Articles Posted in Non-Law Firm Costs

Altman Weil published data in GC Mid-Atlantic, June 2008, at 30, that compares metrics from the firm’s 2003 benchmark survey and its 2007 survey. Mash together the survey’s metrics on lawyer staffing and inside law-department expenses per lawyer and we glean an insight not mentioned in the article.

For all the companies in the two survey years, expenses per lawyer averaged $314,576 in 2003 and rose five percent to $330,133 in 2007. For the same group and years, the numbers of lawyers employed dropped from 20.13 to the 2007 figure of 18.10, a decrease of 11 percent.

Assuming most of the law departments that provided data in 2003 also provided data in 2007, then it is no wonder that costs per lawyer rose as the number of lawyers dropped. What stands out is that costs rose half as much as lawyer numbers declined (5% to 11%). That suggests the possibility that law departments added non-lawyer staff.

I wrote before on the convergence program of Linde Group (See my post of June 18, 2007.). More information about its circumstances appear in FocusEurope, Summer 2008, at 31. The article mentions that both Honeywell and Brady Corporation have chosen a single firm to handle all their legal work in Europe or adjoining regions. Brady asked eight firms to pitch for work worth more than $1 million annually.

Just before the shrinkage of law firms from 150 to five firms, General Counsel Nick Deeming had survived the $16 billion acquisition of the BOC Group. In fact, Deeming was the group legal director of BOC so he must have been promoted over Linde’s legal director. [Typically, the acquiring company’s top lawyer takes over the combined department.].

Asked to find synergies between the merged law departments, Deeming “ultimately reduced the size of the in-house team from 100 to around 60,” which amounts to almost a 40 percent downsizing (See my posts of Sept.13, 2005: Honeywell and Oracle and the layoffs that result from mergers; Feb. 19, 2007: BellSouth/AT&T; and May 5, 2008: morale consequences of layoffs.). The article does not make clear the degree to which the layoffs were lawyers or non-lawyers. Is there any connection that Deeming himself left Linde shortly after the bloodbath, in June 2007?

When US companies prosecute patents in foreign countries, they typically have to retain specialized patent lawyers in those countries. The charges of those patent lawyers – called foreign associates – can be high, and apparently sometimes higher than what local companies are charged. As reported originally by IP Law & Business, then reprinted by Corp. Counsel, May 2008 at 9, at least two companies make their services available to companies, or their legal or intellectual property departments, to ferret out improper charges.

One company, IPR IS, is based in Basl, Switzerland and the other, PTFM (Patent Trademark Fee Management), is based in Minneapolis, Minnesota. Some of their services may be available from companies that license patent and trademark tracking databases (See my post of May 1, 2005: Master Data Center, Dennemeyer and Computer Patent Annuities.).

Personnel expenses, including salaries, bonuses and benefits, dominate the internal budgets of most law departments (See my posts of July 31, 2005 and Feb. 21, 2008: estimates of 75%.). Data on this common situation comes from Altman Weil, in GC Mid-Atlantic, June 2008, at 30, with metrics from the firm’s 2003 and 2007 benchmark surveys (See my post of July 20, 2008: demographics of the surveys and queries on methodology.).

The 2007 data shows an average of $330,133 in total inside expenses per lawyer. Personnel expenses that year averaged $$277,058 per lawyer, which is 84 percent of the total. In 2003, personnel expenses accounted for 79 percent of the total inside expenditure.

Once again, because people costs bulk so large, if a general counsel must pare expenses, the only way to make meaningful cuts internally is to lay off people.

Altman Weil published data in GC Mid-Atlantic, June 2008, at 30, that compares metrics from the firm’s 2003 benchmark survey to its 2007 survey (See my post of July 20, 2008: demographics of the surveys and some observations on methodology.).

One set of metrics covers inside law-department expenses per lawyer. For a group of survey companies with annual revenues of $5 billion and over (“large departments”), in 2003 their average was $345,685; four years later the average had risen 10 percent to $379,273. For all the companies in the surveys, the comparable figures were $314,576 in 2003, rising 5 percent to $330,133 in 2007.

The average large department in the 2007 survey spent almost 15 percent more than the average for all the companies in the group. [A query on methodology; did the analysts remove the large departments from the all-company pool before they calculated the average they describe as “all companies”? If not, the gap is actually larger, since the data from the large departments would bring up the overall average somewhat.]

Data published by Altman Weil in GC Mid-Atlantic, June 2008, at 30, compares metrics from the firm’s 2003 benchmark survey to metrics from their 2007 survey. The 2003 report includes data from 199 corporations “evenly distributed between companies with annual revenues of under $250 million to companies with over $5 billion.” Four years later, the 2007 report includes data from 144 companies “similarly distributed in size.”

For all the companies in the Altman Weil surveys, the average TLS as a percentage of revenue in 2003 was 0.4942 percent. In 2007, the average had risen to 0.5843 percent, an increase of 18 percent. In brief, legal costs consumed significantly more corporate funds.

Let’s take the increase as reliable, even though (1) the survey population dropped 28 percent between the two years, (2) the article from which this data appears, in GC Mid-Atlantic, June 2008 at 30, does not say how many companies took part in both the 2003 and the 2007 surveys, and (3) averages have more variability than medians (See my posts of July 27, 2007: changes in survey participation year to year; and March 28, 2005: averages compared to medians.).

McDermott Will & Emery announced it has created a permanent class of staff associates: “lawyers who will be paid less, work less (though still be full-time) and be billed out at a lower rate than the firm’s other associates.” This innovative offering, described in GC Mid-Atlantic, June 2008 at 15, took some criticism in the article, mostly that staff associates will be viewed and treated as second-class, as intellectually damaged goods.

I commend McDermott Will. The more that clients can choose which type of person will do which parts of assignments, the more cost effective the representation. Already law departments can turn to contract or temporary lawyers, offshore resources, non-equity partners, paralegals, secondees and specialists, each of which class of persons travels with assumptions by others about their cost-value ratio as well as their abilities and relative quality. The Rees Morrison blogometer registers many hits on each of these categories of workers:

Contract or temporary lawyers (See my posts of June 14, 2005: retaining former employees as contract lawyers; July 14, 2005: temporary staff; Aug. 5, 2005 and April 9, 2006: differences between contract lawyers and temporary lawyers; Oct. 8, 2005: two contract lawyers at Dial Corporation; Jan. 10, 2006: cost comparisons on temporary staff; Jan. 30, 2006: Purdue Pharma’s use of contract lawyers; Aug. 2, 2006: Sears’ experience; Aug. 2, 2006: 20 contract lawyers with the State of Massachusetts; Nov. 26, 2006: contract lawyers and benchmark metrics; Dec. 17, 2007: temporary and contract lawyers; and Feb. 27, 2008: fees owed placement agencies when temporary lawyers are hired.).

The organizers of Belgium-based InBev’s 2007 Legal Conference, the seven senior lawyers who manage the company’s 50-lawyer department, wanted to hold the conference in Argentina. As the general counsel of InBev, Sabine Chalmers, writes in Acc Docket, Vol. 25, Sept. 2007 at 16, “The only down side was that business class fares to such an exotic location had the potential of blowing the entire budget for the conference.”

Her legal leadership team came up with a clever idea: “Give attendees the option to travel to Buenos Aires in economy class or to boring old ‘head office’ in business class.” All the lawyers chose the cheap seats to Argentina!

When in-house counsel believe that funds for the $6,000 business-class seat just come from elsewhere, why should they conserve money and fly coach? But if there were some way for those lawyers to fly coach for $1,500 and get a cash rebate (yes, taxed) for, let’s say, half the difference (1/2 of $4,500), I am sure many would prefer the cash and save the law department huge amounts. Or, let the lawyer use a frequent flyer points, and get a cash rebate for half the difference.

The issue of Ethisphere, Qtr. 2, 2008 highlights the 93 companies that the Ethisphere Institute honors in 2008 as “the world’s most ethical companies.” Of them, 29 are not US companies (and for six of them I have done consulting projects) and 33 industries are represented

What I wish we could know is whether total legal spending by these companies, as a percentage of their revenue, is lower than the spending of their less-ethical peers. It seems plausible that if employees consistently choose to act with integrity and ethical sensitivity, their company will suffer fewer lawsuits, acrimonious negotiations, contract disputes, joint ventures riven with legal tangles, and other malefactions.

The Eversheds report, “Law firm of the 21st century” at 5, pronounces a commonplace as if it were a revelation. “The key challenge facing buyers of external legal services over the next ten years is controlling costs and achieving value for money.” (emphasis in original) Of the general counsel, legal directors and finance directors at 50 of the world’s most prominent companies who were interviewed, just over half (57%) mentioned this challenge. I had several thoughts about it.

All buyers try to achieve value for money, without exception, so why is this “challenge” profound? No law department lawyer wants to fritter away money on law firms; they all want to get the most punch for the pound, utility for the Euro, and bang for the buck.

Second, the compound statement – control costs and obtain value for money – complicates the finding. Some respondents might believe that cost inevitably correlates with value: you get what you pay for. Others might believe that some legal services will fall to commodity price levels while other services still command premium payments. Cost and value are not synonymous.