The Outside Looking In
There’s Still Corporate Work for Law Firms, But They Have to Start Thinking About the Company They Want to Keep
Posted Aug 1, 2004 4:39 PM CDT
By John Gibeaut
When a corporation’s general counsel hired an outside law firm in days gone by, the exercise was akin to ordering a la carte in an upscale restaurant—on the boss’s tab.
From cocktails to dessert, nothing came cheap. Nor did paying an outside lawyer by the hour. In those days, law firms rarely offered their corporate clients prix fixe.
So went the basic relationship between in-house law departments and outside counsel until the economy passed out at the table after the 2000 elections. For years, law firms grazed on a corporate buffet and counted on those clients to pay them millions of dollars in fees without quibbling over the check.
Then the stock market pulled up lame, unemployment climbed and, after Sept. 11, 2001, anxiety over catastrophic terrorism gripped individuals and business. Companies cut back across the board. Law departments were no exception as the folks in accounting demanded that general counsel do more with fewer bodies, both in-house and from the outside.
Though still tepid, the economy has begun to show signs of reheating, albeit in fits and starts. Even so, the trend toward being parsimonious likely will endure as businesses explore ways to pare all costs—not just outside legal fees.
But while they’re searching for early-bird specials, general counsel still expect outside law firms to deliver Michelin three-star service.
“I’m a businessman first and a lawyer second,” says Jeffrey W. Carr, Houston-based general counsel for FMC Technologies Inc., which supplies equipment and operating systems to the energy, food and airport industries. “I can pay a dollar to a plaintiff or a dollar to a defense lawyer, as long as I can keep less money going out the door.”
Despite blunt talk by Carr and other general counsel, they also say corporate work can pay off handsomely for law firms large and small. But in-house lawyers no longer simply forward the bills to accounts payable. They’ve assumed control of a relationship once dominated by outside providers.
“From the in-house perspective, we’re not interested in getting high statements of the law,” Carr says.
“We’re interested in business results. I’m willing to pay a helluva lot of money for not many hours—if I get results.”
CYCLE OF FRUGALITY
The role reversal started in the early 1990s with sporadic yet high-profile corporate campaigns to slash legal costs. In the current frugal environment, yesterday’s novelty has become today’s norm governing the relationship between in-house counsel and outside firms.
Firms no longer may assume that they’ll be able to bill for associates’ time at partner rates. Indeed, many corporate clients have stopped accepting work from associates altogether unless they have at least two or three years’ experience. Nor are corporations willing to pay repeatedly for routine research that winds up reinventing the wheel every time they start a new matter. If they can’t get immediate and direct access to the firm’s work product, time sheets and other billing information, corporate clients likely will go elsewhere.
Gone also are the days of the 20-page memo to summarize a 10-minute conference call. With the exception of the often unpredictable costs of major litigation and other nonroutine matters, corporations today expect firms to keep the bills down through alternative arrangements, which can include volume discounts, fixed fees, caps, some form of contingency payment or a combination.
“I’m seeing much more cost-consciousness than ever before,” says Philadelphia lawyer Mitchell L. Bach, the business and corporate litigation chair for the ABA Business Law Section. “Many in-house attorneys see that as their primary responsibility. I think many law firms will take advantage if left unchecked.”
In bygone times, general counsel would often select out- side firms by dialing up old law school buddies. Now firms regularly encounter competitive bidding. Some companies even have conducted auctions for their outside work.
Still, low bidders need to go further than trying to impress executives with glossy brochures that list the firm’s accomplishments. Outside lawyers must know a whole lot more about a prospective client’s business than they can glean from a Standard & Poor’s profile. Before they ever set foot in the door, firm lawyers need to school themselves not only on relevant areas of law but on the forces that shape corporate identity and philosophy—from product lines, marketing strategy and customer relations to the surrounding economic and political environments.
“They’re looking for people who will obsess over their business as much as they do,” says litigator Yuri Mikulka of Howrey Simon Arnold & White’s office in Irvine, Calif. “You just don’t go in with pages and pages of bios on your law firm. Come in with a little of that, but also offer possible solutions to their problem. There are so many outside firms that you really have to distinguish yourself.”
Besides keeping a grip on the bottom line and getting to know a company’s business, general counsel say the firms most likely to receive and keep their business also must impress them with a commitment to diversity among the lawyers and support staff assigned to the account. To clients, diversity is more than a matter of doing the right thing. It’s good business for the lawyers to mirror the composition of a company’s work force and customer base. Diversity can be especially critical in lawsuits involving stockholders or customers that go to trial before juries likely to include women and minorities.
“Companies want to hire outside lawyers who reflect their values and consumers,” Mikulka says. “They don’t want to come into court represented by all-white male lawyers from Harvard.”
Assuming everything else as equal, the advantage could go to firms that take maximum advantage of technology for all aspects of the engagement, whether it’s generating work product or tracking expenses. But while some firms are busy investing in and peddling their homespun electronic packages, clients also may eventually seize control of that aspect of the relationship and require their providers to use the company’s system instead.
“I want to drive the technology I use,” says Robert M. Craig III, an associate general counsel at Waste Management Inc. in Houston and corporate counsel co-chair for the ABA Litigation Section.
While today’s relationship between in-house and outside counsel often is characterized as an evolving one, it’s also cyclical in significant respects. In fact, some general counsel reject management techniques that others say are on the cutting edge.
Shortly after he became general counsel for Prudential Insurance Co. in 1998, John M. Liftin abandoned several such techniques. While Prudential, headquartered in Newark, N.J., still attempts to control outside legal costs by negotiating flat fees whenever possible, Liftin says it got little return from experiments with bells and whistles. One of those was a formalized evaluation system, where in-house lawyers rated outside counsel’s performance.
“Either the lawyers were too lazy to do it, or everyone got a B-plus,” says Liftin, corporate general counsel chair for the Business Law Section. “There was too much grade inflation.”
EXPANDING ROLE OF GENERAL COUNSEL
As late as the 1970s, strong in-house law departments were the exception rather than the rule in American business. The typical corporate department would consist of only a handful of lawyers who handled routine matters, while companies farmed out more sophisticated work to outside counsel, often relying on a single large firm to fill all their needs.
The general counsel position and full-fledged law departments came into their own during the 1980s, partly so executives could make use of readily accessible in-house lawyers already intimately familiar with company operations. Besides acting as lawyers, general counsel began to take active roles in all aspects of management. Today, the general counsel more often than not also holds the titles of vice president and secretary and sometimes sits on the board.
As law departments matured, responsibility for hiring outside lawyers shifted away from lay executives to the general counsel’s office. In the meantime, the law had become more complex and the old practice of relying on a single general-practice outside firm gave way to hiring specialists. In efforts to get the best deals, law departments tried to foster competition by spreading the work over more and more outside firms. In no time, some companies were using hundreds of outside providers.
By the 1990s, however, the number of firms vying for corporate work had outstripped the demand. It had become a buyer’s market. Corporations responded by instituting stricter cost controls and by consolidating their work among fewer providers, such as E.I. du Pont de Nemours and Co.’s highly publicized 1992 elimination of 90 percent of its outside firms that left just 35 firms.
But Du Pont was hardly alone. In Milwaukee, Johnson Controls Inc. had begun experimenting with a “new equation,” borrowed from a method pioneered by Toyota Motor Corp. to manage its suppliers. At Johnson, the approach redefined the relationship between the company and outside lawyers from the ground up. The company makes automotive interiors, batteries and building control and management systems, such as heating, cooling, air conditioning, lighting, security and fire alarms.
“This predated Du Pont’s model,” says Johnson general counsel John P. Kennedy. “We’ve gotten a lot of humor out of watching them get all the publicity over the years.”
Like other large companies, Johnson for years had engaged hundreds of outside firms and paid steep hourly rates. It was a system rife with inefficiencies.
For openers, each new outside engagement came with built-in learning curves, both for the company to become acclimated to the way the outside firm operated and for the firm to understand Johnson’s business.
In addition, some of Johnson’s in-house lawyers already were wasting time doing the same kinds of work that was going to outsiders when the company required more specialized expertise for particular assignments.
“We had inside intellectual property lawyers, inside employment lawyers and inside environmental lawyers,” Kennedy says. “We saw a lot of redundancy.”
So Johnson set about redesigning the way it handled legal affairs. To start, the company put its two-dozen in-house lawyers on a general counsel career path, designed in part to prepare them for top legal jobs with other employers. They work in fields typically associated with cor- porate law, such as governance, transactions and contractual matters. Johnson’s in-house lawyers also serve as part of the management team in each department.
When Johnson went looking for outside firms, it needed specialists in key areas, such as labor and employment, environmental and intellectual property law. But instead of doling out assignments piecemeal, the company hired a single firm to handle each specialty from bottom to top.
For instance, the intellectual property firm is expected to handle everything from routine patent applications to infringement litigation. If a matter requires local counsel, it’s up to the outside firm to make the arrangements. All the outside providers are on flat fees, though litigation is adjustable.
Johnson also broke the classic mold of the inside-outside counsel relationship. Instead of having outside firms report to the law department, Johnson directly integrated them with business-side managers in their areas of responsibility. Based on the outside lawyers’ advice, the managers, not the law department, make the legal judgment calls.
The idea is to get the outside lawyers to think and work like they’re on the inside. Thus, while companies often send out for help only after problems erupt, Johnson’s outside lawyers spend considerable time counseling the business side to prevent fires, rather than put them out.
Though corporations are reluctant to discuss their legal budgets in detail, and law firms are even less willing to discuss their fees, Johnson’s preventive approach appears worthwhile. For example, new employment discrimination lawsuits filed against the company have declined by 27 percent since 2001. Milwaukee-based Foley & Lardner does Johnson’s human resources and intellectual property work.
Foley partner Jack Cooper explains that Johnson was wasting big bucks applying for and keeping current patents on products that weren’t significantly distinguishable from those sold by competitors.
The price quickly mounts when periodic U.S. and for- eign maintenance fees are added on top of the application expenses. So together, the lawyers and businesspeople work to narrow Johnson’s patent portfolio to products that are worth the cost to maintain and defend.
“We were spending an awful lot of money on patents that weren’t adding value,” Cooper says.
SOME STILL CLINGING TO PAST
The profit motive for firms in such arrangements arises from the sheer volume of getting all the client’s work in a particular area rather than just bits and pieces. Still, Kennedy acknowledges, some firms remain skeptical of anything that falls short of letting the meter run on a straight hourly rate.
“I don’t think anybody can walk into a firm, shake hands, walk out and have a deal in place,” Kennedy says. “It takes time.”
Perhaps it’s a cultural remnant of the days when outside firms called the shots, but other general counsel say it remains difficult to persuade some firms to accept the drudg- ery of routine work after years of taking only plum assignments, such as high-profile mergers and acquisitions or major litigation. In other sectors, however, it’s common for a single company to deal in high-end and low-end products and services at the same time, just as General Motors Corp. sells both Cadillacs and Chevrolets.
Houston in-house lawyer Craig B. Glidden suggests law practices could do well to follow the lead of the major accounting firms that in the 1990s transformed themselves into sophisticated—and pricey—corporate consultants. They accomplished that by offering their core auditing and tax services on the cheap in order to get a foot in the corporate door to sell much more lucrative consulting work.
“All law firms seem to be chas- ing the premium-dollar work,” observes Glidden, general counsel for Chevron Phillips Chemical Co. “Frankly, there are more law firms out there than there is premium work.”
Nevertheless, with competition growing keener, law firm snobbery is beginning to ebb. General counsel say they encounter less trouble finding firms willing to go the extra mile to obtain steady corporate work that lasts longer than a single deal or lawsuit. Ingersoll-Rand Co. became one of those firms in 2000.
The old-line heavy equipment manufacturer had begun to diversify, and electronics and computer software had become more important to its business. Like many other companies, Ingersoll-Rand needed additional expertise in intellectual property law and decided to get it from the outside.
General counsel Patricia Nachtigal sent out 20 requests for proposals. Not so long ago, law firms would turn up their noses at competitive bidding, deriding it as a beauty contest. Ingersoll-Rand’s query, however, garnered 15 responses, with three finalists selected for interviews.
At stake was all the company’s intellectual property work except for litigation, which was excluded because of its unpredictable cost. “In this particular case, what you want is a good nuts-and-bolts, salt-of-the-earth law firm,” Nachtigal says.
The winner came from Wisconsin, halfway across the country from Ingersoll-Rand’s headquarters in Bergen County, N.J. Michael Best & Friedrich, a 330-lawyer firm with four Wisconsin offices and one in Chicago, got the work partly because it offered to open a new eastern Pennsylvania office just a short drive from Ingersoll-Rand. The firm also absorbed almost all the company’s in-house intellectual property lawyers and support staff. “Even though they now work for the law firm, we didn’t miss a beat,” Nachtigal says.
Firm management committee member David B. Smith says Michael Best plans to be there for a long time. “It doesn’t make any sense to get into these kinds of things in a short-term relationship,” Smith says. “For it to work, it has to be long-term.”
Still, general counsel gripe that many law firms for the most part just don’t get it. For one thing, in-house lawyers say that their colleagues from the outside often misperceive them as comfortably paid 9-to-5 clock watchers and fail to appreciate the heavy bottom-line pressures general counsel receive from above. But more fundamentally, the traditional structures of corporations and law firms just don’t mesh.
The typical corporate framework forms a pyramid, ideally suited for efficient daily operational decisions, with an almost autocratic CEO at the top. Though more democratic, the flat law-firm partnership structure easily bogs down in endless committee meetings over matters that would appear mundane to corporate bosses.
Also significantly, corporate boards largely measure their officers’ success in terms of shareholder benefits. Senior law firm partners, on the other hand, still predominantly thrive off billable hours generated by their juniors.
“When you do that, it creates a whole culture and set of incentives inside the firm,” says Kennedy of Johnson Controls. “It’s no secret that senior partners make a lot of money by billing at a higher rate for associates.”
Additionally, some solo and small-firm practitioners believe only megafirms have real shots at getting prized corporate work. Philadelphia outside lawyer Bach disbanded his own 30-lawyer firm last year after three decades for more opportunities to do commercial litigation with the 200-lawyer firm of Eckert Seamans Cherin & Mellott.
Litigator Eileen M. Letts has undergone the opposite experience as a name partner in the 13-lawyer Chicago firm of Greene & Letts. To be sure, it doesn’t hurt that all four of the firm’s partners are African-American in an environment where diversity counts for so much.
But Letts says the firm’s overall management style has kept big-time corporate clients coming back.
Representative clients include Nike Inc., DaimlerChrysler and Walgreen Co. The firm also does extensive work for state and local government agencies, whose law departments function much like those in the corporate world.
“I really believe that small firms have been more attuned to the bottom line than large firms,” says Letts, another litigation section corporate counsel co-chair. “We run a leaner operation, which is much more effective. I think that’s one of our selling points.”
SEEING RED OVER REDUNDANCIES
Lots of recent general counsel beefs center on firms billing them for services that they consider redundant or unconnected to the representation, such as photocopying, clerical time and research on routine issues that must be repeated time after time because earlier similar research usually winds up tucked away in storage after the prior representation ends.
Seeing numerous lawyers’ names on timesheets also drives in-house lawyers crazy, because they assume the firm is playing musical chairs and charging for the period it takes each new lawyer to get up to speed. And general counsel really go bananas over bills for internal conferences among firm lawyers.
“A lot of the things they say you can’t do, we’ve never done,” Letts says.
Like other outside lawyers, Letts will not discuss her firm’s rates. But she says the firm remains able to charge its regular hourly rate and has successfully fended off requests to discount that rate or go to some sort of fixed fee.
“Our response is that our rates are lower than other firms,” she says, “and you’re getting a discount because of that.” Letts adds that the firm can take on some fairly heavy-duty jobs by partnering with other small offices or by temporarily engaging individual lawyers with needed special skills.
Just like individual clients, when corporate counsel hire an outside firm, they give significant weight to their impressions of the individual partner sent to deliver the firm’s pitch. All too often, in-house counsel say, large firms pull a sort of bait-and-switch where the affable marketing lawyer vanishes and leaves them to deal with associates. As a small firm, Greene & Letts doesn’t have enough people to sneak by with that and, moreover, sees an advantage in leaving the partner who lands the client in charge of the engagement.
“We tell them they don’t have to go through five or six lawyers before they get to us,” Letts says.
Still, some jobs are simply too extensive for even the most creative of small firms. If the work is going to entail bet-the-company litigation or comprehensive daily representation of a highly diversified multinational corporation, chances are only the largest outside firms are up to the task.
In the heavyweight division, one of the most aggressive stakes in the hunt for corporate clients has been planted by Foley & Lardner, with nearly 1,000 lawyers in 19 offices across the United States and in Brussels and Tokyo. In the late 1990s, Foley began blending technology geared to individual clients with teams of lawyers and other professionals in what it calls a niche strategy that targets 10 industries. They range from the automotive and health care fields to golf and resort services.
“We do everything from cradle to grave,” says CEO Ralf- Reinhard Boer. “Every one of our practitioners knows the industry.”
FACING UP TO REALITY
Foley had operated much like other firms during outside counsel’s heyday in the 1980s. It typically handled all of a client’s affairs from top to bottom, billed by the hour and cashed the checks. But eventually leaders at the 160-year-old firm realized they had to change the way they did business.
“Most law firms griped about it,” Boer says of the new wave of corporate penny-pinching. “We said that’s reality. Our job is to help in-house counsel do their job. Our job is to make general counsel look good.”
Hence, more law firms are adopting a focused niche approach, which features as its centerpiece elaborate electronic connections tailored to the particular industry and further customized to meet individual client requirements. In-house lawyers and lay executives alike can retrieve everything from sample documents with annotations raising concerns that may apply to their company, to detailed information on various aspects of their business relationship with the law firm.
The trick lies in anticipating the client’s needs, says Los Angeles partner James R. Kalyvas, the firm’s technical sage. One result is a better-educated and focused client who knows what questions to ask when it comes time to bring in the lawyers.
“They want to make sure they’re paying for the services they need instead of having us clear the underbrush,” Kalyvas says.
Foley has since seen dramatic rises in its profits per partner, with a 24.8 percent increase in 2002 that was the sixth highest among firms ranked in the Am Law 100.
“We had never been anywhere close to that,” Boer says. “This is exclusively the result of our industry and national niche practice approach.”
Still, some general counsel, such as Craig at Waste Management, question the wisdom of law firms plowing so much money into their own electronic services at a time when clients may insist that firms hook into their systems instead. Craig also wonders about a future where companies specializing in information technology—and nothing else—might introduce standardized case-management systems that effectively compete against firm-generated systems started as sidelines to the main business of law practice.
“It’s a big risk for them,” Craig says. “It’s really questionable in the long run whether it’s going to pay for itself.”
While Foley is willing to use a client’s technology, Kalyvas says most currently don’t have suitable systems of their own and look to outside counsel to fill that need. He doubts that a “generic commercial product” would displace a system like Foley’s that aggregates the firm’s accumulated human knowledge and experience. Put another way, Foley doesn’t view technology as a replacement for real lawyers.
“In no way is it a substitute for what we do,” Kalyvas says. “It’s meant as a complement to what we do.”
John Gibeaut is a senior writer for the ABA Journal. His e-mail address is email@example.com.