Articles Posted in Non-Law Firm Costs

A fertile, fact-filed post in Joy London’s blog, Excited Utterances, profiles some date from ValueNotes’ 68-page report, “Offshoring Legal Services to India.” That report states “legal services offshoring from India generates $61 million in revenues …” and “employs around 1,800 Indian professionals.” [If that figure of $34,000 per professional holds ($61MM divided by 1,800) and if they billed an average of only 1,200 hours a year, that would be about $28 per hour.]

Joy’s post lists 8 Indian entities that are referred to as “captive centers,” as they were founded by and run by law firms, 14 third-party “niche” legal vendors, and 16 entities that provide both legal and other kinds of support services.

As for law departments, the post has a fourth category for “corporate captives,” which are “in-house legal departments of companies like Allstate Insurance, American Express, Bayer, Cisco, DuPont, GE, Microsoft, Morgan Stanley, Oracle, Sun Technologies, and United Technologies.” To my knowledge, at least one of these law departments uses a vendor, not in-house Indian lawyers or other professionals.

Robert Walner, the general counsel of Grubb & Ellis, explained in 2003 that he had saved his previous employer “hundreds of thousands of dollars a year by hiring experienced paralegals rather than junior lawyers.” (Corp. Legal Times, Vol. 13, July 2003).

He pointed out that paralegals in law firms face boring work and no future; in law departments they can take on responsibility up to their abilities and they can grow their abilities. For significant amounts of law department work, a veteran paralegal will do excellently (See my posts in 2005 of March 18 asking if there are practical limits to what paralegals can do, June 28 about shifting toward paralegals and away from secretaries, and Aug. 26 about delegation to paralegals.).

A participant at a Counsel to Counsel session, reported in Corp. Legal Times, Vol. 13, July 2003, stated that she had saved $200,000 a year in outside counsel costs on EEOC-related cases and complaints. Instead of paying outside counsel that amount to handle all the work, the “GC and her department realized the savings by training HR staff in how to investigate and respond to employment-related complaints.”

This anecdote goes to show the power of training clients, with the result that the law department sticks with more complex tasks and reduces legal spending. One might also infer from the estimate of savings that the legal department had tracked its spending in this arena for at least a year or two, and could show the reduction during the year in which HR staff assumed more of the tasks.

Inside Litigation, Winter 2006, describes much about Tyco International’s selection of Shook, Hardy & Bacon (SHB) as the company’s sole products-liability defense firm, including the arrangement’s extranet.

“Tyco and SHB have sole access to a secure extranet where a variety of case information is posted and shared, such as the case assessments [provided by SHB within 30 days of receiving a case], budgets, calendars and databases. The extranet includes a knowledge management database of pleadings and documents …”

As to the selection of SHB through competitive bidding, the article concludes by stating that Tyco “saved between $6 million and $7 million in the past year on product-liability litigation, while getting more for its money.”

“Approximately 80 percent of patents granted represent improvements to products already in existence as opposed to inventions of wholly new products” (Economic Approaches to Intellectual Property: Policy, Litigation, and Management (NERA Econ. Consulting 2005, at 8). Later, “many patented inventions have relatively low values, while a few patented inventions have extremely high values” (id. at 14).

If the facts are these, one wonders about the value of sustaining in-house patent lawyers. They do other tasks, such as M&A counseling, license agreements, but maybe the answer is like the old saw about advertising, “I know half my spending on ads is wasted, but I don’t know which half.”

A recent survey by Gartner found that financial compliance management spending for IT will triple from 2004 (less than 5% of IT budgets) to 2006 (10-15% of IT budgets). I wonder whether legal spending on the same set of issues has jumped anything like this amount.

The report makes the excellent point from another perspective. “Sustainable compliance … will only be achieved by consolidating compliance efforts through a programmatic rather than a project oriented approach.” In other words, a law department, like its IT sibling, should not choose one-off solutions for each regulatory challenge, but should create a broader, longer term program for compliance. Gartner states that a one-off response incurs IT spending “10 times more on IT solutions for compliance” than a programmatic response, which may directionally hold true for law departments.

To the degree that a cost to a company of supporting its law department is understated, neither the company nor the law department can make decisions about investments in the department with as much accuracy as if the full expenditures were known. Several posts have explored the kinds of law-related costs that swirl in a poorly-defined, poorly-captured cloud around the harder numbers of compensation, benefits, travel, telecommunications, and the like. (See my posts of July 20, 2005 on internal costs of responding to litigation, July 25, 2005 on costs of independent directors’ counsel, Aug. 3, 2005 on options and stock grants, and Oct. 4, 2005 on insurance premiums.)

The fully-loaded cost per hour of internal lawyers could well be 10-to-20 percent higher than the usual figures ($160-$180). For another probable omission, consider that neither recruitment nor severance costs are typically included.

If the cost of sustaining an inside lawyer hour is understated, it makes the comparison to outside counsel more favorable, and more inaccurate. (An even greater ingredient of inaccuracy is the estimate of hours worked inside that are equivalent to chargeable hours of law firms. See my posts of Sept. 25, 2005 about using 1,850 chargeable hours and Oct. 18, 2005 on how to calculate your figure.)

An article on analysts’ estimates of Merck’s exposure from its Vioxx litigation (BusinessWeek, Dec. 5, 2005 at 40) explains why those figures have varied from $5 billion to $30 billion or more, and why they careen up or down depending on isolated events (e.g., FDA advisory panel votes, a court decision). (See my post of March 12, 2005 about Merck reserving $675 million and July 25, 2005 about the effect of the litigation on Merck’s share price.)

Three points occur to me from this article. The first is that setting contingent liability reserves for tsunami-sized litigation – as has been faced by such companies at Altria, Ford Motor, Firestone, Halliburton, Microsoft, Wyeth, and Research in Motion – must cause hair loss for some law department managers. Second, the wide swings in estimates for liability probably have matching swings for the budgets that litigation managers must scratch their heads to project. And a third point: companies don’t talk about controlling outside counsel costs, or the costs of all the small fish vendors swarming around the law firms, when risk numbers of this magnitude stare them in the face.

PS. The same issue (BusinessWeek, Dec. 5, 2005 at 80) reported that MasterCard, about to go public but “embroiled in dozens of lawsuits that could cost millions in legal fees and tens of billions in damages,” has stated in SEC filings that “it plans to spend $650 million of the IPO proceeds on legal fees.” Huge legal fees for huge stakes.

For each of its litigation cases, BellSouth’s law department tracks outside counsel spend plus resolution costs. The litigation group can analyze this “total cost to resolve” (TCR) by categories of cases, over time, and across law firms. (From Jan. 2005 materials of ACC provided at a conference organized by the ABA Section of Business Law and ACC, Nov.18, 2005 at 5-6)

To show more completely the costs of litigation, so-called TCR+ adds an estimate for the cost of in-house time spent on cases. At this time, BellSouth does not estimate the costs of employees outside the law department, which would be TCR Super Plus (See my post of May 4, 2005 on companies’ indirect and internal litigation costs.)

Where law department budgets include outside counsel fees, and cost cutters are trampling out the vineyard where the grapes of costs are stored, a latent tension arises: a law department might be tempted to recommend a higher settlement than might otherwise be obtained, to lower its payments to firms and thereby improve its budget figures.

Everyone disparages such an idea, but when you measure something, people change their behavior to look good on the measurement. If you tell a law department to cut its spending, and if settlement payments are not part of the department’s budget, you must accept that a perverse incentive has crept into the deliberations.

To be fair, I have never heard of this ploy being used, but the conflicting demands certainly are very real.