A methodology to show the cost savings a law department generates

A previous post (Dec. 16, 2005), listing unanswered questions in the realm of law department management, included: “how can we quantify the value we deliver to our company?” The Ernst & Young Corporate Conflict Value Model, as described in Chief Legal Executive, Spring 2004 at 42, purports to quantify the value produced (or saved) by the legal function.

The inputs to the model include four categories of annualized direct cost savings: processing, settlement, productivity gains, and reserves. Adding these cost savings to risk reductions, the law department can arrive at a sum for total savings. There are six kinds of relationship risks that can be reduced (relationships with customers, suppliers, partners, investors, employees, and competitors) as well as four varieties of risks (adverse publicity, regulatory, insurance and “catastrophic” risks).

The article explains that E&Y consultants work with the law department and corporate executives “to populate worksheets in each identified area with data that are used to calculate” the savings. In other words, my skeptical minds says, if you estimate savings and add them up, you can say you have shown your worth.

Law–related services handled in India for US companies: three variations

A piece on offshoring, BusinessWeek, Iss. 3969, Jan. 30, 2006 at 56-57, did not specifically concern itself with legal work, but among its many examples of services provided US companies from India, I noted these three:

(1) as part of its market research, Evalueserve “will, within a day, assemble a team of Indian patent attorneys, engineers, and business analysts”;

(2) for those who want to market “a new mutual fund or insurance policy,” Tata Consultancy Services “are building software platforms that furnish every business process needed and secure all regulatory approvals”; and

(3) when the US company Penske buys a truck and leases it, “Genpact’s Indian staff remotely secures state titles, registrations, and permits electronically.”

I would count patent attorneys making assessments of ideas and patents, obtaining regulatory approval for financial products, and getting trucks’ paperwork squared away as services that normally land on a lawyer’s desk.

Accenture’s UK legal department offshores legal work to Mauritius

In 2003, Accenture’s 30-lawyer UK legal department set up a legal service center in Mauritius. Accenture chose Mauritius because its population speaks Dutch, French and English and its lawyers are schooled in both civil code and common law, Legal Week, Jan. 20, 2006 (Ed Thornton). The article explains that the service center has seven staff, “freeing up in-house lawyers to focus on the more creative and demanding work.” (See my post of Oct. 18, 2005 about lawyers not necessarily wanting more creative and demanding work.)

Much has been written about offshoring legal services to India, but here is a dramatic variation (See my meta-post of Nov. 14, 2005 on offshoring.)

The endowment effect and law-firm billing arrangements

According to social scientists, mere possession of an item increases the value a person places on it. This they call the “endowment effect.” The effect shows up when someone has been the highest bidder for an item in an auction, or when they have touched the object for which they are bidding. In both cases, people bid higher, according to Strategy+Business, Issue 41, at 139, citing an article.

When a law department conducts a competitive bid, bidders from incumbent firms feel the endowment effect – “we possess that work now, so we will bid higher for it.” When a law department invites finalist firms to come and look at files, meet key clients, and talk with the in-house counsel, the department boosts the endowment effect and the bids. Perhaps the law department should identify the finalist firms, and thereby increase even more their competitive feelings.

Do your job titles reflect and explain the work your staff does?

As a reaction to ongoing cost and headcount pressures from senior management, one of our clients asked us to assess titles within the Corporate Secretary’s function. Many law departments may find, like this one did, that titles, adopted long ago for various historical or political reasons, no longer serve. The responsibilities have changed or clients need to understand better from a title what people do.

It would be a good idea to review your titles and to take a closer look at designated roles and responsibilities relative to actual tasks performed, and, by clarifying titles, gain greater distinction and transparency in members’ contributions to the company.

Different treatments of costs included in law departments’ internal budgets

Although legal-department benchmarking studies always compare inside spending, no one has definitively defined all its components. In a recent project, we encountered three problematic situations. One law department includes severance costs in its budget; many law departments never see them because HR picks up those costs. Some law departments are charged with the value of stock options and restricted stock grants they award; other departments never see those costs. Most law department budgets include the compensation of the general counsel; for other departments, that cost is carried on an executive officer budget.

Use benchmarking data as directionally correct, recognizing that departments differ at the margins in what they include in and exclude from their budget

Does having more in-house counsel raise revenue per employee?

A study of companies with U.S. revenues greater than $8 billion from the Hildebrandt 2005 U.S. Law Department Survey indicates a correlation between company revenues and number of attorneys. The median number of U.S. attorneys per 1,000 US employees is 1.5, but, more importantly, as revenue per employee increases, so does the number of attorneys per employee.

Cause and effect may be tangled. It could be that plentiful legal support helps everyone in the company produce more; it could be that busy, well-run companies, generating more revenue per employee than the norm, drive the need for more lawyers. It could be that employee revenue and lawyers per unit of revenue have no actual correlation, but some third factor (or factors) cause them to oscillate together.

Law department “business managers” lower legal costs and increase productivity 10-15 percent

These conclusions come from a survey conducted in 2004 by the General Counsel Roundtable, as summarized in Corp. Legal Times, Feb. 2005. They strike me as plausible, but hard to prove.

I cannot help but wonder whether cause and effect are being confused. Do well-run legal departments tend to have lower costs and higher productivity, and also tend to hire empowered and capable administrators? Is the cause of better performance the administrator, or is the administrator one piece of broader effectiveness?

My second question, unanswered by the brief reference in the article, would be: “How did the survey measure in-house productivity? Possibly the study compared departments on total legal staff per billion dollars of revenue, and those with lower ratios more commonly had what the study deemed to be “business managers.” (See my post of Dec. 9, 2006 on my methodological complaints about a study of ADR-favoring companies and their putative benefits.) I doubt the GCRT has discovered the elixir of how to measure law-department productivity. (See my post of March 24, 2005 on that missing metric.)

Breaking the logjam – GCs being promoted

Heinrich von Pierer joined the German industrial giant Siemens in 1969 as a lawyer. Promoted to chief executive in 1992, he retired 13 years later from the helm of the €75 billion (about $82 billion) conglomerate (Fin. Times, Nov. 18, 2005 at Spec. Rep. 4).

Charles O. Prince, III, formerly the General Counsel, and now the CEO of Citigroup, rivals von Pierer as one of the most powerful ex-general counsel.

Going back several years, Sol Linowitz was the general counsel of Xerox and then became its CEO. Hank Barnette followed the same path at Bethlehem Steel (and attended executive education courses at Harvard Business School to hone his general management skills).

According to SpencerStuart, 10.8 percent of the CEOs of companies in the S&P 500 have law degrees. They include Sumner Redstone (Viacom), Ken Chenault (American Express) and Richard Parsons (Time Warner) (Cited in Constance E. Bagley, Winning Legally: How to Use the Law to Create Value, Marshal Resources, and Manage Risks (Harv. Bus. School Press 2005) at 267, n. 23).

While it’s true there is only one GC at the top of the pile, perhaps those beneath have a bit more opportunity to rise if they consider that even GCs can be promoted.

Breaking the logjam – GCs being promoted

Heinrich von Pierer joined the German industrial giant Siemens in 1969 as a lawyer. Promoted to chief executive in 1992, he retired 13 years later from the helm of the €75 billion (about $82 billion) conglomerate (Fin. Times, Nov. 18, 2005 at Spec. Rep. 4).

Charles O. Prince, III, formerly the General Counsel, and now the CEO of Citigroup, rivals von Pierer as one of the most powerful ex-general counsel.

Going back several years, Sol Linowitz was the general counsel of Xerox and then became its CEO. Hank Barnette followed the same path at Bethlehem Steel (and attended executive education courses at Harvard Business School to hone his general management skills).

According to SpencerStuart, 10.8 percent of the CEOs of companies in the S&P 500 have law degrees. They include Sumner Redstone (Viacom), Ken Chenault (American Express) and Richard Parsons (Time Warner) (Cited in Constance E. Bagley, Winning Legally: How to Use the Law to Create Value, Marshal Resources, and Manage Risks (Harv. Bus. School Press 2005) at 267, n. 23).

While it’s true there is only one GC at the top of the pile, perhaps those beneath have a bit more opportunity to rise if they consider that even GCs can be promoted.