Articles Posted in Non-Law Firm Costs

It costs money for employees to find and organize documents that may be responsive to discovery requests; it costs to have employees prepare for depositions and be deposed; it costs to have inside lawyers manage litigation.  Yet no one, as far as I know, has tried to quantify these and other indirect, internal costs of a company’s lawsuits. (Reputation shocks are even harder to tally.)

Has any reader made or seen an estimate of oblique, hidden litigation costs?  Could they be as much as five percent of the overt, outside counsel payments? [See my post of today on event studies.]

Josh Lerner studied the patent awards and lawsuits of 530 companies based in Middlesex County Massachusetts during Jan. 1990 and June 1994.  He found among these companies that “approximately 6 patent suits are filed for each 100 corporate patent awards.”  In reaching this estimate, he noted that companies generally litigate patent cases in their headquarters district, because they can use their familiar outside counsel and make greater use of internal counsel. 

Lerner ’s paper, at www.people.hbs.edu/jlerner/Patintro.html, states also that “patent litigation with the USPTO and the Federal Courts begun in 1991 will lead to total legal expenditures (in 1991 dollars) of about $1 billion.”  He did not say how many cases that figure covered, but did point out that the costs amounted to almost 25 percent of what U.S. firms spent that year on basic research! [See my posts about patent litigation costs on March 6, 10, and 29, 2005.]

A publication by Moore in 2001 states that only 5 percent of patent lawsuits reach a verdict, “which the 1996 AIPLA estimate of median litigation costs [out-of-pocket only] cites at $1.2 million.”  Another 49 percent of cases were dropped before the start of discovery (!), which cases presumably cost relatively little.  The remaining cases – 46 percent – each incurred some costs, with the median cost per case through discovery being $600,000.  It is not clear from what I read whether these figures combine the spending of both (or all) sides to the litigation.

The page [www.nap.edu/openbook/0309086361/html/69.html] which included these findings, plugged in $10,000 for the cases dropped before discovery and then calculated an expected cost of litigation per patent case of $349,900.

An article in the Chicago Daily Law Bulletin (Aug. 26, 2003 ) by Richard P. Beem updated the AIPLA costs to its 2001 Economic Survey: $797,000 through discovery and $1,499,000 through trial.  That is a 25 percent increase over five years in the cost of tried cases.

The study of knowledge management techniques discussed in my recent posting followed a research methodology I wish someone could duplicate with outside counsel cost-control methods.

Ask a varied group of corporate counsel about cost reduction methods they have used recently, then use the list that produces in a survey of a larger group.  Ask the larger group to determine their familiarity and satisfaction with the methods.  Rank the methods according to the survey results and then, in a more difficult step, control for such factors as the number of lawyers in departments that give particular rankings and the resources committed to the method.

Ultimately, calculating the effectiveness of any particular cost management tool must balance measuring the popularity of the tool (how often lawyers in-house draw upon it) with measuring results (how the same lawyers say the tool has contributed to reining in costs – ideally demonstrated with spending metrics.  The next methodological step would be to conduct what the researchers describe as a causal analysis, to show the degree of causation between methods and money: do the methods reduce spending and by how much.

The general counsel of Agrium, a CDN $2.5 billion Calgary-based company, explained at a conference that his company faced some huge lawsuits.  To involve his clients in the litigation and to inject project management skills, he obtained from the client a “business manager.”  That person was responsible for assisting with logistics, planning, and costs of the sprawling, expensive suit (or that is what I suppose).

It makes excellent sense to draw upon skills outside the law department, such as financial planning, project management, and technology, to parry with the ferocious thrusts of high-risk litigation.  That kind of support could be thought of as administrative; more valuable even than that is the heightened involvement of clients in the suit, as compared to them tossing it over the transom “for the law department to fix.”

An article by Michael Ross in GC Mid-Atlantic (Feb. 2005 at pg. 11) described what some law departments have obtained from the law firms that survived a convergence culling.  He cites corporate law departments that have negotiated for “reports on legislative and regulatory developments, periodic revisions to forms and manuals, and in-house training, at no additional cost.”  I suspect that firms could also contribute to a law department’s intranet site.

Besides this, what caught my attention was the article’s statement that one firm relocated its team serving the client to less-expensive office space (separate from the rest of the firm) so that it could make the deal work economically.  It seems inevitable that the associates and paralegals working on that team will feel ghettoized, not a part of the firm, off the main track.  So be it, but a law firm probably needs to think of different staffing and management models for fixed-fee arrangements or volume work. The firm, and the law department, should consider the longer term talent management implications of how they treat people who work under a different economic arrangement.  I suspect that over time, quality will decline in the isolated group.

Beyond lawyering, law firms provide many other services which could be handled by specialist vendors.  Photocopying, making travel arrangements, proofing documents, conducting online legal research, digesting transcripts, building intranets, running law libraries, scanning and coding documents, preparing medical reports, producing trail graphics, researching jury responses, all these ancillary services could be unbundled.

By unbundled, I mean, at least theoretically, that a third party could furnish those services at rates and cost structures less expensive than a law firm’s and probably with better quality, because the third party would specialize in the task and the task would be its highest priority. 

Logistical and coordination challenges arise if a law department were to try to sever pure legal counsel from all the associated tasks that could be unbundled.  Still, opportunities for cost savings are at hand.

Some executive search firms provide compensation data for in-house counsel.  They gather it mostly from candidates, partly from surveys, and sometimes from clients.  Since the executive search firms receive as their fee a percentage of the first-years’ compensation of the lawyers they place, the firms would favor higher compensation figures (those comp levels might also induce some lawyers to look around for other jobs, which helps search firms).

Keep in mind, when reviewing the figures search firms release regarding compensation the potential for bias.  Ask careful questions about the source of the figures, and compare the figures to other compensation data.  You can get law department compensation data from such firms as Abbott Langer, Altman Weil, and Hildebrandt International.

Many companies, trying to control overhead costs, have hired a big-name consulting firm, such as McKinsey or Bain, to review their so-called administrative cost structure.  The large consulting firm sweeps into its analysis of the law department and produces simplistic but harsh metrics regarding legal cost to be cut and amounts that can be saved.  I have worked with two companies where the scythe of the consulting firm recommended lopping off 20 percent or more of legal costs.

Neither consulting behemoth understood law departments; neither of them understood the role or cost structure of outside counsel and the intricacies of retaining them; and neither had any sensitivity to the difference between headcount and external spending.  In both situations the law departments needed to defend themselves against the depredations of the ignorant generalist consulting firm.  Here, then, is one of the uses of benchmark data, namely, to show the ill-informed metrics of someone else mis-portray the cost structure of the law department.

General counsel have a hard time synchronizing their outside counsel spend to their company’s fiscal years.  That spend lags the company’s calendar when a costly law suit erupts years after the events that triggered it; spend leads the company when a potential acquisition, for example, requires expensive counsel fees. 

In any fiscal year, perhaps as much as 40% of outside counsel spending falls into the lag bucket, such as with the defense of legacy litigation that arose with now-disposed of business units; perhaps 5-10% a year of external spending could be in the leading bucket, such as the expenses for prep and prosecution of a patent that may be years away from commercialization.

I have never seen metrics that divide outside counsel fees into lagging, current and leading, but the fact – and challenge to law department managers – remains that such spending spreads itself across a temporal spectrum.  A snapshot of spending, for example “our department spent $4 million in fiscal 2004 on outside counsel” mashed together current, past, and future drivers of legal spending. RWMorrison@Hildebrandt.com