Articles Posted in Outside Counsel

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When meteorologists predict the weather for a month, they often use one of the so-called naïve forecasts. What the average spend during June for the last five years – the counterpart of the climate of the region and the basis for the naïve forecast – stands as a first-cut forecast.

A second type of naïve forecast is persistence, which would predict spending based on the average of the preceding months. All else being equal, it assumes the pattern will continue. A model developed to predict something needs to perform better than both of the naïve forecasts.

A third method, which is not described in David Orrell, Apollo’s Arrow: the Science of Prediction and the Future of Everything (Harper 2007) at 150, looks at the trend line of preceding months. The (persistence) average smoothes out and hides change; a trend line suggests the direction of change and therefore gives more information.

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The supplement to the ACC Docket, May 2012 at 8, charts the career of Brigitte Catellier, Vice President, Legal Affairs and Secretary of Astral Media Inc. Early in her career, while at a large Canadian firm, she was asked by one of her clients, Culinar, to take on the tasks of its corporate secretary. Unusually, she remained with the law firm, but spent about a third of her time working in-house at the company. The article does not add how long the unusual secondment lasted.

This put blog has several references to law firm lawyers who simultaneously hold a position in a law Department, but this is the first instance I have run across where the lawyer is also serving as a company secretary. Since my last metapost on secondment, I have gotten a second wind, so to speak (See my post of Aug. 25, 2009 #2: four-month secondment to Legal Aid Society; Sept. 13, 2009: ten good questions for a secondment; Oct. 13, 2009: if law departments demand large numbers of secondees; Jan. 20, 2010: reverse secondments as a training method for legal departments; March 24, 2010: secondments will rise if more firms decide they are a prerequisite to partnership; Feb. 22, 2010: loyalty scheme of British firm can result in secondees; June 14, 2010: doubt that departments retain firms because of secondment prospects; April 21, 2011: current Motorola Solutions GC was once a secondee to it ; and May 3, 2012: as-need lawyers as alternative to secondments.).

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An excellent article in the ACC Docket, May 2012 at 32, describes the Litigation Investment Model of Reckitt Benckiser. Essentially, the model puts law firms at risk for their profit margin when they represent that company. And, those profits are lucrative.

For the 200 largest law firms in the United States, ALM Media found that their profit margin last year was about 38 percent. (I assume that one-third margin makes up the distributions to partners at year end, over and above their draws.) Law firms make much more than their clients as a percentage of revenue. “In the last reported quarter, the average operating profit, net of tax, for a typical US manufacturing company was 7.2 percent, and among technical and professional services, it was a paltry 6.8 percent.” Thus the heavy-weight firms in the United States are gold-plated; their profit returns are on the order of five times greater than the clients they represent. Hmmmmm……

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Realistic in-house counsel accept that the accuracy of a law firm’s budget declines precipitously the farther out it goes (See my post of Aug. 4, 2009: use a funnel metaphor for budgets; Oct. 22, 2008: build for flexibility rather than strive for prediction; July 9, 2009: obtain budget scenarios instead of single figures; and Nov. 3, 2009: twists and turns when you test the accuracy of law firm budgets.).

A budget re-submission for major matters each quarter makes sense (See my post of April 27, 2005: Cummins and budget no farther than your headlights; March 4, 2008: budget out about a quarter at Time Warner Cable; Jan. 21, 2009: JDS Uniphase and its quarterly updates; March 29, 2009: review budgets every three months; May 6, 2009: meaning of “budget” vs. “forecast”; Aug. 11, 2009: McKinsey recommends quarterly budgets; May 11, 2011: thoughts on budget time frames; and June 2, 2011: e-Bay’s practice.).

The CFO, unfortunately, may still insist on a place-holder figure for the annual budget. This tension between pragmatic usefulness and these-are-the-rules guesstimates will never be resolved.

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On a panel recently, a speaker urged the attendees, all from law departments, to request from their outside counsel what he called an “activity budget.” Rather than a money projection of what the firm’s services were expected to cost for the budget period, the information he requests is what the firm proposes to do during the period – its activities. Projected tasks and outcomes make clearer the strategy of the firm, the pace it proposes to follow, and many of the assumptions driving its case plan.

Even better: combine a spend budget with an activity budget and top it off with a careful review and critique of both by the responsible in-house lawyer.

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A column by Richard Stock for the Canadian Corporate Counsel Association’s quarterly, Leading Corporate Counsel, Fall 2010, provides a rule-of-thumb for when to consider in-sourcing legal work. Stock writes that “a minimum of 600 external hours must be in-sourced to cost justify a new position in the legal department.” What he means, I believe, is that if external counsel bill at, say, an average effective rate of $400 an hour, you need the new hire to take over 600 of their hours ($240,000) to make the additional head pay off.

Even if that suggested threshold is a bit skinny, reduction of outside counsel spend that is projected over a few years certainly justifies to a large degree a new hire, it is not the only reason. With an additional lawyer, the department benefits from more backup and from succession planning – a deeper bench, in short – and probably from higher client satisfaction.

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When embroiled in a law suit, many times inside lawyers ask their litigation counsel: “What are our chances?” Define successful outcome as you will, they want the partner to give the odds. The experienced and wise litigation partner replies, reluctantly, “Seventy percent.” That estimate is a subjective probability, according to mathematicians. It estimates an outcome of a single event, as compared to an outcome from a series of similar events that could be simulated like coin tosses.

A neat idea follow-up question comes from Keith Devlin, The Unfinished Game: Pascal, Fermat, and the Seventeenth Century Letter that Made the World Modern (Basic Books 2008) at 162, as originally proposed by an Italian mathematician, Bruno de Finetti.

Offer the partner a deal based on a thought experiment. Imagine a jar containing 100 balls, 70 of them red (since the estimate was 70% likelihood of a successful resolution), 30 black. Give her a choice. Draw one ball from the jar and if it’s red, the law department will pay the firm $250,000 (or some substantial amount). If the resolution of the case is not a success – as defined in advance and represented by a black ball – the firm rebates $250,000. The estimate was legitimate and confident if the partner agrees to the game; she will modify her estimate if not. A de Finetti test ultimately establishes a correspondence between subjective possibility and frequentist possibility.

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Five years ago a large-scale survey of in-house attorneys tracked how those attorneys said they received legal advice from outside lawyers. They had five choices and were asked to select the two most common methods. Recently, Deloitte revisited that question in a similarly large survey and found a marked swing.

The first time, “legal and other advice was most often set out in formal written reports” 66% of the time. In today’s faster paced world, formal reports plummeted to 20%. Almost reversing those figures is “advice set out in an email” where the method was chosen five years ago by 23% of the respondents but soared last year to 76%. “Verbal advice over the phone” stayed constant (48% five years ago and 51% last year).

To round out the picture, Deloitte’s Global Corporate Counsel Report 2011 at 22, found that “verbal advice in a conference” slumped from 30% selected to 22% and “presentation style advice” held steady at 17% and 15%. In short, law firm lawyers shouldn’t write memos unless asked to specifically. Rather, make the default a concise e-mail.

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At a panel hosted this month by Canada’s Heenan Blaikie, a leading general counsel told the audience that “a law firm’s bill is its best opportunity for marketing its services.” He suggested that the bill can make clear the value the firm delivered that month and, indeed, give some insights into the how well it manages its services. The bill can show adherence to budgets and expectations and indicate the direction the matter is likely to take.

He is right, theoretically, and the positive messages from an invoice that he emphasized do have value. However, to show that time was written off does not inspire confidence and loyalty (See my post of May 20, 2011: invoice with mark-downs is not a shrewd marketing tool.). Even so, far more effective at marketing a firm’s services than any invoice content are such steps as offers of attractive fixed fees or superior and innovative offerings content.

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A recent survey of in-house counsel, reported in Deloitte’s Global Corporate Counsel Report 2011 at 17, gave the three most common responses when they were asked to specify why they retained outside counsel: “Need for greater specialist expertise,” “need for additional legal resources,” and “complexity of the legal work.” Far more chose expertise (80%) than chose complexity (48%), and I wondered what explains the difference.

It could be that in-house lawyers read “expertise” as the outside lawyer’s deep knowledge of a specific legal domain. “Chris knows everything about Ohio environmental procedures,” or “Jean has years of experience with zoning restrictions in Florida.” Expertise connotes pinpoint knowledge of an area of law and its practice.

Whereas it could be that “complexity” has different connotations. The term conjures up the need to combine multiple legal domains, which few outside lawyers can do and is more the forte of the inside lawyer who coordinates outside specialists. To build a shopping center requires tax advice, real estate nous, construction-law depth, and perhaps labor knowledge. To hire outside counsel with all that ability would be quite hard, so the ranking for this reason was lower.