Law Department Management

Is there a widening disinclination in law departments to use consultants?

As my 20-year consulting career testifies, many general counsel turn to consultants from time to time. A few general counsel are inveterate consumers of consulting. The plurality looks to outside advisors every now and then. But many law departments these days, I sense, bear an animus against consultants.

Possibly the company has banned the use of consultants or made it very difficult to obtain approval to retain them. Possibly the culture of the company eschews third-party assistance: “We are a can-do, self-sufficient company and have ample internal capabilities.” Some general counsel do not believe that consultants deliver sufficient value (See my post of June 4, 2007 on the value delivered by consultants.), especially as the fees charged by consultants have gone up like those of other personal service providers.

The free and easy availability of ample ideas and information about law department management (See my posts of April 27, 2007 on the internet and four generations of resources; Aug. 19, 2007 #4 for a sample of conferences; April 15, 2006 on groups for general counsel; and Dec. 26, 2007 for publications that address legal department concerns.) has made it easier to bypass consultants. All in all, the niche industry of consulting to law departments seems unlikely to grow.

As a law department grows, the people demands on its managers grow faster

The bigger the law department, the more of his or her time a general counsel has to spend on personnel issues. You might think that with large law departments, more people are comfortably slotted into the right level and type of work for them. You might think an HR person assigned to support the department would offload much of the paperwork. You might think the administrator and administrator’s staff would absorb additional people-management tasks. Unfortunately, even with al that firepower, I suspect that the people demands grow faster as a law department adds people.

By this I mean that there are more divergent personalities, more invidious comparisons of titles or bonuses or perquisites, more desires to move around and take on different responsibilities – in short, more potential for jockeying and friction. People issues – whom to promote, whom to stroke, whom to deliver bad news to – may not expand exponentially with size but they certainly rise at a faster-than-linear pace.

The crucial and difficult decisions about promotions and responsibilities and career paths come to rest on the desk of the general counsel.

The squishiness of the seemingly straightforward metric of total legal spending in an industry

Total legal spending as a percentage of revenue stands out as the pre-eminent benchmark. It varies, however, according to size (See my post of May 4, 2005 on TLS as a percentage of revenue declining as revenue increases; and Dec. 3, 2007 for some possible explanations.) and within an industry.

The variability by industry merits a word. The chink in the armor is that we think of multi-billion dollar, global companies with tens of thousands of employees as a member of a single “industry.” To assign a large company to an “industry” is reductionist. It’s a crude label, although the best we have. All companies vary amongst each other in an infinite number of ways. A maker of tanks is not like a maker of toasters although both might be slotted into “manufacturing.”

Don’t misconstrue my point. Our industry needs reliable benchmark data, collected over time, and “industry” has become one of the standard cuts of such data. It is the best we can do, but we should not forget the squishiness of stirring into one pot a huge range of ingredients and calling it a certain soup.

A formula to calculate savings from rates frozen for a matter

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.

Thoughts about outside rates rising at twice the CPI

“A comparison of the rise in law firm billing rates over two or three decades with the Consumer Price Index (CPI) shows that hourly rates have consistently increased by approximately twice the CPI.” This provocative statement, from GC Mid-Atlantic, Sept. 2007 at 16, gave me pause.

It seems plausible to me that the internal costs of law departments over the same decades have roughly kept pace with the CPI. After all, compensation costs account for three-quarters of so of the internal budget, and I doubt that many companies last that do not keep their pay and bonus scales at least around the annual CPI. No way, however, would those compensation increases double the CPI.

So, one would expect that over this time period the percentage of total legal spending on outside law firms increased steadily, as their increases in rates far outpaced internal increases in costs. Given that other data has found that the 60/40 ratio of outside-to-inside spending has remained quite constant (See my post of Dec. 5, 2007.) it must be that productivity has significantly increased outside or much less work has gone out.

One psychological explanation for the durability of billing by the hour

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.

A management decision: “Particular lawyers at a firm may not work on our matters”

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.

Coffee – grounds for insights about law departments

In one law department where I consulted, there are no coffee makers. Instead, at 10ish and 3ish a cart trundles around, bell ringing, and people flock to it for their donuts and cup of joe. Other law departments have no alcove with coffee pots and creamers, but the cafeteria provides what you want all day, sometimes for pay, sometimes for free. Still other departments boast fancy machines that turn small cups of grounds into your chosen drink, including espresso, cappuccino and mocha grandes. Moving up the amenity grade, other law departments array not only shiny, high-end libation makers but also soft drinks, fruit juices, teas, and small munchies.

How coffee is made available to in-house counsel says a great deal about the culture of the department and company it serves (See my post of Dec. 17, 2007 on culture.). It speaks to the economics of the department and probably correlates with total legal spending as a percentage of revenue. The ethnographic revelations about shared experiences, water-cooler chats, and freedom of expression are apparent. Even semiotics can draw on the configuration and style of the coffee pantry (See my post of Jan. 25, 2007 on semiotics.). In café veritas.

Due diligence by law firms before they propose on future work

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.).

The inevitability that your department will lose some talented lawyers

Antoine Henry de Frahan, writing recently on his blawg, Legal Management, discusses why general counsel should accept that some of their most talented lawyers will leave.

“In a profession where people are used to the “up or out” philosophy, when there is no way up, the only option is to move out. Hire high potentials, put them in an exciting position, but sooner than later they will come with the question: What's next?“

Most law departments are fairly stable, with little attrition or growth opportunities, and lawyers in the top spots may not be due to retire for years. A general counsel in such a stasis department has to get used to periodically losing his “best and brightest”. Frahan finds some good in these losses:

”- Lawyers who leave the legal department to become business managers will most probably keep good ties with legal. They will become “good clients”;
- The legal department may earn a solid reputation as an incubator for high-potential individuals who then take managerial positions in the company. That may be a very powerful argument to attract candidates in the legal department, who know that after a few years, they may have the opportunity to pursue their career in a business function if they so wish.
- Lawyers on their way out also make room available. Especially if they are holding a senior position, their departure constitutes an opportunity for other, younger, ambitious lawyers in the department to move up… and stay longer in the legal department.”