Articles Posted in Non-Law Firm Costs

If you calculate your expected net return for an investment, be it dual monitors, document assembly, or databases, you should recognize the time-value of money by discounting costs and benefits for years in the future. Whereas many of your costs will be frontloaded in the first year or two, your benefits may accumulate for many years. Those later benefits need to be discounted to present value (See my post of March 26, 2006: economists’ terms of art; and Oct. 22, 2008: ROI with 17 references.).

The publicity about the offshore deal between CPA Global and Rio Tinto gushes, an ink river about Rio. This blog has poured out its share, but here is another small stream. The author of an article in Corp. Counsel, Vol. 16, Sept. 2009 at 60, wonders, “Should its [Rio Tinto’s] lawyers be concerned that the CPA deal could do them out of a job?” I was startled to read in the next paragraph that the architect of the massive deal, Rio Tinto’s managing attorney, emphatically denies that risk: “we will not cut legal jobs as a result of outsourcing … The team in India is there to support, not to replace.”

It seems clear to me that cheaper law-related services obtained from India and other locations will inevitably supplant some in-house lawyers. The clearest saving for a general counsel is to replace higher-cost talent with lower-cost, but acceptably skilled, talent (See my post of May 29, 2008: risk of job loss inside if work goes offshore.).

This observation gave me reason to update my posts on offshoring since the most recent metapost, in late June 2008. Amazingly, this blog has added 29 posts in the 13 months since then (See my post of Aug. 25, 2008: GE and its reversal of patent offshoring; Sept. 3, 2008: Microsoft savings from offshoring; Sept. 16, 2008 #4: “multi-shore” support; Nov. 30, 2008: not just savings, but also process and handoffs; Dec. 29, 2008 #4: Intel’s online auction for offshore support; Dec. 29, 2008: must law firms approve choice of offshore vendor; Dec. 29, 2008: profile of United Lex; Jan. 4, 2009: cost advantage of LPOs may be shrinking; Jan. 18, 2009: 15 blogs on offshoring; Jan. 22, 2009: 2005 survey on uses of offshore firms; Jan. 22, 2009: Gap and its offshore work; Feb. 5, 2009 #2: more blogs about offshoring; Feb. 7, 2009: 2% of legal work sent offshore; Feb. 12, 2009: modest penetration of offshore use in UK legal departments; Feb. 13, 2009 #3: two more advantages of offshoring; Feb. 18, 2009: should GCs insist that their firms offshore tasks; Feb. 22, 2009: professional certification for offshore personnel; Feb. 6, 2009 #3: South African LPO; March 15, 2009 #3: ISDA documentation done by Deutsche Bank; March 16, 2009: contract review project of Corplo; March 26, 2009: offshore decision analysis; May 3, 2009: my article on three major pluses and minuses of offshore services; May 19, 2008: gap between law firms and law departments in use of offshoring; May 21, 2009: 100 online resources about offshoring; June 15, 2009: if concerned about offshore security, use commonwealths; June 17, 2009: discussion of size of Indian LPO market; June 18, 2009: Rio Tinto deal with CPA Global; Aug. 4, 2009: heat map to determine what work can be sent offshore; and June 28, 2009: 10% of legal managers chose offshoring as a cost saving measure.).

The e-discovery niche, according to the ABA J., Vol. 95, Aug. 2009 at 29, is crowded with about 600 vendors. They are jostling for pieces of a large pie. George Socha, a consultant deeply involved in research about e-discovery vendors, projects that “[C]ommercial spending in this young niche is expected to increase this year by 20 percent to $4.05 billion.”

Stay with the $4 billion projection. If US law firms of the size to handle lawsuits that unleash significant e-discovery have revenue on the order of $100 billion (I think the AmLaw 100 brought in last year about the $82 billion) and we roughly attribute half of that revenue to litigation, then a tenth more goes to vendors of e-discovery software, hardware and services. My assumption is that the costs of e-discovery vendors are passed through to clients, mostly law departments.

What is unknown is the portion of e-discovery costs paid directly by legal departments as compared to paid through law firms as their disbursements.

Is there any incentive for corporations to turn to LPOs for such tasks as document reviews when you compare current Indian rates with the recent downward trend in rates domestically?

Fewer and fewer U.S reviews are being performed by the expensive big-firm associates. It is much more common — and a much fairer comparison — for reviews to be performed by some type of lower-cost staff or contract attorney. Even in big cities, contract attorneys can be hired from staffing agencies in the $50/hr range; slightly more if special languages or technical skills are needed. These same attorneys can often be hired directly in the $35/hr range, and (sadly) at even lower rates during this current recession. Craigslist postings reveal offers for U.S. contract attorneys for as low as $20/hr. While the figures are pretty guarded, Indian LPOs pay reviewers in the $15-$30/hr range.

It’s ironic that there’s now salary parity with their Indian counterparts.

It has interested me how the operating costs of legal departments differ from those of law firms. Some figures for law firms on that point come from Patrick McKenna’s MCK Int’l Rev., Spring 2009 at 11. www.patrickmcKenna.com

The largest expense for both departments and firms covers occupancy costs, which make up about one-third of total operating costs of law firms (excluding salaries and benefits). For law departments, the equivalent figure is on the order of ten percent of operating costs.

Professional development (CLE) accounts for about nine percent of the operating costs of a typical US law firm. I don’t know the corresponding legal department costs.

DiscoveryMetrics™, by Casewerx Development, focuses squarely on reducing a law department’s hemorrhage of expense in litigation — document review. Manny Guerrero, a Partner and co-founder of Casewerx, sent samples of a DiscoveryMetrics dashboard and from looking at his slides it appears to be a useful tool.

The dashboard shows productivity, quality and financial metrics for document review projects. Instead of using higher priced law firm associates, in-house counsel and outside counsel can audit the performance of (less expensive) contract attorneys or offshore lawyers conducting a document review. Regardless of the review platform being used, DiscoveryMetrics measures each contract attorney’s productivity and accuracy and can also provide insight into the types of errors reviewers are making. Users can also benchmark law firms and LPO providers against each other, and have actionable data on the quality and cost of service providers.

To be more accurate, these eight beliefs are not total inventions of sourcing heads. Some truth creeps in, as I have noted.

Myth 1: Legal departments don’t know how much they spend.

Fact: Most departments know their total domestic legal spending reasonably well, or as well as the accounting department knows it. Outside the headquarters country it is a different matter.

In three previous posts I listed a total of 27 energy-saving ideas (See my post of April 27, 2008: ten tips; Oct. 12, 2008: nine ideas; Nov. 9, 2008: three ideas; March 11, 2009: four more steps toward environmental preservation; and May 29, 2009: power strips and solar battery chargers.). To that assemblage, I commend six more from Law Practice, Vol. 35, July/Aug. 2009 at 9 (marked with “LP”). You can learn more about these steps at the website. www.abanet.org/environ/climatechallenge/home.shtml

1. Find out and understand your “carbon footprint”
2. Collect and recycle used batteries

A long article about management initiatives in the legal group at Rio Tinto, in Legal Strat. Rev., Summer 2009 at 13, describes a service provider’s tool called a “legal heat map.” The provider, CPA Global, a major LPO company, developed the heat map “to help it identify and filter legal work that would have been managed by internal lawyers or outside counsel but could instead by sent to the Indian team [of CPA Global]” (See my post of Aug. 3, 2009: Rio Tinto’s managing attorney and references cited to the company.).

The goal of the heat map was to flush out low-level work – “the sort of work that isn’t important enough to send to an external firm, but builds up on a day-to-day basis so that when the more strategic and rewarding work comes in, staff are too busy to take it on.” The tool of CPA Global sounds self-serving, but the construct it implies makes sense. Unusual, specialized assignments should go to outside counsel; core legal advice should stay with inside attorneys; and routine, commoditized work can go offshore or to alternative providers.

A recent article lambastes commercial arbitrations on the basis of their sometime costs. Writing in the NYSBA J., Vol. 81, July/Aug. 2009 at 30, Ronald Offenkrantz describes the unregulated and often unfettered charges of arbitrators. Various organizations set some rules for their arbitrator members, such as the AAA Commercial Rules or those of the American Health Lawyers Association, JAMS Resolution Centers (JAMS) or the International Chamber of Commerce but arbitral fees can shock clients. In a footnote, Offenkrantz mentions a study by Public Citizen, Cost of Arbitration: Executive Summary (May 1, 2002)(“[a]rbitration costs will probably always be higher than court costs.”).

I am sure there are two sides to this dispute. Granting that point, the advantages of alternative dispute resolution are touted much more than the disadvantages, such as the potential cost (See my post of Jan. 16, 2008: arbitration with 14 references.).