Articles Posted in Non-Law Firm Costs

Lexakos, a consulting group that advises on governance, compliance, and risk management recently released is Chief Legal Officer 2008 Strategic Planning Survey.

Of the “over 100” chief legal officers who returned the survey, only 21 percent “trust outside counsel to manage costs and choose the best alternatives for document review.” Slightly more than half (54%) of the top lawyers “do not believe outside counsel has a vested interest in devising cost-effective document review strategies.”

Much mistrust exists out there in law department land regarding the bona fides of the natives of law firm land and cost control (See my posts of April 8, 2008: billing padding with 8 references.)

What difference in terms of total legal spending might it make if one company is principally self insured and a comparable competitor has first-dollar insurance for litigation (See my post of Oct. 31, 2007: Fulbright & Jaworski data on insurance coverage against nine kinds of litigation; April 6, 2007: McDonald’s and self insurance for workers comp; and June 26, 2008: self-insurance has increased and boosted law department staff counts.)? Whatever the difference, if the second company does not include the amount of coverage payments it benefits from, its benchmark data on total legal spend will not reflect the full amount .

A handful of posts on Law Department Management Blog concern insurance carriers and their payments for insured litigation (See my post of Oct. 4, 2005: total legal spending and payments for insured litigation; March 15, 2006: insurance reimbursements and the law department as a profit center; Nov. 25, 2006: Oxycontin’s dispute over insurance payments of legal fees; Oct. 22, 2005: insurance proceeds in a loser-pays jurisdiction; and May 31, 2005: insurance where the loser pays the other side’s fees.).

Sometimes a company’s insurance carrier chooses the litigation firm that will represent the company (See my post of Oct. 30, 2006 on insurers choosing law firms.). The law department most commonly plays second-fiddle commonly in products liability and mass tort litigation such as asbestos. Alternatively, a carrier might not dictate which firm to use but might only reimburse for hourly rates it has negotiated with its preferred firms.

Results from a survey with 84 law-department respondents, published in PLCLaw Dept. Quart., Vol. 3, Jan.-March 2007 at 24, tell us that the majority of work sent to outside counsel is because of a lack of specialized expertise in-house. About 20 percent of work is sent outside because the in-house team has the expertise but not the time to handle it.

These findings reinforce why larger companies, and their usually larger law departments, have lower total legal costs (See my post of Aug.21, 2008: total legal spending as a percentage of revenue (TLS/Rev) with 9 references and one metapost.)

More lawyers means it is more likely that someone inside has enough experience in an area of law to handle the matter competently or to oversee outside counsel efficiently. By oversee efficiently I mean that the inside experienced lawyer can direct external counsel as to what issues to delve into and how deep. An inexperienced in-house lawyer might give the firm freer range and costs will increase.

A profile of Kellye Walker, North American general counsel of beverage-giant Diageo, in Legal Times, Vol. 30, Aug. 20, 2007, mentions that entire law department held its legal conference in Shanghai. Diageo’s legal department totals approximately 80 lawyers.

The cost of that gathering, which I presume to have been for at least two days, had to have been huge. My point is not at all to criticize Diageo, because I strongly support bringing lawyers together to meet each other and to share information (See my post of Feb. 12, 2008: retreats and conferences with 8 references.). That objective becomes even more important for wide-spread departments.

Rather, I point out the obvious: costs mount. Might 70-some lawyers flying to China average $5,000 per ticket ($350,000)? Might three nights in a Western hotel in Shanghai exceed $1,000 per person ($70,000)? Might the fully-loaded cost of these lawyers be around $200 an hour, so the opportunity cost was on the order of eight hours a day times four days – assuming the conference ran two days and travel days are included ($512,100)? Might incidentals add at least another $500 per lawyer ($40,000) (See my post of April 17, 2006: schwag, trinkets and give-aways at retreats.). Takes your breath away to think that pulling together a global legal team of 80 lawyers might run up a tab of a million dollars!

Previous posts have addressed different aspects of the fully-loaded cost per hour of corporate counsel (See my post of Oct.18, 2005: how to calculate a fully-loaded cost per lawyer hour; Nov. 16, 2005: links to other posts; Nov. 16, 2005: about $190 an hour; and Jan.10, 2006: estimate for US law departments of $150-170 an hour.). In November 2007, I published an article about the three most important benchmarks for law departments, one of which is the fully-loaded cost of inside counsel.

The fully-loaded cost of your lawyers on a per-hour basis with all expenses of them included is a vital metric. Partly is it important because that cost is a fixed cost and lets you compare your rate to the rate of outside counsel (See my post of Feb. 18, 2006: fixed versus variable costs; Aug. 14, 2006: estimate of $270 an hour for effective rate of outside counsel; Sept. 5, 2005: European law departments at about $220 an hour; and Feb. 21, 2008: a UK figure of about $151 an hour.). Important as the metric may be, it still presents several methodological monsters to slay.

The first issue is how to define a chargeable hour (See my post of Nov. 20, 2006: low estimates of chargeable hours in British law department; and Oct. 30, 2005: administrative time squeezing out substantive time.).

A number of recent posts have drawn on an article published in Met. Corp. Counsel, Vol. 16, July 2008 at 39, by two partners at Meiselman, Denlea, Packman, Carton & Eberz. The authors boldly state that “Most corporations could cut their litigation costs in half without adversely impacting the outcome of any of their litigation matters.” They attribute much of the spiral of litigation spending to the economic incentives of law firms and the pusillanimity of general counsel who seek cover behind expensive, big-name firms (See my post of Aug. 13, 2008: litigation cost control techniques.).

Their tactical suggestions for how to reduce litigation costs include the following:

1. Insist on detailed budgets periodically revised (See my post of Nov. 6, 2005: budgets with 9 references.)

Two paragraphs in a survey report offer some insights into how European law departments use procurement personnel. The data comes from PLCLaw Dept. Quart., Vol. 3, Jan.-March 2007 at 23. Of the respondents to the magazine’s 2006 survey, 18.3 percent of the law departments involved procurement staff, up from 12.9 percent in the 2005 survey. That is a significant increase in a year (See my post of March 1, 2008: procurement with 17 references.)

Of the law departments that turned to procurement for assistance, half of them used the sourcing specialists “to benchmark pitches.” Perhaps that means they used them to extract from the firms’ responses the answers to questions and then to rank those answers. A third of the procurement users had them draw up the Request for Proposal. As to the other two uses, the magazine says that 16.7 percent of the law departments turned to procurement for “general advice” or “fee negotiations.”

Later, at page 25, the article adds that “11% of those who currently do not involve procurement staff intend to involve them in the near future.”

A columnist in ACC Docket, Vol. 30, March 2008 at 20 (Ron Pol), confesses “10 little secrets of working in-house.” His second secret begins with a sentence that I dispute — “You represent one of two choices for the business: Fixed costs for the legal department, or outside counsel at three times the cost.”

Wrong on four counts, Ron. Count one is that legal departments have considerable play in using temporary or contract lawyers, so the department’s cost is not completely fixed (See my post of Feb. 18, 2006: fixed and variable costs; and Feb. 28, 2008: law firm compared to law department costs.). Count two is that outside counsel charge approximately 50 percent more per hour, not 300 percent more (See my post of Sept. 25, 2005: confirming the gap inside to outside; Oct. 18, 2005: inside to outside hourly cost.). Count three is that a company might shrink its legal department and decentralize the location and reporting of its lawyers to the business or staff units that use them the most. Fourth, companies staff for the valleys of work, so there is always too much to do and some lawyer, somewhere, has to do it.

Many managers of outside counsel might feel satisfied and justified when they calculate disbursements as a percentage of fees, whether they make the comparison across firms or across matters within the same firm. That calculation, however, can be misleading because if all other factors are similar, firms or matters with higher billing rates and higher expenses will show the same ratio as those with lower billing rates and lower expenses.

A better methodology is to divide timekeeper hours into the disbursement figures. With this modification, billing rates drop out of the calculation. Although expensive partners may tend to prefer first-class seats, five-star hotels, and vintage Merlot, out-of-pocket expenses by law firms should not be a function of higher billing rates.