Articles Posted in Non-Law Firm Costs

For years people have told me that general counsel strongly value predictability of legal fees, even if that means higher fees. I have doubted that statement. I doubt it because the total amount spent during a year on outside firms is the measure, not whether the law department hit its budget number pretty closely or smoothed out its monthly payments.

But perhaps I underrate the adverse consequences to a general counsel of coming in either much higher or much lower than budget. It throws off the calculations of the financial department.

Predictability is good; budgets have a purpose and take on a life of their own; and management of amounts spent outside is a game worth playing well (See my post of Nov. 17, 2006: survey finds that predictability favors alternative fee arrangements; Nov. 13, 2006: claim by Eversheds that clients demand predictability; and May 2, 2007: e-billing may enable more predictability.).

An article in Fortune, May 11, 2009 at 20, adds some details to what I wrote about previously on funding of litigation by third parties (See my post of April 11, 2009: litigation financing; Jan. 6, 2009: law suit financing offshore; March 20, 2009: a firm in hedge-fund financed litigation; and March 27, 2009: hedge funds and the secondary market for patents.).

Juridica was launched in December 2007 by two lawyers, Richard Fields and Timothy Scramtom. It has raised money by selling shares on the London Stock Exchange’s small-companies market. According to the Fortune article, “insurance companies like Allianz in Germany and several independent investors have launched funds to invest in suits.” Credit Suisse likewise has a litigation finance unit. The business model of these groups doesn’t sound complicated: “Like Juridica, these funds invest amounts typically between $1 million and $5 million in cases where companies sue each other for anticompetitive behavior, contract breaches, and so on.”

Other people also invest in lawsuits, most notoriously so-called patent trolls (See my post of Jan. 20, 2006: trolls and litigation costs; Oct. 29, 2006: Qualcomm’s business model; May 13, 2007: Microsoft’s litigation against trolls; and June 25, 2008: advice against troll litigation.).

The cost-per-hour gap between internal and external lawyers normally bandied about appears large, at 40-50 percent, but the comparison tends to be partner-heavy on the outside and less-veteran on the inside. About half the bill of most law firms for most matters consists of partner fees. After all, the law department has hired the firm for its prior work and expertise.

The inside lawyers who are responsible for the matter do not have the experience of partners at a firm, so the straight comparison of costs per hour tilts undeservedly to cast the firm as more expensive. Even a 20-year in-house lawyer may be such a generalist that on many issues, that veteran is not an equivalent match to the particular practice depth of the specialized external lawyer. Even if you compare costs after adjusting for years out of law school, however, the per-hour gap will shrink (See my post July 25, 2007: calculations for highly-paid general counsel.).

Legal Project Management ran a poll, which garnered 36 responses since April 27, 2009.

The online survey asked, “Which cost cutting method do you feel provides the most effective outcome?”

a) Renegotiating fees (33%): This sounds to me like rate discounts.

A recent paper estimates the total cost of patent litigation to alleged infringers. Paraphrased from the abstract, the researchers analyzed stock market event studies around the date of patent lawsuit filings for US public firms from 1984-99 (See my post of May 4, 2007: event studies with patent lawsuits.). They found that the total costs of litigation are much greater than legal fees, and that costs are large even for lawsuits that settle. Lawsuits cost alleged infringers an average of $28.7 million and a median of $2.9 million (See my post of Oct. 2, 2008: costs of patent litigation, with 13 references.). Moreover, infringement risk rose sharply during the late 1990s to over 14 percent of R&D spending. Small firms have lower risk relative to R&D.

The research paper is Bessen, James E. and Meurer, Michael J., The Private Costs of Patent Litigation (Feb. 1, 2008). Boston University School of Law Working Paper No. 07-08 at SSRN: http://ssrn.com/abstract=983736

Marschall Smith, the General Counsel of 3M, explained his company’s policy about plaintiff’s contingency fees. Speaking at the SuperConference, Smith said, “We don’t favor contingency arrangements if we are the plaintiff because 3M has the cash to pay the firm. It lets the company reap the full reward of the recovery.” Smith’s logic is that contingency fees are for plaintiffs who can’t fund the litigation costs on their own.

Most of the references on this blog about contingency fees refer to plaintiffs’ lawyers (See my post of April 27, 2006: $22 billion war chest in 2003 for contingency-fee firms; Sept. 29, 2006: hedge funds that invest in paying for cases; Aug. 24, 2005: the flow of recoveries in securities cases; Oct. 22, 2005: contingency fee firms are choosy about the cases they accept; Jan. 20, 2006: patent troll and its contingency firms; and May 1, 2006: the signaling function among conditional fee firms.).

A smaller number of references look at contingency fee arrangements through the eyes of corporations (See my post of May 6, 2009: difference between “success fees” and “contingency fees”; Feb. 26, 2008: fee arrangement can unravel if the company changes its strategy; Aug. 28, 2005: rules of thumb for contingency arrangements; and Oct. 29, 2007: survey data on the frequency of contingent fees.).

At the Ninth Annual SuperConference www.insidecounsel.com/superconference, David Grumbine, Senior Counsel, Dispute Resolution Group, of Whirlpool Corporation spoke about best practices for working with outside counsel. He stated: “Work expands the longer a case is open and the more money it costs.”

A trivial point, if Grumbine was merely saying that all things being equal, the longer a case drags on the more it costs a company in fees and disbursements.

But the implication seems to be that the increase in costs is not linear over time, steadily adding up, but instead accelerates. Is it common that that plaintiff’s counsel invests more and more as a case continues, so clients incur higher burn rates each month (See my post of May 3, 2009: burn rates of outside counsel with 6 references; and .). Stated more technically, as cycle times length does the second derivative of costs increase (See my post of April 24, 2009 #3: explanation of the rate of change changing.)?

Some of my thoughts on offshoring legal services are assembled in a recent article, published in Legal Strat. Rev., Spring 2009, at 19. Click here for a PDF . I discuss the three most important reasons why offshoring legal services can be a boon for legal departments, then three leading reasons for reluctance to offshore, and some techniques to ameliorate that reluctance (See my post of June 25, 2008: offshore with 27 references.).

Janine Dascenzo, an Associate General Counsel at GE who is deeply involved in operations, mentions in a profile that “we have been able to cut travel considerably by using our new video conferencing system, called TelePresence, from Cisco Systems.” That’s all it says in Law Tech. News, April 2009 at 54, but it was enough to sustain some spin off ideas (See my post of Aug. 28, 2008: telepresence; June 22, 2008: as a preferred method to communicate, at 5%; and Oct. 3, 2008: ethics training at Lockheed Martin by videoconference.).

Cost is not the only return on investment from teleconferencing. Reductions in the wear and tear from travel counts for something. Further, with the ability to see people, lawyers and clients can get to know each other more quickly; familiarity breeds content. Aside from the vexations of travel, the ease of a phone-plus-visual meeting enables more frequent meetings so there is a quality improvement.

A second point regarding teleconferencing, oriented externally instead of internally, is that it improves screening interviews of candidates and law firms. Nothing surpasses an in-person meeting, but for reasons of cost, burden, and expediency, an on-screen presence may suffice.

Highlighting a point made in a General Counsel Roundtable report, I commend their view that general counsel have several advantages over law firms when their departments choose suppliers and negotiate contracts directly with them.

Law departments enjoy stronger market power because they can aggregate volume, whereas law firms typically send work to suppliers haphazardly as needed. Better rates for bulk copying, for instance, are more likely from a huge company.

Law departments are more motivated to save dollars, as compared to law firms that typically pass along expenses to their clients. Lean terms from contract staff agencies are more likely from a corporation than from a law firm.