Articles Posted in Non-Law Firm Costs

Is there a defensible way to calculate savings from a competitive bid process? The answer is definitely “yes” if the bids are for fixed fees (See my post of Aug. 5, 2007 for my recommended methodology.). If, however, the law firms submit proposed budgets, but with no commitment to adhere to them, can you still calculate any reductions in projected spending?

Certainly you can if you compare the projected budget of the firm you select to the average of the projected budgets of the other law firms that competed. Not that you always choose a firm that anticipates costs below the average, but if you do, two forms of savings are at work.

At the first level, procurement professionals say that the mere fact that the law firms know that they are competing against capable other firms will temper their budget estimates – some use figures on the order of 7 percent. The other saving, more provable, is the selection of a below-average-cost firm.

Hundreds of posts on this blawg have to do with ways a law department can spend money, but the opportunities remaining appear to be endless. The latest expense that has come to my attention is a shadow jury. In Of Counsel, Nov. 2007 at 8, you learn that “A shadow jury is another means by which to attempt to gauge the impression of the actual jury and to adjust the defense presentation accordingly.”

The author points out that observers might spot the shadow jury, even if the members are disperse. They might make comments that confuse trial counsel and “their predictive and interpretive value is suspect.” What you can be absolutely sure of, however, is that a shadow jury costs a law department a pile of money.

Microsoft, with its huge law department and massive patent activity (See my posts of Aug. 3, 2005; and May 13, 2007 on its drive toward 3,000 patents a year.), has the scale to both justify unusual initiatives and the resources to pull off the initiative.

A tidbit regarding this energy comes from InsideCounsel, Sept. 2007 at 64-65. With a recurrent need to classify large portfolios of patents, the software giant developed – what else would you expect – software, which they use to facilitate the process. The law department is willing to license the program to other companies. .

Other law departments have ventured into an entrepreneurial role with software put on the market (See my post of April 9, 2006 regarding Equitable and its licensing program for a matter management system.) CISCO has developed and made available its own e-discovery software. TriPoint’s founder developed its software at Unisys, and then obtained rights to it. American Express has patented a cost management system (See my post of Jan. 25, 2006 as has FMC Technologies, which at least gives them an opportunity to license others to use the patent (See my post of Feb. 8, 2006 on one law department as a revenue generator.).

Within every industry, total legal spending as a percentage of revenue drops as companies grow larger (See my post of May 4, 2005.). As compared to smaller companies, larger companies enjoy economies of scale and scope (See my post of Nov. 9, 2006 on data from European law departments.). Efficiency effects of size show up in mergers, where the combined legal group emerges smaller than the two departments were that came together (See my post of Sept.13, 2005 about layoffs that result from mergers.).

Still, I know of no study that has tried to tease out which of the many reasons for this decline makes the most difference (See my posts of Dec. 6, 2006 with several possible reasons; and July 5, 2006 and references cited.). While we wait for data, here is a compendium of 11 reasons why size begets relatively smaller budgets. Bigger law departments:

1. Have more predictable streams of similar work so those who do it become more expert (See my post of Sept. 10, 2005 on specialist attorneys in large law departments.) and there can be some semblance of process and consistency;

Only rarely do companies track the legal costs – both either internal and external – that they accumulate in furtherance of a business initiative. For example, the roll out of a new product has intellectual property hurdles, marketing materials review, logistics contracts, perhaps employment agreements, and all manner of other legal work, but no one totals the cost of that legal work. If a company opens a new distribution center, who tracks the cost of the legal work to obtain the property, construct the building, hire the workers, transfer the executives, and otherwise get it up and running?

With activity-based costing (See my post of June 16, 2006 for an application of ABC; and April 12, 2006 for another.), companies try to break down the component costs of an activity. ABC doesn’t work with lawyers unless they track their internal time and manage their outside counsel expenses by initiatives, not the customary smaller units of matters.

There are instances, however, such as the acquisition of a company where the legal fees are tracked and capitalized. But for the most part, no one can say that the legal costs were a specific amount for the company to pursue a particular corporate initiative.

General counsel who reduce what the spend on external law firms should get credit for those reductions whether the savings are cash savings or reductions in reserves. Or so thinks this non-accountant.

Law departments that face significant litigation set up reserves. If spending on law firms is applied against those reserve accounts, it may be that the law department on a profit & loss (P&L) basis shows no savings if it reduces those expenditures.

If the law department institutes effective cost management, it will show savings on a cash basis, even if not on a P&L basis.

It is common for large companies to require employees who want to buy a good or service to submit a purchase order (PO) for prior approval. Sometimes, the finance department – usually the force behind the PO process – tries to rope the law department into compliance with the regimen, but the effort usually founders.

According to Paul Roy, the administrator of the law department of TimeWarner Cable, “We in the law department do not have to fill out purchase orders, since we can’t be definitive regarding the costs of outside counsel.” That department has other tools for managing the costs of outside counsel.

A law department I have helped must fill out purchase orders after they have received the bill of a law firm, which strikes me as make work. In Roy’s department of 20+ lawyers, much that it buys, like supplies, is done internally by a purchasing group. Very unusually the law department buys something sizeable, like a fax machine or shredder. But even then they don’t have to complete a PO.

An article in Bus. Law Today, Vol. 17, Nov./Dec. 2007 at 61, differentiates offshoring to India from offshoring to Israel. The author, Ken Wollins of Green Point Legal Services, points out some disadvantages of Indian providers: promising what law departments want to hear because of cultural tendencies to avoid confrontation, a British style of speaking and writing, and capabilities more suited for simpler project-oriented assignments.

Not surprisingly, Wollins commends Israel with its “thousands of lawyers who have been raised and educated, admitted to the bar, and practiced law in the United States.” According to him, “a general rule of thumb is that cost savings of about 30 to 40% can be achieved through Israel and about 50 to 60% in Asia.”

The article concludes by saying that “even taking into account the aggressive forecasts, the total amount of legal work sent overseas will remain below 2 percent of [the $200 billion legal industry in the United States], and a considerable portion of that will be attributable to lower-skilled work that is not handled by lawyers.”

What cost advantage do inside lawyers have because they do not have to buy insurance for their legal work? Data from the website of the Attorneys’ Liability Assurance Society (ALAS) provides 2007 per attorney premium rates for malpractice coverage. Rates vary by coverage limits and retention levels but let’s choose a common combination of the two. Take a retention level of $1 million for each claim up to an aggregate annual maximum of $2 million and match that with a total coverage policy limit of $50 million per claim and $100 million in the annual aggregate. The ALAS rate listed for that combination of coverage is $7,439 per attorney. If an attorney bills 2,000 hours at $350 an hour, that malpractice premium represents about one percent of billings.

A sidebar in Law Firm Inc., Vol. 5, Nov. 2007 at 33, discusses a range of premiums for professional liability coverage, between $6,000 and $10,000 per attorney. The brokers interviewed also added property and casualty insurance, which adds another $1,600 per attorney per year, and per-firm coverage for employment practices, management liability, and the like.

By contrast, in-house lawyers do not bear any malpractice or other non-medical insurance burden. In a 400-lawyer firm, the insurance premiums – to say nothing of deductibles – account for something on the order of $5-7 per hour billed. Not only do in-house lawyers enjoy this small dollar per hour savings, there is also a greater ability to take a legal risk when you are inside. If negligent, you won’t trigger a claim – although you might lose your job (See my posts of Dec. 20, 2005; Oct. 24, 2005; and April 15, 2007 on malpractice from the inside; as well as Nov. 10, 2007 on general counsel retaining counsel to protect them.).

Bruce Macmillan, in-house counsel at Dell EMEA, is cited in a report on hourly billing, by Commerce & Industry (C&I) and BDO Stoy Hayward. At Dell, “procurement function processes have affected legal purchasing for years.” The point for this blog is that “Procurement team involvement is now mandatory on higher spend relationships, with only a few limited exceptions” (See my posts of July 29, 2007 on software for a procurement process; and May 9, 2007 with nine references cited about procurement.).

According to Macmillan, “Legal still negotiates and agrees its budget with the finance function and the business management, but the procurement department is there to help to ensure that the suppliers with whom the legal team spend represent a reasonable use of the company’s resources.” That bland statement leaves me with many questions as to how procurement carries out that assessment (See my post of May 9, 2007 on procurement barging in on law departments.).

He also makes the point that law firms used by Dell “have to justify their practices not only in comparison to rivals, but also a range of other consulting service providers, such as accountants, as these form part of procurement’s benchmarking data.” Shiver.