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The Heart of the Matter: On Law Firm Relationships & Loyalty

I recently read an open letter to GCs and outside counsel posted by a GC on the ACC Docket website.  The letter makes a number of great points about the plight of law firms in this highly competitive environment and how better business practices can help them prosper.  But it also highlights what it characterizes as a “tension” between in-house counsel and law firms that to me is somewhat misstated, or perhaps I should say overstated.  Specifically, the author asks how can GCs expect law firms to make the investments necessary to understand the businesses of their clients and provide high quality services if legal departments refuse to support a law firm’s “necessary” profits.  And he calls into question demands by clients for discounted rates through the use of competitive bidding processes to award work – the proverbial race to the bottom argument.

While his point about wanting sound relationships to assure law firms are capable of providing sound and reliable service is fair, I think it shortchanges some fundamental realities of the legal marketplace:

Law Firms Are In This To Make Money

The inter-web is full of stories about the “new normal” for law firms.  The author hits upon these in his article – more competition, more work being kept in-house, etc.

But how are law firms responding?  Generally they’ve cut staff and other costs and increased rates to protect their profits per partner.  And I’m not saying those are bad choices either.  I’m just noting that in the pantheon of resource allocation decisions, reinvesting to assure they understand their clients’ businesses even better is perhaps not high up the list.  In 2013, the AmLaw 100 saw revenues rise 3.4%. Profits per partner increased by 4.2%.  I know that varies from firm to firm, but it certainly doesn’t suggest there’s an industry wide trend to retool resources towards assuring better customer service.

How Much Profit Is “Necessary”?

The author speaks of supporting a law firm’s necessary profits.  And that begs the question of what is necessary. Presumably no level of profit is too much from a law firm’s perspective.  And that’s fine.  The marketplace can decide how much a particular individual can charge.  I’m reminded recently of an exchange I had with an audience member at a big CLE conference in Minneapolis. We were sitting in the crowd listening to a partner at a big law firm discuss rates.  The partner said “No one is worth $1,000 an hour, but that’s what some of us charge.” The audience member next to me muttered under her breath “Then why does she charge it?” I muttered back to her “Because people let her.”

An in-house lawyer’s job is to discern when she will need outside counsel, who she will use and how she will use them.  Part of that decision is based on what firms charge.  Part of it is based on who she thinks is best positioned to do the job right.

Not All Engagements Are Created Equal

The author notes outside counsel are hired for either very low-end, commoditized work or on a transaction-by-transaction basis for higher-end work. And he notes the long term shift away from loyalty to particular firms.  These are fair points upon which I’d like to expand with some added context.

Whether work is prone to be shipped outside and potentially subjected to a counsel selection process is not just a function of whether it is low-end or highly complex.  The same can be said of who might ultimately be selected to do the work. Both decisions are also a function of a number of other factors such as whether the company is staffed to do the work properly, the profile the work has internally within the company, the overall risk it presents to the company, the cost to maintain relationships with more than one service provider who can provide the service and the familiarity of the company with the engagement it encounters.  Consider these very real examples:

  • A public company in most any significant metro area could turn to numerous local law firms to assist with ’34 Act compliance work. But for most companies this work is fairly low volume. There is little incentive to seek alternatives to a known and trusted advisor for this type of work.
  • Commercial litigation can be highly complex. But many times it is not putting the company at enormous risk and often there are multiple law firms who could assist with an engagement. Sure, I may have my preference of who I’d prefer to engage. But isn’t it also prudent to assure I’m getting their “best shot” to do the work?
  • Patent prosecution work can consume large parts of a legal budget at any company that has proprietary technology. There are almost always multiple potential suppliers of this service. But the costs to maintain numerous law firms to do this work can be significant and the value of having a single source of supply who understands a particular portfolio of IP is high. So even though the work could be viewed as routine, there is often significant value in maintaining one relationship to provide the service as opposed to selecting firms on a matter by matter basis.
  • A company may engage in a high profile acquisition or face a high profile investigation in a foreign jurisdiction where it has never worked. Even if the company is familiar with a law firm that does work in the jurisdiction, if it has never used the lawyers in that location it very well may look to shop the engagement to assure it is retaining the best counsel possible given the profile of the work.

The point is that inside counsel have reasons to be loyal and reasons to shop work. And often those decisions are based on a multitude of factors that vary significantly from work flow to work flow.

Not All Clients Are Created Equal

Just as not all engagements are created equal, the nature and value of the relationship between a law firm and any particular client also hinges on a wide range of factors.  A small public company with a sizable patent portfolio may have significant value to its primary IP law firm and relatively little with those who provide it employment advice.  A retailer with stores in all 50 states no doubt has significant buying clout with law firms providing real estate advice and relatively little in other areas where it utilizes law firms.  And often how those relationships are formed and maintained varies even within the company.  Say one lawyer oversees M&A and another oversees commercial litigation.  Each may have their own prism through which they view the counsel selection process and their own very clear preferences.

Blind Loyalty Can Come At a Significant Cost

A final point that goes well beyond the author’s article is that running RFP processes for even the most baseline engagements can often yield the company surprising results. Just last week one of our clients launched an RFP for a relatively modest engagement where the expected fees did not even reach $200,000.  They invited a handful of law firms to bid a fixed fee on the work, all of whom they’d worked with extensively in the past. The spread in results was more than 2x from lowest priced proposal to highest.  Most of the firms were near the lowest priced proposal.  But even there significant savings were on offer.

It naturally begs the question, how much more do you pay over the course of a year simply by being loyal to a primary provider in every instance? Law firms are facing constrained demand.  Understanding what the market will bear just makes sense.  And just because you run an RFP process doesn’t mean you need to be compelled to pick the lowest-priced proposal.  It just means you are assuring you understand what each firm is willing to do in a particular instance to get your work.

About the author – Dave Sampsell is a 20-year lawyer with extensive experience managing large, complex legal engagements around the world and overall corporate legal budgets. He presently serves as General Counsel of a NASDAQ listed company and is a Founder and Principal of BanyanRFP. BanyanRFP saves companies time and money through an easy-to-use, private and secure online application for the creation and processing of legal services RFPs. For more information, visit www.BanyanRFP.com

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