INHOUSE INSIDER Forum, News, and Career Center for In-House Counsels

Last week we posted a Blog discussing the virtues of virtual law firms (See "The Virtual Law: A Dream Come True"). It is not surprising that as a response to increasingly tight corporate budgets, some attorney have come up with creative solutions to provide GCs with alternatives to the large law firm hourly billable rate.

New companies offering outsourcing solutions or virtual law firms are cropping up across the country (see "Tighter Budget Make Outsourcing Attractive").

Where U.S. Companies and Law Firms once resisted outsourcing, citing concerns over quality, and where virtual law firms were once viewed with skepticism, today they are not only popular alternatives, but also solutions that cost-conscious GCs can no longer afford to ignore.

Can GC's do away completely with the current large law firm model? Absolutely. The real question is whether they want to. While GC's continue to complain over high billable rates, bad service, limited business understanding, and the lack of diversity in large law firms, they are nevertheless continuing to engage them.

Despite GC's many attempts to reform law firms - little has changed to address these concerns. Employing large law firms is like running your car on gas. You know that it is expensive, that it is only going to get more expensive, and that it pollutes; yet most of us keep driving that $4+ a gallon gas guzzling car...despite the fact that hybrids are available in the market. Why? Well, because hybrids just aren't yet as good as regular oil guzzling cars. They can cost more upfront, are harder to fix, and don't go as fast.

The same can be said for GC's who want their companies protected by the liked of the top tiered law firms that make up the Magic Circle and AMLAW 100. GC's don't want good enough quality; they want top-notch quality. And despite the fact that we all know that quality does not necessarily mean more expensive - it's still hard to get away from this line of thinking when there is so much riding on the line. As attorneys, we are typically not risk takers, and most of us don't want to go outside the box.

Do more expensive law firms produce better results? No one has been able to answer this question conclusively.

And for that, GC's are willing to continue to put up with all the shortcomings that come with working with the big law firms.

Imagine this, you are a law firm attorney working from home - every day - with no billable requirements...and yes, you are a partner too! No this is not a dream, really. Sillicon Valley Lawyer-entrepreneur Craig Johnson is making this a reality. Johnson who created the Venture Law Group, is onto his next big thing: a virtual law firm!

VLP is eschewing the normal math that's used by large law firms where one-third of the revenue goes to salaries, one-third goes to overhead, and one-third goes to profits. They're also getting rid of minimum billable hour requirements and high-priced associates.

It's certainly a model worth trying out - both for attorneys looking for a more balanced lifestyle, and for corporate clients looking for more reasonably priced legal services. It's a win-win proposition.

It looks like another player has joined the fight against excessive legal fees.

The ACC, the 23,000-member Association of Corporate Counsel representing in-house counsel across the country says, “It is fed up with exorbitant outside-counsel legal fees."

And, it is ready to so something about it.

An ACC committee is brainstorming with general counsels around the country to develop a set of best practices it will recommend to members – including alternatives to the much-reviled billable hour – such as alternative fee structures; early case assessment; better use of technologies; and bonus incentives to produce results within set deadlines.

Will this make a difference?

Rising legal fees is nothing new, and yet not much has changed in the last twenty years in terms of billing. For years, it seems, corporate law departments have been discussing alternative fee arrangements and overall spending. But, it remains all talk. Companies continue to hire and use big expensive law firms.

Why?

Because when looking at which outside counsel to choose, companies continue look first to results, then knowledge or expertise, followed by cost. They are still being guided by the bedrock standard of firm expertise in making those selection decisions, not cost-effectiveness.

Also, in terms of bet-the-company types of work such as big-ticket litigation, hostile takeovers, and internal investigation, companies want the best and are willing to pay for the best, regardless of cost.

What about alternative fee arrangements?

The practice receives a lot more "lip service" than it does implementation. One of the main reasons alternative fee arrangements aren't being used comprehensively is that law firms continue to be doing well financially and remain in good bargaining positions.

Perhaps as the market turns, firms will be more receptive to alternative fee arrangements, and companies will be more willing to look at cost factors first. The ACC 's efforts merit to be encouraged. Whether they will help change current practices, only time will tell…

Anyone who has had dealings with outside counsels has had their share of frustrations at one time or another – most particularly when it comes to fees. After all, associate salaries have skyrocketed in the last few years, hourly rates have gone through the roof, and with the pressures to increase billable hours, so has the time and focus spent on transactions and documentation…sometime unnecessarily.

So it was no surprise when Jason Mendelson, a lawyer and venture capitalist with the Foundry Group and Mobius Venture Capital fed up with this system, decided to vent his frustration on his blog.

It looks like it touched a nerve.

The post criticized ‘unnamed’ law firm lawyers for overlawyering what Mendelson called simple deals in which a venture capitalist puts money into a startup. The bottom line, Mendelson wrote, is that the unnecessary work leads to higher legal bills.

Mendelson also denounced the rapidly rising salaries of outside lawyers leading to higher legal bills – citing a 132% increase in associate salaries in the last decade.

While Mendelson did not say anything revolutionary in terms of how in-house counsels feel about law firms and their practices, many were ready to jump on the bandwagon. Even The Recorder got into the action, drafting its own article about the post.

Perhaps this hit too close to home, especially at a time when law firms are trying to justify their ever-increasing rates.

Will companies move away from the traditional law firms that service them, as Mendelson suggests? Will they continue to outsource more of their legal work to India, as many already have? Or will law firms change their current structure in response to these frustrations?

Whatever the solution, this post has struck a cord. What do you think?