Internal Investigations Blog

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Paradigm Shift for Investigations and Their Costs?

The law generally moves at a glacial pace. It took the U.S. Supreme Court roughly 235 years to determine in Heller and McDonald that the Second Amendment says that individuals can keep and bear arms. That’s a long time to confirm that written words – when given their ordinary meaning as required for statutory interpretation – mean what they say. Change to the practice of law frequently comes at a similar pace, although that is being altered with respect to the engagement and payment of outside counsel by corporate lawyers. This could spur an important alteration of the template for internal investigations.

Catherine Dunn over at Corporate Counsel recently penned a very interesting article entitled “Can Outside Firms Get Over the Discount Mentality?” that focused on the pitfalls of outside firms discounting their fees as a means of pleasing corporate clients and retaining business. With the economic pinch being felt across all sectors of the economy, the boom years for legal billing have reached their end. At a law school conference in North Carolina recently, General Counsel Jim Strother of Wells Fargo told Reuters that after a company review of expenses, it expect[s] to have a meaningful reduction in outside counsel expense.”

According to the article, Legal Executive Leadership CEO Susan Hackett has some tough love for law firms left wondering how they’ll make do with like-minded clients. She disapproves of their “discount mentality” of doing business that compels them to convince themselves that a client’s reduction in legal spend[ing] is a one-time occurrence and dealing with the situation not by making lasting changes but by deciding to suck it up, offer a discount on hourly billing rates, and take a hit ‘ to revenues.

This is wrong to Hackett, because the cuts are here to stay. As a result, these are really discount requests, but a message about “creating a business model that gets more nimble and more effective every year, as opposed to assuming that next year, maybe [there] won’t [be such] cuts.” Otherwise, unless an outside law firm can afford to take a hit every year, it’s won’t survive.”

As Dunn points out, these cuts are being and will continue to be made because corporate legal departments have schooled themselves in their options. Many are willing to jettison exclusive arrangements with “legacy-relationship firms,” in favor of firms that “are able to offer them better service for better price,” according to Hackett. They can also outsource tasks to a growing number of alternative legal services providers and/or can in-source, by hiring more on-staff attorneys to do the work.

General counsel are also more likely now to be aware of the true value of farmed-out work. Brian Lee, a managing director at CEB, a global corporate consultancy, says that his firm is “seeing more general counsel use metrics and big data with regard to not only how much outside counsel cost, but also potentially the ways in which they use them.”

How might – or should – this impact internal investigations?

By all accounts, internal probes – whether conducted in-house or by outside counsel – aspire to be unbiased fact-finding missions. Indeed, the need for the perception – if not the actuality – of independence is the prime mover behind the growth of corporate investigations as a big-money practice area among the mega-firms. But law firms in this niche seem to be selected not only for their investigative expertise, but also for their contacts and negotiating abilities with the DOJ, SEC, or other agencies. Hence, the predominance of big-firm heavy-weights with AUSA bona fides in this practice area.

For the sakes of accuracy, economy, and holding true to the aims of the U. S. Sentencing Guidelines, consider an alternative universe where the GC’s office drives the investigation bus from start to finish. In such a world, corporate law departments would:

• identify and triage all incidents giving rise to investigations;
• determine which to handle in-house – either by lawyers, security people, HR staffers, or others – and which to farm to outside counsel;
• preliminarily scope investigations projects;
• vet and engage suitable external counsels, provide them with liaisons and access to the company as needed, and then give them carte blanche to do their thing;
• interact with investigators, re-scope probes as necessary, and monitor progress throughout their terms;
• receive the investigative report and determine next steps; and
• self-report to the government as necessary and negotiate – alone or with litigation counsel – an enforcement resolution to the problem.

Doing so would not only bolster the true independence and credibility of investigations in the eyes of government agencies, but it would also improve corporate efficiencies in relation to the same. The taking of more active pre- and post-investigation roles by corporate legal departments would reduce the involvement of outside counsel in matters not strictly investigative, and thereby save money in line with the desires of management.

Further, this would spur investigations projects that are smaller in scope at the beginning and expanded – only if necessary – when developments mandate the same. This would likely result in the retention and use of smaller investigative teams at the outset and the realization of savings consistent with that economy. Costs would grow only as the inquiries broadened, thereby improving budget management. By way of analogy, instead of sending the U.S. Army to reconnoiter every problem, the GC’s office would send a SEAL Team that can do the same work while always retaining the option of calling in reinforcements.  This, too, would increase efficiency and improve the bottom line.

Just something to think about while tightening the old corporate belt.

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