Articles Posted in Non-Law Firm Costs

Patent-related legal services, including litigation, bulk large for many law departments, and data appears frequently about these services. The Wall St. J., June 9, 2007 at A7, offers a number of insights.

“It is cheaper to obtain a patent, which can cost $5,000-$25,000, than to invalidate one. Legal fees average $4.5 million in disputes where more than $25 million is at risk” (See my posts of May 13, 2007 on Microsoft’s spending; and June 11, 2007 on the costs of patent litigation in the US.). I do not know whether this average includes the legal costs of all parties to the lawsuit.

The number of patent lawsuits filed in U.S. courts has risen since the 1990s from about 800 per year steadily up to around 2,700 per year. For the past three years, that total has stayed fairly constant (See my post of Aug. 5, 2005 about the choice between a generalist litigator or a patent lawyer to handle a case.).

Count the number of PCs in your law department. You will probably find more PCs than people, and each PC or laptop wastes significant amounts of electricity. According to the Wall St. J., June 13, 2007 at B6, “PCs waste about half the power they consume,” since, for example, most PC power supplies operate at about 65 percent efficiency. Inefficient voltage regulators installed on the main circuit board are among the culprits.

One conservation step every law department can take is to install on its PCs power-management software, which puts them into an energy-saving mode after a period of inactivity. We are all familiar with Blackberries and cell phones that go dark within seconds of non-use to preserve their batteries.

The software costs about $20 on a PC and if used the annual electricity bill for running an average PC could drop to less than $10 from about $40 (See my post of April 27, 2007 for more on energy conservation.). An even simpler step to take is to urge everyone to shut down their PCs when they leave at night.

I offer this post in hopes that a reader can respond with a better solution to a problem.

A major financial company pays an ASP for its e-billing function. Typically, law departments pay a commission-based fee borne by outside counsel; two percent of the invoice amount is the norm.

An IT person at one such company wrote me recently. Because the typical commission would have been exorbitant, the company negotiated a set fee with the ASP. The law department collects and remits this fee to the ASP. The ASP is fine with this since it gets more money up front and the client collects and remits the fee, limiting the ASP’s accounts receivable overhead and hassle. The writer pointed out that at least four other financial companies, as well a major retailer and a large pharmaceutical company, have a similar arrangement.

Once I noticed one ad that relies on a testimonial of a general counsel I started spotting counterparts everywhere. I wonder what the law departments got in return. Here are a few ads of recent vintage:

Knobbe Martens Olson & Bear ad in Corp. Counsel, March 2007 at 41, quotes Matthew Fawcett of JDS Uniphase. Concentra, a national healthcare company, allows BottomLine Technologies to publish a case study of it in an advertisement Henry Schein, Inc. poses its law department in ads for LawTrac Development Corp. (for example, InsideCounsel, May 2007 at 11). An attorney for American Airlines, not the general counsel, poses in front of an American jet on behalf of LexisNexis Martindale-Hubble (ABA J., Vol. 93, May 2007 at 3). The general counsel of New World Restaurant Group, Jill Sisson, appears in an ad for the US law firm Holme Roberts & Owen (InsideCounsel, May 2007 at 70).

In 2005, $1.1 billion specialty-paper producer Glatfelter brought in its first general counsel. Since then that general counsel, Jeffrey Norton, has added three lawyers, one being a contract attorney on assignment to the company. As reported in GC Mid-Atlantic, May 2007 at 8-9, the legal department also hired two legal assistants. The article states that “The restructuring of the legal department reduced the company’s spending on outside counsel fees by more than 50%.”

If Glatfelter’s total legal spending was at the typical mark of 0.5 percent of revenue, it would have spent approximately $5 million on outside counsel when it decided to create an in-house department. If the four lawyers cost an average of $200,000 each and two assistants paralegals $50,000 each, then with benefits and other costs of a law department the internal spend might be approximately $1.5 million. If that be true, Glatfelter’s in-house investment quite plausibly reduced outside counsel fees by $2.5 million.

The 700-lawyers of Allstate’s legal department consume a tremendous amount of continuing legal education because many of them are admitted to practice in Illinois, which has mandatory CLE. To whittle away at those ongoing professional development costs, Allstate ask its premiere legal firms to provide free seminars that qualify for CLE credits. As reported in Corp. Counsel, Vol. 14, May 2007 at 98, all 13 of Allstate’s primary firms have agreed to give CLE sessions and ‘the insurer is saving an eye-popping $1 million over two years on continuing legal education classes.” (See my posts of March 6, 2007 on CLE credits for a law department’s own courses; Jan. 20, 2006 on mandatory CLE; May 10, 2005 on reimbursement of CLE expenses; and May 1, 2005 on the obligation to disseminate CLE training.).

Note another nice touch. Allstate invited in-house lawyers from neighboring companies to take advantage of the classes. Here’s an example of collective law department activity (See my post of Oct. 14, 2005 and references cited on collective actions by law department.).

These days, patents are revered by many companies. To identify, protect, and license patents has become a widespread and important initiative.

Curiously, at the same time one of the most common legal services subject to fixed fees are – you guessed it – patent applications and prosecutions. Many law departments have negotiated fixed fees for the services of law firms that prepare and prosecute patents (See my post of May 24, 2006 and some data.). Often those arrangements recognize the varying complexity of applications and break the fixed fees into two or three tiers of cost. Some law firms take on the work at break even levels, or even as loss leaders.

It’s hard to reconcile the strategic value of patents with assembly-line pricing.

Auctions tend to be dominated by cost: which law firm will offer the lowest billing rates or take on the work on offer for the lowest fees. Competitive bid processes scrutinize costs, of course, but also take into account more subjective determinants, such as each firm’s experience, staff, diversity, approach and technology.

Auctions are usually done quickly, in real time. If all the bidders are prepared to hold up their cards, the auction can be conducted relatively rapidly. Competitive bid processes, by contrast, typically unfold over several months.

Auctions can be done online and electronically. In most competitive bids, although law firms may submit their proposals electronically and may ask questions by email, the most significant decisions and steps are not done through the Internet. For instance, often a bidders’ conference takes place and in person presentations.

At a recent panel, a general counsel told the audience that his department was under a mandate to reduce costs from its 2005 baseline at a rate of two percent each year, year after year. That is a Herculean task. Beside that vapid comment, two prickly issues trouble my mind.

Does a law department strive to achieve all the savings it can in one year, even though its managers know or suspect they will be called upon to deliver more savings in the following years? Humans being human, managers will probably strive to meet the goal this year, but not consume next year’s savings. Something like smoothing out quarterly earnings prevails.

As to the second issue, is the goal of a law department to meet the budget-cut numbers for the year, or to effect more radical, longer-term changes? For example, a legal group might transform its relationship with its law firms, restructure internally, or invest in knowledge management. What if it takes money this year to save money next year and in subsequent years?

The law department of a large financial services company had to deal with a mandate from the CEO to reduce costs by a certain percent year over year. Of the many measures this large department adopted, a set of them had to do with bringing compensation costs down. Typically, compensation-related costs account for close to three-quarters of a law department’s internal budget.

One step in the campaign was to adopt something closer to an up-or-out program. If a lawyer was deemed not to be capable of being promoted to a certain level – think of it as the partner level – the law department took it upon itself to counsel that lawyer out. Another step was to scrutinize the work the lawyers were doing and match that work to their compensation. A lawyer’s base rises every year, but if the work done and the productivity displayed remain stagnant, it’s an incremental cost this department wants to think about and possibly reduce.

In a like manner, the department moved aggressively to have everyone delegate work to the lowest cost but capable level of person (See my post of Aug. 26, 2005 about measuring delegation to paralegals.). Finally, the law department pursued flex-time opportunities so that it could more closely match its costs with the services it needs doing.