Articles Posted in Non-Law Firm Costs

“In 2004, a five-year qualified lawyer could expect to earn a base salary of about £68,000, a figure which since then has dropped to £63,000 last year and £62,000 this year.” This quote, from Legal Week, Vol. 8, June 22, 2006 at 13, came from data of recruiters Laurence Simons. For a 10-year qualified in-house lawyer, the average base dropped over the same period from £98,000 to £90,000. Other UK recruiters similarly found salaries static or falling. In this buyer’s market, the gap between in-house and private firm pay is widening.

Neither increased benefits nor share option benefits account for the flat line of compensation, according to the article, but the over-supply of private lawyers who yearn for a corporate position is the culprit that depresses salaries.

I wonder. Did the same companies participate all three years? Did law departments that pay above the reported averages tend to drop out of later surveys, because the data did not help them lobby for raises? Did the law departments have lawyers in more locations, particularly lower-cost (and thus, pay) locations? Is it at least theoretically possible that the quality of lawyers from firms who sought in-house positions dropped, which explains some of the lagging pay? The oddity of real income dropping causes me to wonder.

An economist who studies law departments might say something like this: Division of labor (the degree of specialization) is limited by the extent of the market (demand by clients for legal services for in-house counsel services). Productivity depends on specialization, and specialization depends on the scale of operation, which is also the extent of the market — how much work of a similar kind comes into a law department. Increasing returns are present when the marginal cost of producing another unit of legal counsel is lower than the average cost of all the previous productions, most of which comes from division of labor, specialization, and productivity improvements.

These concepts help explain why total legal spending as a percentage of revenue goes down as law department size goes up (See my post of May 4, 2005 on this trend.). With a wider array of legal needs — a bigger market — a larger department can allocate tasks more appropriately among lawyers and paralegals – achieve more division of labor (See my post of June 5, 2006 about the matching ladders of skills and needs.). Those lawyers and paralegals can produce more because they know more about their area of work – they specialize (See my posts of Sept. 10 and July. 31, 2005 on law department specialists.). Because the larger company generates more of any one kind of legal work, it can support specialists who are more productive than generalists.

Quite a few companies offer content and software, such as ASP hosting, that help companies train their workers. Law departments often have a major say in which vendor the company selects and what courses or modules are offered.

Listed hereafter in alphabetical order are some of the companies that provide this combination of software, instruction and service. Corpedia; ELT; Integrity Interactive; LRN; LRSolutions; MIDI; ThomsonNETG; and WeComply.

Someday a law department might insist on a lower fixed payment to a firm to handle certain kinds of matters over a period of time, and invest the money thereby saved in an insurance policy. The insurance policy would cover a catastrophic outcome for the portfolio of cases or matter, and thus protect both the law department and the law firm.

The insurance company, clearly, would need to assess the proposed arrangement, such as quality of the firm and its experience in light of the likely portfolio of matters to be handled and the role of the client. If enough law departments entered into fixed-fee arrangements, however, insurers would provide the traditional benefit of spreading risks and lowering the costs for each risk taker (See my posts of July 25, 2005 about patent litigation insurance; March 23, 2006 #5 about EPLI litigation insurance; and April 23, 2006 about litigation insurance generally.).

In February 2006, Mahlab Recruitment and Harris Cost Lawyers surveyed the members of the Australian Corporate Lawyers Association (ACLA). Most of the legal teams — the report does not discuss numbers of lawyers — were 10 or fewer people, which translates typically into five lawyers or less at the normal ratio of one lawyer for every non-lawyer. The report states that the average internal budget was $400,000, which seems extremely modest if there is something like two or three lawyers in that average department.

Even more astonishing, half of the respondents indicated that other corporate departments separately budget for legal costs (at 9). The average total legal cost paid by those other departments was $200,000. If you compare that figure to the average costs paid to an external counsel by the law department — $350,000 — you would conclude that the typical Australian law department controls only half of its company’s outside counsel spending.

Law departments must submit budgets, so there is passing interest in budget-busting litigation. I will report them periodically. For example, MasterCard is being sued by rival card companies on antitrust grounds, and expects to incur huge legal bills. It planned to go public and raise more than $2.5 billion, with one of the reasons, according to Fortune, Vol. 153, May 29, 2006 at 18 and its offering filing, “to raise money to cover its pending legal costs.” Those legal fees must be priceless!

Health-South has paid $77 million in legal fees over the three-year period 2003-2006, according to Corporate Counsel, Vol. 13, June 2006 at 21. Such enormous fees are not healthy for the bottom line!

Timekeepers in a law firm are not supposed to bill their client for the time they spend recording their time and submitting invoices. I wonder whether associates, striving to drive up their chargeable hours, honor that ethical rule.

I suspect that law firms spend more time on a bill than does a law department. Each time entry has to be written or typed, entered into a billing system, reviewed and included in a bill, plus all disbursements accounted for. It may well be that the reviewing lawyer in the law department barely glances over the bill before it goes to accounting to be paid – or possibly there is a step in the law department for coding the bill and entering summary information into a matter management system. If the law department uses electronic billing, even those few manual steps disappear.

In sum, it probably takes much more time to produce a bill than to review and approve it. Try fixed fees.

The law department weighs in when the decision is whether to create a loss reserve and for how much. No company should give its law department an incentive to inflate reserves, even though auditors would check such a manipulation.

Certainly, reserves could be one part of total legal spending. But whether law departments should be able to take credit for a reduction in reserves is problematic, as is true with whether they should get credit for recoveries (See my posts March 12, 2005 on a law department that funded its matter management system in return for reductions in reserves; of 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 profit centers and EMC; March 17, 2006 about Autodesk’s; March 15, 2006 on insurance reimbursements; but May 19, 2006 on the problematic side of crediting recoveries.).

The Federal Judicial Center surveyed 278 Federal district court judges, according to a piece in Bus. Insurance, April 11, 2005. The study is cited by critics of the U.S. Chamber of Commerce’s ranking of the best and worst state legal systems in America, (See my post of May 17, 2006 on the judicial hellholes.). “Seventy percent of the [judges] called groundless litigation either a ‘small problem’ or a ‘very small problem’ and 15% said it was no problem at all.”

If the Judicial Center’s survey passes methodological tests and the quote accurately conveys the findings, then law departments cannot cloak budget excesses in the whole cloth of litigation-crazed plaintiff’s lawyers.

A managing partner, speaking on a recent panel, responded to a question about the prevalence of hourly billing. He said that his firm, with hundreds of lawyers, represented only a small number of clients on matters governed by alternative billing, but he then gave that tired horse about hourly billing a giddy-up.

“In the aftermath of all the corporate financial and governance scandals, company managers and lawyers are even more reluctant to limit law firms. If a firm recommends that something be looked at or thought about, given the recent parade of CEOs to prison, no one wants to rein in the firm. Their looking or thinking is best done on hourly rates, or there is a latent concern that firms on a fixed fee will not do something that a later investigation will find should have been done.”

Makes some sense, perhaps. But I still rebel from the notion that it makes business sense to encourage a policy of leave-no-stone unbilled. That’s abdication of in-house counsel’s responsibility of stewardship.