Outside Counsel

Principles for working with outside lawyers

By Sachin Adarkar, a general counsel and chief compliance officer of Prosper Marketplace Inc., a peer-to-peer lending company in San Francisco.

If you’re a general counsel, managing outside counsel can be one of the most difficult parts of your job. There are many aspects to effectively managing outside counsel, but they all revolve around a single, fundamental challenge: ensuring clear and effective communication.

The Right Fit

For me, the most important part of managing outside counsel is working with lawyers whose approach to practice is compatible with my own. The easier it is for me to communicate my goals and expectations, the more effective all our efforts will be. I once worked on a financing project with a lawyer who approached negotiation as a fight to the death. Every sentence in every contract ignited a world war, which wasted time and money and made it harder for us to negotiate the truly important points. The energy and time I spent explaining to him how I wanted to approach things could have gone toward more substantive matters if he and I had been on the same page to begin with.

Compatibility isn’t everything, of course. Technical expertise matters too. But ever since that experience, I’ve sought outside counsel who are more in sync with my way of working; it’s always easier to find lawyers with good technical skills than ones with good communication skills.

The lawyers who have impressed me the most in my career, both at firms and in house, are the ones who have the ability to explain legal issues to nonlawyers without being condescending. As much as most lawyers love to talk, communicating well is still a rare skill. I can find 20 lawyers who understand the Rule Against Perpetuities faster than I could find one who knows how to explain that rule in a way nonlawyers can actually understand.

The Right Work

Once you’ve got the right firm in place, you need to be sure you use its resources effectively. This requires understanding what the firm can and can’t do well. The resources of most law firms are vast compared with those of a typical in-house legal department. Big firms, especially, can throw so much sheer volume at a project – whether in expertise, technology, information, or just bodies – that it’s tempting for in-house counsel to step back and let the firm do everything.

But the relationship between a general counsel and an outside firm should be like the one between a captain and a ship. The firm provides tremendous force and power, but the GC needs to be at the helm, steering and making sure that force points in the right direction. For matters that are huge or highly technical, access to the depth and breadth of a large firm’s resources can be invaluable, but outside firms are less suited to making decisions that depend on judgment and discretion.

The Endless Memo

When I started in one previous in-house position, my company was considering running some TV commercials. The lawyer I replaced had been concerned that the ads might be prohibited under a particular set of regulations and had asked one of our outside firms to look into the matter and make a recommendation. One of my first tasks was to review the 20-page memo the firm produced in response. Unfortunately, it contained about 3 pages of useful information cloaked in about 17 pages of mush. The memo did a good job of identifying the regulatory issues that might arise and describing the precedents for each issue. Then, instead of making a recommendation, the firm ended up repeating the same equivocating formula over and over: If you run the ads, you might have a regulatory problem; or you might not. The real problem was that we had asked the firm to make a decision we should have made ourselves.

It’s not that law firm lawyers have worse judgment than in-house lawyers. When it comes to making a decision for a company that is essentially subjective, however, in-house counsel are better positioned to make the right call because they have access to a broader range of information about the business. This gives them important context, and their risk-reward calculations will be more naturally aligned with that of the business. Of course, too much alignment can be a bad thing. But that’s a subject for another column.

Cost Controls

Once you’ve identified the right firm and the work it should do, controlling costs should be pretty straightforward. There are always some tasks you can’t anticipate, but managing outside counsel costs generally comes down to setting clear expectations and establishing a simple process to reinforce those expectations. Before I assign a project to a firm, I ask for a budget. If the budget seems appropriate, I have the firm promise to tell me if it later expects to exceed that amount and then send me an updated budget. And I ask it to hold off on any more work until I’ve approved the new budget.

This arrangement encourages the firm to prepare its budget and monitor its work more carefully; it also makes it more difficult for the firm to justify going over budget; and it makes my costs more predictable. Painful experience helped me develop this method for controlling costs: Both the war-of-attrition financing fiasco and the endless TV memo mentioned above forced me to pay a lot of money for work I hadn’t requested and didn’t need.

The nice thing about this overall approach is that each of the three aspects – finding a firm with the right fit; choosing the right work to send out; and setting clear expectations – reinforces the others. If you’re working with the right firm, it will be easy to identify the work it should do. And that will make it easier to manage your costs. Conversely, if you’re using the wrong firm, you’ll find it harder to make your expectations clear, and you’re more likely to end up surprised by the bills. Ultimately, though, all these factors point back to the quality of your communication with outside counsel: If you get that part right, you’ll find the rest of the relationship naturally falls into place.