its staffing and billing practices. A firm’s number of lawyers and its billing ethos go together; bigger firms have a bigger cars to move, so to speak, and therefore press harder on both the staffing and billing pedals.

I am gravitating toward the belief that law departments need to change firms, not fees, to really move the needle. Put metaphorically, a fixed-fee arrangement with an expensive firm is hoping the emu can high jump. Hourly billing by a frugal firm is not worrying about a hummingbird over-eating.