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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This law department has created a “compliance audit review process.” The second part (the first is a routine check whether the firm comports with the bank’s billing policies) assesses what the firm has done in the past year in terms of “value-added servicing: such as co-training and shared technology,

The third step is a “General Performance Questionnaire” distributed to a random selection of people who have retained a given firm during the past year. (It sounds as if clients can retain the firms on their own.) The responses to the 30-to-40 questions (too many in my experience) come back confidentially and are summarized in a spreadsheet. When speaking with the firm, the department thus has more comments to provide, all supported by hard data. Counsel to Counsel, July 2005 at pg. 7

In-house lawyers who do not track their time detest, abhor and revile the thought of doing so. “If I wanted to record 10ths of an hour, I’d have stayed at a law firm!!”

I smiled, therefore, when I read that the Corporation Counsel of NYC’s accomplishments included “implementing, over significant internal opposition, a requirement that attorneys keep time records, a reform intended to give [law] department managers a better idea of the resources devoted to the needs of its ‘clients’ – city government agencies.” (emphasis added) (NY Law J. Aug. 15, 2005)

With 650 lawyers in that department, the need for data on how lawyers are spending their time becomes imperative. For small law departments, those under five lawyers, I doubt the efficiency of tracking time. For intermediate size departments, tracking time in hour increments, or only for a quarter a year, or only on certain kinds of matters, gives most of the insights with less of the angst. For large departments, as many as 40 percent track attorney time and I recommend it

Leases, sub-leases and appurtenant legal documents weigh heavily on the law department of a 1200-store supermarket chain. At Food Lion, lease documents had to be reviewed by several groups and physically routed during a process that was manual and could consume two crucial weeks.

Its inside lawyers, however, working with the company’s primary outside law firm, Akin Gump, devised a streamlined approach using scanners, standardized sub-lease term sheets, remote access by they various groups involved, and e-mail integration. “What once took two weeks now takes only two days.” (Counsel to Counsel, July 2005 at pg. 5)

Help me here, readers, because I can go off the deep end with metrics.

Assume for each of your major lawsuits that you have an annual budget as well as an estimate of both the amount at risk and the likelihood of your incurring that risk (settlement or judgment).

Could you not compare their “importance burn rates”? Take the annual budget and divide it into the product of the at-risk amount and the likelihood. (Don’t tell me you have ranges, can’t be sure, depends on the judge and other side, not quantifiable – work with me on this!)

An example: You have budgeted to spend $600,000 this year on a case where $70 million is at risk, but only a 40% chance you will end up paying this amount – we are leaving out any consideration of timing and net present value. You divide $28 million (40% of $70 MM) by $600,000 and find you have at risk $46 for every defense dollar. If you budget $1 million for a case with an adjusted risk of $8 million, you have $8 dollars at risk for every defense dollar. Do this calculation for each case; won’t the ratios indicate directionally whether your spend rates are in line with your financial risks? Don’t wide disparities suggest examining whether your situation shows a rationale allocation in defense dollars?

The legal group in Canada of Schering-Plough developed a checklist of key points and made them mandatory in employment contracts. They settled on provisions for parties, terms of the agreement, position and responsibilities, compensation, vacation entitlement/benefits, policies, and restrictive covenants. (Counsel to Counsel, July 2005 at pg. 5) Nothing surprising, but an excellent management methodology.

Place this step in a spectrum. Law departments must start by recognizing documents they prepare or review time and time again. A further step along the spectrum is to collect examples of those documents, in hard copy or, better, electronically. Next in the spectrum of increasing sophistication, they can create a checklist of key points to look for. Further, they can draft exemplars of key provisions (as did Schering) and go on to having document assembly capabilities as well as annotations to explain the key provisions, possibly with some alternative language where there is likely to be negotiation. The most sophisticated departments delegate much of this to paralegals, if not back to the client organization, and serve in a review mode for exceptional issues.

Moving along this path of standardizing, streamlining and shifting roles, a law department will find that its productivity increases, the quality of the issues it addresses increases, litigation and disputes decrease, and cycle time decreases. Not too shabby!

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.

When you ask your clients to assess your department, ask them not only to evaluate performance on a set of attributes but also to rank those attributes by importance. The more important the attribute - such as timeliness, understanding of the law, responsiveness - the more the clients expect good performance from the law department.

With the data, create an “index of client satisfaction.” The resulting chart should show the results of dividing the expectations of clients – from their importance rankings on each attribute - by the reality – attribute performance ratings. In short, expectations divided by reality, which is client satisfaction.

With 1.0 being the absolute best, where the delivered performance fully met the expectations of the client, your index will decline to around 0.2, where the performance of the law department fell far short of what clients felt was important and expected. By the way, low expectations (importance) fully met shows up in the index as high satisfaction. Focus on the gap between the highest ranking attributes and their evaluation ratings.

In my experience, the general counsel and members of the department almost always pretty well know the issues they face, albeit with different twists on causes, effects, and cures, but a) they can’t state them or discuss them openly for fear of reprisal or controversy, b) they can’t set priorities on the challenges they face, c) they can’t get beyond their personal role and defensiveness or fear about the issue, d) they don’t know a process for grappling with the problems, or e) they can’t imagine how circumstances might be otherwise (See my post earlier today on thinking out of the box.).

Law department managers retain consultants, therefore, to organize their own disjoint and jangled impressions of the department’s issues, tell them how and in what order to address them, and bring to bear lessons from other sources such as benchmarking, case studies, general management learnings, or best practices.

General counsel, struggling to find ways to improve, ask their team to “think out of the box.” They do not mean, I have come to believe, that they are looking for a novel solution. It is a rare law department that wants to wear an untested idea and it is very difficult, in any event, to create a management initiative from whole cloth, one that has not been tried in some form elsewhere.

What general counsel want is for those struggling to improve operations not to be boxed in by their own presumptions, timidities, and perceived limitations. They want the team to question the number of offices that they have or their belief in a certain secretarial ratio. Most law departments could change significantly for the better without radical “extra-box” transformation.