Articles Posted in Non-Law Firm Costs

Several posts have zeroed in on aspects of the logistics of paying law firms (See my posts of March 26, 2008: Six Sigma and invoice processing; and March 2, 2008: invoice review and 25 references cited.).

A handful have suggested what costs are incurred by law departments when paying firms (See my posts of Sept. 14, 2005; June 16, 2006; and May 1, 2006: time spent on invoice review.), which is easier to manage if the bills come in a pre-defined format (See my post of Nov. 21, 2007.) and if fewer people are involved (See my post of Nov. 10, 2007: a three-way approval process.). One law department even took steps to reduce the number of payee sources (See my post of April 6, 2008: from 400 to 40 sources.).

At another company, the cost on the accounting side has been about $10 per invoice, even with electronic billing. With that cost structure, if a law department has 200 matters pending, each billed monthly by a law firm, then the company’s accounts-payable processing runs around $2,000 a month (See my posts of Nov. 5, 2006: costs of processing invoices.).

Ideally, the system in the law department that tracks outside spending ought to produce the same numbers as the company’s accounts payable system. For many reasons, however, that correspondence doesn’t happen.

Both systems would have to treat an invoice as paid as of the same date. They would have to include the invoice in the same period of time. A second source of discrepancy is that people make mistakes: they miscode a general ledger account, they don’t realize a vendor is already in the system; they allocate a fee among different budgets. Conversions of foreign currency may throw off the amounts in one system (See my posts of Sept. 5, 2005: currency conversion; and Nov. 5, 2007: current thinking on currency conversion.). Possibly there are either duplicate payments or incomplete adjustments (See my post of May 8, 2007: duplicate payment of invoices.).

Third, not all payments that should be charged to the legal general ledger code are done properly, and some payments that are not the responsibility of the law department end up on their accounts.

As reported in InsideCounsel, May 2008 at 18, Oracle’s law department has created an in-house virtual team headed by an e-discovery director. The ranks of legal departments with such teams swell every day (See my posts of Oct.1, 2005: Laura Kibbe and Pfizer; Aug. 26, 2006 #1: initiatives at Verizon, Cendant and Pfizer; Feb. 1, 2006: Verizon and Altria; Nov. 13, 2007: should law departments set up discovery teams; Jan. 28, 2008: Women in E-Discovery group; and April 13, 2008: Eastman Chemical’s discovery team).

One step the Oracle team is taking is to cut back from the many different e-discovery vendors it currently uses to “two or three preferred providers” (See my posts of Feb. 9, 2006: hundreds of discovery vendors at LegalTech; and Feb. 19, 2007: mandates by departments to their firms to use one.). The term “convergence” does not have to be limited to reductions in the number of law firms retained.

According to a K&L Gates ad in Inside Counsel, Feb. 2008 at 90, the law department of American Express has “worked hard at …the generation of revenue, typically through [patent] license fees.” Those Amex lawyers may have worked hard, but to claim that their toil has generated corporate revenue goes too far. The decision to out-license a patent rests with a business manager, not with a lawyer. The lawyer merely helps execute the business decision.

It is no more justifiable for a law department to claim it has generated revenue from patent licenses than from any other activity of its business clients.

To underscore the point, consider an even broader claim. All revenue of all companies depends at some level on a contractual basis, and lawyers probably worked on many of those contracts. Even so, that nexus with lawyers doesn’t mean that the law department can boast responsibility for all corporate revenue.

Managers of law departments overlook the total costs of filing cabinets. “If the average four-drawer cabinet holds about 20,000 pages, that equates to 360,000 additional pieces of paper.” [I am not clear just what that sentence says; perhaps 20,000 documents.] According to InsideCounsel, April 2008 at 44, a large file cabinet typically has a footprint of about 14 square feet. But you also have to leave clear about 12 square feet to open the cabinet and as much more to have room to stand in front of the cabinet and pull files. In other words, the quiet and unassuming file cabinet eats up about 38 square feet.

If your law department is charged back what amounts to a market-rate rental for its space, you may be absorbing costs in your budget on the order of $40-$50 per square foot. That file cabinet, holding old documents and perhaps rarely used, costs you nearly $2,000 every year.

Additionally, as the article points out, “less office space means less heating, air conditioning and lighting, which not only means more cost-savings to the company, but also less strain on the environment.” Does an eyesore add a cost beyond economic and environmental? Entranced by all this, you can read more about filing in legal departments (See my posts of Dec. 10, 2005: telecommuting reduces used of filing drawers; May 4, 2007: most lawyers prefer piles to files; April 23, 2006: electronic filing obviates paper storage; and Oct. 18, 2006: RFID devices for filing.).

In the 2007 ACCA/Serengeti Managing Outside Counsel Survey, selected results of which are presented in ACC Docket, Vol. 26, April 2008 at 14, you can ponder some whiplash metrics. “Average reported savings from using matter management systems were 8% of outside counsel legal spending. Average reported savings form using electronic invoicing systems were 10% of outside legal spending.”

No need to blow on the embers of my previous attack on last year’s comparable findings (See my post of April 13, 2007: 11% average savings reported.). Put simply, the information provided in the Docket does not permit us to judge the reliability of either figure. What I note, for what it’s worth, is that the savings for matter management dropped from eleven to ten percent.

The previous year’s survey either did not ask about savings from e-billing or the answers gotten were not reported. More information and the full survey results are available from Rob Thomas, the report’s author.

From time to time, law departments recruit senior lawyers who need to be relocated. Alternatively, law departments move lawyers from one location to another (See my post of Oct. 10, 2005: ex pat pay and relocations; May 27, 2007: mass relocation of Royal Dutch Shell’s law department; June 7, 2006: BHP relocating some lawyers; July 25, 2007 #2: Saks; and June 14, 2007: cost savings for Citigroup from relocation to less-expensive places.). The associated costs ought to hit the law department’s budget.

Those relocation costs can easily reach tens of thousands of dollars, and that is before any subsidies, such as for mortgage interest rates. There are visits to the area and hotel costs, the cost of movers, short-term expenses while the family gets settled and other expenses. Along with executive search firm fees, relocation costs for corporate lawyers can be substantial.

A very large financial institution wanted to know how many different payment destinations it was paying to the 40 law firms it paid the most. Although using Automated Clearing House (ACH) payments, the institution nevertheless was shocked to discover that among those law firms there were nearly 400 different accounts being paid. An average of 10 per firm! Keeping up with all of them was a chore in itself that demand time and aggravation so the institution requested each firm to choose one payee source. If the law firm did not choose a single payee source, the institution told the firm that it would send all payments to whichever source had received the most money in the previous year.

Many posts on Law Department Management concern Requests for Proposal (RFP), which are a popular tool of general counsel. Some general observations about RFPs have deserved comment (See my posts of Oct. 26, 2007: seven tips for more effective RFPs by a law department; Aug. 9, 2006: RFPs compared to targeted talks; May 3, 2007: confidentiality agreements preserve the secrecy of RFPs; Oct. 29, 2006: untrue that “a lot of RFPs are simply fishing expeditions”; Aug. 10, 2007: RFPs every three years to obtain discounted rates from firms; March 26, 2007:Services that are excluded from the coverage of an RFP process; and May 3, 2007: RFPs: format requirements can be inside or outside the bun.).

Competitive bids that use an RFP process are common and legitimate (See my posts of April 5, 2005: lackluster response levels by law firms to requests for proposals; March 17, 2006: RFPs and effort set in motion for firms; April 5, 2006: top 10 desiderata for law firms when they respond to RFPs; May 9, 2007: low numbers of responses to the many RFPs issued.).

Without dispute, the content of the RFP matters (See my posts of Nov. 9, 2006: provide data on spending and matters; Sept. 13, 2006: disclose the names of firms invited to bid competitively; May 3, 2007: unfair question to ask for competitors; July 29, 2007: beyond the traditional RFP; March 13, 2007: broad, essay questions as part of a RFP; and Dec. 5, 2005: use hours of lawyer work, not amounts paid.).

Two posts invited readers to download PDF collections of my recent articles (See my posts of March 5, 2008: five articles on productivity; and March 11, 2008: six articles on cost control). This final collection brings together six articles on spending by law departments. Click here to download the set.Download rees_morrison_law_department_spending_compilation.pdf