Brick by Brick

GCs and outside counsel weigh in on best practices to build a solid foundation

Published in 2014 Super Lawyers Business Edition Magazine — November 2014

Early in her career, Kristina Maritczak witnessed malpractice unfold right before her eyes.

A prestigious East Coast firm that her company hired missed crucial details—including the fact that the plaintiff and co-defendant were in a romantic relationship—and overbilled by approximately $250,000 before discovery even began. “I was not the chief legal officer at the time, and I recommended we file grievances against these lawyers for malpractice,” says Maritczak. “But my boss disagreed. He didn’t want our company’s legal department to gain a reputation of bringing malpractice claims.” Ultimately, with her boss’s approval, she fired the East Coast counsel, but the whole process was costly.

On the plus side, the formative experience influenced how Maritczak built the legal department at Cobalt Mortgage Inc. from scratch: She only hired in-house counsel that she trusted completely. Anyone who was subpar she’d phase out immediately.

The inside-outside counsel relationship is longstanding and nuanced. In recent years, companies have pared down the size of their in-house teams as well as their portfolio of outside counsel. They are increasingly using alternative billing structures. And more than ever before, companies care that outside counsel are a culture fit with their corporation. But at the end of the day, these relationships are like any other: They’re built on trust.

We spoke with several GCs and outside counsel to get a sense of how they manage these relationships.

 

‘Hire the lawyer, not the firm’

With a company’s reputation and profits on the line, GCs aren’t willing to take chances.

“If we’ve been sued in a jurisdiction and don’t have connections to firms there, I’ll rely on my network and ask others if they have referrals,” says Maritczak, who recently left Cobalt to start her own Seattle-based firm advising companies as outside counsel. “I’ll get referrals from two to three different firms. And I always hire the lawyer, not the firm. I follow the lawyer. One outside counsel with us has worked at three to four firms. In that situation, you know whether or not they’re going to bill you for every conversation you have.” When one of her favorite outside counsel switched firms, his rate doubled, but she stuck with him for his expertise and dependability. 

Wynn Segall, who is a partner in the international trade practice at Akin Gump Strauss Hauer & Feld’s Washington, D.C., office, says he attracts most of his new business through existing clients, citing recent referrals in Russia, England and Hong Kong. Although new business is often generated by a phone call or series of calls, his team is also familiar with the grueling Request for Proposal process. “RFPs are a lot of work,” he says.

Jeffrey Tenenbaum, a partner at D.C.’s Venable, agrees. “Our most extensive RFP was with the American Bar Association. They were attempting to consolidate their outside law firms. They had dozens of outside law firms in many areas, with six rounds of interviews, and lots of different attorneys on the phone. They ended up selecting us as their principal outside counsel.” What tipped the scales was his firm’s depth of expertise in a wide variety of areas that applied well to the ABA’s work as a nonprofit trade and professional association.

Since competition is fierce, even the most seasoned outside counsel need to continually market their services. “Business development is everywhere,” says Segall. “I get out and speak at conferences and put out articles in publications on a relatively frequent basis.”

That kind of marketing works. “Firms are not shy about introducing themselves to us,” says Leslie M. Turner, senior vice president, general counsel and secretary of The Hershey Company in Pennsylvania. “We have a strong global presence, with firms in China, India, Latin America, everywhere. We often go by word-of-mouth and experience and results.”

Best Buy general counsel Keith Nelsen, based in Minnesota, says that his team currently has approximately 40 lawyers in-house as well as relationships with outside counsel, including 10 to 15 outside the U.S., with a select number of preferred relationships, which is typical for a large corporation. “There’s lots of value in the firms knowing our business, knowing how to navigate through our systems and processes,” he says.  

 

‘It’s worth paying for experience and expertise’

More than anything, GCs hire for expertise.

“Their experience, subject matter expertise and depth of wheelhouse is very important,” says John Page, senior vice president, chief corporate social responsibility and legal officer of Golden State Foods, based in California. “Very rarely is there something new under the sun as it relates to transactional work or employee relations. Some areas are new and innovative, but most of the work is not in that space.”

Ona Alston Dosunmu, general counsel of D.C.’s Brookings Institution, has two generalist go-to firms that she deals with regularly. “If I’ve been presented with an issue that is both outside my comfort zone and has some urgency to it, outside counsel can generally point me to someone in their firm that has seen the issue 199 times. When I need a gut check within hours, it’s worth paying for experience and expertise,” she says.

Often, that gut-check is Segall, who focuses on international trade controls, economic sanctions, regulation of foreign investment, export controls and anticorruption. “For my clients in Russia, and any in the international markets, I have to understand the issues at a political and broad policy level, and that just comes down to everything I consume and read,” he says. “Staying on top of the law is the easy part. Having an appetite for the subject matter goes a long way in terms of not missing things.”

Turner says Hershey looks to outside counsel specializing in evolving areas such as cloud technology and privacy laws instead of building up that expertise more internally, especially as it’s grown internationally. “If you look at what the company is doing today—such as our opening an R&D center in China, building a greenfield manufacturing facility in Malaysia and the agreement to acquire the Shanghai Golden Monkey confectionery business in China—it’s certainly very different from supporting just a U.S.-centric business,” says Turner. “The demands on the law department are very different from those of five years ago.”

 Tenenbaum says he’s noticed a trend toward in-house lawyers demanding industry specialization. Companies, in other words, don’t just want an outside counsel who specializes in copyright law; they want outside counsel who specialize in copyright law in a specific industry and can provide advice based on their work with dozens of other clients in that industry. 

 

‘They have to know what we want’

But the most knowledgeable attorney simply doesn’t serve a client well if he or she doesn’t deliver quickly. “The baseline is someone who can turn around high-quality work in the timeframe you need it in,” says Dosunmu. “They don’t waste a lot of time chasing false leads, and appropriately narrow the scope of the project.”

After companies relay their expectations, the burden largely rests on outside counsel to manage the relationship. In today’s business environment, “you need a sixth sense about what your client wants, how they’re going to use the legal advice, and understanding the broader context in which the legal issues are being considered,” says Tenenbaum.

“Communication is frequent,” Page says. “They have to know what we want. Sometimes on the client side it can be difficult, too. We often know what we want and it may take increased resources to get there; we want someone to give clarity on that. There are times when you need to have constant conversations.” But more than anything, he says, “They have to know who we are, how we conduct things, and our philosophy and approach to matters.”

Developing that sixth sense takes time.

“Effective communication and transparency comes from understanding as much as we can about our client’s business. The most important thing is understanding their business and their business objectives,” says Segall. “What are their business goals at a high level? Trust and understanding are the key factors. Trust comes with time and familiarity.”

It helps if the outside counsel can walk the halls of their client’s headquarters and blend in.

“We’re looking for culture sensitivity,” says Turner. “That is, counsel that aligns with our values and culture.”  

While Best Buy doesn’t put a premium on culture fit, per se, it does put a premium on relationship fit. “If your gut tells you that a particular lawyer or firm won’t interact well with employees, the board of directors or managers, it’s not likely to be a successful relationship,” Nelsen says.

It’s healthy to rotate counsel to ensure diversity, says Page, but once you find counsel who fit all the specs, you build that relationship. “You’ve invested the time to take them on company tours,” Page says. “They understand how you make money, lose money, invest. You don’t want to keep paying for new counsel.”

 

‘Bring efficiencies or absorb it’

Then there’s the money. GCs are feeling increasing pressure from management to select counsel and firms that are affordable, and to negotiate alternative billing structures.

“We’re seeing in-house counsel demand more flat fees for projects,” says Tenenbaum. “In the past, you billed by the hour, whereas clients these days are existing on [arrangements like] flat fee or cap, or a monthly retainer that covers all the legal services you’re going to provide. That works for us in part because we’re efficient.” 

Segall has a similar perspective. “For all the major law firms, it’s a fairly normal practice to do alternative billing arrangements. We’re as creative as can be when thinking of these different kinds of arrangements. Our firm has dedicated a full-time staff person who focuses on billing arrangements with clients.”

Pay structure depends on the client and the nature of the project. For example, says Maritczak, “Cobalt grew a lot in a short period of time, and sophisticated employee issues have arisen. So we pay outside counsel a flat fee to answer any questions and help train our director of HR on sophisticated issues.”

The most important thing is having transparent discussions up front to ensure that there are no surprises. “We’ve tried other fee arrangements, and what continues to work is a clear engagement strategy with upfront discussion on budgets, including what’s to be spent on each stage,” says Page. “We have said, ‘This is what we’ll spend on this matter and that’s it.’ We tell firms: Bring efficiencies or absorb it. If anyone has to do something that’s inefficient, it is free. Great outside counsel make their work successful and profitable.”

Page also says that he stays clear of large firms to save on costs: “Mid-tier firms, in terms of annual revenue and size, are nowhere near mid-tier in skill set. Whatever the price point is, you want value. If there’s a matter on which you’re looking for advice, say a minor real estate question, you don’t need someone for $1,000 an hour doing the work when you could have a capable associate do the work. But some corporations are less concerned about that.”

Even though GCs are increasingly leaning toward alternative fee arrangements to appease management, at the end of the day, the costs may pan out the same. “Most GCs grew up in the private sector,” says Segall. “And they understand how to do the multiplication. They understand the business drivers that affect our ability to price in different ways.”

Turner sums up her experience this way: “You get what you pay for in a competitive environment.”

 

‘The analytics … will disrupt the legal profession’

But what does the data say? Perhaps that transformative innovation is not far off. “Companies are getting back to the basics of establishing the right teams,” says Page. “Oftentimes the analytics are not studied here. They’re hiring actuaries and back office functions [to study analytics]. Everybody is looking into the data. All things being equal, why did something initially cost $200,000 and half a million dollars this time? We’re looking for predictability in the costs associated with outcomes.”

With the help of sophisticated tools, certain metrics come to light. “Analytics have always been with us but not incorporated into our evaluative processes or used to determine value and predictability,” Page continues. “With Watson from IBM and other intelligent tools and systems, I sense there will be a foot race on better processes, better analysis and better prediction of outcomes leading to better lawyering and efficiencies. The billable hour or profits per partner are not [the most] efficient or the sole metrics, or even the best measures of success. The analytics will help build tools, processes and even thinking that eventually will disrupt the legal profession.”

Maritczak says she has used analytics to measure the effectiveness of her internal and outside counsel teams, but that larger companies with bigger budgets and resources are more often the ones who use data to guide their business decisions. 

Ultimately, companies want predictability, transparency and trust—all of which are the cornerstone of any great relationship. “My own relationships with the clients I serve end up growing at a personal level just as anything,” says Segall. “It’s an ageless thing.”

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