Articles Posted in Non-Law Firm Costs

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The larger the company the more it sustains specialized groups whose work fringes on that of lawyers. Those groups whose work is larded with law – the likes of human resources, risk management, environmental safety, leasing and real estate acquisition – understand well most of the practical law that applies day-to-day to their activities. To that degree, they need to rely on an in-house law department less than their compatriots in smaller, less-well-staffed or sophisticated companies (See my post of Aug. 30, 2006 that discusses legal moons around the law department planet.).

If this hypothesis holds true, it partly explains why total legal spending as a percentage of revenue drops off as revenue increases (See my post of May 4, 2005 with some explanations.). If there were some measurement of the cost to a company of legal knowledge that doesn’t reside in the law department, the total spend ratio would not decline as much, but no one has attempted that quantification (See my post of July 20, 2005 which emphasizes this point.).

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According to an October 2005 item by the Lawyer Group, the telecommunication giant “halved its total legal spend since 2000 from almost $400m (£224.1m) to just under $200m; it has also halved the amount it spends on external counsel to $110m (£61.6m). It also cut its in-house legal department from 400 staff to 200.” These are Sweeney Todd cuts!

I am assuming that the company itself did not shrink anything like 50 percent during this time. Some of the management initiatives of Motorola have included the use of offshore resources (See my post of Nov. 14, 2005.), a restructured patent group (See my post of Nov. 13, 2005.), and the appointment of a Chief Governance Officer (See my post of Sept. 10, 2005.).

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An intriguing idea: insist that your outside litigation counsel provide a project manager for any case likely to have expenditures above a very substantial amount (See my post of Nov. 15, 2005 on the definition of major litigation; and June 27, 2006 on how BellSouth handles them.). This is what I categorize as an intervention by a law department in a law firm’s operations (See my post of July 5, 2006 on other forms of intervention in law firm operations.).

What would the person do? What kind of training and experience should a law department expect in the project manager? What would the person cost? One wonders whether a non-lawyer project manager would be able to contribute effectively where partners are long accustomed to running the show.

A big lawsuit project manager is a sound idea. Both sides should think in terms of the effective management of litigation wholly apart from the substantive legal maneuverings. Examples of this already include discovery managers (See my post of Oct. 1, 2005 on Pfizer.), parallel settlement counsel (See my post of July 21, 2006.), bill analysts (See my post of Aug. 24, 2005.), and client representatives (See my post of April 2, 2006 about orphan/legacy litigation.).

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A number of law departments have negotiated favorable terms with vendors. Examples include photocopy services, court reporters, travel agents, messengers, hotel chains, and similar services (See my posts of July and Aug. 2006 on various cottage industries; and of April 2, 2005 on unbundling ancillary services from law firms.).

It makes sense for a law department that has extracted favorable terms from a vendor to extend those terms to their primary law firms. More assertively, the law department might out and out require that the law firm use the designated vendor. On the order of 10 percent of the costs paid to law firms goes to disbursements, so there is room for shaving costs without nicking quality.

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For law departments, everyone sees and forecasts technology as sunshine. Technology increases productivity (See my post of May 17, 2006 on technology.), reduces drudgery (See my post of Nov. 18, 2005 about mind mapping software.), improves quality (See my post of Jan. 16, 2006 about McDonalds and document assembly.), and enables more work to be done by clients (See my post of July 21, 2005 about routine answers available to clients online.). Law departments bask in technology’s rays for the reason that it giveth them more capabilities.

Even so, clouds darken the sunlight and software taketh away law department dollars. Software causes law departments to spend more because it increases the workload. Isn’t it true that word processing expedites the filing of ponderous lawsuits and the ready addition of multiple defendants? Don’t the unceasing gushes of e-mail jack up discovery costs?

Aren’t more cases and legal material online and don’t fancy search engines pile on costs in litigation? Doesn’t the Internet allow plaintiffs who share a common grievance to find each other and mobilize, not the mention the plaintiff’s bar to share strategies and material? Doesn’t PowerPoint soak up costly time? All of these consequences of software’s availability, which is hardly exhaustive, stand at times on the neck of law department budgets.

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When the budgetary ground shakes, and we look at the intensity of cost-cutting measures, we can draw on the Richter scale. A tremor leads to cuts in library subscriptions, discretionary travel, CLE, and consulting services. Somewhat more intensity means cancellation of the all-department conference, restrictions on temporary staff, and a refusal to fill open positions. A Richter 3.0 budget quake includes steps like demanding discounts from key firms and freezing their billing rates for a year or two.

More severe seismic shifts and law departments lay off administrative staff and a paralegal and finally terminate the lawyer or two who have long been underperforming. Richter 6.0 crumbles law firms with fixed-fees, competitors, restrictions, and bill audits. Richter 7.0, a truly major cost quake – brings down more lawyers and cleans out the administrative staff and limits the role of the law department. Richter 8.0, the cataclysmic upheaval to slash the budget, cuts to the bone of staff, turns off the spigot of outside counsel and contractors, and jeopardizes compensation for those who remain standing.

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“At Sears, in conjunction with our Procurement function, we had developed an effective temporary help model for project-based legal work. This model enabled us to evaluate the need for internal time/headcount, outside counsel use, and temporary assistance, adding a third leg to the legal support stool. The result was cost savings and the ability to work within headcount constraints.” This description comes from Met. Corp. Counsel, July 2006, at 30 in an interview of Heidi Rudolph.

This setup does not sound like Sears struck a deal with a provider of temporary staff. It sounds more like resource balancing based on a disciplined model of costs and positions.

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Some law departments, those with tens of thousands of dollars spent on a disbursement, negotiate national contracts with vendors. The contracts lock in better rates, stronger performance guarantees, more committed resources, and other benefits. Some of those departments, having worked hard for their national deals, insist that their law firms use the national vendors.

Instances of this include temporary staff (See my posts of Jan. 10, 2006 on some cost comparisons; and April 9, 2006 on contract staff versus temporary staff.), photocopy services (See my posts of April 2, 2005 on unbundled services; and May 14, 2005 on shared copy costs.), service of process, litigation support (See my posts of Sept. 10, 2005 on costs; and Feb. 23, 2006 on patents for litigation support software.), legal research (See my post of Jan. 16, 2006 and a dubious piece of data.), and court reporters (See my post of Oct. 24, 2005 on FMC’s policies; and July 11, 2006 with some vendors.)

All of these examples include denizens of the cottage industry that live off law departments (See my posts during July, 2006 on several of these niches and the links cited.).

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I am persuaded that law departments that chargeback to operating units the outside fees incurred on their behalf thereby improve client accountability (See my post of Oct. 30, 2005 with its dissenting view; and April 17, 2006 for comments on accounting granularity.). Clients feel the pain; they have a reason to avoid legal mistakes; no longer do their law firm fees get absorbed elsewhere, in some legal budget – and forgotten.

On this basis, a law department should seek to chargeback outside counsel fees incurred even on behalf of staff units, and indeed the corporation as a whole. Complete chargeback, a 100 percent policy, would be difficult for some work, such as enterprise-wide mergers and acquisitions or shareholder derivative suits, but even then some senior executive might be deputized as the responsible client.

Not crazy, that idea. I have heard of a company appointing a czar for some corporate-wide expenses, such as asbestos defense or cleanups of environmental legacy sites. That way, some non-lawyer executive has some degree of accountability. With this system, a law department could chargeback every penny of its external legal fees.

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After once-over lightlies about the swarm of vendors other than law firms who supply goods and services to law departments as part of a multi-billion dollar ecosystem – a classic cottage industry, it seems it will help readers if I collect information on those niche markets (See my posts of April 18, 2005; Oct. 18, 2005 on the revenue that might go to companies that are part of the cottage industry; and May 30, 2006.).

Accordingly, a number of subsequent posts have noted various clusters of suppliers to law departments (See my posts in 2006 of Feb. 9 – document discovery vendors; July 4–litigation and trial consultants; July 5 – corporate governance groups; July 5 – online legal and compliance training; July 6 – legal search firms; July 11 – e-billing vendors; July 11 – court reporters; July 14 – matter management systems; July 14 – class action claims firms; and July 19 – corporate secretary web portals.).