Articles Posted in Outside Counsel

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.).

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.

In a recent interview, a senior lawyer at Marsh McLennan, Lucy Fato, recounted some history. “A few years ago, we started examining all the firms that we were using to come up with a preferred provider list in the U.S. and then we rolled it out in the U.K. We’ve now narrowed that list to the top 10 to 15 firms that we’re using on a more regular basis to see if we can drive more business to them, eliminating other firms that we were using on a more costly one-off basis. Now, with e-billing and the new matter management system, we will really be able to start tying all these things together and to whittle that preferred list down even further. These systems allow us to look at the firms more closely and analyze the value we’re getting from them.” Fato added: “we’re definitely getting a better handle on the firms and we’re doing a better job of trying to apply billing guidelines and rules in a more consistent way.”

The steps taken are quite typical for U.S. legal departments in recent years. (1) Narrow the list of law firms that are approved for use, starting in the U.S. (2) Extend the process to Canada or the UK. (3) Choose from that list a smaller group of preferred firms. (4) Concentrate the larger portion of total external spend on those preferred firms and exact from them concessions on rates, staff, training, etc. (5) Improve and extend outside counsel guidelines. (6) Enable these steps with software databases and electronic invoices. (7) Think analytically about the data collected. Not that these steps need to be followed in precisely this order, but there is a logic in the set and its progression.

Corporation Counsel for the city of Chicago has pushed to use no-cost lawyers from some of the larger law firms in the city to alleviate the department’s tight budget. In 2010, the city spent $25 million on outside counsel and something on the order of $37 million (its proposed 2012 budget), for its inside staff. Volunteer lawyers can make a difference in the external legal spend.

New York City has also dipped into the free talent pool of nearby firms. Since 2002, New York has saved approximately $84 million in legal fees by doing so. The city’s entire law budget is about $110 million a year so something like an average of ten percent of its budget was saved each year. This interesting practice of not-for-profit law departments comes from the ABA J., Dec. 2011 at 26.

Last year there was news about law department consulting offered by Eversheds and several law firms tout their consulting skills regarding e-discovery. Recently I saw another instance of a law firm that wants to consult to law departments.

An ad in the ACC Docket by Seyfarth Shaw promotes how its “team of lawyers and consultants helps Global 2000 companies re-engineer their internal legal processes and manage complex internal legal projects.” SeyfarthLean™ Consulting draws on its internal experience with Lean Six Sigma (See my post of June 9, 2011: Lisa Damon presentation on firm’s use of Six Sigma tools.).

I wonder whether general counsel retain a law firm to consult on operations without being aware that the firm’s advice might be tinged by some self interest. It’s a similar pressure to a technology consulting firm that recommends a strategy for a law department all the while being more than eager to implement that very strategy.