Articles Posted in Non-Law Firm Costs

The whole topic of compliance, ethics, risk management and governance has attracted much attention and drawn consultants. Three of them known to me are Linda DiSantis of EthicsLINC, Rick Wolf of Lexakos, and Debra Sabatini Hennley of Compliance & Ethics Solutions. DiSantis has been a co-author on this blog.

Each of them offers significant experience from their days in corporate life and have now joined the ranks of consultants. Other consulting groups that provide advisory services in these broad areas undoubtedly have among their staff some former lawyers.

The bubbling cauldron that is electronic discovery these days intimidates me. Unless you are immersed in this turbulent field, the enormous variety of offerings and competing claims for excellence can deter even the most confident blogger. That said, it does seem to me that software for litigation discovery review that clusters together documents of similar content should advantage law departments. A piece in the Met. Corp. Counsel, Vol. 16, March 2008 at 8, mentions this software and offers a metric.

Discovery jacks up litigation costs dramatically (See my post of April 24, 2005.). Claiming that “a major component [of discovery] is the cost of review for production”, one contributor to the panel (a vendor) notes that “clustering technology allows reviewers to complete their work in one-half to one-third of the time, compared to traditional review applications.” If these productivity metrics are true, there must be some counter argument by other vendors or this technology would sweep the battlefield.

My friend Ron Friedmann of Integreon emailed me about my post on price inelasticity (See my post of March 20, 2008.). The original posting discussed three ways that law departments can cope in a world where they cannot raise prices. ”I would add a fourth strategy, namely create a queue. A common way to ration a good or service where price is not easily modified or where there are reasons to keep price constant is to allow a queue to form.

One example is Disney World and other popular theme parks. Rather than price popular rides differentially, they ration supply by wait time. Customer service at most consumer companies is like this as well. You can’t pay more to get better or faster help from you utility or cell phone carrier. They ration service by making you wait. I suspect that many in-house clients might feel they are subject to this.”

Good idea, Ron, and thank you for it. The dubious side of me worries that delays by in-house lawyers might not be as deliberate and thought out as commercial queues.

What truth is there in the following quote? Do general counsel pay more to lawyers whose specialties are vital to the company? “Large corporations, for example, place a high value on limiting their tax liabilities. The most talented corporate tax attorneys are often able to reduce these liabilities by tens of millions of dollars, and their salaries are scaled accordingly. Regulated companies may be viewed as being in high-stakes contests with the government across an even broader front. These contests pit the skills of company lawyers and economists against those of the regulators, and the result is often intense bidding for the economists and lawyers most likely to influence the outcomes. Similar behavior is triggered by decisions about the locations of attractive government facilities, the recipients of broadcast licenses, tariffs and quotas on imports, and other forms of public largess.”

The claim comes from Robert H. Frank and Philip J. Cook, The Winner-Take-All Society (Penguin Books 1995) at 44, but the two sources cited by the authors are at least a decade old and are economists writings about rent rather than data from law departments.

While logical to an economist – demand raises prices — the claim may be wrong. The relative pay of in-house lawyers does not seem to correlate with objective measures of how important their practice area is to the welfare of their client company. On the other hand, this notion may suggest one reason why tax lawyers are typically not part of the law department: they want to preserve their higher pay.

A speaker from a financial-services firm, who obviously has an economics background, describes law departments as “businesses with no price elasticity” (See my post of April 27, 2006: explains the term elasticity.). By that he means that law departments cannot raise their prices to their clients. Because of that limitation, all they can do, in terminology borrowed from the dismal science, are three things.

First, they can lower the cost of their supplies, which means squeezing the nickels of law firms and other service providers.

Second, they can increase production, which means getting more work out of the available inside and outside resources at the same cost (See my posts of in the category “Productivity.”).

Tough legal issues surround companies that are having difficulties, which suggests that their inside lawyers might be relatively immune to reductions in force compared to other employees in a company. But layoffs scythe through all groups (See my post of March 1, 2008: Ford’s law department lost 32% of staff.).

Recently, at Home Depot, according to a piece by Katheryn Hayes Tucker on Law.com, Feb. 26, 2008, an estimated 17 people from the law department lost their job. What was the percentage laid off? The article cited one person’s estimate that the company has 80 lawyers. (A directory of corporate counsel for 2005-2006 lists only 16 and the Georgia Bar shows 41 lawyers.) If we assume 80 is about right, and that there were somewhat less than one non-lawyer per lawyer, the department might have had about 150 people. If so, the layoff was in the vicinity of 10 percent.

Three other management points come from the short piece. The first is that the new approach of the department is called “lawyer light” and it “includes cuts in compliance,” so it appears that compliance reports to the general counsel. Second, the CEO of Home Depot is a lawyer (See my posts of May 26, 2007: GCs who become CEO.). Third, or a period of months in 2007 the company had an interim general counsel (See my post of June 5, 2006: designated successors and Sears and Coca-Cola with interim general counsel.).

Data from InsideCounsel, March 2008 at 56, shows that the larger the company the more the general counsel is paid. For example, in companies with $3 to $10 billion in revenues, median total cash compensation for the top lawyer stands at $470,000, while in companies with more then $10 billion in revenues, the pay packet hits $740,000.

Comparable sharp rises in cash compensation as companies are larger show up at other levels of lawyers. Since compensation accounts for such a large portion of a law department’s internal budget (See my post of Dec. 10, 2007.) you might think that total legal spending as a percentage of revenue would increase as companies grow. Not true, as I have pointed out (See my posts of Feb. 6, 2008: total legal spending declines as a proportion of revenue as revenue increases; and Feb. 17, 2008 #1: more metrics.). .).

It’s as if bigger companies, and their correspondingly bigger law departments, are more able than smaller law departments to winnow out the less productive lawyers. Small law departments have to make do, so to speak, with the lawyers they can hire and keep, whereas bigger law departments have more room to maneuver in terms of personnel. In short, they can pay more for fewer but better lawyers and thereby still enjoy the cost reductions of scale.

Many law departments have touted shortening the time cases last as a good aid to budget discipline (See my posts of Sept. 28, 2007: cost-control technique; May 16, 2006: FMC Technologies’ reductions; and May 23, 2007 GE on reduction of cycle time.). The shorter the duration, the lower the cost, they argue. At the least, a general counsel can measure the elapsed time of cases and base some decisions on that information (See my posts of April 2, 2005: panel presentation; May 28, 2005: cycle time in federal civil court cases; Dec. 10, 2005: speed time to resolution; Oct. 27, 2005: time-to-resolution; Feb. 20, 2006: some analytic metrics; and Feb. 23, 2008: eLawForum data on cycle time and early case assessment, with references cited.).

What butts heads with cycle-time reduction is the obvious fact that sometimes cases lie fallow for long periods of time (See my posts of Feb. 27, 2008: Ford Motor and inactive asbestos cases; Oct. 25, 2007: the percentage of dormant cases; April 17, 2007: percentage of dormancy months; and Aug. 22, 2006: a metric of law firm performance.). Sometimes courts creep like glaciers, sometimes the other side loses enthusiasm, sometimes nothing significant happens for months at a time.

It may be fiscally prudent and legally sound to let some cases snooze on and on. Rather than wake up the other side so that you can lower your average turnover period, just tiptoe silently away.

An article about services supply management in Cal. Mgt. Rev., Vol. 49, Summer 2007 at 53, cites a study by a financial services company. The company found that its actual temporary labor prices were 6.2 percent higher than what the company had contracted for. The authors remark: “This range is typical of procured services.” That remark says to me that it is common for prices of services – dare we consider legal services? – to exceed what was agreed to.

Law departments don’t often negotiate fixed fees (See my post of March 1, 2008: references cited on fixed fees.) or even blended rates, so they have little ability to calculate pricing over-runs. But even so, it is disappointing in an age of procurement, to read about services typically costing more than was negotiated.

This blog has mentioned at least nine law departments that have worked with their internal purchasing/procurement/sourcing group (See my posts of Aug. 14, 2005 [Oracle]; April 7, 2006 [GE Consumer Finance and FT Group]; April 30, 2006 #5 [Microsoft]; Aug. 2, 2006 [Sears]; June 16, 2006 [Bank of Ireland]; May 9, 2007 [Pitney-Bowes]; July 29, 2007: [BMO Financial Group]; and Nov. 13, 2007 [Dell]. In my consulting, I have worked with at least four other law departments that have drawn on the skills and disciplines of their procurement colleagues. Many more company’s law departments have done so (See my post of March 13, 2007: 2006 Hildebrandt Law Department Survey found 11 percent of 201 companies agreed that within their company procurement had an active level of participation.).

Paul Roy, Director of Finance & Administration of Time Warner Cable’s Law Department, allocates to 20+ divisions and regional offices outside-counsel costs incurred by the Department on their behalf. His department charges back approximately 60 percent of its outside costs in a typical year. The rest is absorbed in the Department’s budget as a corporate cost. Lots of matters are deemed corporate, like class action litigation, regulatory demands of a cable company, securities, benefits plans, and legacy litigation.

InsideCounsel, Jan. 2008 at 50, notes from an Altman Weil survey “62.5% of legal departments charge back outside counsel costs to operating units.” This is not to say that 100 percent of outside counsel costs are charged back by the law departments in that survey; like Time Warner Cable, most legal departments absorb a fair amount of spend (See my posts of Oct. 15, 2007 on a client gatekeeper for external expenses; May 31, 2006 on charge backs; Nov. 10, 2007 about a three-way approval process.).

Roy tries to give the divisions estimates of amounts to be charged them but it is difficult to do because costs are hard to predict when you become granular – the total legal budget of the Department is easier to predict. There are some discussion about which costs should be assigned to which bucket – a business unit or the law department, as business units don’t want to absorb costs and so they argue for them to be paid as a corporate expense. Sometimes the outcome is to split costs.