My most recent article, published in the National Law Journal last month, summarizes why incumbent firms have such a strong hold on the legal departments they represent. That is common sense.
More originally, the article offers ten ways to combat the bias toward the familiar firms and level the playing field for new entrants (See my post of April 16, 2009: incumbent firms with 11 references.). Click here to download a copy of the article. Download 09-06-xx Incumbents and 10 ways to balance the field
I learned about another network of law firms, MSI Global Alliance, so I wrote to Giles Brake and asked him for an example of a legal department that uses a member firm.
Brake obliged: “Our Buenos Aires law firm member Garcia Menendez Abogados are the lawyers for an Argentine multinational which is the worldwide leading manufacturer of gas compressors (Aspro GNC). The firm handles all of the company's agency, distributorship and transfer of technology matters around the world. The CLO has used MSI members in various locations around the world.” (See my post of Feb. 21, 2008 #2: law-firm networks with 7 references.).
“About 280 firms are invited to complete the Vault/MCCA Diversity Survey, and results go into a database that is accessible at no cost to corporate counsel.” This resource of information about law firm diversity, described in Inside Counsel, June 2009 at 48, saves law departments from the effort of collecting their own data and saves law firms from providing basic diversity data to law departments.
The diversity database is an excellent example of a collective activity to help law departments (See my post of June 17, 2008: diversity with 29 references.).
A survey in 2008 of in-house counsel in Central and Eastern Europe, conducted by the Forbes Institute with Martindale-Hubble International, asked respondents to rank 13 reasons for “removing a law firm from a preferred provider list.” That is not the same, perhaps, as firing a law firm absolutely, but in European legal departments – partial to panels – it is pretty close (See my post of Feb. 19, 2007: fire law firms with 8 references and my article.).
The litany of reasons offers nothing new, but three of them diverge from what one might expect. “Not maintaining confidentiality with your information” was the second most common reason chosen. “Not being treated as an important/priority client” came in 9th and “Key lawyers working with you leave their firm” was 11th. In the US, at least, client confidentiality is a given. The last two points are also unusual to hear stated.
A 2008 survey of in-house counsel in Central and Eastern Europe, conducted by the Forbes Institute with Martindale-Hubble International, has some data about the relatively low importance of interpersonal chemistry. “Personal relationship with lawyers/chemistry” ranked 10th out of 12 in terms of criteria for choosing external counsel. It ranked 7th out of 11 in terms of being retained after the first matter.
In short, whether or not you like the outside lawyer you hire (“good chemistry”) has much less influence than the skill set they bring. An outside lawyer whom you dislike is another matter, but given a neutral or positive attitude about a lawyer, the relationship is essentially that of a service provider. True, unlike a plumber who fixes your sink and whom you need never meet, counsel spend late nights and pressured moments with you. Still, chemistry is often over-rated.
The downside of hiring specialists to supplant outside counsel are several. When you add a lawyer skilled in an area of law you risk (1) that the specialist work might dry up, (2) the compensation paid will upset internal equity, and (3) turnover when the economy strengthens. Law firms are more attracted to specialists than corporate generalists. You also incur more administrative time because of another staff member and you increase your employee costs, which are fixed, as compared to your outside counsel costs, which are variable.
Advantages of a specialist hire, however, are evident. You should be able to reduce the amount spent on outside counsel in that area of law. The lawyer under your roof is also both more subject to your direction and oversight and better positioned to get to know the business and industry.
“Overall demand for legal services dropped sharply in the fourth quarter of 2008, causing a further decline in law firm productivity. Firms participating in Hildebrandt’s Peer Monitor® reported Q4 negative demand growth of -6.6 percent, compared to Q4 2007, and negative productivity growth of -10.4 percent compared to Q4 2007.” This oblique statement comes from the Q4 ‘08 Executive Report issued Feb. 2, 2009 by Hildebrandt International.
The first sentence confounds me. What does it mean by “overall demand for legal services”? The next sentence refers to hours billed (obliquely, and see below), which expresses demand, but otherwise how do legal departments convey demand (or law firms recognize it) if not in requests for services that lead to amounts billed?
As to the drop off in billable hours, I assume that “negative productivity growth” means the firms in the study billed 10.4 percent fewer hours or dollars in the last quarter of 2008 than in the same quarter a year before. To that extent, doesn’t that mean the law departments that retained those firms paid the same amount less? If demand is down overall, legal department budgets should be declining.
“Recent European Lawyer research has found that, on average, the proportion of legal work retained in-house has grown from 42 per cent to 61 per cent over the past five years, and the results of the survey suggest this figure will continue to rise.” The article, which is in European Lawyer, April 2009 at 18, attributes the growth in the proportion of in-house work as "partly the result of technology that enhances the ability of legal departments to project-manage internally and to store and access the required know-how.”
An initial question asks how the proportion, and thus the claimed change, is calculated, a point I have raised before (See my post of Dec. 11, 2006: from the same survey in 2006, “the proportion of work that they send out has decreased from 50% in 2004 to just 36% in 2006, despite strong growth in many areas of legal work”; March 19, 2006: hours inside vs. outside in Canada; and June 10, 2007: odd aspects of numbers of matters sent outside.). Notional spend might underlie the estimate of proportions of work, but my doubts remain (See my post of Nov. 2, 2006 about DaimlerChrysler and notional rates.).
It mystifies me how the survey respondents quantified the shift in their make-buy balance for legal services (See my post of March 5, 2008: make-buy with 11 references.). The proportions they give must be based on something other than a comparison of internal costs and external fees, since that ratio has stayed quite similar for years (See my post of March 29, 2009: 40/60 ratio of inside-to-outside spend with 18 references.).
My second point questions the explanation offered for the shift in proportions of internal and external work. The two reasons given are odd – or at least they are minor considerations. Better project management makes a contribution, but to credit technology so much? Knowledge management has never gotten off the ground.
After a journalist, Amy Miller, called me to ask about Jeff Carr’s Litigation Value Challenge (See my post of May 13, 2009: process announced at SuperConference.) I wondered why the turnout was not greater among large firms. Several reasons occurred to me.
It could be that the bigger firms (a) do not feel that there is enough business to warrant taking part in such a crowded competition, (b) do not like the direction FMC is going with outside counsel so they won't endorse it by competing, (c) do not feel the particular tranche(s) of work is sufficiently interesting/exciting to strive for, (d) do not want to be in the glare of the publicity generated by the process, (e) do not want rejection touted to the world, (f) suspect that the process is pre-determined as to its outcome (See my post of March 16, 2009: rigged competitions with 6 references.), or (g) have too many internal approval processes to overcome.
An article in the European Lawyer, April 2009 at 18, quotes Sandra Mulrain of Georgia-Pacific, now owned by Koch Industries. Referring to changes brought about by the bad economy, she explained a tougher attitude in legal department regarding retentions of outside counsel. “It’s no longer just a matter of need and volume. You have to have a real justification for using an outside firm.”
What is a “real justification”? That smacks of authorization being required from a more senior lawyer before you can ask a firm to do something (See my post of April 1, 2009: gating process.). Other requirements test for justification. For example, perhaps a client has to agree to bear the estimated costs of the external firm. Perhaps you have to obtain and get approval for a budget from the firm. Perhaps the firm must be a panel counsel (See my post of Feb. 14, 2009: demand management at Royal Bank of Canada.). Perhaps any spending on firms is on a very short leash (See my post of March 19, 2009: firms can’t spend much without approval.).
Gate-keeping steps such as these cool the ardor of someone who wants to hire a firm, slow down the process, and probably reduce fees paid.
