Articles Posted in Non-Law Firm Costs

Nestlé, with 250 lawyers worldwide, “has a matrix of legal departments covering 52 countries,” according to the Financial Times report, “Innovative Lawyers 2009,” dated Oct. 23, 2009 at 33. The report says that the legal team “has set up centres of skill and scale, where premium, specialist work is carried out in the former and repeatable work done in the latter.” Its group general counsel, Hans Peter Frick, describes the effect as “outsourcing across its own network.” He points out that “it is difficult to beat legal work done in Barcelona for €130 an hour.”

The economics and labor arbitrage make sense, but three deductions follow. First, Nestlé doesn’t pay all of its lawyers at the same level, or there would not be such a differential as the Barcelona quote implies. Second, some lawyers must recognize that they are doing the grunt work of repeatable processes and that must dampen engagement and recruiting. Third, someone has to categorize work at the start to shunt it to one stream or the other.

A report from BNA, HR Department Benchmarks and Analysis 2008, pronounced that “Outsourcing of HR functions has become a widespread practice. Three out of four employers have outsourced one or more HR activities. The single most important motivation for HR outsourcing is access to greater expertise, although for the largest organizations, cost savings is the most important factor.”

General counsel primarily outsource work to law firms for expertise; they offshore work generally for cost savings; and they unbundle services for the combination of cost, expertise, and efficiency (See my post of April 11, 2009: services of law firms that can be separated out with 12 references and one metapost.). Different goals for each technique, I propose.

An article in Met. Corp. Counsel, Vol. 17, Dec. 2009 at 28, covers the usual points about an Indian-based legal process outsourcer. The particular company is Bodhi Global Services, yet even so the interview of its CEO, Arihant Patni,turns up a few points that stood out for me.

One point is that the firm is backed by AZB & Partners, one “of the largest law firms in India with almost 300 attorneys across three cities.” The other backer is the Patni Family, “a well established IT group in India” with revenue approaching $1 billion. “The idea behind Bodhi Global is to create an amalgamation of law and technology.”

A second point is that “Bodhi Global was one of the first LPOs in India to receive an ISO 27001 certificate, an international data security standard that helps us identify, control and minimize a vast array of threats to which digital information is regularly subject” (See my post of Nov. 25, 2009 #4: ISO 9001 certification of an LPO; and April 28, 2009: ISO and other certifications in the legal industry.).

An article in LTN Law Tech. News, Vol. 16, Dec. 2009 at 47, describes some of the various efforts of “the light bulb guy.” He is Alexander Tait at the Sonnenschein law firm atait@sonnenschein.com and he writes engagingly about his crusade to reduce the amount of power the 700-lawyer firm consumes. Since I have already collected quite a few conservation tips, here are four so far unmentioned. Every legal department could do some of these simple steps (See my post of March 11, 2009: conservation for law departments with 7 references.).

1. Save the coffee grinds in containers and let people take them home for composting.
2. Reprogram lights controlled by the building to provide only emergency lighting after 6 pm. That simple expedient saves Sonnenschein $10,000 a year.

Hildebrandt, a unit of Thomson Reuters, released some data on cost control strategies from its 2009 Law Department Survey. Not exactly bold steps taken by general counsel.

Reducing travel expenditures tops the list of 18 measures tracked in the survey as the most

widely implemented cost savings strategy among law departments. Some 82 percent of the companies reporting indicated that they have reduced or will reduce the travel budget for the law department. An additional 8 percent are considering this strategy. Even with the economic crisis, 10 percent have no plans to reduce their travel budget.

Procurement professionals may chafe at legal budgets: huge, scattered and opaque, wide variability, ad hoc decisions on retentions of firms, abysmal metrics, and generally a deplorable lack of discipline. Other than that, what legal spends conforms perfectly to model sourcing stratagems.

But if sourcing experts step onto the field of legal spend, they have to play nicely with the lawyers. A fixation on raw numbers about matters, firms, dollars, and time and single-minded pursuit of the lowest cost per specifications do not a sensible cost program make.

I am not trying to be an apologist for general counsel, but the practice of law at the level of sophisticated corporations does not reduce to unit prices, CAGR calculations, immutable metrics, and fungible firms. Rather, to bring more fiscal discipline to legal spending, procurement staff need to marry their strengths with the professional skills and demands of lawyers. Without collaboration, purchasing’s intervention is doomed (See my post of March 1, 2008: procurement with 17 references.).

“It’s a range [of damages] of about 5 percent, one standard deviation from the mean.” That statement comes from Jeff Carr, FMC’s general counsel, whose database of litigation outcomes shows how consistently outcomes converge around a similar amount. The quote comes from Litigation 2009, Fall 2009 at 101.

It is quibbling to point out that one standard deviation on either side of a mean (average) covers about 66 percent of the figures in a standard distribution, which is much wider than five percent. Even so, assume Carr is basically correct that for most legal departments, their litigated matters end up in a relatively narrow band of payouts (See my post of Dec. 17, 2008: settlements with 26 references cited.).

If Carr is right, the bounded range of most resolutions should allow more fixed fees because the variance risk is relatively small and the data can be incorporated in the formula for the fee. Bonus arrangements ought to be easier to arrive at because outcomes don’t splatter all over. An outcome, then, can be assessed against norms. Litigation strategy, including the use of decision trees and early case assessment, ought to become somewhat more science than art. And, finally, benchmark metrics on litigation resolutions ought to be more available, since the distribution is tighter than one might otherwise expect and therefore not so confidential.

In 2005 there were approximately twenty offshore legal-service providers, according to David Galbenski, Unbound: How Entrepreneurship is Dramatically Transforming Legal Services Today (2009) at 138. “Two years later, in the spring of 2007, there were sixty legal-service companies ready to perform legal outsourcing work. Today, there are over one hundred providers” (See my post of Oct. 25 2009: questions an estimate of $4 billion for the industry.).

Later, the book explains that the National Association of Legal Outsourcing Companies held its first meeting in July 2007 for its 33 Indian LPO founders (at 158). The author describes the nascent group’s background and adds that “over fifty companies have since joined.” I found no website for the organization. A shakeout has probably stopped its growth and indeed thinned the herd, so perhaps the Association has withered.

“America’s 1,000 largest corporations spend more than $60 billion, or 50 percent of their total legal operating budgets on average, to prepare documents for litigation, which is the single largest legal operating expense for most corporations. The growth of electronically stored information, which is the key driver of this expense, is rising rapidly. It’s as much as 60 percent annually according to one study. At this rate, $60 billion will become more than $500 billion dollars in five years, absent a change in the rules or the way this work is done. That’s unsustainable.” Catch your breath, grab your wallet, but bring out the calculator.

Raymond Bayley, CEO of Novus Law, offered these shockers in Met. Corp. Counsel, Vol. 17, Nov. 2009 at 47. Dubious, I asked him about their source and he wrote back:

They are “estimates based on aggregating and cross referencing data from several sources, including the 2008 Fortune 1000 list, American Lawyer analysis/description of the Am Law 200, Altman Weil surveys, several miscellaneous industry articles (e.g., Mark Chandler at Cisco purports to spend 60 basis points of revenue on legal operating costs), work of process and quality management professionals (e.g., Michael George), and our own analysis and experience. In other words, not a terribly straight forward calculation, but one that is understandable, reasonable and in the ball park.” Readers, what do you think?

Marshall Grossman, a partner at Bingham McCutcheon, is quoted in Litigation 2009, Fall 2009 at 30. He perceives that clients in these malignant economic times may be more reluctant to start lawsuits because of the expense. But, if sued “they are much more anxious to litigate and defer settlement consideration until the last minute. That’s because they generally believe that it is more cost-effective … to litigate rather than use their resources to settle the case.”

When interest rates slump near zero, how can bleeding litigation and discovery costs make fiscal sense? Maybe a company with cash flow problems would rather pay law firms and stretch out cases, but most companies should strive to find a fair settlement and be done with it.

If Grossman’s perception is true, early case assessment would be a joke and cycle time reduction wrongheaded. If true that clients would rather spend on litigation fees than consider settlement, budgets of legal departments would engorge. If he’s right, how can a CEO hold a general counsel responsible for a legal budget over-mastered by CFOs and business considerations?