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Oct 31, 2007

Building better relationships

Rising costs and prosecution of counsel are driving focus on compliance

Surging compliance requirements are driving corporate general counsel to find better methods to improve management of their legal departments, especially when it comes to outside counsel and related matters. But it will take more than better management to conquer difficulties in the inside-outside relationship.

According to annual surveys run jointly by the Association for Corporate Counsel (ACC) and Serengeti Law, compliance has jumped to the top of concerns expressed by corporate lawyers, nosing out their focus on the cost and management of outside counsel, which nevertheless is a close second on the list of top legal department management issues.

But in fact, says Rob Thomas, author of the surveys at Serengeti and vice president for strategic development, the two topics are inextricably linked. ‘Up until three years ago,’ says Thomas, ‘controlling outside legal spending was the top concern. This compliance stuff, because of Sarbanes-Oxley and the highly publicized prosecutions of in-house counsels has caused compliance to pop up to the top since then.’

According to him, there have been more suits filed against corporate counsel in the past year than ever before, much of it linked to new exposure which calls for legal counsel to sign off on compliance matters. This, coupled with a generally rising demand for better management control of both risks and costs has brought a dramatic increase in the use of structured software systems to assist in-house counsel in running their operations.

Meanwhile, the 2007 annual survey of litigation trends authored by Fulbright and Jaworksi notes that while there has been a year over year decline in total suits and regulatory actions among the companies it surveys, one third of US corporations face at least 25 lawsuits, with 18 percent defending more than 100 cases domestically.

All in all, it makes for a heavy burden of litigation projects and related outside counsel management since, with the exception of only the largest companies, corporations must rely completely on the help of local attorneys, their staff members, outside experts and registered agents.

Historical patterns

Historically, the typical relationship between in-house and outside counsel was based heavily on trust rather than detailed contractual contingencies. Deals were done with a handshake and the next official contact beyond litigation matters was delivery of a bill. Today, while trust is still key to the success of networks of firms hired by corporate counsel, the requirement for better management and close control has brought a much more disciplined approach to the connections between in-house counsel and their outside hired hands.

Contracts and budgets are far more commonplace, with regular reporting, monitoring against benchmarks and comparisons across providers now a regular feature for in-house managers handling outside counsel or legal teams. In response, electronic systems have proliferated attracting more and more in-house general counsel to having a direct connection with their outside counsel. Among other things, this means everything comes in electronically and is immediately available for their reports. They can track changing legal inventory, spending, budgets,  case status and results.

In addition to increased focus on control and project management, there is a heightened concern brought on by new requirements for in-house counsel to actually sign off on audits and other compliance matters. Putting their own name on the line has focused corporate lawyers’ attention much more sharply on the entire process. While in the past a spreadsheet requiring manual entry was the sharpest tool when monitoring was deemed useful, now, compliance requirements, scrutiny of senior managers and the board mean there is a necessity to be ready with background information and full explanations at any time, often with very little notice.

This emphasis on readily available data stems in part from legal requirements that have come along with Sarbanes Oxley and increased litigation, but also from the knowledge gained of event-tracking systems used elsewhere in the corporation.

‘Overall,’ explains Thomas, ‘in-house counsels are becoming more businesslike, more systematic in the way that they manage outside counsel. They are paid to manage their part of the company like vendors are handled in other parts of the company.’

It is a tectonic shift in more ways than one. Not only is it large essentially permanent change, it has the other salient geological characteristic; slowness. Among the factors holding back a more structured approach to managing outside counsel and other legal matters has been a culture that has generally steered clear of automation.

‘Five years ago, the lawyers were still a little bit uncomfortable with computers and the internet,’ notes Thomas, whose Tracker system is fully internet-based. ‘Trying to sell them on this management and online billing was an uphill battle,’ he says. ‘Now, I think what is happening, the CFO is coming to the GC and saying, why aren’t we doing this? We have hit a kind of tipping point.’

Obtaining information on best practice in the handling of outside counsel and related concerns is increasingly easy. In August of this year, Bank of America posted a 21-page guide that it created for its in-house staff. The ACC regularly addresses the issue for its 23,000 plus members, and seminars by private organizations are popping up around the country. Likewise, CT Tymetrix sponsors user groups to share information in a range of industries including telecommunications, finance, insurance, energy, pharmaceuticals and manufacturing. One major player recommends walking down the hallway and talking with managers who already deal with best practices in management theory and practice.

Big Money

While the industry appears to be holding the line in its budgetary outlays to outside counsel, there is still a lot of money sloshing around. The Fulbright and Jaworski study for this year notes that nearly half of US companies responding to the survey said their annual spending for outside counsel is under $1 million, including a third for whom lawyers’ fees fall below $500,000. 

‘A total of 85 percent of smaller companies keep yearly law firm spending under the $500,000 mark as do 42 percent of middle-market firms,’ the survey states. But the spending rises as company size expands.  Some 2 percent of smaller firms reach the $5 million mark, according to F & J, ‘compared to 7 percent for mid-tier companies and 45 percent of billion-dollar businesses, including 27 percent spending $10 million.’ 

The amount of money spent is a big issue in today’s management of legal matters. With such sizeable amounts, companies spend a fair bit of time focusing on methods of payment, ranging from dickering over fixed fees versus hourly rates to paying bonuses for out performance and by seeking volume discounts. But the surveys show there has been little progress on the hourly versus fixed fee front. While companies try mightily to get fixed fees, hourly charges still win out, once again bringing focus back to overall performance against benchmarks.

The automated systems provide the opportunity for legal officers to compare what they get from different firms. Many of them allow comparison reports on fees, timeliness, changes in billing promises and other criteria. As a result, whether based on legal performance or benefit and valuation ratings, there is a regular turnover in the number of outside firms used. According to ACC studies, in 2005 over half of in-house counsel terminated some of their law firms, citing poor quality work and personality issues among the reasons.

But, while automation has brought the danger of close competition to law firms vying to gain corporate approval to represent them, the local firms also have a new advantage. Through the Serengeti system, a worldwide marketplace has been created. Using the data which comes with creating legal projects, Serengeti’s Tracker allows an in-house lawyer to search through all the law firms that have been ever been used by company participants in the system.

Thus, looking for a lawyer specializing in litigation in say, Malaysia, one turns up a list of 23 firms, with details on their size, structure and other features. This new shop window, as it were, is a bonus feature of the system from the local law firm’s perspective. The corporate in-house department buys the overall facility paying on a volume basis which begins at $2,000 a month. In doing so, they enlist all the outside counsels to various projects.

For the local firms, access is free, gained by being on a team put together by the corporates. Once given access, they stay on the database and they are then allowed to upload all kinds of information about themselves.

‘We have over 13,000 law firms on,’ says Thomas. ‘We now find new clients are finding most of the firms they want to use are already on the system; companies like Google, E-bay and American Express using so many outside counsels help to draw them in.’

The benefit for the paying corporation is also high. ‘A company can compare multiple firms,’ he adds. ‘This is a godsend for small companies who don’t have the budget to get staff to handle all their needs.’

Beyond management

For corporate secretaries, these kinds of tools can feed nicely into several areas. In some cases, they are being used to help with the need to keep senior officers and board members informed. Indeed, these top managers are often the drivers nowadays in getting legal departments on board with automated tracking.

As an example of how these systems can move beyond legal matters, a project can be set up which includes any sources of information, whether all internal or a blend of internal and required external sources. The project management product comes with all the tools to gather and coordinate documents, emails, slides or other materials and can easily be built into the sort of briefing book a board might expect to see, either about total company performance statistics, or the status of a given project. Then, board members can obtain access, via the internet, so they can look at the materials at their convenience.

As an internet-based product, such an information package can be readily updated at any time, forgoing the usual rebuilding of a book or re-entry of extensive documentation. According to Thomas, some of his clients are already doing this.

Better management is not the only reason for legal departments to automate e-billing and project management. Last year, the general counsel and corporate secretary at Calgon Carbon Corporation was terminated after he failed to report $1.4 million in legal bills during a required disclosure period. The bills had been overlooked as the financial statements were drawn together for a reporting quarter and the error caused a restatement of results, which in turn, cost the lawyer his job.

At one of America’s largest companies, which also has a deep and wide history of litigation, the view is that while automation may be helpful, it also can be a detriment to the number one value: closer personal relationships.

Personal connections

‘You just can’t have the kind of connection you need on Blackberries, the internet, in front of computers,’ says Bill Ohlemeyer, associate general counsel and vice president of Altria, parent of tobacco giants Philip Morris International and Philip Morris USA.

‘We develop long-term relationships,’ Ohlemeyer relates. ‘There is a lot of institutional knowledge in regular, repeat representation, retained knowledge that can be redeployed in future litigation.’

‘We aim to get lawyers we can continue to work with,’ he continues. That is a very important first step in managing outside counsel. As a result, we have a handful that respond to most of our needs. Then, we force them to work together. They understand they are expected to relate collaboratively. That is the best way to give our clients the best service.’

Law firms aren’t inclined to do that, he adds, but they will if they find it is in their long-term interest.

‘The third thing we do is have very detailed and candid assessments of people’s performance. We are very clear about expectations and clear about measuring against our criteria,’ Ohlemeyer says.

All these steps are necessary in managing outside counsel, he observes, but only better personal relationships will solve the most vexing problems legal counsels face. Chief among them today, he maintains, is holding down ever-increasing costs. ‘There comes a point where you can’t take pricing increases constantly moving up,’ he says. ‘A lot of the current attention on alternative fee structures is because of this. To the extent that personal relationships can be developed, the situation could be like it was 50 years ago when you paid a bill that simply said: For Services Rendered.’

‘You will pay because you understand the arrangements,’ he says. Good personal relationships, he says, ‘produce reliability and expectations that everyone can deal with.’

In his regular appearances at legal gatherings where the outside-inside relationship is discussed, Ohlemeyer says another key question he hears from law firms is about marketing, and in particular, how someone like him uses the various marketing materials that law firms often produce to tell their stories.

‘They have their brochures and electronic newsletters; some have very good websites,’ he notes. ‘They all participate in organizations that promote them. But I don’t think a lot of big companies make decisions based on marketing material. It is about who you know.’

Altria goes beyond that. While they may have good relations with a given supplier of legal services over several years, they are inclined after five or six to years ask about whom else is in the firm. Working with the same people, no matter how good they may be just isn’t enough. ‘Who you get to know is just as important as who you know,’ Ohlemeyer says.

As a result, Altria maintains pressure for outside firms to introduce new and up-and-coming lawyers to Altria on a regular basis. This tends to rub against the grain because it essentially forces them to spend more time and resources on developing staff, something that is hard to do in the face of a culture with less mentoring than in years gone by, one in which firms are reluctant to invest too heavily in training staff members who may not stay around and where short-term gains outweigh long-term planning. However, none of that phases Altria’s determined vice president. ‘It all takes time and effort,’ Ohlemeyer says. ‘But that is exactly what is required.’

Michael Reilly

Michael Reilly was a 24-year veteran of Reuters Group before becoming president of internet communication specialist Hally Enterprises