Articles Posted in Thoughts/Observations

Joseph Mazur, What’s Luck Got to Do with It? – The history, mathematics, and psychology of the gambler’s illusion (Princeton 2010) at 92, “Economists have long sought a meaninghful measure of risk, which should depend on a person’s specific financial situation.” Similarly, the finances of a company affect how legal risks are perceived and handled. The larger the company, the more risks it can take and still remain confident of continuing on if the situation worsens or blows up. This may be another reason why greater size is associated with lower total legal spending – the resources to absorb larger risks and therefore not to invest as much in their detection and amelioration.

Penny Simpson, energetic, funny, generous of her time and talents, caring of those around her, a completely warm and loving person, and incidentally the very capable founder of an innovative legal technology consulting firm, lost it all two years ago from a massive heart attack. Amazingly, you could say, she survived, or at least her body did, but the loss of oxygen to her brain robbed her of her abilities, personality, husband, and joyous élan.

Penny died New Year’s Day, and it is a sadder 2012.

Wordnik.com shows how English words are actually used in books and other publications. I searched for “law department” and found most of the references were to the law programs at universities, but with one charming exception. “After he took her picture, just as a lark, and displayed it in his shop, it was seen by an errand boy who worked in the law department of Loews, Inc.” The quote comes from J. Randy Taraborrelli’s, Sinatra, The Man Behind the Myth.

For “legal department,” there were quite a few more references in works of fiction. The one that made me smile was from a science fiction work called Moonwar by Ben Bova. “As I understand it,’ the head of the legal department tried to explain, ‘Edie Elgin beamed her report here from Moonbase.” Beats faxing.

Finally, in Dan Fogelman and Tom Clancy’s thriller, The Sum of All Fears, Wordnik salvaged this commonplace: “Nancy, could you tell the general counsel that I need to see him?”

In 1998, while a partner at Altman & Weil consulting to law departments as I have done for the years since, I wrote an article about ten 1999 resolutions for general counsel. Now, 14 years later, have those resolutions been acted on and come to pass?

No, since the first four still apply to many general counsel and their law departments.

1. Experiment with Non-Hourly Billing.

In litigation, loser pays in Germany and Australia: This blog has noted that the UK and Germany have loser-pays rules for litigants. According to the Economist, Dec. 10, 2011, that is the norm also in Canada (See my post of July 1, 2009: loser-pays jurisdictions with 6 references; June 2, 2011 #4: FRCP 68 look-alike in Britain; and July 18, 2011: Australia has loser-pay rules.).

Some states bar in-house counsel from providing pro bono assistance. Met. Corp. Counsel, Dec. 2011 at 38, has a column by Amar Sarwal of the Association of Corporate Counsel. He refers to efforts to promote pro bono services by in-house lawyers, then adds “Unfortunately, some states forbid in-house counsel from offering this kind of assistance.” Apparently Hawaii, Iowa and Minnesota are among those benighted states (See my post of Jan. 16, 2009: lack of pro bono opportunities for inside counsel.).

Acedia, also known as the “noonday demon.” The essay in the NYT Book Rev., Dec. 25, 2011 at 31, charmingly writes about the decline in attention at mid-day. A lawyer’s breakdown in concentration around lunch could be psychological (distractions), physical (hypoglycemia, lack of sleep), or ethical (lazy, poor work habits). Whichever the cause, the solution is a change of pace, a choice of a management task to accomplish, some discipline and some knowledge about the acedia effect.

A stimulating review of two books about the history of science gave Nicholas Jardine, an emeritus professor at the University of Cambridge, an opportunity to summarize four high-level perspectives on scientific efforts. His review is in the Times Lit. Supp., Dec. 16, 2011 at 3-4. My application of those perspectives to management of law departments borders on presumptuous but the ideas are perhaps provocative.

The dominant narrative to date has been that a few far-sighted, rational, and progressive general counsel devised groundbreaking management tools. The “great GC” version of Whiggish progress has been unquestioned. Until, that is, someone were to take a “social constructivists” look at management beliefs “as the products not of disinterested inquiry, but of pursuit of social interests.” Law departments and their scope, responsibilities and operation result more from the finances and power of companies or the connivances of politicians and regulators than the studied breakthroughs of heroic senior managers in law departments.

A third and very different perspective privileges neither rational nor social factors in figuring out why law departments operate as they do and have changed over time. The “actor network” view advocated notably by Bruno Latour would investigate law departments and their agents – employees, law firms, business executives, judges, perhaps journalists and consultants – as the forces for change. Finally, in a fourth turn from the history of science, Jardine writes about “decentring” and its emphasis, were it to study law departments, on such lesser players as direct reports to the general counsel, heads of operation, paralegals, and hidden lawyers within companies (See my post of March 9, 2009: survey estimated the percentage of hidden lawyers.).

Profit figures of law firms. The U.S. Census Bureau estimates that law firms in that country earned gross profits of $51 billion in 2003, which was a profit rate of 40 percent compared with revenues. However, the Rand report, “Innovations in the Provision of Legal Services in the United States, at 5 (fn. 1) explains that “these figures are not calculated in line with usual accounting standards.” GAAP Principles would reduce the profits. I have therefore mistakenly compared law firm profitability to the profitability of U.S. public companies (See my post of Sept. 22, 2008: traditionally high profit margins in law firms.).

Difference between “experience” goods and “credence” goods. A recent Rand report distinguished between these two terms. With experience goods and services, quality can only be confirm after use. With credence goods, quality may still be unclear even after the service was rendered because some event has not yet happened, and might never. Legal services are mostly experience goods and often credence goods, such as when a lawyer’s drafting of a contract is never tested in court (See my post of April 26, 2006: credence goods; and March 31, 2010: information asymmetry and credence goods.).

Kaldor-Hicks test for improvements. Pareto decision-making seeks to reach a point where any change would make someone worse off (See my post of Nov. 24, 2010: Pareto optimality.). Another criterion was put forward by two men (Kaldor and Hicks) that would permit change if those who are made better off by the change gain more than is lost by those who are made worse off by the change. Law department managers can maneuver more under the Kaldor-Hicks principle.

Macroeconomics takes a top-down perspective on economic activity whereas microeconomics looks at the elements of economic activity. According to Nicholas Wapshott, Keynes Hayek: the clash that defined modern economics (Norton 2011) at 196, John Maynard Keynes invented the macro branch. Possibly, but whether he did or not is beside the point of this post. Along the way Wapshott claims Keynes also invented econometrics, the measurement of economic activity at a national level. The genius of Keynes, Wapshott summarizes, switched the economic discourse from philosophical and abstract to social scientific and empirical.

Management of legal departments hardly stands shoulder to shoulder with economics, and in fact the comparison is risible. Still, a macro view of law departments would cite globalization, telecommunications, business models, environmentalism, and total flows of legal expenses and revenue. A micro view would break the subject up into components, perhaps like the categories on this blog. As far as a counterpart for econometrics, benchmarks anyone?

I admire the report just issued by Fronterion Top Ten Trends for Legal Outsourcing in 2012. The full version is at www.fronterion.com/tenfor2012. As I thought about trying to write a counterpart for law department management, another part of my mind objected. The objections carried the day.

1. Trend-spotting has an air of astrology. When you generalize grandly, you leave all kinds of interpretative flexibility. “Law departments will seek increasing flexibility and inward-outwardness.”

2. When you pronounce ex cathedra – “Law departments will exhibit more managerial agility” – you sacrifice the grounded grit of specificity. You smooth and polish reality to such a high shine it blinds.

Splines. A spline function is based on the difference between a firm’s performance and the performance of a relevant comparison group. For instance, a spline function would look at a manufacturer’s law department metrics after subtracting from them the medians in that industry (See my post of July 31, 2011: smaller law departments should adjust when comparing themselves to benchmarks dominated by large departments; April 24, 2009: adjustments of share price changes for industry and size; and Dec. 31, 2006: nominal versus inflation-adjusted figures.). If each company in the industry is then subtracted from the median, its performance would be stripped of the broader industry fluctuations. This is also referred to as “scaling” — all the above from Acad. Mgt. J., 2011 at 725.

Gibrat’s Law. Gibrat formulated the law of proportionate effect for growth rates to explain what he empirically observed as the pattern for manufacturing firms. The law states that a firm’s expected growth rate should be independent of its size. In other words, “the probability of a given proportionate change in size during a specified period is the same for all firms in a given industry – regardless of their size at the beginning of the period.” If that is true for the revenue of a company, given the relationship between revenue and number of lawyers in a legal department for the same industry, one would guess that Gibrat’s Law holds for law departments (See my post of Oct. 22, 2006: the “laws” of Gresham, Murphy and Damon Runyon.).

Publicly traded company in legal management. We can now add Epiq Systems (NASDAQ: EPIQ) but we must remove LECG (See my post of March 20, 2007: lists four publicly traded firms that do forensic accounting — CRA International; FTI Consulting; LECG, and Navigant Consulting.).