Charging back external counsel costs falls short of creating market discipline

Progressive law departments charge back to a business or staff unit all costs of external counsel incurred on behalf of the unit. Sharing the pain is supposed to impose some market discipline on outside spending. But if often doesn’t.

One reason is that the executive getting the chargeback didn’t cause the ruckus that now costs so much, so shrugs off the message of the charge. (See my post of March 18, 2005 on lag times for legal costs.) Another reason is that the client who registers the cost doesn’t know enough to judge it high or low. A low-level finance person simply records the cost. Third, the time delay for clients to learn of legal costs stretches even longer than the time law departments learn about a cost. As a fourth reason, some clients can be intimidated by lawyers, or comments from them such as “quality costs,” or “would you like us to default?” Then too, the legal fees and expenses may be aggregated at the client end so that no one can link legal costs to business goals. Finally, clients might assume (or hope) that the law department has vetted the bills, so why should the clients presume to question amounts?

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