Consequences of understating total legal spending and hourly cost

To the degree that a cost to a company of supporting its law department is understated, neither the company nor the law department can make decisions about investments in the department with as much accuracy as if the full expenditures were known. Several posts have explored the kinds of law-related costs that swirl in a poorly-defined, poorly-captured cloud around the harder numbers of compensation, benefits, travel, telecommunications, and the like. (See my posts of July 20, 2005 on internal costs of responding to litigation, July 25, 2005 on costs of independent directors’ counsel, Aug. 3, 2005 on options and stock grants, and Oct. 4, 2005 on insurance premiums.)

The fully-loaded cost per hour of internal lawyers could well be 10-to-20 percent higher than the usual figures ($160-$180). For another probable omission, consider that neither recruitment nor severance costs are typically included.

If the cost of sustaining an inside lawyer hour is understated, it makes the comparison to outside counsel more favorable, and more inaccurate. (An even greater ingredient of inaccuracy is the estimate of hours worked inside that are equivalent to chargeable hours of law firms. See my posts of Sept. 25, 2005 about using 1,850 chargeable hours and Oct. 18, 2005 on how to calculate your figure.)

Compounding both the incompleteness of internal costs of lawyers and the softness of chargeable hour assumptions is the proclivity of inside lawyers to remember the high billing rates of senior partners, instead of looking at more representative blended rates. (See my post of July 30, 2005 on some metrics.)