Articles Posted in Non-Law Firm Costs

An interview of Jerry Okarma, General Counsel of Johnson Controls, quotes him on recent efforts to reduce costs “including making absolutely sure that the investment in legal support needs to be made, and made now. Costs and expenses that can be delayed or deferred have been, and we’re much more cognizant of assigning the right level of resource to the task at hand, whether that be an in-house our outside attorney.”

Okarma continues to make an important, related point, one that looks to a future when cost control becomes less exigent.

“The challenge is to make these changes permanent, so we impact the spend into the future, and are not tempted to revert back to the way we did things before the recession.” The quote, from Law360, May 4, 2010 reminds us that costs, like pounds, creep back up. With outside counsel, for example, the price of feedom is eternal vigilance. Beyond that atrocious pun, you can take at least four steps to keep the belt tight:

Vendors produce sparkling accounts of how their software or service reaps huge benefits, quickly. They have wonderful ROI calculations, in other words, not to mention persuasive charts and figures. But, take it all with a shaker of salt.

Even so, it is smart to work jointly with a vendor to let them help you craft what you view to be a measured calculation of the benefit to be gained by a proposed investment. You can use some help to clear the hurdles set by finance (See my post of Oct. 22, 2008: ROI with 17 references.). Vendors will oblige

In the latest issue of Met. Corp. Counsel, April 2010 at 21, two authors from a software vendor make three suggestions for law departments to consider when they check vendor references. The first two apply equally to references from law firms.

1. “[C]reate a list of questions to ask references, because it is often hard to get a second conversation.” Also because you want to have thought through the information you seek before you pick up the phone and call. (See my post of Sept. 21, 2005: vendor references to clients; and June 4, 2008: general counsel need to give vendor references.).
2. “[I]nform the vendor about the types of companies with whom you want to speak. Ask for peers within companies and provide the vendor with a list or your trusted outside counsel to see if any are their clients.” Whenever you choose a service provider, you have a right to request specific types and numbers of references (See my post of Feb. 6, 2007: troubling thought about references given by legal departments; Nov. 11, 2007: different viewpoints on disclosure of most-used firms; and Nov. 17, 2008: thoughts on references given.)

The legal team at Barclays has swollen to 800 lawyers, according to Corp. Counsel, April 2010 at 20, but even as grand as that it feels pinched for resources. When I read that, I rummaged for earlier posts about the huge bank, and found plenty (See my post of April 18, 2005: 37 firms on its panel; April 18, 2005: Mark Harding’s belief that European general counsel were more commonly managing legal risk; Oct. 17, 2005: praised for its technology; Dec. 9, 2005 #1: Chief Operating Officer for 600-strong group; April 18, 2005: lawyers in 17 countries; May 27, 2007: demanded metrics from firms regarding gender and ethnic demographics; Jan. 28, 2008: gave up on rebates because of administrative hassle; and Aug. 11, 2009: litigation partner came aboard as secondee.).

Obviously, Mark Harding’s legal department actively and creatively manages many aspects of its operations. A new step, described in the article by another lawyer, was that in a recent lawsuit “we hired our own temporary paralegals for nine to 12 months.” They worked well, according to the lawyer, with the law firm that represented the bank.

Tucked into a list of 70 points on a checklist for outside counsel guidelines, published by the ACC Docket, March 2010 at 48-49, is the cautiously worded number 67: “Consider prohibiting your legal department’s responsibility for third-party invoices.” The author presumably would not have even mentioned the problem unless he believes that sometimes, after due consideration, a general counsel should absolve the department of responsibility to pay third-parties who have agreed to do something, such as for a law firm that billed the firm’s client (the general counsel). I guess that is the thrust of the “think about” point and the potential risk.

A law firm that represents you is your agent, and if your agent agrees to pay some third-party for a product or service, it seems to this lawyer manqué that you are legally bound. If you prohibit that possibility, your law firms might reasonably insist that all third parties they retain, such as car services, photocopy shops, messengers, temp agencies, and on an on either run a risk of non-payment or enter into contracts directly with you. What a waste. What am I missing about this mysterious prohibition?

Asked about Procurement’s involvement with his legal department, a speaker at an Ark Conference last week recalled very little interaction or pressure for Procurement to step in. “They think we have a good handle on legal spend so they leave us alone.” If your legal team can explain its spend and show command of cost-control measures, the sourcing gurus may leave you alone.

Second, the speaker continued, “Procurement staff helped us competitively bid for the services of six ancillary vendors, not law firms, such as court reporting, e-discovery and duplication.” He spoke well of their ability to prepare RFPs, field calls from proposers and hammer down costs. The mindset and capabilities of purchasing groups fit better with vendors than with law firms.

It seems plausible to me that when an inside lawyer has to orchestrate several firms and vendors on a project – create a virtual team – that lawyer would have bandwidth to manage fewer cases than a counterpart who hires a firm to do it all (See my post of Jan. 10, 2010: a virtual firm for Pfizer; and Aug. 10, 2007: virtual firms with 6 references.).

A speaker at a recent Ark conference suggested that the constraint is not so much the managerial ability of the inside lawyer nor the number of firms or providers managed but the characteristics of the entities. Good ones collaborate well, understand and accept their roles, and minimize managerial demands. The extra burden that you might expect may barely happen.

An email from UnitedLex (Kristie Kushner) brought to my attention a recent development that involves both a major legal department and a major LPO provider. I normally find little value in press releases but this one seems of the magnitude to deserve mention. I shortened the email but preserved portions of its wording.

Five years ago, BT, a Fortune Global 500 company that operates in 170 countries created an in-house, offshore legal unit in India. Recently BT chose UnitedLex is to take over that group.

The email cites UnitedLex’s application of six sigma concepts “that enable UnitedLex to standardize processes and reduce risks.” David Eveleigh, General Counsel for BT Global Services, praises the arrangement.

Data in a paper by Prof. Michele Beardslee, presented at the Georgetown Conference on the Future of Law Firms at 19, reports on the salaries of 46 general counsel and the total compensation of 39 general counsel. The paper cites Execucomp as the source of its data.

In 2006, the median salary of those general counsel was $420,000. Dwarfing that figure was their median total compensation of $2,208,000. It is questionable to calculate with medians, let alone when the populations are somewhat different, but roughly speaking it appears that total comp was five times larger than salary. At the 75th percentile the comparable difference was $517,000 to $3,099,000, which is somewhat more than five to one and at the 25th percentile the comparable difference was $356,000 to $1,287,000, or a tad less than four to one.).

From this back of the envelope glimpse, beyond their not-too-shabby salaries, these general counsel must have received handsome cash bonuses and Midas-level grants of options, restricted stock and other financial perquisites. For every dollar of salary, their incentive packages added about four dollars.

When you buy bonds of a company, you can buy a swap from an investor who agrees to pay you a certain amount if the bond issuer defaults. Why not, then, buy a swap from an investor who agrees to pay you a certain amount if the damages awarded against your company or the settlement approved by your company exceeds a certain amount. The catastrophe is the major adverse outcome of litigation (See my post of Dec. 4, 2005: catastrophe modeling; April 26, 2006: calculations of litigation catastrophe odds; and March 6, 2009: speculation by me on catastrophe bonds.).

Further, someone who is not a party to the lawsuit might speculate on the outcome, rather than hedge the outcome. Litigation loss swaps may be coming to a hedge fund near you!