Articles Posted in Non-Law Firm Costs

Deep within a Metropolitan Corporate Counsel interview of Eric Elfman, the founder and CEO of DataCert (Sept. 2005 at 33) , a sentence caught my eye. Elfman’s company, founded in 1998 – the primeval days of e-billing, has more than 70 law departments using its electronic invoice management software.

“We’ve also been responsible for creating a market potential of approximately $2 billion where virtually none existed before.”

I have seen figures estimating that US corporations spend $100 billion a year on outside counsel so the market potential referred to would be about 2 percent of that amount, which presumably could go to e-billing vendors. That suggests they charge, on average, 2 percent of the invoice amount for their services of gathering, analyzing, reporting, and tracking outside counsel bills.

In a recent consulting project, we studied the relationship between law firm’s blended billing rate and the number of lawyers in the firm. For 12 law firms, all based in the U.S. and nearly all of them exceeding 200 lawyers, when we looked at more than $200M worth of invoices in total, we found the correlation between blended rate and firm size to be quite strong.

Bigger firms have more overhead, which is reflected in their rates, or they are good enough to be able to charge more for work.

These costs rarely surface, so I was interested to see that the law department of New York City disclosed that it spent on a document management system for “more than half” of its 650 lawyers together with a litigation support system a total of $3.4 million. (NY Law J. Aug. 15, 2005)

I could not tell from the brief mention in the article why the system would be available to less than the full contingent of lawyers, in as much as document management has department-wide benefits. The answer might be that the software helps with litigation, and not everyone in the department handles law suits.

Is there a proper procedure or standard for the date on which you convert foreign currency invoices? I have seen a British company that sets a currency’s conversion rate for the entire year, and therefore the date of the invoice or its payment does not matter. I have also seen a law department that converts foreign invoices as of the date the law department enters their amounts into its matter management system. I think their reasoning is that they do not know the date in which accounts payable will finally cut a check so they have chosen their own date.

Over the course of the year, currency conversion may not make any material difference, but it would be nice if there were a GAAP standard to apply. (This also makes up one more variation in total legal spending.) Some matter management systems have currency conversion among their capabilities and perhaps you can set the conversion date. (See my post of July 17, 2005 about currency conversion.)

The 650-lawyer law department of New York City has begun sending hypothetical bills to all the City agencies it represents in litigation. The mock bills detail how much it has cost the City to defend the agency’s cases, which is primarily inside lawyers’ time (See my earlier post today about the Department starting to track attorney time). The goal is to create a greater awareness of litigation costs and to encourage the agencies to do what they can to keep those costs as low as possible. (NY Law J. Aug. 15, 2005)

Every law department that does not charge back the fees and expenses of outside counsel retained to defend the company in litigation could consider this innovative technique. If you can estimate internal hours (and multiply them by your fully-loaded internal cost per lawyer hour), so much the better.
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Under a typical contingent fee arrangement, when a law department retains a firm to sue another company the firm receives 33 percent of the recovery if the case settles before trial and 40 percent if the case goes to trial (Corp. Counsel, June 2005 at pg. 69). According to the article, firms are likely to pass on the opportunity to represent the company plaintiff if less than $2 million is at stake (too much risk for too little reward) and companies may lose interest if more than $10 million is at stake (not enough risk and too much reward to the firm).

I like the article’s suggestion of a blended contingent fee arrangement, such as when the company pays a reduced hourly fee in exchange for a reduced contingent fee. The example used $200 an hour (don’t we wish!) and 20 percent of any recovery.

These arrangements have many pitfalls, as the article describes, but they marry the interests of company and outside counsel better than do hourly billing arrangements.

If, and it’s a big if, one or more of your law firms agree to knock off 2-3 percent for your paying them in, say, less than 10 days (See my posts of May 4 and Aug. 24, 2005 dubious about such discounts.) you have to change some internal operations.

For example, Waste Management’s law department creates an incentive for lawyers to review bills expeditiously because their budgets benefit, it regularly reports on cycle time for approvals, and it develops statistics tied to accounts payable. (Metropolitan Corp. Counsel, March 2005 at pg. 55).

The website of Legal Cost Control includes a brief bio for Richard Hess, Esq. It describes him as having been a “consultant in the legal cost containment arena for 15 years.” My mouse dropped, however, when I read that he has “reviewed over $10 Billion in professional billings.”

Mind reeling, I figured that was an average of $750 million a year, or if he took four weeks of vacation, ten national holidays and the weekends off, he reviewed $3.3 million in fees every day for 15 years. Lou Gherig plus Bartleby the Scrivener! (See also my post of May 1, 2005 on the ROI of a certain bill review software and process.)

A site hosted by JURIS, which offers a leading law-firm time and billing system, has a post (Aug. 1, 2005) that urges firms to use retainer billing, especially retainers for the coming quarter in advance, and to periodically renegotiate the retainer rate based on activity. The note closes with the sanguine comment that corporate clients, “under the gun to manage their budget,” are ”willing to pay in advance for a billing arrangement that lets them forecast legal expenditures for the coming quarter.”

Not in my humble opinion. Law departments want to reduce costs, not to budget with certainty high costs.

I have a feeling that law firms do not care much whether their corporate clients pay in 10 days, 15 days or 45 days. They are not inclined to give a discount – say, one or two percent – simply for being paid faster. They may grant a discount for other reasons, such as to retain favor in the eyes of the client. (See my post of May 4, 2005 to the similar effect.)

If you were a standard issue law department with ten lawyers and $5 million in outside spend, and if you could persuade half of those billers to accept a 2% discount for speedy payment, you would save $50,000 during the year. Not peanuts; but also not coconuts.