Articles Posted in Non-Law Firm Costs

Some law departments attempt to create their internal budgets from the ground up each year (See my post of July 6, 2007: an example of zero-based budgeting.).

Advantages of zero-based budgets are that they challenge received wisdom. Social passing of line items fails. The process also tends to get more people involved and therefore heightens consciousness of spending and controls on it. Similarly, more involvement brings in fresh perspectives. “Why do we spend so much on watering plants?”

On the down side, however, a start-all-over budget may not in the end make all that much difference. Internal costs are fairly steady. It certainly takes more time and effort. Lastly, a zero-based process may raise contentious issues best left alone to be decided by managers – “Tell me again who is eligible for MBA tuition reimbursement?”.

From the First Law Department Operations Survey, published by InsideCounsel and Blickstein Group with special contributions by David Cambria of Aon, we learn something odd about budgets for operations.

Of the 50 total respondents, 27 answered the question. They split, with 16 stating they have a “distinct budget for operations,” while the remainder said they do not. The categories in those budgets include “compensation, professional fees, IT, premises and equipment, travel & entertainment, and other.”

I note that only half of the administrators with distinct budgets have a category for “premises and equipment” (See my post of Sept. 9, 2008: 34 line items in one law department’s budget, but nothing like “imputed rent”; and Dec. 7, 2008: 52 line items in another department’s budget.). Rental, whatever it is called, ought to be a cost charged to a law department (See my post of Dec. 6, 2007: document management with 15 references.).

Wondering about this, I posted a question to the Law Department Management group on LinkedIn [Reader, join me on LinkedIn!]. Two responses, edited slightly by me, offer insights into an answer: No.

Matt Williams, a lawyer at Safeco, wrote: “It depends on the financial structure of the entity that the law department serves.

If the cost of legal services is somewhat variable by month and if it is a component in the cost structure/pricing of the products sold by the entity, then monthly accrual becomes important to be able to accurately price the product, account for seasonal trends, and react swiftly to market changes.

Some people foresee increasing amounts of law-related information available for free online. Yet of a group of 84 in-house counsel at large companies, all of whom are technologically savvy enough to belong to Legal OnRamp and completed a recent survey, only one-third agreed. Doubting Thomases were 21 percent. But the largest group didn’t know (43 percent).

As anyone who reads this blog must appreciate, I am all for putting online my best thinking and ideas, for free. Lawyers in firms, too, will gravitate toward this view, because it lets prospective clients assess their knowledge, style, and breadth – and the best legal work will always go beyond whatever can be written. My prediction is that much more information than now, that could be charged for now, will relatively soon be free online. Webinars are already being driven to no cost so soon there will be guidelines, annotated forms, hypotheticals with analysis, briefs, memoranda of law and other work product. This future means significant revenue declines for law firms. If anything like 20 percent of their revenue might drop to zero within five years, the outlook is grim.

An aggrieved managing partner at a recent conference told a roomful of inside counsel that payment patterns are changing with clients. He said, in effect, that law departments are stringing out payment of fees for months and months.

My feeling is that no general counsel adopts delay as a money-saving idea. No, the holdback and drip-feed stems from the finance group. When a company has to conserve cash, all vendors get the same back of the hand.

This factoid comes from an article in 8-K, Vol. 4, Fall 2008 at 30, and others have said as much (See my post of Oct. 27, 2005: Fulbright & Jaworski notes 60% settle during trial.).

Law department management issues surround from settlements (See my post of April 26, 2006: internal barriers to settlement; Dec. 3, 2005: cost cutting may spur poor settlements; May 8, 2007: Ford’s settlement policy; and Nov. 25, 2005: whether law departments should manage settlement funds.). Whether settlement funds should come from the general counsel’s purse is debated (See my post of May 30, 2006: law department budget should include settlements.). Some tools are available to help litigation managers (See my post of March 13, 2006: verdict and settlement databases; and Dec. 31, 2006: online settlement tool combined with ADR.).

Even so, metrics about settlements are much discussed (See my post of April 15, 2007: confidentiality of settlement amounts; May 30, 2005: lack of benchmark data about settlements; Sept. 22, 2006: 95% of settlements are in cash; Feb. 13, 2008: data on DuPont’s settlement amounts; July 16, 2005: settlements as a percentage of total legal spend; May 30, 2005: settlements and total legal spend; Feb. 13, 2008: settlement ratios by practice area; May 30, 2005: include settlements and judgments in total legal spending; and July 16, 2005: settlements and judgments in relation to outside counsel spending.).

A disturbing piece in the ABA J., Vol. 94, Dec. 2008 at 32, bitterly describes the plight of a contract attorney, immured in a basement, who spends all day reviewing electronic discovery documents. “The buzz around reviews is that the firm bills out an attorney at $180 an hour and pays the temp agency $60 per; the agency, in turn, pays the attorney $40.” If that is anything like a representative surcharge, law departments with major discovery efforts ought to (a) insist that law firms disclose their markups and (b) retain contract attorneys on their own or through an agency (See my post of post of Feb. 16, 2007: up to 200% add-ons; and March 11, 2007: two responses to my comment on surcharges of contract lawyers.).

It gets worse. “If I review 100 documents per hour (a very fast pace), I get paid the same hourly rate as if I review 30. Moreover, each project consists of a finite number of documents; so the faster I work, the sooner I am out of a job and need to start hustling for the next project.”

Not only do law departments pay multiples of what the contract attorney receives, but the worker has a disincentive to be productive.

Just after having written about one law department’s budget categories (See my post of Sept. 9, 2008: 34 line items.), I came across a second set of accounts. This one has 52 items of which most resemble a category in the previously-reviewed budget.

With so many more categories, however, the second one breaks expenditures more finely. Instead of “travel and lodging” this one has “air/ground travel,” “car rental – short term,” “mileage, tolls, parking,” and “lodging/hotel.” Elaborating on the single category of “training”, the second set has “in-house employee training,” “outside employee training,” and “employee training materials.” A final example: rather than simply “office supplies,” there are narrower categories for “office supplies,” “stationery,” “miscellaneous other supplies,” “equipment < $3,000),” “expensed tools,” and “merchandise consumed.”

As should be expected, the second general ledger system has some categories that do not appear in the first set.

Some general counsel support conferences as sponsors (See my post of Oct. 10, 2008: several named sponsors of diversity conference.). Others support worthy causes with cash.

An advertisement in Diversity& the Bar, Vol. 10, Nov./Dec. 2008 at 71, thanks five law departments for donations they made to the Minority Corporate Counsel Association. Those five are Microsoft ($500,000 donation), DuPont ($150,000), Wal-Mart ($150,000), Xerox ($100,000) and The Gap ($30,000).

Although in-house lawyers uniformly despise tracking their time – “That’s why we left law firms!!” – the practice has its supporters and detractors (See my post of Sept. 10, 2005: why in-house attorneys loath tracking time; Jan. 13, 2006: pros and cons of tracking time; March 24, 2007: more on pros and cons of time tracking; Jan. 1, 2008: tracked time and reimbursement of attorneys’ fees; and Jan. 13, 2008: report legal issues, not hours.).

Some posts recount observations about time tracking from groups of corporate counsel or specific law departments (See my post of June 16, 2006: Australian in-house mates; Nov. 20, 2006: Aviva and its low hours; April 27, 2005: Eastman Kodak; and Aug. 31, 2005: NY City Law Department.).

Other posts illuminate the plumbing of time recording by corporate lawyers (See my post of May 16, 2006: definition of “chargeable time”; and May 14, 2006: multiple internal billing rates.). Someday there may be tools that collect time without requiring lawyers to record it (See my post of Aug. 28, 2008: time based on cell phone use.).