In-House Counsel Turn Back the Clock While Increasing the Hours for Firms

Mark Schauerte


July 1, 2000

In-House Counsel Turn Back the Clock
While Increasing the Hours for Firms

By: Mark Schauerte

Four partners from four different firms met in Chicago on a Tuesday morning in June with the same client.

With no pending litigation or crisis, the in-house lawyer had one item on the meeting's agenda: What could the client do to help promote the firms?

Welcome to the world of partnering, a rare but growing phenomenon in which corporate counsel and a core group of firms work collaboratively on the company's legal business and the firms' bottom lines.

Companies guarantee firms a large volume business in return for price concessions and a willingness to share information freely with the other firms on the client's team, something attorneys said can be counterintuitive to the law firm mentality.

At Heller Financial, Inc., Debra Snider, chief administrative officer and general counsel, initiated a partnering program in the mid-1990s.

She said her goal was to make better use of Heller attorneys, who, up until that time, were buried under the paper of documenting transactions for the company, which finances small and mid-sized companies worldwide through loans, capital investments and other services.

"We wanted to focus on being a true strategic asset for the company,'' Snider said.

Heller was using between 200 and 250 different outside firms, said Mark Ohringer, chief corporate counsel at Heller. Ohringer said Heller was like most corporate legal departments.

"There was no strategy in how we allocated the work or why,'' Ohringer said. The company needed a lawyer, found a lawyer and then waited for the bill, he said.

"Just by definition, that's going to be inefficient,'' Ohringer said. "We needed people who were consistently working on our matters and really knew us.

"It's not hard to find a really good lawyer to do a transaction, so what we are looking for are things that go beyond lawyering, like deal referrals, introduction to customers who need financing, and marketplace intelligence without breaching any privilege but pointing to new markets.''

Ohringer said establishing an effective partnering relationship between client and firm requires a long-term perspective.

"Each has to make an investment in each other,'' he said. "You have to trust each other that if you both make that investment, that each will benefit.''

The term "partnering'' has most commonly been applied to how DuPont changed its legal team in the early 1990s, said Peter Jenkins, director of training and projects for Jaffe Associates, a marketing and legal consulting firm.

Faced with managing more than 300 different outside firms in litigation, DuPont cut the number of firms it used to a little more than 30 and established a regional network of firms for its litigation work.

Since DuPont reduced its number of outside counsel and implemented a partnering program, companies such as Motorola, MCI WorldCom, Mobil, Prudential Insurance, Sears, Chrysler, Dole Food, Whirlpool, Marriott, Comerica, and Aetna have followed suit in cutting the number of law firms used, Jenkins said.

While they all have reduced the number of law firms they use, the companies vary in the extent to which they "partner'' with those firms.

Baxter Healthcare Corp. recently embarked on a partnering program by choosing four law firms as its preferred provider network, said Suzanne E. Dawson, senior counsel at Baxter. She did not identify the firms.

"This is obviously one of the hot topics,'' she said.

The examples of partnering have occurred mostly with large companies where the reduction in the number of outside counsel has significantly lowered legal expenses. Smaller companies often question whether partnering will work.

Elyse M. Tish, assistant general counsel for Grubb & Ellis Co., a commercial real estate services firm, said formalized partnering structures do not fit the needs of their five in-house attorneys.

"We have a much smaller law department,'' Tish said. "We can't do some of the things because we don't have that much business to throw around.''

Tish said their biggest firms bill around $100,000 in business a year.

Even so, she said the Grubb & Ellis law department utilizes some partnering concepts, such as working with a limited number of outside counsel.

"It's something that we don't talk about, but it's something that we do instinctively,'' she said.

Back to the future

A key element in partnering programs is the use of a limited number of outside counsel over an extended period of time, Jenkins said.

The dependence on "primary'' counsel resembles a return to how firms and companies used to relate to each other, said Robert L. Nelson, a professor of sociology at Northwestern University, a law professor at Northwestern University School of Lawand a senior research fellow with the American Bar Foundation.

"It's kind of funny how these things reinvent themselves with slightly different faces,'' Nelson said.

Nelson noted that partnering relationships resemble the business integration that banks used to have with one primary firm, such as Mayer, Brown & Platt's relationship with Continental Bank of Illinois; and New York's Shearman & Sterling with Citibank. He said those arrangements included major billing discounts for the banks.

Snider defines partnering as a "different way of relating to one's vendors, suppliers and clients.''

She said inside and outside counsel should think of the arrangement as being in business with each other instead of doing business with each other.

"It's very different than just cost-cutting,'' Snider said.

Ohringer agreed, saying Heller wants its firms to provide more than legal services.

"Sometimes they know about business people who are looking for a job, who they'll say to, `Why don't you send a resume to Heller?' '' Ohringer said. "There are lots of things like that that. Being in business with us is not just doing our legal work.''

Joel Henning, senior vice president and general counsel of Hildebrandt International, is skeptical about the widespread prospects of partnering.

"There's less than meets the eye,'' Henning said. "There is a great deal more lip service being paid to it than actual progress.''

"I can't imagine when something is so new that it turns the world upside down,'' said Kay Hoppe, president & CEO of Credentia, Inc., a legal search and consulting firm. "These adaptations go on, and on and on. I have seen so many things described as innovative, but there is always another one that follows.

"Inside counsel are increasingly sophisticated. [Partnering] is a function of an upscaling of corporate America's law departments. They have become sophisticated consumers and are doing things in a far more timely and efficient way. It's an attempt to improve efficiency.''

Miriam J. Frank, principal at Major, Hagen & Africa, a legal search and consulting firm, disagreed.

"It is something more than just putting a new name on old stuff,'' said Frank, who was an in-house attorney at Heller before the implementation of its partnering program. "This is taking the relationship between law firms and clients to a different level, but I have not seen a tremendous move to it.

"It sounds to me like it's taking a much deeper look at the needs of the client and the training and staffing at the law firm and trying to make a better long-term fit. It really enables a much closer relationship.''

Philip Hablutzel, a professor at Chicago-Kent College of Law, said one impetus for partnering "is that the large corporations may have learned that if you have a stable law firm on the outside and they can get to know your business, they can be very effective.''

Hablutzel said companies moved away from long-term relationships with firms in the 1980s and 1990s because "you didn't have to rely on one firm to do everything, and you could get your costs fixed. You could predict what your legal costs were going to be.''

Hablutzel said partnering helps large-corporation law departments manage their legal business.

"If you're a very large company and you are using 50 different firms, it taxes one's ability to keep up with 50 different law firms,'' he said. "It's much easier to deal with five or 10.''

The Heller program

To begin its partner program, Heller first selected three firms -- Winston & Strawn, Latham & Watkins, and Katten Muchin Zavis. Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz was added later.

"Partnering in my mind is a phrase that gets used to fit a variety of situations,'' said David M. Mason, a partner with Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., one of the four "top tier'' firms in the Heller partnering program. "In its most advanced form as we are participating, I think those types of more mature relationships are few and far between.''

Jane DiRenzo Pigott is the point of contact for Winston & Strawn in the Heller partnering program.

"It requires you to think as if you are in business with them rather than providing just legal services to them,'' she said.

David R. Dlugie of Katten Muchin Zavis is the relationship partner with Heller for his firm.

"What Heller is doing that is unique is to intertwine the client and the firm together,'' Dlugie said. "You're not just being the attorney for hire. You are involved with product development, and new ideas and what is going on in the marketplace.''

Snider became Heller's general counsel in October 1995. She formerly was with Katten.

The company had a $10-million budget for legal services but was spending $40 million.

"[The chairman] said, `I don't know if that's twice what it should be or what. Figure it out.' ''

The company's new business has grown from $3.5 billion in 1995 to $8.1 billion in 1999.

At the same time, legal costs for internal and external counsel have dropped from $40 million in 1995 to $33 million in 1999, Ohringer said.

If she had been called upon to achieve such a reduction, Snider said she "would have lopped heads every year.''

"The financial results [since 1995] are an outcome, not a goal,'' Snider said.

As we looked at the department, we were having lawyers doing the work that could be done by paralegals and, in some cases, administrative assistants,'' Snider said.

The number of Heller lawyers has reduced since 1995, from 35 to 18, but the head count for the legal department has remained the same, with more paralegals and legal assistants hired, Snider said.

"It has the ability to be very strategic,'' Snider said. "People inside have created time to be strategic and proactive rather than being literally buried by piles and piles of deals to be documented.''

The Heller program delegated responsibility for standard loan deals to outside counsel, Ohringer said.

Previously, a Heller attorney was assigned to each deal, he noted. The partnering program lets inside counsel worry about bigger picture issues.

To implement the partnering program, Heller attorneys first decided to pick a limited number of firms that would form their legal team.

David S. Ruder, a professor of law at the Northwestern University School of Law and a former chairman of the Securities and Exchange Commission during the Reagan Administration, said he sees a substantive advantage to companies using a limited number of outside counsel.

"You don't have to educate the firm every time,'' he said.

Snider said the company looked at historical use patterns to determine which firms had been used most in the past.

Heller opted against a full-blown "beauty contest'' and request-for-proposal parade because "it seemed inefficient and a waste of time,'' Snider said.

"For us, there is a lot to be said for knowing who we are dealing with,'' Ohringer said.

Having a substantial Chicago presence was not a key criterion in the selection process, Ohringer said.

"But, it's a natural element for us because most of our closing process is done in Chicago,'' he said.

Ohringer added that Winston's New York office and Latham's California offices helped because the company needed lawyers on each coast.

"Now that law firms have become national, you can go to a big firm and it will have offices in multiple jurisdictions, and you might be able to depend on a few firms,'' said Hablutzel of Chicago-Kent.

The four firms in Heller's program receive 75 to 80 percent of Heller's annual legal business, Ohringer said.

Heller still uses about 100 different firms for the remaining legal dollars spent, Ohringer said.

"Over the course of a year, if you need a lawyer in Boise, Idaho, you use local counsel,'' he said.

Fee concessions

In return for a guaranteed volume of business, the chosen firms had to offer price concessions to Heller.

"When we were first invited to join the program, we were told, `The volume of work has been at X dollars; we will make it X+Y. We guarantee that you will receive that. One of the things we are looking for in exchange are price concessions,' '' Mason said. "I thought that partnering meant price concessions. We kind of blindly entered the program.

"As the years have gone by, we have come to realize that while price concessions are an important part of partnering, partnering is more than price concessions and many benefits are available to a participating law firm. We have been candid with Heller when we've been dissatisfied, and Heller has been candid with us.''

David S. Heller, the relationship partner with Heller for Latham & Watkins, found some fringe benefits in having the client's name as his surname.

"As the business with Heller began to grow, we would travel often with Heller attorneys on business,'' Heller said. "I would always let a couple of Heller attorneys check in first with their Heller credit cards, and then I would step up and say, `I'm Mr. Heller.' I always got the biggest suite. It was very nice.''

Snider said the partnering program requires lawyers to think of themselves more in a business context.

"Lawyers tend to think of themselves as guns for hire,'' Snider said. "We really kind of have a tendency to sit by the phone and wait for the call and then do great work.

"We view our outside counsel as integral to our company,'' Snider said.

Ohringer agreed, adding that "We would like nothing better than to write huge checks if they provide huge value. We have written discretionary checks when they introduced us to new business partners or thought of a new deal structure. The perfect model is that each one of us sits down and says, `How can I make Heller a better company?'''

Ohringer said the partnering program has been an evolutionary process.

"Once we had a few successes, we understood its potential power,'' he said. "We added the training programs where we helped train each other and put more of a structure on deal referral programs where we want to educate law firms on our business products.

"We have taken top Heller executives to firms to make presentations about the business and the products. That way, when [firms] hear about people who need financing, they will suggest they go to Heller.

"They have called here with changes in the law that we would be interested in with the bankruptcy code or the tax code changing and say, `Here's a new product area you might want to think about.' ''

Structure

The structure for Heller's relationship with its firms depends on an exchange of communication by more than just Snider and one partner at a firm, Snider said.

Snider said she wants lawyers, paralegals and legal assistants from both corporate and law firm departments to communicate with each other.

Ohringer said Heller's legal department is divided into seven parts by business products: corporate finance, real estate lending, small business lending, health care, leasing, international financial transactions and general corporate work that includes human resources and benefits.

Each of those categories has a legal services relationship manager, who is a Heller in-house attorney, Ohringer said.

"That lawyer is supposed to figure out what the right mix of inside and outside counsel is and who is the best outside counsel we know of,'' he said. "Part of their job is to understand where we can get the best legal services, so they need to be familiar with firms' expertise.''

He said those Heller attorneys have the authority to assign the business without gaining approval from Snider.

Ohringer described Heller's structure as non-hierarchical.

He said the in-house attorneys meet weekly for 90 minutes to discuss any number of topics, including the distribution of business to its partnering firms.

Other topics include the use of outside vendors and the role of the Extranet site, which went live in January.

Heller uses Legal Cost Control, an outside vendor, to manage its bills from the outside firms.

"Reviewing those bills doesn't add any strategic value to Heller, but paying someone a fee is well-worth that fee, and it has been,'' Snider said. "The firms weren't thrilled. They said, `What is this? It doesn't feel very partnering.' But [Legal Cost Control] helped us get to more of a form template bills and electronic billing.''

She said firms now receive their money more quickly than previously.

Limitations

"We're asking them to do something that otherwise might be uncomfortable for them because it's right for their client,'' Ohringer said. "They are not necessarily competing for exactly the same business. We never want to have just one law firm. Different firms are more appropriate for certain matters.''

But, sometimes the partnering pinches.

"While we are still cooperative with the other firms, there is still a notion that these are our competitors in the Chicago marketplace,'' Mason said. "If we come up with innovative ways of doing transactions, we are still reluctant in sharing this information.''

At another level, it works well.

"We encourage secretaries and paralegals to get together,'' Mason said.

"Our paralegals will get together with Heller and from other law firms and talk about some of their procedures,'' Mason said. "For the most part, it is on Heller transactions. `Oh, this is the way we handle process X and process Y.' Then the group will talk about which way is best. Again, you're back into how much is shared. There is a line to be drawn. We're happy to share on processes unique to Heller.''

Meet Walter

In early 1999, Heller and Winston embarked upon creating an Extranet site to place form documents and provide a centralized communication forum.

Ohringer said he worked closely with Winston's IT team, headed by David Hambourger, to set up the site.

"The goal was making it easy to handle matters,'' Ohringer said. "One of the logistical problems is that all outside counsel have up-to-date form documents and officer lists.''

Ohringer said the Extranet site, named Walter, the first name of the company's founder, Walter E. Heller, provided a centralized place to put all of these standard documents, accessible to the entire Heller team.

"Before, if we had a form credit agreement that 20 different firms are using and there is a change to the law, we had to figure out how to get that out to 20 different firms. With the logistics, we could never be sure if every firm would be using the most up-to-date form. Now, every time a law firm is doing a new loan, we can be confident that they are working with the most up-to-date forms.''

Dlugie said he checks Walter at least once a week.

"It becomes a virtual filing cabinet to what's important to them in servicing their corporate legal needs,'' DiRenzo said.

Mason said the information posted on Walter includes issues that arise during transactions.

"Most transactions are based on forms that have been in place for two, three, four years,'' Mason said. "We could be in a situation with an opposite counsel who says, `This is the way we read Section 3.3 of a document,' '' Mason said. "Then we say, `Boy, their reading is a better reading.' It could be a word there, a tweak there.''

Mason said a note of this interpretation would then be posted on Walter for all of Heller's outside counsel.

"That way Heller isn't embarassed when on transaction six, the same opposite counsel says, `This is the way we interpret Section 3.3,' and a Winston attorney says, `No, you're all washed up,' only to have them say, `Well, this is what Goldberg, Kohn said two months ago.'

"This is done all with a goal of Heller presenting a consistent face in the marketplace.''

Summit meetings

"We are finally at the stage of feeling we can be candid without being stricken from the list,'' Mason said.

"We will bring three or four people,'' Mason said. "It allows Heller to articulate their goals for the coming year. They will say, `We have seen an increasing need for labor law or employment. Tell us what your capabilities are there.' ''

Mason said with other clients he has experienced some elements of partnering, but the Heller relationship involves "more structure and more entanglement. Partnering attempts to be more encompassing.''

"It's a realization that if done properly, it is advantageous to both sides,'' Mason said.

"The traditional means of compensating the rainmaker doesn't work in the context of partnering,'' Mason said.

"If one of our partners here gets a tremendous credit from a compensation standpoint for all of the Heller work and on a Friday afternoon Heller calls and says, `Dave, a big project came in. We're going to need you to work through the weekend,' if I have the expertise, I'm going to do it.

"But if it's an employment issue and I call the partner in the employment area and say, `Hey, sorry, but Heller called and they've got this big project. You're going to need to cancel your weekend plans.' He may say, `Hey, wait a second. Every dollar that comes in from Heller goes to you. I'm going fishing.'

If the compensation does not inure to the benefit of one rainmaker but instead inures to the benefit of all, institutionally we all have the same incentives to make the client happy.''

Originally published in "Chicago Lawyer."