Articles Posted in Outside Counsel

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For some time, I have fretted about an under-discussed obstacle to successful cost reduction. Law department managers assume their reports will diligently keep the brakes on law firm spending. Counter-intuitively, perhaps, those same lawyers may willingly tramp on the accelerator.

My article last week in the National Law Journal lays out my thinking about the reasons for this ironic situation and some steps that might alleviate it. To learn more about this psychological reversal, click on this link.

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“Despite the anecdotal perception that demand for alternative fee arrangements may have
grown stronger following the 2008 collapse, there are no publicly available longitudinal data to evaluate such claims. Comprehensive empirical data on the market penetration of alternative fee arrangements, and the demonstrable benefits of those arrangements to corporate clients, are lacking.” The damning quote comes from An Early Assessment of the Civil Justice System After the Financial Crisis (Rand Corp. 2012) at 34.

I agree. We lack empirical evidence regarding the touted growth of AFAs. Several times this blog has referred to putative “findings” about the increasing prevalence of AFAs, but the posts have been laden with methodological doubts. Most have to do with the definition of “alternative fee” – is a discount an alternative fee? – and some have to do with the bias injected by “right-thinking” respondents – who these days would say that their department does not make use of this trendy technique (See my post of Aug. 23, 2011: AFA posts since early 2009 with 35 references.)? Always, there is the question of penetration – if a firm says it uses AFAs but in fact only for a few small matters, does that support the claim? We need much better data.

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An article with this title appears in Claims Mgt., March 2012 at 14. Metrics fan that I am, I read with interest about the six. Not much to say on the first two, except to agree that time to close and average defense cost per claim make sense to track. “Lawyers per indemnity dollar” comes from dividing the fees paid outside counsel by the number of lawyers who recorded time on the matter. All law departments could look at this measure since stray timekeepers don’t add commensurate value.

The fourth metric, “Predictability of verdicts and settlements” from the first forecast to the final result sounds plausible. It might break down, however, because of the variability of when the first forecast is made and the inclination to high-ball it.

“Alternative fees compared to hourly billing” is partly about the balance of hourly and non-hourly fees and partly about the overall costs that result from each variation. This metric adds value if your department has enough matters of each kind and assigns them randomly. Few departments meet the former test; none the latter.

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Two schools of thought about ethics afford us a different way to think about value delivered by law firms. Consequentialism is the ethical view that what is right is what brings about good results. That is the summary in A.C. Grayling, Ideas that Matter: the concepts that shape the 21st century (Basic Books 2010) at 89. Deontology is the view that “rightness or wrongness of an action is intrinsic to the action itself, and is quite independent of whatever consequences follow from its performance.”

If we apply those two ethical concepts to the services of law firms, we could say that the value of those services depends on the outcome – the utilitarian assessment of what the company obtains as a result. Who cares about staff and processes (maybe even quality of work or cost) if the company achieves its goal?

Or, we could posit that the value of the services inheres in the work the firm does, regardless of the outcome. After all, the law firm may play a bit role to compared to business decisions and realities. Often outcomes have very little to do with the contributions of the law firm.

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An article in the ABA J., March 2012 at 26, focuses on bad behavior – jerks – in law firms, and cites Haynes and Boone as a firm that touts its long-standing no-jerks policy. Moreover, “The policy extends to clients as well, and Haynes and Boone has had to disengage in a few cases.”

Really? If a client doesn’t pay invoices, that justifies a firm if it stops working for the client. If a client engages in unethical behavior, stop the representation. If a deep disagreement arises over how to proceed, disengagement may be the only choice. But how many partners in law firms, having scrabbled and struggled to land a client, will pull the plug because whoever hired them is a “jerk”?

The quote is one of those lines that make people feel good to say, but not back up with specifics. “Our consulting firm doesn’t work with lousy clients.” “We only design buildings for clients that get it.” “Our law firm only handles interesting cases.” Maybe the bloviator can recall once when they turned down work for a client or bounced a client, but they recall that highly exceptional situation precisely because it is was rare. A bit like the reflexive quotes from law departments along the lines of “We fire firms that don’t serve us well,” the fact of the matter is it happens once in a blue moon, and firms firing clients because someone is aggressive, boorish, demanding, or jerkish probably happens when the moon is made of green cheese.

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Vincent Polley’s weekly compilation cited Legal Futures, Feb. 20, 2012, regarding Riverview Law. Riverview Law is the brainchild of LawVest, which has financial backing from global law firm DLA Piper and intends to become an alternative business structure (ABS). It will offer “businesses with up to 1,000 employees annual contracts from as little as £200 a month for all their day-to-day legal support, or receive a fixed price for a particular piece of work.” Further, “Advice is mainly provided remotely, backed up by sophisticated IT,” according to LawVest chief executive Karl Chapman.

I guess “remotely” means offshore, not just that lawyers won’t do house calls. “Sophisticated IT” may refer to form generation capabilities and databases of common questions and answers. The ”from as little as” wording could be a tease. Notwithstanding, the idea of moderately priced full-service legal support for companies exhibits daring.

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Whenever a law firm agrees to a fee to handle all the work of a defined kind for a set period, what is known as a fixed-fee agreement, that firm should be granted a corresponding ability to influence what the company does that triggers the work. The firm should be permitted, indeed encouraged, to educate clients, improve procedures, alter settings, make available tools, or otherwise have the company take steps to reduce the flow of those kinds of matters.

Otherwise, the firm could be at the mercy of a perverse incentive: “Hey, who cares what happens, since XYZ firm has committed to take care of it for a set price.” The moral hazard that accompanies all free goods and services becomes obvious.

If the firm can train store managers, intervene on the quality assurance steps, suggest better ways for complaints to be handled, or all such improvements without over-reaching management’s prerogatives and responsibilities, then those rights better align the fairness of the economic arrangement.

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Writing in the ACC Docket, Jan./Feb. 2012 at 18, Ron Pol discusses some of the financial and ethical pitfalls of fixed fees. He cites the frustrated managing partner of a major law firm: “In-house counsel often seek alternatives to hourly rates, then demand hours and rate information as well, forcing the firm to accept the lowest figure – whether that be the agreed retainer (‘as we agreed to pay’) or time cost (‘it would be unfair to pay more than your time cost’). The firm has now all but given up trying to be innovative.”

Like Pol, I recommend against creating that bind. If you negotiate a fixed price, you have settled on the value you seek for what you are willing to pay. It is the firm’s privilege to provide that value – and to make as much profit as they can from the deal. It’s not fair to have heads I win, tails the firm loses.

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An article in Paradigm, Winter 2012 at 24, by Clayton Wire lays out five things companies should consider to lessen the likelihood that they will need to resort to a malpractice claim. Companies, he writes, “should never proceed forward with representation by outside counsel without a written fee agreement.” Each agreement would be in addition to an outside counsel guideline. If he means that the law firm states in writing that it will bill by the hour, that’s innocuous; if he means the firm will specify the fee it will charge, that’s ridiculous.

Further, Wire states that fee agreements should ensure “that outside counsel are covered by a sufficient level of professional liability insurance for the matter at hand.” The fee agreement letter provides an additional contractual based claim should there be a malpractice lawsuit. In my experience, inside lawyers who retain a partner don’t give a moment’s thought to the sufficiency of the firm’s insurance coverage and they are highly unlikely to do so.

That’s not all, because “it is imperative that companies investigate and verify security protocols that outside counsel have in place for documents and funds.” Law departments that take the time to do this, or more generally to bullet-proof themselves with an eye to malpractice success have their eye on the wrong ball.

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Respondents to last year’s ALM metrics survey ranked seven possible internal obstacles for law firms to fully implementing alternative pricing strategies. The leading reason was “Law firms are more comfortable with the billable hour” (2.2 average ranking where 1 is most important). Next was “Absent better metrics and data, it is difficult to determine alternative values” (2.9), followed by “Firms have insufficient experience defining or managing work on an alternative basis” (3). After that, “There is not sufficient billing history or pricing methodology to know how to bill AFAs” (3.6), followed by “Other” (4) and “Alternative fee arrangements are too risky for the firm’s overall revenue” (4.3) and “Partners object or refuse to cooperate” (6).

The gaps in the average ratings highlight how dominant the respondents thought the first reason was. The gap to the next reason is 33% of the lowest score. “Absent metrics” and “insufficient experience” are in a virtual dead heat (2.9 and 3) so they are perceived to be equivalent blocks. Then a 20% gap between the third ranked reason and the fourth (“insufficient billing history”), which is close to the fifth (“Other” at 4). Partners’ objections were off the chart low. Rankings tell us something; gaps between ranks adds to our understanding.