Articles Posted in Non-Law Firm Costs

Chock full of numbers, history, and specifics, an article in the ABA J., Sept. 2010 at 42, covers many of the entrepreneurs, and the investors who fund them, who are eating away at law firms’ hegemony. Law departments that don’t shake off the dead hand of tradition will lag those who benefit from the parallel legal services movement.

For example, I was astounded to read about Mindcrest, Inc., and its founder CEO Ganesh Natarajan, who has grown the legal process outsourcing company since 2001 to “700 lawyers in the U.S. and India.” Seven hundred lawyers! And Mindcrest, mind you, has a handful of comparable LPO providers.

What can’t such armadas of hungry legal talent do? The article mentions that legal research was Mindcrest’s modest first target, but in 2007 it started embellishing Bloomberg Law, and to do so sold a minority stake for $4 million to Talon Asset Management. Among their more recent scope of projects they now assist companies with reviewing garnishment orders. Natarajan sees numerous corporate processes that have a legal component. The entire field of legal services lies within their sights.

One of my benchmark participants asked how common is to include in the general counsel’s budget costs for SEC filing fees for 10-Qs and 10-Ks, registration fees for the New York Stock Exchange, or costs for third-party vendors that supply web-based compliance training? A significant chunk of that company’s internal spending consists of the above items.

I welcome comments here or by email regarding how other legal departments treat these costs, but will offer my own, partial sense.

My supposition is that legal departments do pay for the costs of filing annual reports, quarterly reports and other reports with the SEC. The amounts charged are unknown to me.

It bedevils me that so much is written about the incredible costs of electronic discovery, yet little empirical research publicly available helps us get behind the headlines to the fine print of reality.

Even so, I have written quite a few posts about those costs, not ones I know well but which oppress general counsel, and still see little illumination in the inky darkness (See my post of Jan. 16, 2009: LPO activities devoted to discovery as a percentage of all activities; Feb. 7, 2009: do companies settle too early because of fearsome e-discovery costs; Feb. 13, 2009 #1: costs of translations in discovery; April 9, 2009: empirical research on a discovery cost model; Aug. 31, 2009: $4 billion projection of e-discovery spend; Oct. 24, 2009: component pricing at J&J; Dec. 1, 2009: more than $60 billion spent by US corporations; Dec. 9, 2008: controversy over temps who do review work; April 23, 2010: suggestion that the government collect data on e-discovery; July 14, 2010: major cost increases predicted; and Aug. 19, 2010: estimate of e-discovery market in US.).

I culled the ideas, and much of the phrasing, of what follows from an email message dated Aug. 16th from ValueNotes. In the last four to five years, the Philippines has emerged as a leading LPO destination, second only to India. LPO vendors from India are setting up centers in the Philippines to provide legal services to law firms in the United States, the United Kingdom and Canada, including Integreon, SPi, ACT Litigation Services, and Adec Solutions.

Local LPOs have also emerged, including LPO Manila Inc, LegalNetwork Philippines, and K&C LPO Services (See my post of June 17, 2009: observation that the Philippines only has 50,000 registered lawyers; and Sept. 18, 2006: DuPont’s use of 30 Filipino attorneys.).

The 2010 Socha-Gelbmann Electronic Discovery Survey estimates the value of the electronic data discovery (EDD) “market in 2009 to have been about $2.8 billion, up about 10% from 2008.” The quote comes from Law Tech. News, Aug. 2010 at 1.

If total spending on outside counsel in 2009 by US companies was on the order of $100 billion (See my post of July 16, 2009: four estimates of spending on law firms in the US.), then e-discovery spending on vendors would account for something like three percent of that spending. That is nothing like the near-60 percent of spending tossed around in comments about total EDD spending (See my post of Oct. 24, 2007: cascade of 60% for components of legal spending, including discovery).

Manifestly and expensively, the amount that law firms charge for discovery work by their staff may close the gap to reach 60 percent of external spend by law departments in litigation, but at least we now have a responsible estimate for the discovery-related expenses of vendors.

Disclaimer: I compete with Huron Consulting Group.

Huron recently announced its IMPACT™ solution, which “can save our clients anywhere from 15 to 40 percent – directly improving their bottom line.” It rubs me the wrong way to read such a claim. Savings of that magnitude are not just lying around awaiting the magic wand of consultants.

The press release says that the “solution evaluates cost control methods in a systematic and data driven way, focusing on the following key cost areas:

Sharp Legal Brands – Global Elite (2009) from Acritas at 44, delves into attitudes of law departments toward their law firms outsourcing some tasks. One of the choices was “outsourcing standardized or commoditized legal processes to companies in emerging economies such as India.” Given three choices to indicate their attitude toward that move, twice as many law departments were negative than were positive. More than 400 companies weighed in on this particular question.

In light of all the press about offshoring in recent years, such antipathy strikes me as strange. The report offers no further thoughts but as I see it, I am confident the movement offshore will continue to grow.

Yesterday, SAI Global Limited announced that it has entered into an agreement to acquire Integrity Interactive, a leading Compliance and Ethics solutions provider, subject to US regulatory approval. Hats off to Jeff Kaplan of Kaplan Walker for alerting me to this.

Among the big four companies in the market for online compliance training – Integrity Interactive, LRN, SAI Global, and Corpedia, this merger will shake things up (See my post of June 11, 2008: compliance with 33 references; and Jan. 20, 2009: reporting lines of compliance function with 11 references.).

Several posts since the most recent of those two metaposts have to do with reporting lines (See my post of May 15, 2009; a clear explanation of a chief compliance officer’s mandate; May 21, 2009: law and compliance overlap and need role clarification according to 2005 EY study; July 23, 2009: compliance groups in legal departments and decentralized through the company; Feb. 16, 2010 #4: reporting lines of compliance officers in the UK; July 6, 2010: a regulator’s view on compliance reporting; May 19, 2009: 2005 study of corporate regulatory compliance practices, including reporting lines; and Sept. 5, 2009 #3: reporting lines of the CCO under the Federal Sentencing Guidelines;

An article in MIT Sloan Mgt. Rev., Summer 2010 at 17, describes three broad buckets of IT expenditures: operations (day-to-day taking care of business), process improvement (bigger projects to add capabilities), and innovation (new initiatives and major changes). Executives interviewed for the research covered by the article said that spending should be about a third for each, but in actuality the spending is weighted much more toward operational plumbing and maintenance plus a chunk toward project improvement and not much for innovation.

What if we assigned the spending of typical legal departments to the same buckets – investments of time and money? Getting agreements done and basic legal advice constitutes what part of the expenditure? Enhancements to processes, such as new litigation-hold policies or wider levels of authorization of invoices, account for what? And can any legal department claim that innovation in terms of legal service delivery or management accounts for a third of its budget? A wholesale convergence effort, an aggressive RFP process, a genuine commitment to offshoring, implementation of e-billing: these and comparable innovations do not account for anywhere near one-third of a legal department’s energy. They are rare.

A distribution of 70 percent operations, 25 percent process enhancement, and five percent innovation would mark a legal department as very progressive.

Consider this ravening projection of e-discovery costs. In KMWorld, July/Aug. 2010 at 6, “Gartner [the research group] … reported that e-discovery vendor revenue grew 30 percent in 2008, and predicts an annual growth rate of 21 percent through 2013.” Let’s assume that most of “e-discovery vendor revenue” eventually means “law department expenditure.” If litigation accounts for approximately 60 percent of external spend by legal departments and if e-discovery costs comprise, say, one quarter of that, then the Gartner prediction foresees a 20 percent increase each year in that component. That would work out to be a nine percent increase in external spend each year.

For a law department with 10 attorneys and a total legal budget of $4 million inside and $6 million outside, the annual extra burden of e-discovery would be just above $500,000 (9% of $6MM). If that is the general pace, many general counsel will go crazy trying to balance the legal budget.