Hiring Outside Counsel

Hiring Outside Counsel

I. When to Hire and When Not to Hire

With respect to any given legal matter, a company’s default choice will always be to handle the matter in-house, if possible. This default choice exists for a host of reasons: cost (the company is already paying the salaries of its legal department staff to handle the company’s legal matters; cost per matter is typically lower for matters handled in-house); corporate knowledge (legal department staff is more informed and plugged-in to the company’s internal structure and overall objectives); and other miscellaneous intangible reasons (e.g., legal staff will learn from each matter and can apply knowledge to future legal matters the company will face). Accordingly, when a new legal matter arises, the company will first consider whether the matter can be handled internally by the company’s legal department. Two key factors come into play in this analysis: (i) expertise of the company’s legal department; and (ii) available capacity of the company’s legal department.

When a new legal matter arises, the company’s senior legal adviser (e.g., General Counsel) will determine whether there is someone in-house who is qualified to handle the legal matter at issue. In-house legal departments for construction and design companies are faced with matters ranging from complex litigation and personnel issues to securities offerings and general corporate affairs, and it is unlikely that any one company will have the necessary expertise to handle all potential legal matters in-house. With respect to any given legal matter, expertise may be in the form of industry knowledge, a particular legal skill, familiarity with local procedure, personal relationships with involved parties, etc. If the requisite expertise for a particular legal matter is present in-house, the company should next consider its legal department’s capacity to handle the matter internally.

If the legal department does not have the necessary expertise to effectively handle the particular legal matter, then obviously the company need not analyze its legal department’s capacity to handle that matter. Instead, the company should consider other options it has to resolve the matter, such as engaging outside counsel. While it may seem hiring outside counsel is the obvious choice when the company does not have the expertise necessary in-house, in reality, the company has other various alternatives to consider. For example, if the matter is one that the company will frequently encounter in the future, rather than engaging outside counsel for each such matter, it may be more efficient for the company to expand its legal department to include someone who has the expertise in that particular practice area to handle such matters on behalf of the company. Another alternative the company may consider is handling as much of the matter internally as possible, with only that portion of the matter requiring special expertise being handled by outside counsel.

Assuming the company’s legal department has the expertise necessary to effectively handle a particular legal matter, the company should next consider whether there is sufficient capacity to handle the matter in-house. When analyzing the legal department’s capacity to resolve the legal matter, both present capacity and future capacity should be taken into account. If present and future capacities are expected to be sufficient, the legal matter should usually be handled in-house, barring a matter-specific consideration external to expertise and capacity (e.g., the company may benefit from outside counsel’s community presence and familiarity with the local courts). If the legal department has present capacity to handle the matter, but doing so may limit its capacity to handle any additional matters in the future, then depending on the estimated duration and involvement of the legal matter at hand, the company may want to hire outside counsel to preserve future capacity, as it may not be practical for the company to begin handling the matter in-house and then later turn it over to outside counsel part-way through the resolution of the matter.

If present capacity is insufficient, the company’s options include: engaging outside counsel to handle the entirety of the particular matter or, if it is expected that future capacity will be sufficient, hiring a contract attorney on a temporary basis to handle the matter until in-house capacity becomes sufficient to take over. If present capacity of the legal department is constantly insufficient, the best course of action for the company may be to expand the legal department by hiring additional staff.

All in-house legal departments generally have the same goal – to ensure the company is legally protected to the maximum extent possible in the most efficient and effective manner. Protecting the company is goal number one and the benefits of engaging outside counsel to handle legal matters that are beyond the expertise or capacity of the in-house legal department can help achieve that goal. However, it is important for the company to consider alternatives to hiring outside counsel, as such alternatives may prove more beneficial to the company in the long-term.

II. Who to Hire

Once a company has determined that it makes business sense to hire outside counsel for a particular legal matter, the company then must determine who to engage for the job. The following is a list of criteria a company should consider when retaining outside counsel:

A. Legal Expertise/Competence

There can be a lot of truth to the common saying “you get what you pay for,” especially in the legal profession. However, that does not mean that the most expensive lawyers are the best or that the best are the most expensive. In the legal profession, engagement of the most knowledgeable, skillful, and experienced attorneys does not have to mean more dollars spent by the company. This is one area where in-house counsel can make the biggest impact to their company’s bottom-line. In-house counsel not only produces legal work on a day to day basis, but oftentimes spends a greater portion of their time managing outside counsel and legal budgets.

It is crucial that companies make informed decisions when engaging outside counsel. The company must do its homework and thoroughly research outside counsel prior to engagement. Just because an experienced lawyer may charge a higher hourly rate, does not necessarily mean that lawyer will ultimately be more effective. That being said, engaging a more experienced lawyer with a higher hourly rate may lead to lower dollars spent by the company for a matter, as a more experienced lawyer may be able to achieve the desired result in a quicker manner than a lawyer with less experience.

B. Discipline

Depending on the size of the company, it may be cost-effective and more efficient for the company to engage a law firm with expertise in multiple disciplines and operations in multiple jurisdictions/states. If the company is national, it might be practical for the company to engage a national firm, or it might be practical for the company to engage several regional firms. If the company is local, it may only need to engage a local firm.

C. Responsiveness

This is hands down one of the most important criteria by which outside counsel are judged. It is important for outside counsel to not only be available, but also responsive. Being responsive means communicating with in-house counsel frequently and openly with respect to items such as: goals (short-term and long-term), strategy, status updates, billing, etc. However, responsiveness is more than frequent communication. The content contained within each communication must meet the expectations of the company and satisfy its needs.

D. Understanding of Company’s Business Objectives

Outside counsel should understand the inner workings of the industry in which the company participates and should be willing to learn the company’s business objectives. Based on such an understanding, outside counsel can better prioritize the company’s objectives and customize legal strategies based on the client’s needs. Outside counsel should use their understanding of the company to be innovative and offer value to the company through legal services. A company’s relationship with outside counsel will flourish when executive management is able to trust that outside counsel is vested in the company and has a personal interest in its well-being.

E. Case Management Skills

The legal department’s expenses often are critical to the budgeting process of most major companies. Blown budgets for transactional work and potential/actual legal exposure can have a dramatic impact on a company’s bottom line. In-house counsel must be able to rely on projections, estimates and evaluations provided by outside counsel, as in-house counsel will be reporting to upper management based on such projections, estimates and evaluations.

Outside counsel must consider the cost to the company when deciding how to proceed with a case, as the best legal outcome may not always make the most economic or practical sense for the company. The company may desire to settle litigation matters early or may prefer to use alternative dispute resolution over traditional litigation. Alternatively, the company may want to litigate aggressively so as to send a message to future plaintiffs. With respect to each individual matter, outside counsel must listen to the company’s objective and pursue resolution of the matter in line with that goal.

F. Character

It is important for outside counsel to be moral, loyal, trustworthy and personable. Outside counsel should require little management from in-house counsel and should be able to handle a matter with minimal supervision. In-house counsel should be able to trust that outside counsel’s interests are fully aligned with the company’s. After all, outside counsel is acting as a representative of the company and actions of outside counsel will reflect back directly on the company.

G. Rates

Rates for outside counsel should be reasonable, especially during the current economic cycle. Outside counsel should strive to maximize use of junior associates, paralegals and staff when possible in order to save the company money. Outside counsel should be willing to negotiate alternative billing arrangements and terms. This may not be as appropriate or welcome when outside counsel is engaged for a one-time matter, but if there is an ongoing relationship with the company, outside counsel should be willing to negotiate rates.

The following are a few commonly used alternative billing arrangements.

· Fixed Fee: This concept is simple - for a set price, outside counsel provides a specific service (e.g., preparing an agreement). The key to this billing arrangement is for the parties to sit down and set forth in detail the services that will be performed for the fee so that both parties are on the same page. This billing arrangement prevents the company from facing an unwelcome surprise when the legal bills are sent for payment, however, it does not always provide outside counsel with the financial incentive to spend the necessary time on the matter to ensure a certain level of work quality or outcome to the client (once the legal costs exceed the fixed fee, outside counsel is not getting paid for any additional time devoted to the matter).

· Capped Fee: In this billing scenario, the company agrees to pay outside counsel up to a set dollar amount. Like the fixed fee arrangement, the capped fee provides the company a degree of certainty with respect to legal costs, however, the company is not guaranteed a set amount of services for such costs. The amount at which the capped fee is set is critical to this billing arrangement. If the capped fee is set too high, it will not be very effective in constraining the company’s costs. If it is set too low, this billing arrangement will present disadvantages similar to those encountered in the fixed fee scheme.

· Contingency Fee: Under this arrangement, outside counsel is paid based on the outcome achieved. Payment is typically expressed as a percentage of a recovery or settlement. The obvious advantage of the contingency fee is that the company only pays outside counsel if there is a successful outcome. The risk of loss is partially shifted onto the shoulders of outside counsel. However, this billing scheme can be risky for a company if the recovery or settlement is large - the company can wind up paying outside counsel much more than it would have under the traditional hourly billing arrangement.

· Retainer: In this situation, the company pays outside counsel a fixed amount in exchange for future services or for a guarantee from outside counsel that is will be available to the company for a specific period of time. As with a fixed fee arrangement, it is imperative that the parties reach agreement as to the specific services that will be performed for the retainer.

· Volume Discount: In this billing arrangement, outside counsel agrees to lower its hourly rates in return for the company guaranteeing a certain volume of legal work. The company enjoys lower hourly rates but is locked in to funneling work to a particular firm. Additionally, this billing arrangement can present the same disadvantages encountered in the fixed fee and capped fee schemes.

· Blended Hourly Rate: The law firm bills the company a uniform hourly rate regardless of the attorney billing the time. While this arrangement will generally result in lower hourly rates for the company, it is still based on the billable hour and therefore discourages efficiency on the part of outside counsel.

· Hybrid Approach: This approach involves combining various billing arrangements in order to fit the company’s circumstances and billing preferences.

III. How to Hire

A company has multiple resources to look to when selecting outside counsel. The resource used by the company to select new outside counsel will depend on the company’s particular preferences, as well as its past hiring experiences. A resource that worked well for a company in the past will likely be used again and again.

One of the most common resources is the personal referral. A personal referral may come from sources such as: incumbent outside counsel, in-house counsel at the company, in-house counsel at other companies, a company-approved outside counsel list and other employees at the company. A company may select outside counsel that performed well against the corporation in the past. Perhaps less often, the company may use published directories and searches of law firm Web sites to locate new outside counsel. Published directories and Web site searches can be very useful when a personal referral is not readily available.

Requests for Proposals (RFPs) are typically used when a company is selecting outside counsel to handle a large number of matters. Companies that use RFPs usually have formal written rules and selection procedures that the company distributes to potential firms. Once proposals are received from potential firms, the company may seek additional information from the firms as needed and then select the firm that best fits the company’s needs.

As an alternative to the RFP process, a company may research various firms and then ask a handful of firms to make a presentation to assist the company in selecting its outside counsel. Presentations can provide the company with valuable information concerning a law firm’s qualifications, experience, billing options and staffing philosophies.

IV. Hire on a One Time Basis or Establish a Long Term Relationship?

Assuming a company’s legal department has the requisite experience and capacity, matters that concern standard issues are typically handled in-house. In instances where routine matters cannot be handled in-house, such matters are often referred to outside counsel with whom a company has a long-term relationship, as it is usually less expensive and more efficient for a company to send routine matters to incumbent outside counsel. Incumbent outside counsel has a history with the company and is already up to speed with the inner-workings of the company and its counsel with respect to things such as operations, goals and preferences.

As to legal matters containing more discrete issues, it is often the specific matter that initially dictates whether or not it makes sense to establish a long-term relationship with the attorney serving as outside counsel. For a matter that requires local counsel or special expertise, such a matter is often originally handled by outside counsel on a one-time basis. However, one-time matters are often the springboard to long-term relationships. Specifically, if outside counsel handles a one-time matter in an effective and efficient fashion that meets or exceeds expectations of the company, that same attorney will often be engaged for future matters of a similar (or different) nature, which eventually may lead to the establishment of a long-term relationship.