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Marsh & McClennan’s Michael Caplan, who manages the finances for that company’s legal team, spoke at length recently about accruals: “Technology to manage un-billed fee estimate accruals from law firms is critical and we put a process in place to capture un-billed fees monthly from our top 50 firms. We also have a report that lets us know what invoices remain with which lawyers for 30, 60, 90 days. In the last three months, we haven’t had anything sitting there for more than 60 days.

How we manage spending for our business partners ties very much to what’s in the system but also what is not in the system. And it’s not just a dollar amount that’s important; the matter categories are also important.” Caplan has put his finger on two important aspects to law departments of accruals: timeliness and comprehensiveness. For the full interview, here is the URL.

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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.).

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A rare example of quantitative research that bears on management issues of legal departments appears in the Acad. Mgt. J., Oct. 2011 at 981. The authors analyzed all two-party disputes involving vertical relationships handled by one law firm in Western Europe between 1991 and 2005. Those 102 disagreements involved 178 different companies and amassed over 150,000 pages of documents. The researchers classified the contracts at issue as distribution (35.3%), production supply (29.4%), information technology (26.5%) and consulting and other services (8.8%). Perhaps that is a reasonable classification scheme and distribution in general for vertical (purchaser-supplier) procurements. They also classified the key provisions in terms of whether they emphasized control or coordination.

The researchers drew on earlier work that developed “an unweighted index of contractual complexity, which tabulates the presence of up to eight key contractual clause categories.” At least two other studies had used that index (See my post of June 25, 2007: contract complexity; Jan. 24, 2010: group contracts by complexity; Feb. 15, 2010: software to gauge complexity of contracts; Oct. 31, 2010: Halstead metrics of software complexity translated to law department contracts; and Nov. 10, 2010: response to comment on contract complexity; and Jan. 24, 2011: a method to group contracts by complexity.). Law department managers might find useful insights in the academic literature on contractual sophistication and how to assess it.

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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.

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The size of the U.S. legal services industry, the term used in a Rand report just released, “Innovations in the Provision of Legal Services in the United States,” remains undecided. Rand’s study has more data that might clarify the number. Rand cites the Department of Commerce’s Bureau of Economic Analysis estimate in 2009 that the legal services industry generated almost $282 billion in output.

It would be squaring the circle to reconcile all the estimates I have collected just this year for the U.S. legal industry (See my post of March 27, 2011: market concentration of spend – perhaps $70 billion by the Fortune 500 and $60 billion to US law firms; Oct. 25, 3011 #2: $60 billion global and $200 billion U.S. litigation figures; Oct. 28, 2011: $100 billion U.S. corporate legal market as 20% of global market; and Nov. 21, 2011 #3: Jomati Consultants – “American legal market” generated around $255 billion.). Someday I may try to reconcile the various estimates and their methodologies.

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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?

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A collection of international laws is available on vLex. Along the lines of Justia’s offering, vLex appears to me from wandering around on its website to be very impressive. In the banner it boasts “43,505 customers, 62,590,371 documents (actually, I counted 62,590,369 but I may have lost track somewhere), 1,024 publishers, 13 languages, and 128 countries.” For a blogger enchanted by metrics, I am impressed by that parade!

There appears to be a free basic subscription for individuals or a premium version at $39 a month (U.S. material only), and $269 a month for the whole vLex storehouse for all countries. As law departments find they have to cope with foreign laws and regulations, a resource such as vLex could be quite cost effective.

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An ad in the Economist, Dec. 17, 2011 at 160, seeks a general counsel for The Energy Charter Secretariat. It has three aspects that deserve mention. (1) It seeks candidates with “an excellent law degree.” Perhaps this is a Britishism, perhaps it is a polite way of saying “You have to have graduated a name-brand law school,” or perhaps it seeks high grades and law review (come to think of it, are there law reviews in non-US law schools?). To be blunt, what does this requirement of excellent law degree mean?

(2) The chief lawyer will get “an attractive, tax-free remuneration package.” The Charter is an international organization so perhaps its employees pay no tax in the way at least some United Nations employees pay no tax. Nice work if you can get it. And, “remuneration” is much tonier than “pay.”

(3) The Secretariat position “is offered on the basis of a three-year, fixed-term contract with the possibility of renewal.” Although many general counsel of U.S. law departments have contracts, I doubt that they are term limited (See my post of Jan. 18, 2009: severance contracts for general counsel.).

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The quote comes from a NY Times article on Dec. 18, 2011 at BU 1. Prof. Andrew Morriss of the University of Alabama School of Law then adds that there aren’t enough lawyers who will handle personal matters for individuals, like divorces and bankruptcy filings, at “reasonable rates.”

The article blame law schools as too expensive, with the consequence that heavily indebted graduates must earn princely sums to pay off their debts and therefore their firms must charge a king’s ransom to compete on salaries.

An economist could respond that corporate buyers, by and large, are the ones that support $300 an hour lawyers, and indeed many lawyers who are much more expensive. No one forces them to retain outside counsel nor sets minimum hourly rates they must pay. It appears, I grant, that the ABA and state legislators have restricted “the practice of law” and thereby raised the cost of legal advice. Still, companies are not without choices. Nor does any law or government regulation or guild-like agreement restrict lawyers from charging individuals “reasonable rates.” No, it is economics.

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Jeff Hodge, Executive Director, Corporate of matter management and e-discovery vendor doeLEGAL, wrote December 13th on the company blog about the growth of the electronic document discovery (EDD) market.

“Starting at about $40 million in revenues in 1999, the market appears to have grown to approximately $70 million in 2000, and then $150 million in 2001. We estimated that the total 2002 domestic, commercial market for EDD services was at least $270 million. (George Socha and Thomas Gelbmann, “The Size, Scope and Growth of the Electronic Data Discovery Market: Survey and Results”, 2003).” Hodge then refers to more current research from IBISWorld that found the EDD “industry has grown at an annual rate of 5.6% over the last five years to an estimated $786.5 million in 2011.”

My expertise does not extend to e-discovery, but it would not surprise me that spending almost tripled from 2002 to 2011, and that $800 million might be this year’s total e-discovery spend. If the U.S. corporate spend on legal is around $100 billion, with $60 billion of that going to external service providers, and $36 billion of that related to litigation, to estimate on the order of three percent in there for EDD sounds almost conservative.

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