Articles on Outside Counsel

Leading M&A firms and differences in the average size of the deals they have recently worked on

Another perspective on the law firms that were ranked highest on M&A deals is to look at the average size of the deals they worked on. That data appears in the following plot.

avg.value

The X-axis shows average deal size in billions of US dollars. The plot adds another piece of information: the home country of the firm.  To do so, the software alters both the shape of the “point” and its color for each law firm. An example is the Blake Cassells, the only Canadian firm in the group, and thus the only one in red and with a circle.

At a glance you notice that the two firms in the top right, Cleary Gottlieb and Sullivan & Cromwell, have had a “fewer but bigger” set of clients; by contrast, Jones Day in the lower left appears to churn through many more deals but much smaller ones.

One way a law department might narrow down the selection of M&A counsel

If a company wants to buy another company or has been approached by a company that wants to buy them, either company’s law department might like some guidance as to which law firm to retain. Since large deals announce the law firms representing both sides in mergers and acquisitions, companies compile the data. The New York Times published some of that data regarding M&A legal advisors through the second quarter of 2014 (July 1, 2014 at B8).
The firms are Allen & Overy; Blake, Cassels; Cleary Gottlieb; Davis Polk; Freshfields; Jones Day; Latham & Watkins; Simpson Thacher; Skadden, Arps; Slaughter and May; Sullivan & Cromwell; Willkie Farr; Wachtell, Lipton; Weil, Gotshal; and White & Case. Together, these fifteen firms accounted for a significant chunk of the nearly $1.77 trillion worth of deals announced in the first six months of 2014.
Let’s present the M&A data on leading law firms using graphs. The first graph shows the 15 law firms and the number of deals on which they have been retained.

deal.number
The next plot shows the same 15 law firms according to the value of the deals they have been engaged in during the same time period. The values are expressed in b illions of dollars. As can be seen, of the top three firms by numbers of deals handled, only one of them makes the top three by value of deals. Lots of relatively smaller deals earned them a place in this group of elite M&A firms, in other words.

deal.value

Approximately equal numbers of small, medium and large firms retained by departments?

If we had more data on the sizes of law firms retained by U.S. law departments, the industry would have some guidelines for typical distributions. For example, it might be a rule of thumb that roughly one-third of the law firms retained by a typical U.S. law department would be small, say with less than 10 lawyers. Perhaps one-third of the firms would be in the intermediate category of 11-to-20 lawyers. The final third would be large firms with more than 21 lawyers.

The guidelines would vary depending on how you rank the firms. If it is by total fees paid perhaps larger firms of predominate. For example, 60% of fees to the top third of firms by size. If you rank by number of matters handled that could present a very different picture. This data from a representative group of law departments would likely undermine claims about convergence.

US legal system costs for liabilities are higher than those of the Eurozone by fifty percent

The U.S. legal system is the world’s most costly, according to a study released this week [PDF] by the U.S. Chamber Institute for Legal Reform (ILR). The study, conducted by NERA Economic Consulting, shows that the American system costs about one and half times more than the Eurozone average.  I would be remiss if I did not mention that the ILR may have a political agenda.

The NERA study compared liability costs as a percentage of a country’s gross domestic product. The 13 countries included in the study have similar levels of regulation and legal protection, leading analysts to conclude that higher costs could be attributed to more frequent and/or costly claims.

According to the NERA study, the U.S. costs were about 1.7 percent of GDP.  For our $13 trillion economy, that finding would say that “liability costs” consume on the order of $221 billion.  That amount includes outside counsel costs, but also many point items.

Countries on the low end of the range—the Netherlands, Belgium, and Portugal—had costs around 0.4 percent. Legal liability costs in the U.S. were found to be about 50 percent more than costs in the U.K.

$800 an hour rates and a shift noted toward larger and larger law firms

Aric Press writes in the Jan. 2013 American Lawyer at 134 about an analysis he did of law firm billing data from 37 substantial companies.  CT TyMetrix provided the data and Aric explored various findings, such as total hours billed over a three year period and total external spending.

 

One finding that struck me was that $800-an-hour-and-up billings accounted for 179,768 hours during the first two quarters of 2012 out of a total of 2,796,077 hours.  That means a bit more than six percent of all the hours billed to those law departments were at $13.33 a minute!  As Aric put it, “For the right talent, price is not the problem.”

 

He also made the point that increasing shares of work flowed to Am Law 200 law firms.

 

The frequency of high hourly rates and the shift toward large firms go hand in hand.  They support my research that shows a positive and strong correlation between the size of a law firm and its billing rates by comparable levels of lawyers.

 

If you’re serious about reducing your external spend, you have to make more use of smaller law firms.

A prediction if there come to be many virtual law firms that offer all their services at a fixed cost, such as $150 an hour

The Wenham Law Group pays its network of experienced lawyers between $75 and $100 an hour, but bills clients a flat $150 an hour – for everything.  As described in New England In-House, July 2012 at 5, the cofounder of Wenham Law group, Inder-Jeet Gujral, expects the firm to handle work especially in the non-compete, contract, and employment areas.  Interestingly, Gujral is not a lawyer.

 

If there were a number of organizations that priced their legal services on a fixed hourly rate, law departments would over time sort out their work according to the appropriate cost structure.   Work the departments felt was worth $150 an hour or more if done competently will flow to such a provider. If this were to happen, it would put intense cost pressure on law firms that charge the same hourly billing rate regardless of the work done.

Thoughts on cost differentials based on average hourly rates for litigation associates in 2011

The 2012 Real Rate Report, produced by TyMetrix and the Corporate Executive Board, includes some data on 2011 litigation rates. As explained in the ABA Journal, July 2012 at 33, the average hourly rate for associates was $357. Whether those rates are representative of other services provided by law firms the article does not explain.

 

If we assume that for every associate hour there is one-half of a partner hour, a leverage ratio which may be approximately correct for U.S. law firms when litigating, the overall rate – assuming partners are in the $500-$700 an hour range – would near $500 an hour.

 

This blog has repeatedly written how internal costs per lawyer hour for US law departments, when fully loaded, are around $200.

 

I do not know how to reconcile these figures except that law firms also bill for paralegals and we would need to include their rates and hours to make the comparison comparable to the fully loaded cost of law departments.  Second, the article does not say whether these rates are what the clients in fact paid or whether they were what was billed at standard rates and may have been subject to either discounts, write offs, or both.  If a law department receives a 15% discount on $450 an hour blended rates of lawyers, that drops the effective rate paid into the upper $300s.

 

All in all, if we take large law departments that hire large firms as the standard, thereby estimating fully-loaded internal costs at $225 and if we reduce the external costs by the paralegal time (and assume a discount), we might compare the internal cost to something like $350 an hour externally.  That gap of somewhat more than one-third (one-third of $225 is $75) is what others have estimated – it is the partner profit at law firms.

 

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To improve the invoicing process, consider “workload reports” and “progress reports”

In the 2012 supplement to Bob Haig’s massive compilation on law departments, Successful Partnering between Inside and Outside Counsel (West 2012) at 42:18, the authors of a piece on project management mention an idea. An unnamed law firm “combined a timely ‘workload report’ sent by e-mail or fax early each month with a progress report sent two weeks later.”  The workload report describes recent activities, total hours spent on the matter during the prior month, and the staff breakdown of those hours. It also includes a trend line of hours worked and a forecast of the key activities upcoming.

 

The progress report follows by the 20th of each month, and it adds new developments and revises the forecasts. The law firm provides these previews for its insurance company client in addition to normal, monthly invoices.  For massive, long-running engagements, something like these early-warnings can help a law department ride the tiger.

An example of how law departments can encourage their firms to innovate with software, process improvement, and knowledge management

A lawyer from Littler Mendelson, speaking at the InsideCounsel SuperConference, described the firm’s software to handle administrative agency charges.  The firm developed the system to coordinate EEOC complaints on behalf of a huge employer who wanted to bring down its outside counsel spend.  Built on Contract Express, the innovative system had handled about 4,000 matters.

 

A law department can have the firm handle take over its administrative charges for a flat fee per charge.  Armed with the system, Littler can offer this unit-costing.  From what I heard, this investment in knowledge assembled, software written, and processes streamlined points the way law departments should push their primary firms.

An expedited RFP process from Kaplan Inc.’s legal department

The General Counsel of Kaplan Inc., Janice Block, spoke on a panel at the InsideCounsel SuperConference.  She described a quick-step process by which her legal team selects law firms to handle certain matters.  When an appropriate new matter comes in, they pick six law firms and send them an e-mail with the basic information about the matter.  Kaplan gives the firms 48 hours to respond with their strategic approach, their proposed staffing, and the key tasks they foresee.  She did not mention a budget, but that might also be part of the response.   She also did not say how much the Kaplan legal team knew about the firms beforehand, but I presume they knew enough to entrust any of them with the work.

 

Block added that often they narrow the group down to three and invite those finalists to come in for an interview.  This selection with alacrity makes sense.