Articles Posted in Non-Law Firm Costs

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Britain’s National Health Service analyzes particular drugs, at a known cost per patient per year, to decide whether they provide sufficient benefit, measured in terms of additional “quality-adjusted life years” (QALY). For example, as described in the Wall St. J., Vol. 246, Nov. 23, 2005 at A1, an Alzheimer’s drug costs more than $100,000 per QALY, which is far too expensive for the health service to underwrite. In other contexts, a cost-benefit analysis guides or critiques policies, such as environmental protection mandates, surgical interventions, and tariff or import quota protections.

Can law departments calculate the costs and benefits of their decisions, say in the area of litigation management? Yes, if they aggregated data.

If ten law departments would contribute data on the last 20 employment discrimination cases they resolved, and provide the same information about them, the consortium could come closer to answering cost-benefit questions that now remain unanswerable. Do investments in reducing cycle time reduce total litigation costs (See my post of Nov. 14, 2005 on total investment.), and by how much? To what degree does investing in discovery reduce total litigation costs? Does the size of the company’s law firm influence total litigation costs? Does early case assessment (ECA) make a difference, and how much (See my post of Sept. 14, 2005 regarding claimed cost savings.)? Where does spending on ADR show a payoff?

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If your company does not want to invest in a full-time employee lawyer, it nevertheless might want to have an experienced generalist work on site one-to-three days a week as a rent-a-GC, an outsourced general counsel.

A number of former in-house lawyers or veteran law firm partners offer this service. Included in this group is a firm in Texas, Phillips & Reiter, which hosts a web site that advertises the service .

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Panelist at a recent conference of general counsel compared practices on the disbursement of monies obtained by the law department’s actions. At one company, the law department can recoup from the settlement, judgment, royalties, or license fees recovered, the expenses it incurred in the effort (and sometimes even gets a premium). I like this idea, because it creates an incentive for the law department that never appears if monies brought in simply swell the corporate coffers.

Another panelist disapproved, and is happy simply to fill his client’s coffers, because of the downside risk of being charged for some portion of adverse decisions. (See my posts of May 30, 2005 on including settlements and judgments in total legal spending and July 16, 2005 on those payments in relation to outside counsel spending.)

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Finance departments sometimes tell law departments their aggregate budget for the coming year, which is “top-down budgeting.” Other law departments figure out their spend for the coming year and tell finance, a reverse practice referred to as “bottom-up budgeting.”

Most common might be “golden-spike budgets,” where law and finance come together, as did the east- and west-bound tracks of the first transcontinental railroad. “Golden” conjures up the dollars involved; “spike” connotes the stake in the ground that the budget represents where it is jointly agreed to. (For more on law department budgets, see my posts of July 16, 2005 on GCs and their business acumen, Sept. 27, 2005 on variance in outside counsel expenses, and Oct. 20, 2005 on delegating down budget responsibility.)

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Managers of law firms undoubtedly feel pressure to keep their firms profitable, enjoying juicy and increasing profits per partner. Realistically, large firms are “publicly traded” in the sense that their comparative profits-per-partner are splashed all over the trade journals. If the collective cost-cutting of corporate clients threatens that take-home, should it matter to law departments?

Some, but not much. If any purchaser drives too hard a bargain, the supplier will fold or flee. General counsel, however, highly value law firms they trust and who know them, so the market, in fact, is often price inelastic (See my posts on Oct. 4, 2005 about loyalty and July 30, 2005 about fear of losing the department’s favored firms.)

In the era of deflating product prices, it might just be the tough love rules of the game for a company’s law department to allow its law firms to change billing rates only in line with cost of living indexes (perhaps the Consumer Price Index), or at the percentage of revenue growth (or decline) of the company, or the company’s increase (or decrease) in profitability for the year.

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A previous post admired Cisco’s investment in technology for handling discovery documents (Sept. 21, 2005 about the investment and possibly licensing it). A fuller, very informative description of that company’s efforts appeared in Law.com’s In-House Counsel.

One of the points that struck me was the statement that when electronic discovery workers remove application, help, read me, and log files, that “process can reduce data volume by 70 percent.” I wonder whether the gigabyte statistics for e-discovery that one always reads about include all that useless software accretion.

Also noteworthy was the claim that Cisco, by building its own storage array and other accoutrement of litigation support, effected savings in the first year of operation – compared to bids from several major vendors to deliver substantially the same services and benefits – of a whopping $23 million. Perhaps part of that bounty, or perhaps a separate source of benefit, the law department remarked that it was able to “reduce our costs of discovery by approximately 97 percent” and “the expense of outside legal review by 30 percent.”

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The Salary Wizard shows 25th quartile, median, and 75th quartile data for base, bonus, and benefits of in-house lawyers.

For example, I looked at figures for the “top litigation executive,”, with data prepared using the Salary Wizard’s “Certified Compensation Professionals’ analysis of survey data collected from thousands of HR departments at employers of all sizes, industries and geographies.” Base compensation was $139,183 at the first quartile, $164,784 at the median, and $206,050 at the third quartile.

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The website of HR AnswerLink (OFDA) announces that “the average [employment] litigation cost is $50,000 per case,” and that “the average settlement is $200,000 per case.”

As to legal intensiveness of the HR field, the site points out that there “are 7,000 federal code sections, and more than 40,000 pages of employment regulations. On top of those, there are thousands of state and local regulations.”

I spotted no sources for these metrics and an online search yielded nothing. Not sure of the date, either. For other estimates of average costs per case, see my post of Nov. 19, 2005 on D&O claims and May 1, 2005 on patent litigation.

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Yes, 12 year old data, but it made me wonder why more law departments have not followed this path. In 1992, the insurance company USF&G evaluated its 250 law firms and dropped 100 of them. It replaced those firms, not with more $80 average an hour firms but with national firms whose average billing rates were over $200 an hour (mercy me!).

At the time, the insurer was paying 10 percent of its litigation budget for claims to law firms and 90 percent to claimants. A little over a year later, the company estimated it had saved $15 million on law firms and $35 million on claims payments!

Query: if higher-billing rate, and thus presumably better-quality lawyers produce such eye-popping savings in total claims litigation costs, why has there been only one float in this parade? This data came from an article by Stephen Voltz of QuantilLex (See also my post of May 30, 2005 on a law department that uses only partners.)

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The 1996 Watson Wyatt Directors’ & Officers Liability Survey pulled together some data which even now, if one increased the dollar figures nine years later for inflation, probably provides some boundaries for thinking about D&O claims. According to that report, summarized in the Babcock White Paper Series, the average litigation cost per claim in 1996 was reported at $919,494.

More detailed data showed that average defense costs varied widely by the disposition of claims. Claims closed by litigation averaged $405,165; claims closed by settlement averaged $1,185,410; claims dropped by claimants averaged $347,225.

Open claims awaiting trial averaged $699,215; claims tried but being appealed averaged $2,701,850. This is wonderful analytic data, but it would be more useful if the summary had shown medians and numbers of claims in each category. We cannot assess the representativeness of the global average figures.