Articles Posted in Non-Law Firm Costs

The law department of chipmaker Qualcomm has elevated the term “profit center” to a prodigeous level. The revenue the law department and its outside counsel brought in from patent royalties in 2005 accounted for more than two-thirds of the company’s $2.3 billion in operating earnings. According to BusinessWeek, Oct. 30, 2006 at 75, Qualcomm has used its 1,800 patents for wireless devices to obtain payments — the magazine uses the trollish pejorative “extract outsize royalties” — from other companies on current and next-generation products.

All law departments would burst with pride if their efforts were associated with bringing in close to $1.5 billion in revenue.

For more on law departments as profit centers (See my posts of March 12, 2005 on a law department that funded its matter management system in return for reductions in reserves; Nov. 25, 2005 about whether law departments should manage settlement funds and recovered amounts; Feb. 8, 2006 on DuPont’s collection efforts; Nov. 28, 2005 and Feb. 16, 2006 on IP recoveries; March 15, 2006 on litigation recoveries; March 28, 2006 on EMC; March 17, 2006 on Autodesk; March 15, 2006 on insurance reimbursements; and June 15, 2006 on release of reserves; but May 19, 2006 on the problematic side of crediting recoveries.).

I have counseled against chargeback rates that differ for lawyers of the same department (See my post of May 14, 2006 which attacks multiple rates inside.). At the same time, I urge different billing rates for the same outside lawyer (See my posts of Jan. 13, 2006 and May 14, 2006 on rates according to value delivered.). Am I hopelessly self-contradictory?

I deny the charge! If differentiated billing rates more closely align the value of the work a lawyer performs to the value of that work to the client, then both inside and outside lawyers should employ multiple rates. The inside lawyer, for example, might charge more for time spent on quasi-legal services (See my posts of Sept. 10, 2005 and its discussion of such tasks; of July 21, 2005 with definitions; and Feb. 23, 2006 on how to find them.). The message to the consuming market is “Don’t use us for this lower-value drudgery!”

If it is fine for different lawyers at the same law firm to sport different rates, the same conclusion should apply with a company’s employed lawyers. What I opposed and what isn’t desirable is to allow internal clients to shop around for a bargain basement inside lawyer.

Every year, the value of technology owned by a law department loses some value – it depreciates. The different treatment by law departments of the depreciation charge on hardware and software makes for differences in what they report as their total legal costs. Total legal spending, therefore, has yet another variable and yet again calls the coverage of the term into doubt (See my post of March 22, 2006 about GC compensation and collected references.).

At least one law department includes in its inside budget a six-figure number for the depreciation of its hardware (I doubt that law departments depreciate licensed software.) Most departments, I suspect, do not reflect depreciation because they are unaware of the need or that expense is treated on the books of the company through the IT function.

Nevertheless, it is another cost of maintaining an internal law department (See my post about the inclusiveness of total legal spending of Sept. 4, 2005 (the ultimate metric.)).

We don’t hear anymore the din about online auctions for legal services (See my posts of Sept. 4, 2005 regarding GE’s online auctions in 2005; and March 12, 2006 regarding GE in 2003.). For good reason.

The process belies thoughtfulness and professional standards; the dregs of procurement-style cost bludgeoning are all that remains. Only a handful of companies have the quantity of legal services that share enough similarity to create sufficient savings from the effort. Lowest-common denominator services leach out to on-line auctions, not high-quality, high-cost matters. For all these reasons, there is not only no surge but a withdrawal from LegalBay.

“Companies spent 32 percent more on outside counsel for intellectual property litigation in 2003 than in the previous year, Chuck Fish, the chief patent counsel for Time Warner, told the House Judiciary Subcommittee on Courts, the Internet and Intellectual Property earlier this year.” Further, the NY Times, Sept. 24, 2006 at BU9 reports that Mr. Fish testified that “spending for all other to litigation rose a mere 1 percent during that time.”

A flabbergasting pair of numbers, both of which strike me as dubious. I assume the proclaimed increase for IP litigation is in aggregate payments, not hourly rates, and I presume it is a median figure. What I don’t know is whether a few Midas-touch suits swelled the 2003-04 spend. Otherwise, the jump is incredible. As for all other litigation, where is the proof? A miniscule single point increase doesn’t comport with all the caterwaulering about cost increases.

Law departments all say “Our costs are driven by our client’s business activities!” True, but the obligation to manage those costs as effectively as possible remains the law department’s. To get some traction here, law departments need to measure inputs and outputs. That is to say, they need to track baseline activity, and show how they have wrestled at least this input to the fiscal ground, while at the same time to report total output, which rises with business initiatives. Reductions in the normal run-rate of the law department – the baseline spend – are more reasonable to expect than reductions in an overall figure subject to unpredictable major matters that crop up during the year.

When the CEO or CFO sets a savings quota, the figure from which savings should be calculated ought properly to be the normal, year-over-year amount. Paradoxically, then, a law department can demonstrate savings against the baseline rate even while its overall legal budget rises due to the expansion of business or extraordinary events.

Total legal spending relative to revenue declines as companies grow larger (See my posts of April 5 and Sept. 10, 2005 that propose several reasons; but also my post of July 5, 2006 that discusses some contrary arguments, including being deep pockets and innovators of business practices.).

Other reasons come to mind for the decline in total spend. Larger companies might be more measured in the risks they take, more careful to follow sound procedures, more inclined to spot and sidestep legal blunders. Perhaps big companies make fewer legal mistakes, the best brake on legal costs.

In larger perspective, in some industries an oligopoly of large companies may have matured to where there are accepted standards of competition and the rough edges of the law have been smoothed out. Fledgling industries, or ones full of scrabbling competitors, may be bumpy with new and costly legal issues. Both the corporate view and the industry view might explain some of the size-related decline in total legal spending.

BusinessWeek, Issue 4001, Sept. 18, 2006 at 42 describes breathlessly Dupont’s use of R.R. Donnelly’s OfficeTiger for legal services performed in the Philippines and India. Some 30 Filipino attorneys, including three who have passed US bar exams, are teamed with 50 other staff on a massive litigation support effort. In Manila, while in India OfficeTiger staff “are helping out on more than a dozen projects, from monitoring old contracts and licensing agreements to managing documentary evidence for product-liability cases.”

According to the article, Dupont aims to save 40-to-60 percent “on document work and cut up to $6 million from its annual $200 million-plus in legal spending.” That statement suggests that DuPont would otherwise have spent at least $10 million on the services performed offshore, if the high-end 60 percent savings figure is assumed. DuPont “figures 70% of the labor in a typical insurance or liability case can be outsourced.” If savings of that dimension prove true, huge changes are in the offing for the US legal industry (See my post of Nov. 14, 2005 on Motorola and collected references to my other posts on offshoring.).

William Ross, a professor at Samford University’s Cumberland School of Law, conducted a billing survey in 1996. Although the results are a decade old, nothing has happened since then to change the landscape, so the findings are disturbing. Perhaps.

Ross found that “two-thirds of the attorneys (and three-fourths of the clients) reported knowledge of bill padding,” according to the Wall St. J., Aug. 30, 2006 at B2.

That finding does not mean that two-thirds of the attorneys admitted to padding their bills. “Reported knowledge of bill padding” has a squishy feeling that doesn’t let you state firmly just what the words mean. Nor does the quoted language limit the findings by time or by amount. Did they have that “knowledge” based on the past year, two years, twenty years? Does one hour added wrongfully count as much in support for that “knowledge” as an egregious pattern of deliberate bill inflation over a long period? The quote also makes me wonder because clients found more padding than did lawyers, which means to me that some convictions of padding are judgmental.

Before law departments distribute requests for proposal, they sometimes agitate themselves over whether to disclose how much they have spent on outside counsel. Confidentiality agreements can assuage that angst, but law departments should accept that what they distribute to a few law firms might leak for all to read.

Not to worry, because the total amount that a company spends in a given year on outside counsel affords no competitor a strategic advantage. The total (or some portion) might be embarrassing, may look profligate, or may trigger inquiries within the company, and some much-used law firms might be crushed at how little of the department’s spend they were paid. But I can conjure up no other way for outsiders – including plaintiffs’ lawyers – to take advantage of the knowledge. Bear in mind on aggregate figures that most departments remove from them one or two one-off matters that incurred very large fees.

Quite distinct from annual totals of dollars paid, even broken down by practice area, dollars paid on individual cases deserve to be zealously guarded from disclosure.