This article appeared in the May 17, 2004 issue of Michigan Lawyers Weekly.

Iannotti & Associates can assist your company’s engagement of outside counsel. Use our expertise to make better purchasing decisions that result in higher quality and lower cost legal services. The following article highlights what’s important in the process of selecting outside counsel.

We recently helped secure a $7,000,000+ verdict for a client in a complex contractual dispute with a firm we helped select.

Getting Engaged: What General Counsel Want From Law Firms © Daniel Iannotti 2004.

Early in my tenure as the general counsel of a NASDAQ company, I was dissatisfied with the service provided by the law firm handling our securities work so I invited several law firms to submit proposals. Ironically, the existing firm had the highest proposal. Two other firms submitted very attractive proposals, both with a fixed annual fee significantly lower than the incumbent firm. Of those two firms, the firm I was leaning toward submitted the higher of the two proposals; their proposal was $4,000 higher than the lowest proposal. I discussed it with the firm I favored and they happily reduced their fee to win the business. Several months into the new relationship my company began discussions with a potential acquirer and ultimately the company was sold. The new securities law firm handled the transaction for us and earned a fee of approximately $1,000,000.

I believe those events are noteworthy for several reasons. First, despite a long relationship with the company, the incumbent law firm let service slip which led to the end of the relationship. Second, even with the knowledge that their work was “under review”, the incumbent firm submitted a bid that was far from competitive. Third, potential new firms were eager for the business; sufficiently so to “get their foot in the door” with a very attractive fixed annual fee. These new firms positioned themselves to win additional business from the company beyond the work for which they submitted proposals. This article explores the courtship of GCs by law firms and suggests ways to put your law firm in a position to turn $4,000 into $1,000,000.

I. Must Haves

Understand the Company: This is an area that in my experience many law firms miss the mark. There are many reasons why companies hire GCs but one reason near the top of the list is that the close working relationship will foster a better understanding of the company’s business. Recognizing this, law firms should “do their homework” on the company so that they too are up the learning curve. There’s no substitute for a good understanding of the business and legal issues facing the company and its industry and tailoring your pitch to the company’s situation. What are the company’s strengths, weaknesses, opportunities and threats? How do those compare with those of its competitors? What are the company’s new products or services? Is the industry in a growth or contraction mode? Are competitors being consolidated?

Consider, for example, auto suppliers who currently are facing intense competition, price reductions and layoffs. Some creative strategies that law firms may use that may be attractive to GCs in this industry include: 1) “leasing back” in-house lawyers by hiring them from the auto supplier to provide essentially the same services they previously provided as employees; 2) annual flat fee arrangements for routine or repetitive matters; 3) a multiyear escalating fee arrangement with lower rates in the first year and increasing thereafter; and 4) a hybrid fee arrangement with reduced hourly fees coupled with bonus payments for excellent and/or timely results.

Another aspect of understanding the company is checking into whether the company has an ethics policy that may restrict the GC ability to take part in certain social activities or to receive gifts. In a post-Sarbanes-Oxley world, ethics issues are increasingly important and falling down on ethics can be an irreversible error.

Understand Your Competitors: The marketplace for legal services is competitive. With few exceptions, GCs can obtain high quality legal services from several different firms. From the perspective of the GC, excellent legal service – that is an excellent “product” – is a given, sort of a price of admission. What really differentiates law firms are the three other “P’s” – price, promotion and place. How are you differentiating your law firm from other competitors? Don’t be complacent; your competitors are likely willing to offer attractive fees to GCs to disrupt relationships with current clients.

Price: Price and pricing structure are the most significant factors that a GC considers in selecting outside counsel. Generally speaking, fees for outside counsel are the largest component of a GC’s budget. The budget is fixed and GCs, like other department heads, are compensated in part based on their ability to ensure their actual outside counsel expenses don’t exceed the budgeted number. Competitive pressures on companies result in pressure to reduce internal expenses, including outside counsel expenses. Competitive pressures force firms to seek ways to do more with less. If there’s a single area where you want your firm to stand out, focus on price.

Price is also a significant weapon for competing law firms. Are other law firms willing to drastically reduce their prices for services to one of your existing clients just to get their foot in the door? Are your rates generally higher than competitors?

Just as companies move factories to foreign locations with lower wage costs, companies will outsource legal services to lower cost producers. An emerging trend, especially in Fortune 500 companies, is the ability to outsource legal services offshore (generally to India) where they are performed at dramatically reduced rates. This trend is comparable to competition local retailers’ face when a Walmart comes to town. How would your firm respond if a GC called and said he’s considering outsourcing legal services to a firm in India for half of your current rate?

Pricing structure is equally a significant factor. Why? Most firms are paid using an hourly rate structure which, by its very nature, presents difficulties in budgeting annual expenses – a problem for GC’s – and in meeting budgeted expenses – a problem for the law firms. Because hourly fees are essentially uncapped, there are often surprises when the bill arrives. In addition, in the case of litigation, an hourly fee structure is often contrary to a client’s interests. That is, in most litigation matters clients seek favorable results with a minimum of expense. With an hourly rate structure, a law firm’s financial interests lie in billing more hours rather than keeping a lid on costs. Flat rate or hourly rates with a cap(s) are structures which can more closely align the law firm’s interests with clients’. Flat rate pricing structures also help the GC to increase the certainty and reduce the variability in his/her budget.

Responsiveness: We live in a digital world. Computers, software, cell phones, fax, email and numerous other digital devices have brought enormous improvements in the efficiency of law firms and law departments. But those efficiencies have come at a cost; clients have an expectation that lawyers will use these tools to be more responsive. Law firms are, of course, not immune from this expectation. In my experience, law firms have a difficult time understanding GC’s expectations for responsiveness. Does your firm have standards for expected response time to emails and voice mails? Are those standards consistent with the expectations of the GC? If you haven’t explicitly discussed the GC’s expectation on responsiveness to emails and phone calls, you should.

Understand The GC: It is a universal axiom that everyone is different, including GCs. What works for one GC may not work with others. Here are some questions to explore as you tailor your approach to a GC. Is the GC new to his/her position? A newer GC usually presents a marketing opportunity to firms, especially those who haven’t previously done work for the company. A new GC may be open to explore relationships with new firms than someone who has been in the position for several years. Is the GC from a firm that previously supplied services to the company? If so, there may be tacit understanding that the existing firm will continue to provide services. Does the GC come from a large firm? If so, the GC might not be receptive to a pitch from a smaller sized firm.

The Four “P’s”: Marketing of legal services is no different from marketing any other product or service. Without an understanding of the “four P’s” of marketing – product, price, place and promotion – law firms will struggle to achieve success. Strength in only one of these four won’t make up for shortcomings in other areas. Thus, a firm with a strong “product” - excellent capabilities and talent in a given legal area – but poor “promotion” may be a firm that has difficulty in attracting new business. You can be the finest litigation firm in the world but if nobody is aware of the distinction, the distinction is irrelevant.

II. Nice To Haves:

The following is a list of items that are pluses but not quite as critical as the items above:

· Frequent communication - If a GC ever calls you to find out the status of a matter, alarm bells should go off. Can you ever really communicate too much?

· Efficiencies – Is your firm using document assembly software, email, electronic documents, etc. to gain efficiencies? Are you using non-lawyers to do more of the work? Do all of your lawyers and paralegals have laptops with remote access to email and the Internet?

· Disaster Recovery – Does your firm use backup and disaster recovery technology when (not if) there’s a computer glitch?

· Electronic search services – Do you use electronic search services to stay on top of news relating to the company, its competitors or the industry?

· Satisfaction Surveys – Does your firm employ systematic feedback mechanisms for GC’s to rate your work?

· Seminars/Newsletters – Does your firm use seminars and events to help the GC remain abreast of legal developments?

· eLawForm – Has your firm ever participated in an eLawForum bid process?

· Onsite – Do you have a method by which your lawyers periodically spend time at the company’s headquarters?

· Charitable Work – Does your firm regularly engage in charitable activities? Pro bono work?

II. Not Very Important

The following are law firm marketing efforts that generally don’t have much impact on me or are detrimental:

· Golf – I generally enjoy golf but I find it difficult to block out sufficient time for it. Time on the golf course is generally time not spent in solving client problems.

· Large Firm – Although many firms argue that they can handle any legal matter by virtue of their size, I view bigness as code for “large overhead”. Big firms have a greater burden with me to demonstrate their cost competitiveness.

· Expenses as Profit Centers – When I receive a bill that has, in my view, excess expenses, I begin to question other aspects of the bill. For example, with intense long distance competition, there’s no one who doesn’t know that long distance can be purchased for 3¢ - 4¢/minute. If your firm is charging more than that rate, consider whether you might be winning the battle and losing the war.

Sometimes winning new clients is easy, most times it is not. Successful firms put themselves in a position to win with GCs by smart marketing, competitive fees, competitive fee structures and by staying flexible.