Articles Posted in Non-Law Firm Costs

General Electric’s law department has apparently invested in a document management and document assembly system, an innovation that the department anticipates will save $12 million annually. In the fine print of the article, Corp. Counsel, Vol. 14, Jan. 2007 at 61, the law department mentions outside counsel fees and inside lawyer hours, but also includes the profit or revenue expected to be made by General Electric, through use of the contract toolkit, from quicker or more frequent sales of aircraft. Thus, faster and better turnaround of contracts leads to more corporate profits than would have happened otherwise, which the law department has appropriated as departmental savings.

On this reasoning, where a law department process improvement can take credit for business revenue, no law department should ever be considered only a cost center. But, second-order “savings” (increased corporate profit) is not legitimate; savings from a law department initiative needs to come from less cost for the same output. For more on ROI estimates, see my posts of May 1, 2005 on bill review software; May 14, 2005 on knowledge management; May 14, 2005 on projecting savings; and July 31, 2005 on implausible assumptions.)

Out of a research set of 1,124 US federal district court IP cases – 670 patent, 436 trademark, and 18 both – decided between 1980 and June 2005, “on average since 1983, plaintiffs … are awarded damages approximately 53% of the time” according to the 2006 Patent and Trademark Damages Study by PwC at 5. So much is written about the costs of patent lawsuits, especially, but law departments and their counsel fare quite well; plaintiffs can’t be too encouraged if they win barely more than one half of the time.

As to the vaunted litigation surge, the number of patent cases brought has climbed steadily from 1,171 in 1991 to 3,075 in 2004; for trademarks, the same timeframe saw an increase from 2,220 to 3,508 filings (id at 7). During those 14 years, corporate revenue in the US might well have doubled, or more, so IP cases filed per billion dollars of revenue appear to have roughly kept pace.

Finally, what amazed me (at 23) is that in “patent decisions, only about 30% of the damages decisions issued by US federal district courts during this entire period were affirmed (i.e., left unchanged by the appellate court.” We always read about huge awards, but less frequently do we read about those decisions being overturned, adjusted, or remanded. Therefore, in proportion to revenue growth, and adjusted for inflation (See my post of Dec. 31, 2006 on this calculation.), the numbers and damages of patent litigation appear less frightening than their usual description, and victory is had as often as not by those who are sued.

Data has yet to come to my attention about how often law departments request from their law firms what US lawyers refer to as “formal opinions.” The law firm’s malpractice insurance backs up a firm’s formal opinion letters. Outside of mergers (See my post of Nov. 9, 2006 on UK law firms and liability caps.) and patent infringement analyses, such letters are probably rare.

Less formal second opinions, however, can be sought by law departments at any time and vary considerably in their purpose and cost, but serve mostly to corroborate the internal judgment of law department lawyers. Such comfort is not so rare.

In fact, one cost spigot that a general counsel can turn off is too much checking with outside counsel. Sometimes a firm’s expertise, research skills, and experience across several companies justifies another head, but too frequently done it betrays lack of confidence in the abilities and judgment of the inside lawyers.

According to Iain Larkin, group general counsel at DaimlerChrysler UK, in LegalWeek, Sept. 21, 2006 at 18, “Statistics prove that, contrary to popular belief, external legal costs increase rather than decrease with the introduction of a legal department.” I can well believe that, because some clients don’t even know what they don’t know about legal problems. Having unopened eyes and no one to call, clients just blunder on.

Bring in a lawyer, and people start meeting that lawyer and becoming more aware of legal issues. And, if the lawyer is at all savvy, the lawyer will spot some issues, a few of which will need outside expertise. Hence, add an inside lawyer and watch external costs rise.

A tidbit from Counsel to Counsel, Nov. 2006 at 10, notes that the in-house lawyers of Golden West Financial Corp. are assigned to and co-located with the bank’s three major business units. The units must include in their annual budgets the costs of the lawyers assigned to them. Because that cost is a fixed overhead, those who manage the business unit try to make the best use of the resource (See my post of Feb. 18, 2006 on fixed versus variable cost lawyers.). No longer a free good, the charge back arrangement disciplines the use and increases the effectiveness of the in-house business lawyers.

Co-location with clients and a fixed cost assessed helps aligned business lawyers to the group they support. To whom those lawyers report is another issue.

You can’t hear about law departments’ travails of cost control without hearing one of the perennial candidates; alternative dispute resolution (See my post of May 21, 2006 where it is ranked number 6.). Within the ADR quiver, mandatory arbitration is one of the proudest arrows (See my post of Dec. 9, 2005 about dispute-wise companies.).

But some law departments have found that the arrow neither flies true nor punctures the target. The ABA J., Nov. 2006 at 19, explains the process you sometimes need to endure just to enforce the right to arbitrate. Arbitration has also taken on the trappings of litigation, with discovery, expensive outside counsel, costs of arbitrators instead of a free judge, and lengthy hearings. Moreover, you can’t obtain summary judgment and many arbitrators merely split the difference, whereas judges decide a winner. Also, few disputes go to trial, so arbitration avoids something that is anyway unlikely to happen. One of the in-house counsel quoted in the article finds no marked difference in the speed of arbitration compared to litigation.

The article claims, therefore, that mandatory arbitration is waning, but mediation may be waxing.

In the early 1990s Aviva, a UK-based insurance company, started having its in-house team of lawyers track their time. According to an article in Law Dept. Quarterly, Vol. 2, Sept./Nov. 2006 at 44, they currently use an in-house system to track lawyer time.

The article points out three ways Aviva has dealt with the fear that if the in-house team tracks and charges back time, it will deter some impecunious business managers from incurring costs and they will avoid approaching the legal team with everyday issues.

The law department recharges its costs to each business unit as a whole, “with only exceptional non-business-as-usual activity being charged direct to specific business projects.” When legal expenses roll up that high, managers will be less inhibited about turning to lawyers. The second protection is that there are policies that mandate the use of in-house counsel. For example “contracts have to be passed on to the legal team whenever they are signed, and the legal team must also be consulted whenever an extra law firm is approached.” Third, the company encourages a culture which encourages the use of the legal function. Good antidotes, all, for an otherwise poisonous situation.

A recent Legal Week Intelligence Client Satisfaction Survey garnered responses from 297 UK law departments. The results summary in LegalWeek, Oct. 26, 2006 at 3, has a strange paragraph in it, at least for US law departments.

“General counsel identified law firm policies towards liability caps and conflicts as significantly more important factors in choosing who to instruct, rather than their global reach or their diversity policies.” No strangeness anywhere about the desire of companies for their firms to have clear conflict policies.” As a factor for choosing a firm, conflicts seems oddly ranked so high, but the criterion is understandable.

More strange and less understandable is the importance attached to “liability caps.” Research and explanation by Amanda Nelson, Administrator of Diageo’s law department, cleared it up. In the UK, law firms can be held liable to third parties who rely on the firm’s due diligence. That potential risk – possibly huge – does not exist for US law firms. A few of the leading UK law firms have sought to limit their liability with caps. This is far from a tempest in a teacup; potential change in the UK situation is brewing.

The AXA Equitable law department, under General Counsel Richard Silver, used a Six Sigma-based process to drill down systematically on how its 11 litigators practice. “The analysis determined that in-house [litigation] attorneys were doing work that paralegals can handle, while sending out work they can do themselves” according to InsideCounsel, Sept. 2006 at 54. Accordingly, the department hired two temporary paralegals, and watched spending drop during the following year 5 percent below budget.

Whenever a law department’s professionals can assign work to a less expensive but qualified person, the law department climbs the efficiency curve (See my post of Aug. 26, 2005 about delegation to paralegals.).

Five metrics in the Corporate Legal Standard’s “Top 25 Law Department Operations Metrics” (in its report dated Nov. 10, 2005 at 10) have to do with legal invoice processing. In order, those metrics are “legal invoices processed per accounts payable FTE”; “remittances processed per accounts receivable FTE”; “cost per invoice”; “cost per remittance”; and “average time to process each legal invoice.”

It would be hard for most law departments to state how many full-time equivalent employees of the department handle accounts payable. If the metric looks to accounts payable staff outside the law department, the task is even harder. I am guessing that remittances are checks sent out, but it makes little sense to differentiate staff and costs between processing incoming invoices and outgoing checks. Finally, elapsed processing time might be controllable within the law department, but rarely is it controllable within the corporate accounts payable domain.

This quixotic quintet of metrics reflects more the availability of putative figures than the usefulness to a law department of their pursuit.