Articles Posted in Non-Law Firm Costs

Panelists at the Fifth General Counsel Roundtable, Dec. 6, 2007, summarized in a publication by the Economist Intelligence Unit at 13, think that some litigation is on the decline. “The pendulum has indeed shifted in favor of defendants,” and for several reasons.

One is that stock market gains have been strong for the past several years, and the plaintiffs’ bar has been weakened due to the legal troubles of its two most prominent lawyers. The greatest change, however, has been a series of decisions by the U.S. Supreme Court that translate into procedural or substantive advantages for corporate defendants.

Wouldn’t it be nice if general counsel get some relief from litigation cost pressures, even if the lightening of the load comes from external changes (See my post of May 21, 2007: exogenous forces that influence law department management.)?

A paragraph about the law department of Qwest Communications, winner of Corporate Counsel’s Best Legal Department of 2008 award, intrigues me. A consultant worked closely with the legal department of Qwest for four years. “Qwest lawyers helped [the consultant] create a company, Falcon Discovery, that coordinates the company’s electronic discovery.” This approach may be superior to creating and maintaining an in-house discovery team.

But my main point goes in a different direction. Evidently, Falcon Discovery is now a freestanding startup. My question is whether Qwest’s law department monetized its investment in the new company (See my post of June 15, 2008: legal department patents and IP rights in inventions.)? Large law departments can provide the equivalent of seed money, not to mention pilot programs and references, for fledgling companies. Legal OnRamp may be an example of such an investment underway right now. In those entrepreneurial situations, law departments deserve a quid pro quo.

Unable to find software that met its needs, the legal department of General Motors created some customized applications. The ideas and coding must have been outstanding since Corp. Counsel, Vol. 15, June 2008 at 104, explains one of the supplemental benefits. “Their work was so innovative that GM obtained four patents on the programs and sold them last year” for “a substantial sum.” GM thereby joined the ranks of several law departments that have obtained management-related patents or economic rights (See my post of Jan. 25, 2006: American Express’ patent on law-firm rate increases; April 9, 2006: Equitable’s license of its matter management system; Dec. 11, 2007: FMC’s patent on cost-management, Microsoft’s patent-classification software, CISCO’s e-discovery software, and Unisys’ TriPoint software; and June 4, 2007: Wal-Mart’s I-9 compliance package.).

I question the inclination of law departments to roll their own software (See my post of May 23, 2007: disadvantages of customized software, and 5 references cited.). But if you do decide to go down the path of customizing software, consider how to capture the value of what you create.

One problem with matter budgets is how to have inside counsel negotiate tight budgets when they will later be judged on how closely they hit those budget numbers. Perhaps one solution is to uncouple the two efforts. The lower the budget the law firm signs off on, the better, and to some extent play down whatever happens thereafter. Maybe what law departments need to do is hire lawyers from temporary staff agencies to review budgets. This would be analogous to law firm bill auditors.

An inherent tension is between the desire of an in-house litigation management lawyer to resolve the case successfully and the desire of the general counsel to hit a budget number for the department. The line lawyer may give lip service to cost control, but down deep would just as soon open the taps and bring in a successful defense or recovery. Actually, the same principal-agent conflict afflicts a general counsel: It’s no good to tell the CEO that we lost the case but we saved $150,000.

An ad disguised as an article in Met. Corp. Counsel, Vol. 16, June 2008 at 52, says that DataCert “has completed more than 130 custom integrations” of its software and has “72 Fortune 500 clients.” Assume, therefore, that DataCert has around 130 law department clients.

A sidebar to the article points out that the company “processes in excess of $9 billion of electronic invoicing data on an annualized basis.” Assume, therefore, that 130 clients processed in 2007 $9 billion in invoices from law firms and other service providers. The total legal spending of those clients is no doubt higher, because not all vendors bill through e-billing systems. That means an average of at least $70 million in external legal spend per client.

Very few legal departments shell out more than $70 million in a year, so I must be understating the number of clients DataCert has or not adequately accounting for some with gargantuan legal fees, or both.

“The Fortune 500 corporations spend the equivalent of one-third of shareholder profits on litigation. This cost and the associated risk are not transparent to shareholders.” Met. Corp. Counsel, Vol. 16, May 2008 at 47, blares out this staggering claim by the President of eLawForum.

I decided to test the statement on DuPont, which is probably at the high end of litigation cost exposure. From 2004-06 huge company, beset by product liability and mass tort litigation, spent about $300 million inside on litigation plus $420 on outside counsel compared to $800 million on settlements and judgments (See my post of Feb. 13, 2008: 2004 to 2006 data).

During those three years, the total after-tax profits of DuPont (net income) were on the order of $7 billion (in 2006, $3.15B; 2005, $2.06B, and 2004 $1.78B). Not being a CPA, I do not know whether “shareholder profits” are the same as “net income.” If they are, then DuPont spent less than one-third of its shareholder profits on litigation, assuming $7 billion net income and $1.5 billion on litigation. Closer to 20 percent in fact.

An employee, hit by a truck and brain damaged such that she requires full-time nursing, recovered $417,000 from the trucker’s company, which funds a court put in a trust to pay for her medical care. The law department of the employee’s company succeeded in getting another court to order her family to reimburse the company $470,000 it spent on her medical care. According to the NY Times Book Rev., May 25, 2008 at 14, “the court’s ruling cited a clause in the company’s health plan that gave it the right to recoup medical expenses if an injured employee collected damage payments in a lawsuit.” Thus, the law department enforced a subrogation right.

The reviewer notes that “Until recently, companies rarely filed subrogation suits in such cases. These suits are now widespread.”

If law departments assert subrogation rights with the effect described, and then crow about amounts they recover and proclaim themselves “profit centers,” they should be ashamed (See my post of April 27, 200: 18 references to law departments as profit centers.).

Increasingly, law departments are taking a look at offshore legal process firms. When the general counsel does that, a sotto voce fret might drift through the hallways of the department – “worry about your job!” To the extent law-related work goes overseas, that shift threatens someone’s current job.

You can never be sure whether protestations about quality, unauthorized practice of law, hidden costs, and lack of exportable work are not masking insecurity and job protection (See my post of May 23, 2008: unauthorized practice of law.).

In the fall of 2006, San Francisco-based utility PG&E paid $337,296 to relocate its new general counsel. Hyun Park, from Allegheny Energy in Pennsylvania. This item, from Portfolio, June, 2008 at 36, witnesses to the high costs law departments incur – or some budget in the company incurs – when the department relocates a person (See my post of April 8, 2008: costs to move a lawyer to another city.).

Even so, lawyers in legal departments are moved from time to time as the needs of the department change (See my post of June 14, 2007: save money by relocating to a lower-cost city; June 7, 2006: BHP and its relocated lawyers; Oct. 10, 2005: ex pat pay and relocations; May 26, 2007: Royal Dutch Shell and its relocation of lawyers; May 14, 2005: turnover costs of lawyers includes relocation of replacements; and July 25, 2007 #3: Saks relocation of legal department.).

The legal department ought to absorb those costs in its budget if it believes it should state a total cost to the company of the department.

The following list comes from an article in Finance & Risk Mgt. Commentary, Oliver Wyman, Spring 2008 at 6. The article says that companies ought to master 16 “tools to identify and manage costs.” Several of the tools seem irrelevant to general counsel (“Marketing effectiveness,” “Collections effectiveness,” “Sales force management,” and perhaps a fourth — “Controls optimization” – which was not explained. That leaves a dozen cost control tools that general counsel might deploy.

1. Internal and external benchmarking (See my category: Benchmarking.).

2. Shared services (See my post of Feb. 4, 2008: five references to shared services.).