Why is it that some law departments go through an end-of-year rite, asking their law firms to give them estimates of November and December bills so that the department can accrue for them, yet other law departments ignore that effort? A major regional bank I have worked with makes no effort.
It must have to do with the ability to either spend money during the year or spend it later if they have accrued for it. My ignorance or naiveté must be glaring.
The Economist (Aug. 13, 2005 at 61-62) cited the estimate of Institutional Shareholder Services that payments under pending and tentative settlements in class-action lawsuits had reached $20 billion. Based on the typical payment to plaintiffs’ lawyers in large securities cases of 5-10 percent or so, that means “a bonanza of cash that the top law firms can plough back into making themselves even more formidable….”
With deeper pockets, more access to quality research and expert witnesses, carrots for attracting and keeping talented lawyers, and the funds to invest in technology and management, this well-heeled niche of the plaintiffs’ bar can step on or go toe-to-toe with corporate adversaries. The cost of litigation will rise, as will the stakes.
The ABA Journal, in an article in its August 2005 issue (pg. 38) quotes a lawyer as saying, “The issue that threatens to swamp everything else on cost controls is electronic discovery.” Later, the article cites a Jones Day study that found that the average corporate executive has accumulated about 180,000 to 200,000 pages of records, or about 100 to 120 full boxes.
Law departments may have to team with their internal IS department and with law firms or vendors to have a chance against spiraling discovery costs. (See my post of March 5 on Preston Gates and e-discovery, and Aug. 5, 2005 about Sears’ discovery efforts.)
Despite yearning to reduce law firm costs, despite dissatisfaction with one or more firms currently handling litigation, despite finding a firm that offers better prospects for costs and results, despite all this most in-house litigation managers balk: they are worried about loss of case-specific knowledge and about savings being eaten up by the transfer’s transaction costs.
Such concerns are over-rated. The replacement firm will absorb some of the ramp up expenses of becoming familiar with the case and making the necessary filings. Second, the first firm was not performing as effectively as you would like – or you wouldn’t be pondering the switch. Third, a new set of eyes might see in the case possibilities for resolution that the previous firm had been blind to. Fourth, the files and pleadings to date can accelerate learning about the case, although admittedly they do not capture the personalities of those who are enmeshed in the litigation. The net cost of transferring cases, even those that are mature and long-running, can be minimal.
“Cost savings [in joint litigation support efforts] can be considerable in all aspects of the document discovery process – savings typically range from 40% to 60%.” This estimate came from an article by a lawyer, Clyde Hettrick, Director of Legal Research at LRN – The Legal Knowledge Company.
The article explains how some plaintiffs and defendants have joined together to share the costs associated with automating case-related information. Document production, document management, and information retrieval are all areas where cost savings can be realized, yet with protections for adversaries to keep confidential their work product and strategy.
Makes sense to me, and this article offers a framework, with specifics, for entering into such an arrangement.
I have heard estimates of around 60%, but have yet to see quantitative research. The quote comes from Richard Finkelman, a Navigant Consulting director (Litigation Support, June 2005 at 3). The article describes Sears Roebuck’s project to review 4 million pages of documents and records comprising 175 gigabytes.
Sears combined (a) a group of more than 30 contract lawyers, (b) a portal customized by Navigant, (3) a method of viewing documents that does not require scanning and uses commercial discovery-management software (EED’s Discovery Partner), (4) organization of the records by concept rather than by custodian, and (5) support from the Sonnenschein law firm.
What Sears thereby handled in about four months – reviewing and coding 1.5 million pages – would have taken, they estimated, twice as long manually or “60 associates to be locked in war rooms around the clock for six months.” Setting aside the consulting and implementing costs, does it sound as if the Sears/Navigant/Sonnenschein approach, compared to the more traditional techniques, might have cost half as much.
Corporate Legal Times (Nov. 2003 at 37) quoted Jon Bellis, then of PricewaterhouseCoopers: “All things being equal, a stable legal organization will see inside costs increase by about 7 percent every year…”
Why should inside costs increase faster than the Consumer Price Index? Around three quarters of inside spend goes to compensation – salary, bonus, and incentive stock – and compensation is not rising at anything like 7 percent a year. Nor should other internal costs, such as travel, entertainment, facilities, subscriptions, phones, and CLE.
If corporate revenue increases by 7 percent or more a year, then one could accept the law department’s internal costs matching that pace, but for many companies that would be a champagne year. To the point: I question the validity of the 7 percent solution
Return-on-investment calculations make sense, but law departments can abuse them if they try to justify investments based on unrealistic extrapolations on “loss of productivity.” The typical ROI argument goes something like this:
It takes a typical lawyer six minutes each day clearing spam from Outlook. We have 100 lawyers. Therefore, we are spending 600 minutes (10 lawyer hours) each day clearing spam. Our fully-loaded internal rate is $200 per lawyer hour. Therefore, we are spending $2,000 each day clearing spam. With 250 business days each year, we would recover $500,000 each year by implementing effective spam protection.
Baloney.
In a previous post (July 30, 2005), I discussed outside counsel fees that are borne by insurance carriers and that do not show up on a law department’s budget. Other expenses are kept off-budget when a project’s legal costs are capitalized, such as when there is an acquisition.
My view is that all cash laid out by a company to law firms should be included in the law department’s budget. Accounting treatments, tax considerations, reserve management, and the payments of other functions to law firms – claims and risk management, tax, human resources, for example – should not conceal or mislead total spending by a company on law firms. Otherwise, how can a company know and manage end-to-end its total legal expenditures?
Some law departments do not count in their outside counsel spending those fees paid on their behalf by insurance carriers who are defending claims. This off-the-books treatment continues, even though the company’s premiums may well currently or retroactively reflect such costs.
Other law departments, faced with large product liability claims and finite insurance coverage, want to be able to guide how their carriers spend defense dollars, because fees paid reduce the total available for indemnity. The first group misleads as to the company’s spending on legal matters; the second group takes more accountability. My view? Include all external legal expenses in the department’s comprehensive budget.
Law Department Management Blog