Law Department Management

Three points regarding your law firms if you want them to work on fixed fees

Most partners need considerable nudging from their clients if they are going to commit to fixed-fee billing. An article in the ABA J., Vol. 94, July 2008 at 26, gives three suggestions.

Choose services that are amenable to fixed fees (See my post of March 1, 2008 – 36 references to fixed fees.). The example given in the article is immigration law, “where flat-fee billing is the industry standard from boutique to multinational giant” (See my post of June 17, 2008: real estate services.).

Choose services where the law firm can analyze years of its bills and thereby propose a reasonable and reliable fee arrangement (See my posts of Feb. 19, 2007: “data mining”; and Feb. 24, 2008: analytical tools of law firms.).

Choose firms that will bill on a fixed fee but also track their time and submit it. Even with a fixed-fee arrangement, the department needs to receive and review bills (See my post of Sept. 13, 2006.). I mention this mostly because the article states that one firm, having moved to fixed-fee billing, adamantly refuses to “secretly” keep time. That may be fine for the firm, but not for the law department that wants to know how long tasks took so that it can re-bid the services later and use the billing information to inform its competition.

Four fundamental questions to answer when the lawyer responsible for a matter reviews an invoice

Bill approval is a pain in the neck. That said, if an inside lawyer wants to focus his or her attention, answer these four questions about a bill.

A. For the results and work accomplished during the month, do the fees seem reasonably related to the value delivered? This is the ultimate conclusion that only the responsible lawyer can assess. Everything else nickels and dimes at the edges (See my post of May 1, 2006: sometimes inside lawyers are not expert enough to assess value.).

B. Are there occasional billers – drive-by billers – whose contribution was not likely to be worth the fees (See my post of Jan. 21, 2008: exclude timekeepers with driblets of hours.)?

C. Did some lawyers spend too much time on tasks that they should have delegated (See my post of March 9, 2007: not enough use of paralegals by firms.)?

D. Do there seem to be too many instances of superfluous people at meetings or on conference calls?

If lawyers in charge would diligently attend to these four questions, and refuse to pay firms when invoices transgress, bills will drop significantly.

Law department attendees at conference flail law firms on efficiency – who’s to blame?

Attendees at a recent conference excoriated their law firms on efficiency. Voting on electronic pads with a scale from 1 low to 5 high, “87% of them gave their law firms a 1 or 2 on efficiency and not a single in-house lawyer rated them a 4 or 5 for efficiency,” as stated in a press release by the Association of Corporate Counsel, dated June 30, 2008,

Why are those law departments hiring law firms that fall dispairingly short on efficiency? Why are invoices from those firms not slashed drastically to reprimand the firms and bring fees into line with efficiency and value delivered? If the lawyers outside are so monumentally wasteful of time, why haven’t law departments hired more lawyers inside so that they can handle the work more efficiently? If inside counsel can spot inefficiency that is so glaring, why haven’t they trimmed it?

Those who check off a box on a survey can decry the situation, but very little indicates to me that law department lawyers act on the sentiment expressed by these particular answers (See my post of Sept. 17, 2006: actual vs. espoused or expressed beliefs.). In fact, most law departments grumble about costs but stick with the same lawyers and their efficiencies year after year.

Do big companies dance mostly with big law firms?

Many in the US legal industry probably believe that big law departments mostly hire big law firms. After all, deep pockets face more lawsuits, for more millions of dollars, and on more cutting-edge transactions than do their smaller competitors. Accordingly, they routinely turn to law firms with hundreds, nay thousands, of lawyers.

That myth has a vein of truth, but more slag. The law firms that represent the elite US companies may average hundreds of lawyers, but the median firm – if you rank by number of lawyers all the firms paid by a law department in a given year and pick the middle one it is the median firm – might be well below a hundred lawyers.

Here is where convergence – a policy to restrict the number of law firms retained – crashes into cost. If a law department hires fewer firms, those are inevitably larger firms because they can handle a broader range of specialties and greater volume. Unfortunately, increasing size brings increasing hourly billing rates so the convergence may increase costs. True, the presumed benefit comes from discounts, but rate differentials and hefty annual increases can emasculate puny discounts.

The myth perpetuates because surveys and profiles of law departments ask for the primary firms of the companies. Those firms are usually name-brands because those firms are respected and put the law department in a good light: “We use premium mega-firms.” Unheralded are the schools of smaller firms swimming around the whales.

On autarky, plus a benchmark for the percentage of legal work handled inside

At Respironics, a $1.2 billion manufacturer of respiratory medical products, nine lawyers and three support personnel make up the internal legal department. According to the company’s general counsel, quoted in GC Mid-Atlantic, June 2008 at 9, that team handles “probably 90 percent of our non-international, non-litigation work internally.”

Economists call an economy that is self-sufficient an autarky. Such an economy does not rely on imports of goods or services. The Respironics legal department, with its four transactional attorneys who average 17 years of experience, takes care of nearly all the company’s legal needs on its own, without importing services from outside counsel. The hardworking legal department has been able to hold non-M&A legal expenses flat over the past three years, even though the company has been growing at an annual rate of 15 to 20 percent. The metaphor is that of an autarkic legal department.

The legal services the department imports are the classics of litigation and work abroad. This degree of self-sufficiency implies that inside spending as a percentage of the total legal budget is higher than the normal 40 percent or so (See my post of Dec. 5, 2007: typical ratio.).

A method to rate outside-counsel guidelines

Intriguingly, the Ethisphere Institute offers to complete a Code of Conduct analysis using its methodology and ratings on 57 elements. As described in Ethisphere, Qtr. 2, 2008 at 13, each of eight critical components has a weighting and they aggregate the scores of experts on those ratings.

Perhaps someone will organize a comparable panel of experts to rate outside-counsel guidelines on a range of components. Both law departments and firms could submit guidelines and receive a rating of the guidelines on the various scales, plus an overall assessment. Departments would like to know new ideas and how they might improve their statements of operating principles; law firms would like to know if a department is over-reaching.

I have written frequently about guidelines that set compliance requirements for law firms (See my posts of Dec. 17, 2007: profusion and prolixity of guidelines; and Feb. 6, 2008: nine ways to improve them.). Many posts concern specific injunctions set out by such guidelines (See my posts of Jan.10, 2006: use of company’s name for promotional purposes; March 4, 2007: disbursements; Aug. 16, 2006: over-time charges; Jan. 10, 2006 and Sept. 5, 2007: billing for travel time; Dec. 1, 2006: disbursements; Aug. 9, 2006: managing partners certify compliance; Nov. 5, 2006: retention of your legal files; March 25, 2008: budget expectations.).

Other posts have ranged across a variety of other topics regarding guidelines (See my posts of Aug. 1, 2006: questions whether they achieve their goals: Sept. 5, 2007 and March 5, 2008: detailed and strict guidelines compared to short and constitutional; Aug. 24, 2006: differences between retention letters and outside counsel guidelines; and Oct. 29, 2006: beyond retention letters and outside counsel guidelines.).

Individual lawyers, making risky decisions, are the key to saving money on outside counsel

All the techniques in the world for outside-counsel cost control make barely a dent unless the in-house lawyers who direct firms willingly set their shoulders to the yoke. The hard pulls of choosing not to retain counsel, but if so of then choosing a good but lesser-known and less costly firm, and even then of telling it to leave some stones unturned and that some work has too little value to be billed -- all of it falls on the responsible in-house lawyer.

You kid yourself, you putter at the periphery, to think depersonalized system changes like requiring prompt billing permit more effective cost management than do the individual decisions of lawyers: to coax out putative discounts, go through the charade of reviewing bills, crack down hard on copy charges, jawbone flush partners, and re-issue your outside-counsel guidelines. Those peripheral efforts are not where a general counsel will reap significant savings.

No, the unpleasant work of lowering legal fees demands vigilance, vigor and some violence to the accustomed routines of law firms made wealthy by cost-plus excesses. The analogy in military terms is boots on the ground, the grunts on the front line.

To reduce external legal costs, in-house lawyers have to take risks. Risks that their client ought to understand and accept; risks to the lawyer’s career when some decisions backfire. The lawyers who manage outside counsel have to make tough calls, some of which will look bad in retrospect. And they have to do consistently what they dislike to do at all – exercise tough love on lawyers they need and like. That grass-roots discipline doesn’t happen steadily enough without massive shifts in culture, incentives, training, and tools.

A reader takes a different view than I did on “trust” toward law firms

My recent post on the importance of “trust” in relation to law firms (See my post of June 20, 2008.) spurred Andrew Shipley, Assistant General Counsel - Litigation for Northrop Grumman Corporation, to respond. He disagrees with my interpretation of the term as a paternalistic relationship between unequals. Shipley makes a good point and I quote his comment in its entirety below:

I couldn't help but think that you may have colored the word "trust" in hues not contemplated by the clients who stated they valued what it stands for. The success of an attorney-client relationship, like any significant relationship in which confidences are exchanged, depends on a number of factors. While the ones you cite, "mutual respect" and "reliance," certainly number among them, so does trust. I don't believe the word connotes only asymmetrical relationships in which one is beholden to or dependent upon the other. I think the concept also applies to relationships between equals (aren't successful marriages dependent to some extent on mutual trust as well as respect?). Simply put, I hire outside counsel I trust, as I believe they will act in my client's best interests. That does not preclude a working relationship based on mutual respect and reliance. It does mean that if we hit any bumps in the road, we are more likely to work them out because of the trust we have in each other to do the right thing.

Evolutionary economics and law department–law firm relations

The discipline of evolutionary economics “looks at the economy as an ever-changing, complex adaptive system—not unlike that of biological evolution. Immune systems, language, the law, and the Internet are all examples of other complex adaptive systems. They learn and grow from the bottom up.” This grand concept from Fast Co., June 2008 at 44, suggests a metaphor for how to interpret the constantly changing ties between law departments and the law firms they retain.

The context and content between buyer and service provider evolve (See my posts of Aug. 20, 2006: the evolution metaphor and law department managers. Sometimes people explicitly invoke the metaphor or gradual change toward fitness (See my posts of March 15, 2006: DuPont’s ECA procedures “evolved over the past decade”; April 27, 2007: four changes in knowledge management over time; May 31, 2006: emergent strategy development; Dec. 17, 2007: the morphing of outside counsel guidelines over time.). The concept of evolution applies to workload and capabilities of in-house lawyers (See my posts of May 1, 2005: evolutionary computation as a tool for making decisions; Dec. 11, 2007: evolutionary design and patents; and Sept. 5, 2007: agent-based models of complex systems.).

An arms race goes on between in-house managers of outside counsel and the partners they retain. In the evolution of outside counsel management (or client management from the standpoint of law firms), Darwinian mutations occur as departments and firms produce permutations of countless management techniques and every now and then spawn something new. The article uses an unusual word: “Both evolution and the economy are autocatalytic, which means they each contain self-driving feedback loops.” For example, as law departments demand more detailed bills from firms, firms develop better training for their timekeepers and closer review of their pre-bills. No one imposes change on the players in the legal services market; the changes emerge from the stew of competitive forces.

A Wall of Shame for practice groups that don’t reduce the amounts paid on law firm invoices

A law department I encountered tracks bill write downs by practice groups. The general counsel periodically publicizes the amounts that lawyers in different groups collectively knock off bills from law firms. Lawyers being the competitive types that they are, everyone pays attention to the league table and presumably sharpens their pencils.

Of course, once the general counsel announces that this metric sits atop the pedestal, wily lawyers will figure out how to succeed at the game. One can imagine that some might subtly encourage law firms to bill a bit higher than normal with the expectation that the in-house reviewing lawyer will then shave some off. Also, if a law department institutes some version of this public tournament, the write-offs need to be on a percentage basis, not an absolute basis. Some practice groups barely use outside counsel in comparison to the litigation group.