Articles Posted in Non-Law Firm Costs

Consider this hypothesis: lawyers per billion correlates positively with an industry’s average margin of profit. The logic is that high technology and financial services, industries marked by relatively high profit margins, have more lawyers per billion than do commodity industries that run on low margins, like extraction and agricultural products (See my post of Feb. 19, 2009: toss-up between lawyers per unit of revenue and units of revenue per lawyer; Feb. 24, 2009: importance of intangibles in industries drives lawyer ratios; and Feb. 25, 2009: lawyers per billion with 22 references and one metapost.).

Where profit margins are razor thin and high grosses result in modest nets – think about grocery chains, internal legal talent is at a premium. Where margins are fat due to rapid expansion of an entire market – think about cell phones, rapid differentiation, protected oligopolies, or advantageous intellectual capital, an investment in internal legal talent pays off more handsomely and companies support more lawyers.

Data from a recent benchmark survey, covering responses from 44 law departments in Europe, Middle East and Africa (EMEA), allowed a different analysis of IP spending. Those law departments reported their external counsel spend as well as their spend on patent and trademark registration, maintenance and annuity costs (See my post of Sept. 9, 2008: include governmental IP expenses in the law department’s budget.). This survey was conducted by Laurence Simons, a leading legal recruitment firm, and this author; the report is available for a nominal cost from Laurence Simons.

I dropped the bottom quarter and the top quarter, and calculated the average of the middle half. The group that remained spent 36 percent of what they spent on outside counsel on their governmental IP costs. Because those companies were not necessarily IP-intensive, the rough benchmark of one-third of external counsel costs goes to IP fees might hold for many companies.

This is the second in a series of postings by Jeff Kaplan on compliance and ethics (C&E) programs and cost. The first examined the growing costs of C&E program failures. In this and succeeding posts I’ll explore non-costly ways to achieve C&E program successes.

One of these is to build C&E risk assessment into other functions. Conducting a C&E risk assessment is, of course, foundational to having an effective C&E program, but many companies have failed to construct this foundation – partly out of concern for cost. Ironically, this failure may lead to unnecessary C&E program expenditures – i.e., to overshooting the mark in terms of effort. (A common example of this is providing training to too many employees – a cost issue that will be discussed more in a future posting.)

Moreover, frequently much (although not necessarily all) of what is needed can be accomplished by building risk assessment features into other C&E functions. For example, in conducting training of a company’s senior management, the trainer might not only address generally each major area of risk (e.g., corruption, competition law, etc.), but use the occasion to solicit information about the company’s specific risks and the sufficiency of its remediation for that area. This can itself be a form of risk assessment. (One should, of course, solicit information of this sort in a more confidential way, too – such as through interviews or questionnaires. However, the training can make managers’ risk assessment feedback, regardless of how it is sought, more informed and hence more useful.)

Some general counsel would simply like to talk about a situation and get some expert advice, immediately and in flexible doses. They can’t afford a big, expensive consulting project; they don’t want to wade through endless pages of reading.

To meet that occasional desire for advice specific to a particular law department, I offer Corporate Counsel Consulting on Call. Your fixed fee is $1,500 for any month you call, no matter how many or how long your calls or how numerous the topics. Whoever undertakes the arrangement, however, must be on the calls. I will share my experience and thoughts for as long as you want to discuss your situation and offer my recommendations and solutions for how best to address it. (See my post of Feb. 25, 2009: fixed fee for benchmarking projects.).

Paul Boynton Esq. of In-House Legal, a production of Legal Talk Network, recently interviewed me for a podcast. I spoke for about ten minutes about offshoring, competitive bids and secondments. Those topics, Paul and I had agreed, are among the leading-edge ideas in law department management.

For your listening pleasure, here is the MP3 link for the podcast.

It’s been quite a series of recent firsts for this blogger: first YouTube exposure (See my post of Feb. 3, 2009: LegalTech NY debut on YouTube); first blog poll (See my post of Feb. 26, 2009: first survey on this blog.); my first Legal Talk Network program (See my post of Feb. 24, 2008: Corporate Counsel Network podcast.); my first interview program with questions from readers (See my post of Feb. 20, 2009: interview for a program.); and my first unleashing of Twitter (See my post Feb. 1, 2009: one month on Twitter.).

As I understand a recent article, heavy hitters in the banking world have agreed some conflict of interest rules that more realistically adapt to current realities. Corp. Counsel, Vol. 16, March 2009 at 62, explains that Deutsche Bank, Goldman Sachs, UBS and JPMorgan Chase, among other banks, “are offering waivers allowing their external legal providers to act against them in certain disputes between financial institutions, in a bid to quickly resolve issues arising from the current economic turmoil.”

For example, a law firm that represents one of the banks could handle a mediation against it on a simple dispute, but still could not represent a plaintiff in a significant law suit.

The financial collapse has spurred this collective action to loosen conflicts rules. In part this will reduce legal costs because alternative dispute methods will be able to resolve more claims involving the banks.

A month ago this blog dropped the bombshell that facilities costs for US law departments range around $25 per square foot (See my post of Jan. 29, 2009: based on US office rates nationwide.). That post left room to ask: “What is the typical square footage used by a US in-house lawyer?”

Glad you asked. Data from the Altman Weil 2008 Law Department Metrics Benchmarking Survey at 144, tells us that median “occupancy expenses” per lawyer range around $16-$18,000 per year. The upper quartile figures climb 50 percent above that range. So, if $25 per square foot is a reasonable figure for office rent and if $17,000 a year is the occupancy cost of a US lawyer, that means the lawyer enjoys has an office (and appropriate allocation of hallway, conferences rooms and other spaces) of about 700 square feet. The office itself is likely to be the major portion of that expense.

Warning: I am not a CPA, but I try to be accurate, so I invite anyone to correct me on this topic.

A patent is an asset that depreciates. As defined by Fireworks Zone, “Depreciation is writing off a tangible asset as consumed on pro-rata basis, for the estimated pre-defined life of the asset.” As explained more specifically on Investopedia, “For example, a patent on a piece of medical equipment usually has a life of 17 years. The cost involved with creating the medical equipment [patent on it?] is spread out over the life of the patent, with each portion being recorded as an expense on the company’s income statement.”

At least some law departments capitalize some portion of the costs of obtaining a patent. With that accounting treatment, the prosecution and filing fees, as well as annual maintenance fees, are not expensed in the year incurred but they are depreciated over the period of patent protection.

I welcome guest blogger Jeff Kaplan, one of the country’s foremost legal experts on compliance and ethics.

Are there practical ways of containing or even reducing compliance and ethics (“C&E”) program costs while still maintaining an effective program? I believe that there are, and in future postings will describe some of them. But to properly frame the discussion, the costs of non-compliance must first be considered.

These costs are on their way up, and there is no end in sight. First, with little notice, we have evidently entered the era of the “mega fine.” Before 2008, in the entire history of U.S. criminal law, there had been only one corporate fine larger than $340 million. But in rapid succession we have now seen five more and a sixth is expected soon. Significantly for global companies, this phenomenon is not limited to the U.S., as record breaking fines have also recently been imposed in Europe for corruption and competition law violations. Moreover, given the extent to which the public blames irresponsible business conduct for the recession, the specter of mega fines seems unlikely to recede at any time soon.

One element in the calculation of fully-loaded internal costs are vacation days (See my post of Aug. 27, 2008: fully-loaded cost per lawyer hour with 31 references.).

Therefore, conscientious and obsessive, I spent time one recent holiday collecting my posts that involve vacations (See my post of May 11, 2008: typical in-house lawyer vacation entitlement; May 18, 2007: vacation days typically granted to in-house counsel; June 10, 2007: work-life policies at Northwestern Mutual; June 30, 2007: not taking vacation does not necessarily make you a workaholic; Sept. 25, 2005: assumptions about vacations and 1,850 chargeable hours; April 23, 2006: sabbaticals and vacations; Aug. 26, 2008: sleep-deprived associates and vacations; April 1, 2005: sabbaticals for in-house counsel; Dec. 12, 2006: “extreme jobs”; and Jan. 23, 2009 #2: vacation roll-over and cash-out policies.).