Batting $1,000

With outside counsel fees starting to break the $1,000 per-hour barrier, in-house attorneys need to reevaluate how to get the best value from their outside counsel.
The billing issue hit the radar in the middle of last year, when the first Manhattan firms announced hourly rate increases, and the Wall Street Journal called the $1,000 number the possible “vomit point” for clients.
And last November, Wal-Mart issued a moratorium on “across-the-board” billing rate increases.
“Until further notice,” wrote Miguel R. Rivera Sr., Wal-Mart associate general counsel for outside counsel management, “we will only consider reasonable, individual requests for rate increases for those attorneys in your firm who are performing at an exceptional level and whose experience and knowledge is adding substantial value toward meeting Wal-Mart’s legal objectives.”
Rivera, in the letter sent to the company’s outside law firms, attributed the hourly rate increases to the “dramatic” increase in annual salaries for associates in large and boutique firms over the past few years, and asked that the law firms detail the rates it is charging for each class of junior associates.
In-house counsel predict that – like many other trends – it’s only a matter of time before law firms in Boston and other major cities increase their associate salaries and hourly billing rates to match those in New York City. The ceiling for Boston lawyers, for example, is currently in the $850 ballpark.
“We are already hearing about this trend moving up here,” said Barry Nagler, general counsel of Hasbro in Providence, RI.
Attorneys also expect that the Wal-Mart memo might make more law firms think twice about how much they charge.
“The Wal-Mart memo is going to make all law firms think about this, and law firms are going to face a more critical eye from businesses,” said Robert Molloy, assistant general counsel of Staples, Inc. “It might change the climate of law firms just getting whatever fees they charge.”
But in some sense it’s not really about an exact fee amount.
“The $1,000 number is a bit of a red herring,” said Nagler. “It’s hard to subscribe to the point of view that a $900 billing rate is okay and $1,005 is not okay. What’s important is the value you are getting from your outside counsel.”

Getting value

As fees escalate, in-house attorneys are contending with how to contain their bottom line.
“How do you justify those big billing rates to your board?” said Christopher Mirabile, general counsel of IONA Technologies in Waltham, Mass.
It’s important that companies arrange rate plans with firms they trust so they can avoid having to change outside counsel all the time as their fees get too big.
Switching firms can be a challenge as an in-house legal department and new firm develop the familiarity and understanding that helps to hold down costs.
“There has to be comfort in your relationship with outside counsel, and there is a big cost to switching every time someone raises their billing rates,” said Mirabile.
Nagler agreed: “I value continuity of personnel.”
In some instances, it might just be worth paying the high ticket price.
“If you had your bet-the-company case, that might be the one situation where you might default to that large law firm,” said Nagler. “It is possible to get value at $1,000 an hour, but you want to count those hours fairly carefully.”
Molloy said Staples is willing to pay higher hourly rates “if we believe the lawyer will be able to complete the matter in a cost-effective, efficient manner.”
In some cases, higher fees might mean bringing more work in-house, suggested Steven Reynolds, general counsel at Sensata Technologies in Attleboro, Mass. Reynolds noted, however, that it’s difficult, if not impossible, for a company to do all of its litigation work without the assistance of outside counsel.
In general, it’s all about figuring out the right balance and how to get value from outside counsel.
Companies can often find efficient, talented attorneys that charge lower fees.
“My advice would be to be much more proactive,” Nagler said, “in seeking out the smaller boutique firms that charge lower fees. Don’t be bound geographically by the city in which you’re located.”
Hasbro, for example, uses a real estate lawyer in San Diego and a patent lawyer in Chicago, Nagler said.

Transparent planning

Molloy said the latest developments might encourage outside counsel to arrange more reasonable fee structures with companies.
Byron Kalagerou, who practices with Dewey & LeBeouf in Boston and formerly worked in-house, says it’s the cost of an entire project that matters most, not an hourly fee.
Kalagerou and his colleague, Terry Mahoney, developed a web-based mechanism called the “Deal Dashboard” for setting up a plan for any legal work it performs for a company in advance.
“We sit down up front with in-house counsel, assign tasks and budget out M&A transactions in four phases, including due diligence, negotiation, closing and post-closing,” he explained. “We then report against that budget using the Dashboard which provides a degree of transparency.”
One key to the planning is assigning tasks and people to perform them in advance.
“There is increased visibility of who is doing what throughout the process,” Kalagerou said. “That way you don’t get the bill and say, ‘Who are all these people I never talked to?’”