Articles Posted in Non-Law Firm Costs

The maintenance costs of equipment in a law department can amount to significant sums. Here is a comment from the administrator of a very large government law office.

“Normally, we spend $750,000 on equipment each year. That includes everything from computers to digital senders to faxes to copiers and we’re going to defer $500,000 into the next year. So the money that we’re saving, not spending, on copiers and equipment, is going to save jobs.

The other thing that we’ve done is to not buy maintenance agreements on all of our copier equipment. We spend $5,000 or $6,000 every year to insure a copier that might cost $25,000, so that if it does break down we call somebody out. It’s covered under the maintenance agreement. I think that we’re taking a bit of a gamble, but we’ve decided we will buy maintenance agreements on most of our equipment, but not all, to save $100,000.”

Very roughly, fully-loaded inside lawyers in the US cost their companies about $200 an hour as a fixed cost. As roughly, the effective rate paid outside counsel reaches about $300 an hour, a premium in the vicinity of 50 percent for that variable service (See my posts of Nov. 16, 2005 on fully-loaded costs per lawyer hour; Jan.10, 2006 that offers an estimate of $150-170 an hour; Oct.18, 2005 on calculating a fully-loaded cost per lawyer hour; and Aug. 14, 2006 with its estimate of $270 an hour outside.)

It distorts our judgment to get caught up in the stratospheric rates ($1,000 an hour!!) of some prominent partners. Look at the mix of time charged to a matter by various lawyers and rely more on the effective rate for a matter (See my posts of June 13, 2006 and its comparison of blended and effective billing rates; Sept. 10, 2005 and Oct. 25, 2007 on the correlation of rates to firm size; and Dec. 28, 2006 on differentials between partner and associate rates.). Then give thought to the gap between your internal lawyers’ costs and your external law firms’ costs.

Compensation makes up three quarters of the typical inside budget of a US law department, so the fully-loaded cost of the lawyers in a given law department is a result mostly of paychecks. According to Bus. Law Today, Vol. 17, Jan./Feb. 2008 at 6, data from Hildebrandt’s 2007 Law Department Survey shows that law departments are spending more than 80 percent of their inside counsel dollars on compensation (See my post of July 31, 2005 about compensation rising 7% a year, including equity awards.).

Of that compensation driven budget, I have seen in benchmark surveys and consulting projects that the compensation of the lawyers accounts for three quarters of the total departmental compensation.

Going one metric further, it may well be that base comp – salary — accounts for three quarters of the total lawyer compensation.

For most matters where outside counsel have been retained, the disbursements of the firms cluster around 10 percent of their total billings. At the same time, of the total outside spending by a law department, roughly seven or eight percent of it goes to service providers other than law firms (See my post of May 30, 2006 regarding the business ecosystem of law.). If you were to treat airfare for inside counsel (and related lodging and travel expenses) as an additional service provider, and add in the expenditures during a year of a typical law department on matter-related flights, it would not surprise me if the law department percentage for “disbursements” reaches approximately 10 percent.

It’s as if law departments were law firms and their out-of-pocket expenses coincidentally equal the pass-through expenses of law firms.

Cal. Mgt. Rev., Vol. 49, Summer 2007 at 56, has an article about strategic sourcing of services. It makes a thoughtful point about law department’s bidding work to law firms (See my post of May 21, 2007 on bids compared to auctions.). “While a competitive bid sourcing process can provide good insight into the current market pricing for a predefined service, it rarely provides insight into the underlying dynamics of the supplier’s cost structure or the relative costs of the various activities the supplier is taking on. In essence, competitive bidding may tell you what the service does cost, but it does not tell you what a service should cost.”

Managers of law departments do well to run competitive processes before they pick a firm. The process, as noted, does not tell them about how firms operate themselves (“the underlying dynamics of the supplier’s cost structure”) nor much about what an ideal market would price the same services.

Cal. Mgt. Rev., Vol. 49, Summer 2007 at 44, has an article about how procurement’s next frontier is managing the supply of services. Figure 1 (at 46) puts legal spending at about 90 percent outsourced and about 15 percent of that is “controlled by formal supply management.” As compared to the other 16 outsourced services, the authors place legal services as more completely outsourced than all but two (only “Professional Services” and “Printing/Copying” and Construction/Engineering” are more outsourced) and with as little formal purchasing control as all but one (only “Inventory Management” is less controlled).

Data from law departments does not support the contention that 90 percent of legal spending is outsourced, since typically about 60 percent of total legal spending goes to law firms. As to formal supply management, I doubt that it reaches as high as 15 percent among US law departments.

Still, cavils like that aside, the point is that procurement experts view the legal department as the raw, untamed and wild West.

I seem to be running across quite a few problematic sentences and paragraphs. This one, from an advertisement supplement by EMC2 in Corp. Counsel, Vol.15, Jan. 2008, after 50, set scratching my head: “The costs and risks of eDiscovery (sic) can be dramatic, with the average cost of a case being in excess of $1 million.”

It is unclear whether the million-dollar figure is intended to apply just to ediscovery expenditures, which cannot possibly be true. The quote also seems to refer to the cost of an average case, because no case can have an average cost. Nor am I sure why “risks” shows up, when the sentence has to do with financial exposure. And, finally, why label some circumstance dramatic if the average of whatever runs to seven figures?

After litigation under some statutes, the prevailing side is entitled to recover the fees of its attorneys. A small body of substantive law has developed around the rights of in-house lawyers to recover attorney’s fees.

My crude understanding is that sometimes, if inside lawyers are to recover their costs, a court must agree that employed lawyers are entitled to have their “fees” recovered. Second, the court must determine the recompense to be awarded for the time and efforts of the inside attorneys. Some courts have looked to prevailing rates of outside counsel who handle similar work in that jurisdiction. Other courts have approved a fully-loaded cost of in-house lawyers (See my post of July 27, 2007 on this term.). A few courts have set arbitrary or idiosyncratic lodestars. Whichever formula a court approves, this is one situation where tracking internal time can turn out to be useful.

To recover attorney’s fees is different in intent than to operate a law department as a profit center (See my posts of Feb. 8, 2006 on DuPont’s law department and its efforts to collect money as a profit center; Dec. 10, 2007 on recoveries of class action settlements; and June 15, 2006 and references cited.).

A large bone of contention between law firms and the law departments that they serve, when there are outside counsel guidelines, is the travel policy. For what kinds of trips or lawyers is first class or business class available? (See my post of Sept. 5, 2007 for thoughts on whether law firms can bill for travel time; and July 20, 2007 on two airfare cost-saving ideas.).

Most companies recognize that transoceanic flights for their own employees warrant an upgrade and most permit upgrades for VP-level lawyers or the equivalent. For the rest of the law department’s employees, there is a continuing administrative drag of individual approvals by superiors based on circumstances and budget.

One simplified solution is to mandate the same policies for lawyers in-house and those out-house. Such a symmetrical policy has the merits of simplicity, equity, and enforceability. Wal-Mart, I am told, has this tough but balanced policy. It decrees that all employees and suppliers of services may only fly coach. Full stop.

“A comparison of the rise in law firm billing rates over two or three decades with the Consumer Price Index (CPI) shows that hourly rates have consistently increased by approximately twice the CPI.” This provocative statement, from GC Mid-Atlantic, Sept. 2007 at 16, gave me pause.

It seems plausible to me that the internal costs of law departments over the same decades have roughly kept pace with the CPI. After all, compensation costs account for three-quarters of so of the internal budget, and I doubt that many companies last that do not keep their pay and bonus scales at least around the annual CPI. No way, however, would those compensation increases double the CPI.

So, one would expect that over this time period the percentage of total legal spending on outside law firms increased steadily, as their increases in rates far outpaced internal increases in costs. Given that other data has found that the 60/40 ratio of outside-to-inside spending has remained quite constant (See my post of Dec. 5, 2007.) it must be that productivity has significantly increased outside or much less work has gone out.