Articles Posted in Non-Law Firm Costs

A general counsel who does not control virtually all decisions on which law firm to retain falls short – to the degree that right is absent – from being a fully empowered general counsel (See my post of Sept. 13, 2005 on Carey’s Board.). In the United States that power of retention is usually not questioned.

It is questioned, however, are in companies where clients of the law department perceive that law firms help them generate business or succeed at business. The most notorious examples include investment bankers, commercial bankers and real estate brokers. Each believes that law firms refer them business or make a difference in the completion of deals. These clients jealously guard their prerogative to send work to those law firms they perceive as reciprocal beneficiaries.

In my consulting projects, I have never been able to quantify the actual value of referral work, but the opinions of clients are wide spread and fiercely defended: “Our bottom line depends in part on the law firms we use and reward with work.”

A handful of posts have touched on aspects of litigation insurance, each to report on such coverage for different types of litigation risks and the effect the insurance might have on benchmarks (See my posts of July 20, 2005 on IP litigation insurance, and Nov. 16, 2005 (3rd morsel) for its availability in Europe; July 30, 2005 on third-party insurance coverage and total legal spending; May 31, 2005 on insurance where the loser pays the other sides’s fees; and March 23, 2006 (4th morsel) on employment practices liability insurance.).

Marsh & McLennan’s Viewpoint, Vol. 32, No. 2 of 2003, at 5 brings a broader perspective: “A relatively small group of insurers specialize in assessing and valuing open litigation in such areas as securities, intellectual property, and product liability. Once the merits of the litigation and the probably losses have been evaluated, an insurance policy can serve as an asset on a company’s balance sheet to potentially mitigate or cap the liability.” The paragraph later refers to this technique of ex post facto litigation insurance as “ring fencing.”

Might the availability of litigation insurance after a lawsuit has been filed help a law department better manage its litigation costs? How does such insurance coverage affect reserves? Should large law departments, already possessed of specialized talent (See my post of Sept. 10, 2005 for a list.), include experts on litigation insurance brokerage?

A piece in the Wilson Quarterly, Vol. 30, Spring 2006 at 90, draws on work by Jonathan Cohen, published in the Journal of Economic Perspectives, Fall 2005. Psychology and neuroscience intersect to suggest why law departments favor impersonal cost-control techniques over personal ones.

Research that uses the so-called switch and footbridge scenarios suggest this preference. In the switch scenario, individuals are asked if they would flip a switch to divert a trolley car onto a sidetrack if it would kill one person but save five others who are on the main track. Most people say yes.

In the footbridge scenario, they are asked if they would push a man off a footbridge onto the track below to save the same five people; in this instance, most people say no. We instinctively recoil from the idea of pushing someone off a bridge – a distinctly personal deed, but if we can flip a switch from a distance – a system-based intervention, we seem able to make the rational choice.

Matter management systems that run on a company’s own servers usually charge an upfront license fee and thereafter an annual maintenance fee, usually in the range of 10 to 20 percent of the base license fee. Relatively straightforward.

Far from straightforward are the pricing models of e-billing systems. The possibilities include a charge per open matter – and variations depending on how active the matter is or whether outside counsel bills are collected in it, a percentage of the invoices reviewed, the number of users who have access to the system, and any number of fixed-fee arrangements. Absolutely Byzantine.

With a self-hosted MMS, you can calculate precisely the three-year cost of the system. With e-billing, you grope for a plausible range of amounts you might have to pay over that period.

You didn’t know this, I’m sure, but electronic discovery costs money. Yes, it’s true, but how true you know even less about. Fios to the rescue, however, in Corp. Counsel, Vol. 13, March 2006 at A6, where Prashant Dubey, its VP and GM of Discovery Management, outlines how corporate law departments can figure out their TCeD.

TCed consists of hard costs, soft costs, and opportunity costs. Hard costs are “anything for which you ask Accounts Payable to cut a check.” Since outside counsels’ invoices do not usually break out discovery-related expenses, Fios urges law departments to consider “performing an invoice review and spending time with outside counsel applying percentages to past invoices” or have your CFO assign to you a managerial accountant to use the technique known as Activity Based Costing (ABC).

Soft costs include the value of the time your IT department and your clients and your law department staff spend when they assist in electronic document discovery. “Soft costs are the most ignored element of cost – however the most pernicious.” Dabney urges ABC as the technique to calculate soft costs.

In a pique of pedantry, I looked up definitions for those things law firms send in for payment:

Bill: “a statement, usually itemized, of charges for goods or services; invoice”; dictionary two says, “a statement of money owed for goods or services supplied.”

Invoice: “an itemized list of goods shipped to a buyer, or of services rendered, stating quantities, prices, fees, shipping charges, etc, often with a request for payment”; dictionary two: “a detailed list of goods sold or services provided, together with the charges or terms.”

Previous posts noted the arrival of procurement departments on the field of outside counsel selection (See my posts of Feb. 20, 2005 and Aug. 14, 2005.). Reinforcements arrived from Legal Week, March 23, 2006 at 12, in the form of a slew of statistics from a survey conducted in association with Davies Arnold Cooper (See my post of April 7, 2006 on law firm surveys that produce law department metrics.).

Although I see little new in the murky metrics, two points offer twists. Tim Bratton, head of legal at the Financial Times and the FT Group of companies, holds the view as to procurement’s involvement that “you need to have certain economies of scale before it makes it worthwhile.” I think spending north of $1 million might tip that scale.

Elizabeth Lee, general counsel of GE Consumer Finance, says that “[Procurement] helps analyze our spend and reduce the number of law firms that should be on the panel….” If procurement staff bring analytic skills to the effort, good, but that is not what most law department managers worry about when they foresee the invasion of pencil purchasers: cost fixation, standardized treatment, endless procedures, and a cult of metrics worshippers.

Domenic Leo, in a post on Dec. 24, 2005, adds an important point to my earlier note (See my post of Dec. 23, 2005 on costs of licensing and staffing a matter management system.).

The total cost for migrating legacy information and processes from the old system to the new system frequently exceeds the cost for initial software. These components include: moving data to the new system, training staff on the new system and developing output (reports) for the system. In 1999 I implemented a new IP matter management system for a Fortune 100 pharmaceutical firm where the total cost of software and hardware accounted for less that $200,000 of a $3,000,000 project. The majority of costs were incurred in the QA, testing and training of the global system. Additional background on these items can be found in my two posts in September 2005.

Leo is very correct about data conversion, which can be an expensive bear.

At a speech I gave recently, I met the general counsel of AHC, Inc., a specialist company that helps hospitals increase recovery of their receivables. AHC’s website says that of its 400 plus employees almost 100 are healthcare attorneys. That impressive corps of lawyers has expertise that includes workers’ compensation.

My mind roamed as I conjured up images of environmental remediation companies and their employee lawyers who know environmental remediation, of international shipping companies and their employee lawyers versed in export/import law, of the temporary help agencies whose lawyers understand everything about immigration law – all the wide range of legal talent that companies have outside their law departments.

With the cost of using law firms rising steadily, with 30 percent and higher profit margins at law firms, and with the screws of cost control tightening, is it silly to speculate whether law departments might obtain some relatively low-cost legal guidance in niche areas from companies whose business is in that specialty? Possibly with some release of malpractice coverage?

In a profile of Paul T. Dacier, senior vice president and general counsel of $10 billion EMC Corp, Nat. L.J. Vol. 28, March 13, 2006, Dacier mentiones that his law department has an “operating budget” of $25 million for its 70 lawyers and 40 other staff. As a benchmark junkie, I reflexively calculated that EMC’s inside spending per lawyer – assuming that is what the operating budget covers – comes to $357,000 per lawyer, which is a modest-to-low figure. And, compulsive that I am, it has 7 lawyers per billion dollars of revenue, which is a bit on the high side, except that EMC is most definitely a high-technology company. To complete my obsessive trifecta, the ratio of almost two lawyers per support staff is very high, in light of the median of one to one found generally.

But quantophrenia must be resisted (See my post of Feb. 8, 2005.). The comment that inspired this post came right after his $25 million budget statement. Dacier proudly pointed out that “we bring in more than we spend on the legal side.” Wouldn’t that warm the cash registers of a CFO’s heart! Truly a law department as a profit center (See my post of Feb. 8, 2006 on DuPont’s efforts, Feb. 16, 2006 on IP recoveries, and March 15, 2006 on litigation recoveries.).