Articles Posted in Non-Law Firm Costs

In Met. Corp. Counsel, March 2012 at 16, an FTI consultant mike.kinnaman@fticonsulting.com shares some findings from FTI’s interviews last fall with 31 in-house counsel. The topic was e-discovery and the participants were primarily from huge U.S. companies. He writes, “In spite of greater emphasis and attention on e-discovery, corporations still don’t have a concrete understanding of how much they spend year over year.” The consultant was also surprised that “most participants don’t yet have a line-item tracking system for all expense areas [of e-discovery].”

Others have bewailed the same omission (See my post of Dec. 30, 2011: absence of tracked data on e-discovery attributed to smallness of companies.). It is quite understandable why law departments do not pin down e-discovery expenses. It is a sufficient spur that those costs are exorbitant; no need to weigh an elephant to know it eats a lot. The perceived benefits of granular numbers don’t outweigh the costs to collect them. Further, to pinpoint e-discovery dollars burdens you with difficult assumptions, complex definitions of actions, undesired spotlights on individual or team performance, and heavy-duty analysis of the data that spews out (See my post of April 23, 2006: Uniform Task-Based Management System data lies fallow.).

A recent survey provided InsideCounsel with average total cash compensation for the five practice areas at the top. They were M&A ($288,962), Antitrust ($280,441), International ($257,097), Intellectual Property – Licensing ($252,948), and Tax ($250,209). These figures came from a data set that includes a fairly high proportion of large law departments, so the figures are likely to be higher than prevails across the board in the United States.

For the highest paid lawyers, by the way, M&A cash compensation works out to be $160 an hour, assuming 1,800 chargeable hours. For Tax, it is $140 an hour. If you add in some value for equity awards and a fairly standard 25% overhead, then it is easy to see reaching and breaching $225 an hour for these corporate lawyers.

A recent survey asked respondents about the bases for raises to their in-house lawyers. By far the dominant reason was “merit,” with 94% of the respondents checking that reason. A lawyer perceived as adding more value to the company deserves a fatter paycheck.

Next came promotions, at 80%, where rising to a new level brings with it a salary bump. Third, “market-based equity” at 46% means that HR and the general counsel determine that someone’s pay lags what comparable lawyers make at other departments. Fourth, discretionary pay increases at 29% were far more common than “employee’s skills” (11%), “experience” (8%), “cost of living” (5%), and “tenure” (1%).

An article in Fortune, April 9, 2012 at 16, describes an ingenious method to quantify the possibility that companies will tangle over their patents. An analyst needs to compare how often companies cite each other’s patents in their own applications. “If each company’s patents are of equal quality, and each cites the other at about a 1:1 rate, then one would not expect litigation, since each company seems equally reliant on the other’s technology.”

The article analyzes Facebook, Yahoo, Amazon and Google in these terms and forecasts the likelihood the companies might clash. The article leads you to believe there is empirical work on the possible amounts of settlement that could eventuate should there be litigation, depending on the degree of imbalanced citation – if one cites the other much more, that company is more vulnerable.

Look into the future. One can imagine a comprehensive system like this that analyzes large numbers of patent-intensive companies, integrates an algorithm for estimating their patent-related litigation expenses, and thereby contributes an important driver of total legal expenditures.

Unable to pass up metrics that pertain to law departments, unwilling not to squeeze metrics for what might drip out, I will confess that a recent sentence left me puzzled. In Met. Corp. Counsel, March 2012 at 16, an FTI consultant shares some findings from FTI’s interviews with 31 in-house counsel. The topic was e-discovery and his metric is that e-discovery service providers to the law departments had dropped in one year “from an average of five providers in 2010 to a 2011 average of three.”

What to make of that finding? First, let us assume that the methodology was sound enough. That is, 31 in-house senior lawyers who handle discovery issues were reasonably representative and the question was clear and the group year-over-year was sufficiently the same, etc. (I noted that three out of four work in companies of $10 billion or more in annual revenue, which alone makes them highly unusual.). Second, let us assume that the median change was comparable, not that one law department that had used a large number of providers drastically cut its rolls and lowered the group average. Third, let us assume that FTI, a large and capable service provider, did not bend the findings to promote its value proposition: hire just us, not lots of others, because we can do it all.

Does, then, the 33% drop in the average number of providers hired portend drastic consolidation in the industry? Does it mean law departments have virtually eliminated some particular kind of provider (consultants, forensic specialists, hosting services, temporary staffers) or is the shrinkage shared across them all? Even more telling, and going to the nub of the implicit benefit, has the proclaimed drop in the number of retentions saved money or improved quality?

The ALM benchmark survey in 2011 gathered data that broke down participants’ external spend. Some thirty departments gave figures for their outside counsel spend as well as for their external spend other than outside counsel, such as expert witnesses, patent maintenance and filing fees, directors’ costs, etc. The median ratio between those two figures came out as $10 spent on law firms for every dollar spent on other external expenses. Stated differently, about 90% of external spend for those U.S. legal departments goes to law firms.

That seems a useful benchmark, except a general counsel can influence it. A law department that pays some large disbursements directly will appear quite different than another department that pays the law firm and includes the disbursements in the firm’s invoice. Some spending can be internal or external depending on the choice of payment process. That variability admitted, the 10-to-1 ratio sounds about right.

Of a group of respondents to the ALM Legal Intelligence survey last year, 75 answered a question regarding whether they had “contracted during the last fiscal year with any legal service providers (or vendors) to provide outsourced services.” Of them, 48 said “no” they had not and 23 said “yes.” For those 23 who had contracted for outsourced legal services, 5 of them designated “off-shore” arrangements.

In other words, out of the survey population, less than one out of ten said they had gone off-shore for some legal-related services during the past year. The survey did not ask about the scale of those offshore services obtained nor the kinds of services so we really don’t know much. What we do know, however, is that from a reasonably sized sample of U.S. companies, there was no enormous sucking sound of legal work going offshore.

What makes estimations of return on investment intractable is the inherent reliance on unreliable assumptions. All ROI “calculations” depend on givens: “Lawyers spend at least 10 minutes a day looking for documents,” “Paralegals costs us about $25 an hour,” “We prepare more than 30 placement agreements a quarter,” or “Approximately 8 percent of all disbursements charged us exceed our guidelines.” If managers don’t know a number, they estimate or guess it, a risky step.

The assumptions in ROI forumulas rest on presumed facts that are to varying degrees carefully and objectively obtained. In the end the concatenation of assumptions leads to a saving or an improvement in output. Similarly, the input – the investment – harbors some grabbed-from-the-air figures. All ROI estimates, therefore, depend on the assumptions people build into them, which naturally gives opportunity to slant the resulting division of outcome divided by input. And we haven’t even mentioned holding all other factors constant that might influence the results.

Quantifying risks avoided stumbles like calculating ROI: both are exercises based crucially on assumptions, and everything revolves around those key projections or approximations. “Hiring this firm at these rates will avoid a second class action,” “Reducing the number of discrimination complaints by 10% is certain,” “Among these patents are at least two with 7-figure revenue.”

It is well recognized that internal law department costs consist mostly of compensation and benefits. The data from ALM’s latest metrics collection corroborates that belief. In fact, it comes up higher than some general rules of thumb. Based on the numbers reported by about 70 U.S. legal departments, 86 percent of their internal spend went to the direct people costs of salaries, bonuses, equity awards, and benefits.

For every $21 of compensation and benefits spent, $1 (about 5%) was spent on occupancy costs and $37 dollars on comp for every technology dollar (about 3%). “Other” was 8% – perhaps CLE, travel, lawyer conferences, subscriptions, expert witnesses, consultants and the like. To learn more about the Law Department Metrics Benchmark Survey of ALM Legal Intelligence, click here for ALM’s website.

A column in the ACC Docket, Dec. 2011, at 24, by an unabashed proponent of offshoring who invests in companies that provide those services, went too far. He recounts an ABA panel which “showed that outsourcing legal work is more than a trend among law firms and corporate legal departments.” The panel of a professor, a general counsel and a law firm partner had discussed issues and examples, but to my reading had offered no proof of the columnist’s claim that this technique has moved beyond “trend.”

Promoting his view further, his next sentences ends with bravado regarding outsourcing legal work: “It is a new standard in our current legal environment, and has become a permanent fixture among corporate legal departments and law firm users.” No, offshoring and outsourcing are not standard practices among U.S. legal departments nor anything like a permanent fixture. Offshoring (and near-shoring) is one evolving tool that some departments have tried for certain needs and met with varying degrees of success.