Articles Posted in Non-Law Firm Costs

To increase accountability for cost reductions, general counsel should assign portions of the overall external budget to the chief lawyers for business units or legal specialties, such as litigation and labor/employment. With a cascade of responsibility for reducing costs down one level, more lawyers will have a personal stake in controlling legal costs.

Another advantage of segmenting departmental budgets comes from hearing from the newly-charged overseers what problems they foresee. When a lawyer’s bonus depends upon coming in under budget, that lawyer will sharpen the pencil on assumptions and circumstances that might confound the budget.

(See my posts of May 30, 2005 about setting special budgets for extraordinary SOX expenditures and two on July 30, 2005 about what should be included in internal budgets, Aug. 3 on stock option grants and budgets, Oct. 4 on insured litigated matters, and Sept. 27 on variance of outside counsel budgets.)

People have sung the praises of this idea for a while, but it deserves an encore. Law firms that pride themselves on swinging the wrecking ball of litigation find it difficult to tickle the fancy of the opponent with the sweet talk of settlement.

A stance that privileges prompt and businesslike resolution of matters – the stuff of settlement – depends not only on a different lawyer personality, but also a complementary inside lawyer view and client involvement. For example, senior business executives need to take an active role, sometimes, in talking to their adversarial counterpart about settlement.

Law departments, ugly-duckling cost centers, sometimes dream of molting into swan profit centers. One way is through collecting royalties from patents improperly used by other companies. The New York Times (Oct. 4, 2005 at C8) discussed expert witness firms, such as the giants LECG and Exponent, that assist law departments who bird-dog infringers.

The article stated that “the handful of large expert-witness firms have made ‘handshake’ agreements to act in partnership with companies that are accumulating portfolios of patents with the intent of collecting revenue from them.”

A bit hard to parse, that quoted sentence, because aside from some so-called defensive patents whose purpose is to block competitors from patenting in an area, obtaining a patent always has the near or long-term hope of letting the holder collect revenue.

Multiply the number of in-house lawyers in your department by a presumed 1,800 chargeable hours per year. Other hours of work are administrative or CLE or of a kind that an outside lawyer would not bill. If a lawyer left or joined during the year, adjust the number to come closer to the equivalent of full-time lawyers during the year.

Divide the result of 1,800 times full-time equivalent lawyers (FTE) into the inside spend for the year, i.e., divide chargeable hours. That spending figure should include all the kinds of expenses that a law firm has to cover (except malpractice insurance). Thus, it should include all compensation-related costs to the company of the entire law department staff, even if some of the costs are not part of the law department’s budget. It should include a fair market facilities cost (the counterpart of rent) and all allocations or charges by the company for support, such as technology, finance or human resources (even if the department estimates what those charges should be).

The fully-loaded hourly cost – which should capture the total cost to the company of employing its lawyers – is what the lawyers would have to charge their clients for their equivalent of billable work to cover all the department’s costs.

A thoughtful review of British legal technology in LegalIT (Oct. 11, 2005) cites Hammonds Direct. Hammonds, a large British firm, combined online technology and process engineering in the conveyancing (real estate) market to dominate that market with banks and other lending institutions. The article distinguishes commodity legal work that law departments can obtain through an online site from the next level up of legal sophistication: online legal services.

Linklaters’s Blue Flag, Clifford Chance’s NextLaw, and Allen & Overy’s online banking capabilities are mentioned, but “most firms found that the demand for these services from clients simply was not there.”

Are the online services not robust enough? Are law department troglodytes unnerved by using them? Has collaboration fallen through? My hunch is that people want to talk to people, not labor through the online equivalent of a labyrinthine automated telephone answering system.

It’s a simple statement, “The law department will reduce its budget by six percent.” It may be far more complicated, however, to allocate that overall budget reduction to specific business units or specialty functions.

For example, if outside counsel spending must drop by $800,000, how do you know whether it is the widget unit that must spend less or the floozis unit? And should the patent group have a set amount by which its budget is reduced? These details of allocating budget cuts are the devil.

The Wall Street Journal mentioned three law departments using lawyers in India: DuPont for drafting patent applications, Roamware for creating a contracts compliance database, and DirectoryM for researching litigation matters. For the last two, as compared to the costs US firms would have charged, the offshore lawyers’ costs were approximately 10 percent.

If much legal work where there are large volumes of documentation or repetitive activity, and the applicable documents can be emailed or faxed, can be done in India for one-tenth the cost, the de-leveraging of law firms and law departments will proceed apace. Even if law department lawyers cost 30-40 percent less per hour than the outside lawyers they retain, the cost in favor of Indian lawyers would be around 15 percent.

This shift of commodity work will proceed quickly since more than 200,000 Indians graduate law school every year – five times as many as graduate US law schools.

Ex pat packages – extra supplements for lawyers who move to a foreign location – can double, or more, the cost of stationing a lawyer out of his or her native country. Those costs may be so high that an opportunity for professional development is not affordable by the law department. Client, lawyer, and department lose.

The expense of ex pats is a subset of the difficult issue of paying people around the globe equivalent amounts — purchase power parity. (See my post of later today on PPP.)

Previous posts have discussed several pots of spending that may or may not be included in a law department’s total budget. (July 20 lists several of them and Sept. 4, 2005 praises TLS as a percentage of revenue for its pre-eminent role.)

One outflow pertains to spending on insured matters. If the premium paid by a company reflects in part payments made by the carrier in defense of insured matters, the company’s total legal spending ought to reflect some portion of the premium payments. I am sure reality is much more complex than the previous statement, but the point remains: the total outlays on law-related expenses for a company is undoubtedly larger than law departments report.

How much money do in-house litigators direct? Consider that they account for, very approximately, one in ten lawyers in departments that spend roughly $600,000 in outside counsel fees per lawyer – with about half of those dollars going for litigation. Taking those figures together, the lone litigator in a ten lawyer department would presumably be managing external spending each year of about $3 million.

That person should have some tools for bill review, such as guidelines for outside counsel, checklists to help parse bills, standard formats for bills, budgets, paralegal assistance, electronic billing, and fixed fee arrangements among them.

It is impossible to come up with representative numbers for spending on settlements and judgments, but the range might be from half to twice the outside fees litigation fees paid.