Articles Posted in Non-Law Firm Costs

A provider of software technology to legal departments, Marcus Linden of LexisNexis, writes in Met. Corp. Counsel, Vol. 17, Sept. 2009 at 22, that after outside counsel expenses, “The next two largest drivers are salaries for in-house staff and technology costs.” He is correct about compensation-related costs dominating in-house budgets – an estimated 75 percent of the budget. But facilities costs for law departments that are assessed them are likely to be larger than technology costs.

Perhaps over a multiple-year period this might not hold, because in one year a department might invest hundreds of thousands of dollars in a matter management system and associated costs. But year-to-year, when only maintenance and depreciation come due, the imputed rental costs of a legal department are higher (See my post of Feb. 25, 2009: data of $17,000 per year per lawyer for facilities costs.).

Actually, I do not know enough about depreciation charges for technology hardware or how commonly legal departments absorb those charges in their budgets. But my guess is that Linden is not talking about technology depreciation either.

Despite having written fulsomely about fully-loaded costs per hour of inside lawyers, I have not explicitly recognized two areas where those costs cannot be compared to the effective billing rates of outside counsel.

Law departments piggy-back on technology infrastructure, such as backup, local area networks, email, document management, intranets, bulk purchase rates and the people and costs associated with all of them. They may, however, escape some of the costs of that technology backbone (See my post of June 16, 2009: Information Technology staff group with 23 references and 1 metapost.). Law firms, by contrast, bear those kinds of costs and cover them in their hourly billing rates.

Likewise, some amount of personnel costs in a company fall to the Human Resources group, not to the law department. Those expenses such as for maintaining job postings, calculations of bonuses, oversight of the 401K plan, answering questions about benefits, vacation tracking, and many more may fall in the HR budget and not be allocated out (See my post of June 14, 2009: HR departments with 16 references and 3 metaposts.). The law department does not see those costs, at least to some degree, whereas a law firm has to staff for them, pay for them, and charge enough to cover them.

Research by the General Counsel Roundtable published in 2001 (based on 1999 data) found that “legal departments with a business manager pay, on average, hourly rates 9% lower than departments without a business manager.” This could well be a research conclusion where confounding or correlated variables undermine the reliability of the study. For example, savvy and aggressive legal departments may be more likely to hire a fee manager, so the savings may be attributed to many other efforts than that person’s.

Still, if a business manager attends to outside counsel costs and has some ability to influence the retention, management, guidelines, and payment, almost certainly there will be savings. During the ten years since this research took place, some of the low-hanging fruit in the orchard of cost control may have been plucked, but more remains (See my post of Feb.13, 2008 administrators, office managers with 21 references.).

According to the US Department of Energy, cited in an ad from Fortune, Vol. 160, Sept. 28, 2009 at 55, “lighting is by far the largest user of electricity in commercial buildings. It consumes 38% of the total – more than space heating, cooling, ventilation, equipment, and computers combined.” (emphasis in original).

The ad by Lutron recommends the installation of dimmers, which “can easily reduce lighting electricity by 20%.” Add occupancy sensors and you can cut energy consumption by an additional 35 percent. Daylight controls go even farther.

A further benefit for a legal department that invests in or encourages dimmed lights is that the air stays cooler without air conditioning. “As a rule of thumb, cooling usage is reduced by one watt for each three watts of lighting that are cut.” The article mentions additional benefits from sophisticated lighting systems, such as morale and productivity.

Richard Hennity, a senior lawyer from HSBC, spoke at the Legal Week Corporate Counsel Forum last week. HSBC, with 850 lawyers and 1350 legal staff, has for three years run a six-lawyer offshore program in Malaysia (See my post of April 13, 2008: pilot program of HSBC with Malaysian branch legal support.). An ex pat lawyer looks after the Malaysian legal group.

The team responds to written questions from the bank’s branches about legal questions, typically overnight. Hennity explained that the geographic dispersion of the bank makes it difficult to achieve enough work of any particular kind to sustain more of an offshoring program. In his words, “there is a lack of economies of scale.”

Hennity also mentioned that Deutsche Bank had outsourced work to an Indian LPO organization in the area of Treasury documents, but quality problems pushed them to recall the work to low-cost Birmingham, England. Hennity made the good point that offshoring to India doesn’t save much if the work comes from low-cost locations, only from high-cost countries.

Leah Cooper, the global managing attorney for Rio Tinto, spoke at the Legal Week Corporate Counsel Forum last week. Her remarks added nuance to what I have written previously about the company and its ground-breaking arrangement with CPA Global (See my post of June 4, 2007: 50 lawyers worldwide for Rio Tinto and decentralized reporting; May 4, 2009: 100-year relationship with major firm; June 18, 2009: describes offshoring arrangement and annual £60 million external legal bill; Aug. 3, 2009: Cooper’s role; Aug. 4, 2009: heat map used by CPA Global; and Sept. 1, 2009: deal will support, not replace, in-house attorneys.).

Cooper said that the litmus test is “if it can go to a paralegal, it can go to India.” Having started on May 1st, to date the law department has sent 120 projects to India, of which 46 would otherwise have gone to a law firm and 74 would have been done inside. She estimates the savings at $4 million.

The department measures the quality of each project on a scale of 1 to 10; the average rating is in the 7-8 range and any project below that gets scrutinized.

A speaker at the Legal Week Corporate Counsel Forum this past week was from BAT (British American Tobacco). He mentioned two side benefits from using a legal process offshoring vendor. One was that if routine, commodity chores go to the offshore provider, the workday ennui of the law department’s lawyers lessens. They don’t face in the same amount the unpleasant task of slogging through uninteresting work.

As a second benefit, he explained that law departments sometimes have trouble obtaining funding for technology projects. If the arrangement with the LPO includes the development of a database, for example, the law department can obtained its technology without wrestling with internal requirements and IT.

A recent article clearly states how offshoring could help almost any legal department that has responsibility for a large number of contracts. Written by two Mindcrest principles, the article describes how they helped restore order to a large number of contracts and agreements governing properties a client managed.

The client and the unnamed LPO company designed a contract review assignment. Pursuant to it, the offshore provider’s staff (1) summarized, categorized and abstracted the contracts; (2) created and filled in a contract tracking database; (3) reviewed the contracts for compliance and due diligence; (4) finished some of the contracts so they could be signed; and (5) at times dealt with other parties based on client-approved terms. Those tasks sound spot on for many law departments.

Previous posts about ROI calculation noted the time value of money and some of the complex factors affecting benefits. Nailing down the costs is no less complex, according to guest author Steven Levy. A valid ROI calculation includes the following factors on the cost side:

1. All ROI calculations should include a pessimistic schedule as well as an expected schedule. Note that for the pessimistic schedule, development costs continue unabated monthly through the extended period needed to deliver the solution.

2. Costs generally should not be adjusted for inflation in future years; the object is to express the full ROI in present-day (constant) dollars. The overall discount rate/time value of money applied to benefits is the right adjustment.

A valid ROI calculation, according to guest author Steven Levy, includes the following factors on the benefits side:

1. Time value of money, usually at the corporate internal discount rate (often ~10%/year).

1. Assignment of returns to the proper fiscal period. You don’t start receiving returns until after the system is deployed, which means discounting for the time value of money.