Articles Posted in Non-Law Firm Costs

A general counsel’s compensation may be included not in the law department’s budget but on the executive group’s budget. How often that happens is unknown to me, but it means that the inside budgets of some law departments understate the company’s total legal spending.

Given that lawyer compensation quite often accounts for about half of the inside budget, the inclusion or exclusion of the highest-paid lawyer’s compensation can make a material difference (See my posts about the inclusiveness of total legal spending of Sept. 4, 2005 (the ultimate metric), July 25, 2005 (costs of independent directors), May 30, 2005 (fines, judgments and settlements), Aug. 3, 2005 (equity awards) and Oct. 4, 2005 (insured matters).

Yes, all you doubters, it’s true, and beyond a cavil strategically crucial. Abbott, Langer’s survey of 111 law departments, published December 2005, unveils the earth-shaking profundity that legal secretaries who use shorthand boast a median total income 15.3 percent greater than that of their compadres who “transcribe from dictation equipment recordings” ($45,903 vs. $39,800). Far be it from me to be droll.

Now, as to those secretaries who use thermograph repros as compared to Wang OIS word processing …

An article published four years ago reports how Deloitte & Touche verified a Six Sigma project at DuPont. Deloitte looked at 18 employment cases concluded during a seven-year period. The project and Deloitte’s review evaluated whether ECA benefited DuPont (Gardner Courson and Thomas Sager, “Metrics for Success in DuPont’s Legal Risk Analysis” Chief Legal Officer, Summer 2002 at 29).

According to the article, Deloitte assessed the quality of the ECA process for each of the 18 cases on the basis of (1) whether it was timely — within 120 days of the first defensive pleading — and comprehensive; (2) whether it expressed the budget and strategy; and (3) whether the ECA analysis process was well documented. The accountants assessed the quality of litigation results on the basis of (1) client satisfaction, (2) outside counsel fees, (3) duration of the case, and (4) payment to the plaintiff. Deloitte found that high ECA quality generally resulted in lower plaintiff payments and higher client satisfaction – which are obviously related.

I admire deeply the decision and effort to analyze whether a cost-control technique actually produces results. At the same time, for a half-dozen reasons, I wonder about the validity of the article’s conclusions.

A recent survey gave law department respondents four choices to select from for their definition of “low stakes matter,” as summarized by LexisNexis Martindale-Hubble based on responses from hundreds of in-house counsel (Counsel to Counsel, March 2006 at 15).

“Limited exposure/risk to company” garnered 91 percent; “simple, predictable process,” had 83 percent, “high volume/recurring matter” came in at 60 percent, and “expertise widely available” was at 51 percent.

These highly-correlated definitions together mean “commodity work.” Companies face lots of these annoying crumbs, but many outside counsel can handle the cookie cutter.

General counsel need to be conversant with one of the terms – and key concepts – of economics. Nominal concepts apply to the company as well as to the law department. Nominal figures for outside counsel rate increases, for example, or for increases in the legal department’s budget, do not adjust for inflation.

It can be misleading when inflation is not accounted for in the department’s spending figures because the amount spend will appear higher than it actually is. The same concept applies to return on investment. If you have a 10 percent ROI and inflation for the year has been 3 percent, your real rate of return is 7 percent, not the nominal 10 percent.

As a result of a Six Sigma analysis in 2001, the law department of NCR “decided to move most of its legal work to outside counsel to save money (emphasis added).” Would that more details were included!

Instead, the piece that breezed across this provocative and contrarian view in Corp. Legal Times, Vol. 14, May 2004 at 24, sped on to talk about that law department’s cross-business unit approach to litigation management, associated metrics, Six Sigma tracking and “heavy duty early analysis [ECA] by requiring a risk memo within four months.”

No data has come my way that compares the pay of promoted general counsels to the pay of newly hired general counsel. It makes sense, however, to me that the outsiders would make more.

If no lawyer within the company is good enough to fill an open general counsel position, the outsider enjoys more leverage when negotiating the compensation package. Secondly, someone from another company has often been a general counsel and knows about the perks of that office. As a third reason, executive search firms rarely spot in-house talent so they lure away other GCs who need enough of a compensation boost to make the transfer worthwhile; it jacks up the cost of recruitment by driving up fees (See my post of March 26, 2005 on executive search firms and compensation data.)

For a typical law department, the difference between its fully-loaded cost per lawyer hour and the blended billing rate of its outside lawyers is around 40 percent. For example, the cost inside is $170 an hour while the cost outside is $240 an hour.

As opposed to this favorable cost gap, it is still true that the employee lawyer is a corporation’s fixed cost; the law firm lawyer a variable cost, and that difference – the ability, at least in theory, to turn the external spigot on or off at will – justifies part of the difference in hourly costs. (See my post of Feb.16, 2006 on malpractice insurance justifying another portion.) Economically rational lawyers willingly pay more for expenses they can control more.

Net Income Per Partner (NIPP) depends mostly on hourly rates and hours billed (Richard Gary, Law Firm Inc., Vol. 4, Jan./Feb. 2006 at 25). Law firms seek to increase both; law departments ought to worry about increases, and indeed, some would say, ought to take a tuck out of them.

High hourly billing rates for junior associates can mean they may be priced above the value they deliver (See my posts of Feb. 8, 2006 about such complaints and Jan. 20, 2006 on probing the ratio between associate costs to firms and their revenue.)

Pressures to bill high numbers of hours invidiously inflate clients’ bills. Worse, even assuming lawyers actually work those 2,000-plus chargeable hours, during all those mind-numbing hours can they think and produce effectively?