Articles Posted in Non-Law Firm Costs

A Legal Week/EJ Legal Big Question survey of 100 senior UK-based partners found rampant discounting, which the British refer to as “low-balling.” “In addition, more than two thirds of lawyers (67%) admitted to ‘sometimes’ doing work at unprofitable rates.” (Legal Week, Vol. 7, Sept. 22, 2005 at 4.)

I have heard the typical breakdown of associate billing rates as covering one-third compensation, one-third overhead, and one-third partner profit. If that split is approximately correct, then the discounts on associate rates – to reach an unprofitable level – would have to be on the order of 33 percent.

It troubles me not a whit if sometimes firms accommodate clients with steeply discounted services. There’s no Eleventh Commandment that decrees all law firms should always make money.

Progressive law departments charge back to a business or staff unit all costs of external counsel incurred on behalf of the unit. Sharing the pain is supposed to impose some market discipline on outside spending. But if often doesn’t.

One reason is that the executive getting the chargeback didn’t cause the ruckus that now costs so much, so shrugs off the message of the charge. (See my post of March 18, 2005 on lag times for legal costs.) Another reason is that the client who registers the cost doesn’t know enough to judge it high or low. A low-level finance person simply records the cost. Third, the time delay for clients to learn of legal costs stretches even longer than the time law departments learn about a cost. As a fourth reason, some clients can be intimidated by lawyers, or comments from them such as “quality costs,” or “would you like us to default?” Then too, the legal fees and expenses may be aggregated at the client end so that no one can link legal costs to business goals. Finally, clients might assume (or hope) that the law department has vetted the bills, so why should the clients presume to question amounts?

In a 2005 survey, the Open Compliance & Ethics Group (OECG) collected extensive data on how 79 companies structured and funded their compliance and ethics programs. The OECG report shows total average costs of compliance and ethics processes over the period 2000 to 2004, broken into six categories. “Legal-External” and “Legal-Internal” were in the six categories, along with “Compliance & Ethics,” “Audit-internal,” ”Audit-External,” and “Non-Audit Services.”

Taking a further quantitative step, the report broke the respondents into companies who suffered “Reputation Damage” during the period and those who did not.

Of these total costs of compliance and ethics, external legal costs amounted to 28 percent for the no-damage group and 39 percent for the damage group. Internal legal costs amounted to 39 percent for the no-damage group and 20 percent for the damage group. All in all, the data supports and quantifies the logical assumption that companies pay outside counsel much more when they have to respond to events that damage their reputation.

According to Fulbright & Jaworski’s Second Annual Litigation Trends Survey (2005, at 10), of the large company’s matters that started trials, 40 percent went to verdict. In other words, 60 percent settled during the trial, which is obviously after the parties have climbed the courthouse steps.

A previous post (May 20, 2005) remarked on the speed up in spending just before trials start, and that burn rate undoubtedly accelerates during trial.

One often reads that “90 percent of cases settle,” but until reading this metric I had only thought of pre-trial settlements, not settlements during trial. I write corrected.

Law departments in the US and UK should pore over the findings from Fulbright & Jaworski’s Second Annual Litigation Trends Survey, which is based on 304 US and 50 UK interviews or survey responses. I reviewed the 32-page summary report and the 126-page full report.

Notwithstanding my appreciation for the report as a whole, I question one metric proclaimed (2005 at 2): “A corporation with $1.5 billion in revenues averages more than $8 million per year in corporate litigation costs.” I could not locate the underlying data for this sentence.

Two quibbles: I presume the sentence means that the average annual litigation spend for the 103 corporations in the survey that reported revenues of $1 billion or more was somewhat more than $8 million. Second, the term “corporate litigation costs” certainly includes external counsel and other vendors, but does it also include settlements and judgments? In this study it might also include “regulatory proceedings” and arbitrations (at 8)

The General Counsel of FMC Technologies, Jeffrey Carr, explained that his department negotiates a budget with the primary litigation firm, but allows the firm to retain local counsel as it deems appropriate, without that local counsel separately billing FMC (ACCA Docket, Jan. 2001) (See my post on July 16, 2005 about national coordinating counsel.)

“[B]ig law firms have horrible diseconomies of scale – firms with 150 or more lawyers typically have overhead $70,000 higher per lawyer than firms with 20 or fewer lawyers.” This metric came from a book based on extensive interviews ten years ago of Chicago lawyers, “Urban Lawyers: The New Social Structure of the Bar” (Legalaffairs, Nov./Dec. 2005 at 61). (See also my posts of April 18, 2005 on attitudes of law departments toward large firms and May 10, 2005 on behemoth firms.)

A decade later, the overhead surcharge has probably grown significantly, but the point remains the same. Smaller law firms can offer legal services that are more economical, although they may lag their expensive large competitors in specialization, breadth of resources, brand recognition, and marketing budget.

I previously wrote about legal systems where the losing side pays the costs of the winning side (May 31, 2005 post). An article by Herb Kritzer, a professor of political science and law at the Univ. of Wisconsin (Legalaffairs, Nov./Dec. 2005 at 20), dissects some of the downsides of this policy. [I recognize that proponents of the system, or some variation of it, are many.]

Under Alaska’s rules of civil procedure, losers have to pay a portion of the winning side’s costs. “A study of the rules found that rather than reducing litigation, they often increased the amount of settlements, because the expenses at stake increased the value of a winning case.” Further, to the contention that loser-pays will reduce the number of merit-less suits, Kritzer writes: “No research has shown that a substantial portion of lawsuits is frivolous.” Later, addressing a common target, he adds, “Research has shown that at least half, and probably more, of the potential cases brought to contingency fee lawyers are declined.” (at 21)

John McGuckin, the General Counsel of Union Bank of California, pondering the relationship of compliance and law (Corp. Legal Times, Oct. 2005 at 78), made a statement about e-mail’s legal risks that goes to the heart of what law departments should communicate in writing: “A compliance process that generates e-mail chains identifying, evaluating, debating and, finally, accepting a compliance risk may be fully discoverable and may create another, potentially greater legal risk than the original compliance risk.”

The ad containing this quote does not explain how people within a company, whether the law department is part of the e-mail exchange or not, should spot and think through a risk without leaving a discoverable trail. That is his point, but the worrying residue seems to be that people should not write about risks. (See my post of July 21, 2005 on software that sniffs through e-mail.)

The key idea behind Attenex’s six-dimension framework is that e-discovery production should be proportionate to the needs of the case. A law department should look at (1) the value of the case in monetary and non-monetary terms; (2) the size of the effort, which includes the number of custodians, pages of discoverable material, and types of files; (3) the degree of focus of the collection effort; (4) the complexity of the case; (5) the format and control of production; and (6) the timeframe for review and production.

A law department should score a case on each dimension, using a scale of 1 to 5, where the higher the number, the greater the sophistication and cost of the discovery process. The rest of the 10-page white paper explains actions a department can take based on the scoring.