An ad in Diversity & The Bar promotes a highly specialized database that can tell a general counsel how much the law department pays in fees to diverse lawyers. I took a look at the website and could not find out more than the ad explains. The ad mentions that TrakItPro “imports data from existing billing systems.” This is an interesting idea, with application beyond diversity: siphon off some data from a department’s matter management system, combine it with other data, and produce specialized reports and insights of more value.

The company that offers TrakItPro, FHGmedia Enterprises, appears to be a very principled, small and new organization intent on advancing the prospects of minority lawyers.

This term, new to me, appeared in a catalogue of books from MIT Press. Here is a definition from George Ainsley’s website.

“Picoeconomics (micro-micro-economics) explores the implications … that people (often) … discount the prospect of future rewards in a curve that is more deeply bowed than a "rational," exponential curve. Over a range of delays from seconds to decades, there are pairs of alternative rewards such that subjects prefer the smaller, earlier reward over the larger, later alternative when delay to the smaller reward will be short, but prefer the larger, later reward when the smaller alternative will be more delayed, even though the time from the earlier to the later reward stays the same. The curves that fit the observed data best are hyperbolic, that is, show value as inversely proportional to delay.”

Ainslie originally discovered hyperbolic discounting as an aspect of a broader empirical principle, Herrnstein's matching law. It’s not simply the size of a reward times the inverse of time until the reward – that would be an exponential function.

The tradeoff between gratification and time delay is not as smooth as an exponential curve but is closer to hyperbolic. As a very broad application of what I have gleaned about picoeconomics, the reward of quickly hiring the firm you know overwhelms the alternative of looking a bit longer and perhaps finding an even better fit.

Any questions?

As companies do business in increasing numbers of countries, it follows that they will need to hire law firms in some of them. Convergence of firms – the deliberate use of dramatically fewer law firms – must then give way to de-convergence – a larger roster of firms retained. Likewise, if legal complexity has increased, which presents another consequence of globalization, it likely brings with it a need for more specialties and thus firms – another blow to convergence.

The shift upwards in absolute numbers of law firms retained does not necessarily entail a reduction in concentration of spend. A law department might well spend three out of every four of its dollars on outside counsel with the handful of firms it pays the most. It could retain dozens of additional firms and not shift that proportion. In the jargon of statistics, the tail grows longer as you de-converge, but the focus on a few key firms can stay just as strong (See my post of Nov. 20, 2006: linear relationship between number of firms retained and size of law department.).

Lee Cheng, the general counsel of Newegg, spoke at the most recent Consero Corporate Counsel Forum. His portion of a panel covered relations with external counsel, including cost management. One bullet on his slides advised that “an excellent reason to terminate a relationship [is] when cost of outside counsel is the primary settlement driver.” Cheng’s sub-points were two: (1) “Very common if using large law firm in any dispute with settlement value <$500K, which a big firm can easily run up in 1-2 months. and (2) “Excessive legal cost should not be the primary reason to settle.”

Not having heard Cheng’s remarks, I can still see the wisdom of his slide material. It is a backhanded swipe at large law firms, whose costs mount very quickly even when defending a lawsuit that could be settled for an amount less than their fees. As to Cheng’s second point, settlement should be decided on in terms of possible damages (to be obtained or paid) or effects on ongoing business relations or publicity or factors other than the fees of legal professionals.

An article in New England In-House, Nov. 2011 at 11, discusses how to prevent runaway legal fees. Most of the article contains plain-vanilla ideas, but the author does mention a confection new to me. He first trundles out the well-accepted technique of a collar on a fixed fee such that if the firm’s actual fees exceed the fee it agreed to (or drop below), such as by 20 percent, the legal department will absorb part of the excess (or receive a rebate). The rationale for a collar is that something happened that at the start neither the firm nor the department could have reasonably expected.

Then appears the new idea: “And, if the risk is truly great, you can even use a second band at, perhaps, 40 or 50 percent.” The higher band is akin to excess insurance coverage – low cost and very unlikely to be dipped into. This second layer is a commendable improvement for very volatile matters.

“Whatever does not add tangible value to client projects is overhead that clients should not be directly or indirectly paying for.” That was the aggressive tagline on a slide by Lee Cheng, the general counsel of Newegg. I did not hear his presentation when Cheng spoke at the most recent Consero Corporate Counsel Forum but he included on his slide pictures of fancy offices, towering high-rises, elegant artwork, and pedigreed associates.

Cheng doesn’t want his invoices to be swollen by mahogany walls, splendid views, Old Masters, and Ivied Orders of the Coif. If so, and given how hourly rates are established, he will be hard-pressed to retain what most general counsel regard as an A-level firm. Copy charges and internal messengers are one thing; the trappings of success are another.

The most recent Annual Litigation Trends Survey Report of Fulbright & Jaworski presents data on levels of satisfaction the responding companies feel about how well outside counsel meet their litigation needs. Displayed at page 16, the two points that struck me were the critical overall views and the gulf between U.S. and UK respondents.

“Electronic discovery,” “budget forecast reliability,” “overall cost management,” and “pricing and alternative fee management” all fell at around eight out of ten or more were either “satisfied” or dissatisfied (the chart shows the percentages of respondents who were completely satisfied or very satisfied). That luke-warm assessment is pretty damning. Perhaps clients are so peeved by being sued that it is hard to feel good about the law firm that you have to pay large amounts to defend you. Even so, the indictment of how those firms handle discovery, cost projections, invoice amounts, and creative pricing is strong.

The chart also shows the corresponding assessments by UK respondents. Overall, three times as many of them were on the positive side of satisfied (completely satisfied or very satisfied) as were companies on the other side of the Atlantic. Do British firms perform that much better? Are UK clients less demanding? The gap seems hard to explain.

David Wilkins of Harvard Law School gave a presentation a couple of weeks ago where he used a memorable metaphor for a useful idea. Referring to the much greater frequency with which general counsel reduce the work going to a firm rather than terminating the firm, he puckishly drew on ice hockey: “they put the firm in the penalty box.”

It’s a good image – a check, a time-out, a shot-across-the-bow, a slap on the wrist – of how to signal discontent. Wilkins didn’t spell it out but the reason for turning the spigot to the right could be poor results, poor client relationships, poor management of matters, or simply pique.

Wilkins extended the point. In his view, the disenchantment and tangible effect of it, lower fees for a period of time or less choice assignments, chills not only the partner who was the culprit but also the larger practice group and indeed the entire firm. Firms might not be red-carded, but they may to cool their skates for a bit.

Michael Caplan, the financial coordinator for Marsh & McLennan’s law department, commented recently in a column about his department’s efforts at outside counsel cost control.

“Back in June [2011], we ran a request-for-information on what were the best-in-class outside counsel billing guidelines and how to utilize technology to align to our billing guidelines. We put 48 firms—large, medium and small—in the RFI …[who] represented about 85% to 90% of our spend. We put some rules in place that were not previously standardized, such as stating that we will no longer pay for first-year associates to work on our matters.”

It sounds as if Marsh used its request for information to learn from many of its law firms how to improve management of firms (See my post of Jan. 5, 2010: survey your firms, but judiciously.).

“But we also looked at blended rate analysis, and when we would accept rate increases, and what you need to do to get a rate increase in the system. In those ways, we let the law firms know that not only is Marsh & McLennan standardizing its usage of law firms but that our business partners should be focused on these standardizations as well. If you’re going to do X-dollars of business with us, you must give us a 10% fee discount. We are keeping firms at 2010 rates.“

So, this huge department has frozen rates and generally tightened its cost-control practices.

A meaty footnote in Michelle Beardsley’s article in the Fordham Law Review, Vol. 79 (2011) at 1924 (fn 314), cites several studies that have highlighted a dramatic drop in the number of trials in the United States. For example, there were roughly 45 percent fewer tort, contract, and real property cases in state and federal courts during the decade before 2001. This trend has been long term and gradual.

The moderating effect on general counsels’ budgets must have been as momentous, because the costs of litigation bulk so large and trial costs can be extreme (See my post of May 20, 2005: budget depletion just before trial.). Fewer trials, less expense.

The countervailing cost of e-discovery during the past decade may have masked the increasing scarcity of trials – and might even have caused more cases to settle. Either the daunting cost of document collection and production spurred resolutions or discovery clarified the strength of arguments and spurred settlement.