Some law departments, those with tens of thousands of dollars spent on a disbursement, negotiate national contracts with vendors. The contracts lock in better rates, stronger performance guarantees, more committed resources, and other benefits. Some of those departments, having worked hard for their national deals, insist that their law firms use the national vendors.

Instances of this include temporary staff (See my posts of Jan. 10, 2006 on some cost comparisons; and April 9, 2006 on contract staff versus temporary staff.), photocopy services (See my posts of April 2, 2005 on unbundled services; and May 14, 2005 on shared copy costs.), service of process, litigation support (See my posts of Sept. 10, 2005 on costs; and Feb. 23, 2006 on patents for litigation support software.), legal research (See my post of Jan. 16, 2006 and a dubious piece of data.), and court reporters (See my post of Oct. 24, 2005 on FMC’s policies; and July 11, 2006 with some vendors.)

All of these examples include denizens of the cottage industry that live off law departments (See my posts during July, 2006 on several of these niches and the links cited.).

Ever since an economist named Ronald Coase first publicized the idea, economists have recognized that companies tend to do work internally whenever doing it externally would cost more or where the transaction costs of coordinating with outside counsel are high (See my posts of Aug. 14, 2005 about the transaction costs of transferring lawsuits and Feb. 18, 2006 about fixed inside costs and variable outside costs.).

This economic doctrine of transaction costs applies to law departments. By the use of in-house counsel, who presumably cost less per hour than outside counsel, the company benefits as to both cost, control and quality assurance (See my post of March 26, 2006 on 14 other economic concepts.). I have often said that about $450,000 a year of foreseeable payments to outside counsel in an area of law justifies hiring a lawyer. Another instance: One of the claimed benefits from convergence is lower transaction costs as firms and departments become more familiar with each other.

It all sounds so smooth as the vendors croon, but the reality of a law department getting electronic bills from its law firms is fractious. Law firms that want to submit electronic bills have different time and billing system and different accounting or technology staff. They need to understand the LEDES format and be able to produce their invoices in conformity with it. They need to know how to fill in the null fields if you are not tracking task and activity codes, for example. They need to know to whom they should e-mail the files and with what file-naming convention. They need to know how to combine multiple matters in one electronic file.

On your side, your person who receives the bills needs to have a procedure for getting those e-mails. They need to know how to process the electronic file with your software – this assumes you are not using a third-party program to do this work – and to correct any error codes. They need to know how to set the various rules which you might apply against the invoices.

The smooth ice promised by sellers is, in fact, cracked, thin and variable (See my post of July 11, 2006 on e-billing vendors.).

Randy Cadenhead, a lawyer at Cox Communications, suggested in a comment to my post of June 28, 2006 that “One metric to apply for comparison purposes would be to use average pay rates for the same level employee.” His thoughtful idea set me to digging and calculating.

According to the latest Hildebrandt International Survey of Law Departments, the ratios of median cash compensation would mean that one lawyer equals .43 paralegals, .32 non-attorney professionals, and .25 secretaries. Those ratios do not mean that four secretaries equal a lawyer other than from the standpoint of cost. This data comes from 130 companies that provided staff and compensation data in the 2005 Hildebrandt International Law Department Survey. It is based on median total cash compensation for 5,778 lawyers at $187,100; 838 non-attorney professionals (administrators, office managers, and other managers, for example, but excluding compliance staff) at $97,341; 1,722 legal assistants at $59,645; and 1,953 secretaries at $45,972.

Perhaps it would be better to limit ourselves to paralegals and non-attorney professionals, and even then downgrade the equivalencies. By that I mean, perhaps three paralegals equal a lawyer, and four non-attorney professionals equal a lawyer – only for purposes of trying to convert legal staff into an equivalent single figure. This is the reasoning of chess, where a general heuristic is that a horse equals three pawns, a rook five pawns, and a queen nine pawns.

What law department managers call knowledge, economists call non-rival goods. As explained in David Warsh, Knowledge and the Wealth of Nations: A Story of Economic Discovery (Norton 2006 at xvii), economists also refer to ideas and concepts as “nonconvexities.”

Non-rival goods can be employed simultaneously by any number of law departments. Rival goods can be consumed by only one person or department at a time. A law department expert on anti-trust is a rival good, available only to that law department; a law department that understands competitive bidding possesses a non-rival good, in that such knowledge can be employed by many departments simultaneously. A core competency ought to be a non-rival good.

I am persuaded that law departments that chargeback to operating units the outside fees incurred on their behalf thereby improve client accountability (See my post of Oct. 30, 2005 with its dissenting view; and April 17, 2006 for comments on accounting granularity.). Clients feel the pain; they have a reason to avoid legal mistakes; no longer do their law firm fees get absorbed elsewhere, in some legal budget – and forgotten.

On this basis, a law department should seek to chargeback outside counsel fees incurred even on behalf of staff units, and indeed the corporation as a whole. Complete chargeback, a 100 percent policy, would be difficult for some work, such as enterprise-wide mergers and acquisitions or shareholder derivative suits, but even then some senior executive might be deputized as the responsible client.

Not crazy, that idea. I have heard of a company appointing a czar for some corporate-wide expenses, such as asbestos defense or cleanups of environmental legacy sites. That way, some non-lawyer executive has some degree of accountability. With this system, a law department could chargeback every penny of its external legal fees.

A partner who by experience and personality litigates adroitly may not be equally adept at settlement discussions. If not, a law department might consider parallel tracks: the one partner campaigns like Sherman on the judicial field while a partner at another firm negotiates like Kissinger to reach a resolution that both sides can accept.

Yes, one can imagine problems of conflicting messages, increased costs and tripping over each other, but the divergent tactics may make it worthwhile. Both partners need to be sensitive to the developments of the other, and they should avoid competing with each other before the client.

“In 2005, the typical litigation costs for patent infringement suits with less than $1 million at risk was $650,000; with $1 million to $25 million at risk was $2 million; and with $25 million or more at risk was $4.5 million.” This quote regarding the costs to plaintiffs who allege infringement of a patent comes from Vincent Napoleon, general counsel of Digene, in InsideCounsel, July 2006, at 14 and has no citation.

As these figures stand, who would bring an infringement action if only a paltry million dollars or so were at stake? Even more, because Napoleon volunteers that “patent holders in infringement suits have about a 50 percent win rate.” Whereas, for huge stakes, the litigation costs do not rise commensurately.

There are some earlier figures for patent litigation. An article in the Chicago Daily Law Bulletin (August 26, 2003) by Richard P. Beem updated AIPLA findings: $797,000 through discovery and $1,499,000 through trial. That marked a 25 percent increase over five years in the cost of tried patent cases. (See my posts about patent litigation costs on March 6, 10, 29, and May 1, 2005.).

Having pulled together the posts on economics (See my post of March 26, 2006.) and sociology (See my post of July 19, 2006.), I would be crazy to shrink from compiling posts that draw from psychology’s concepts. To couch it differently, how do you feel about that?

Decision-making (See, for example, my post of Jan. 17, 2006 on large and small decisions; March 23, 2006 on the sunk cost fallacy; March 18, 2005 on intuition; Sept. 4, 2005; and Jan. 16, 2006 (risk aversion.).

Emotional intelligence (See my post of July 31, 2005 on its predictive powers, July 14, 2005 on another set of definitions; Dec. 21, 2005 on Ei diminishing with rank; and Feb. 6, 2006 with links.).

Intelligence (See my post of Nov. 13, 2005 on this and other intelligences; and Jan. 1, 2006 on executive intelligence.)

Passive-aggressive (See my post of Jan. 17, 2006.).

Pattern recognition (See my post of June 6, 2006 on scatter-plots; and Dec. 16, 2005 on ethnographers’ patterns in behavior.).

Psychometric tests (See my posts of Oct. 21, 2005 and April 27, 2006 on these instruments.).

Rationality (See my posts of March 18, 2005 and Sept. 10, 2005.).

Risk-aversion (See my posts of April 12, 2006; and Jan. 16, 2006 and the principal-agent problem.).

Satisfaction (aka ”utility) (See my post of June 12, 2005 on stress levels; and May 1, 2005 on employee satisfaction.).

Some concepts straddle sociology and psychology, such as managerial styles (See my post of Jan. 20, 2006 on cognitive style differences; and July 18, 2006 on gender/style differences.)

Other concepts from psychology that crop up in law departments include incentives, variable reinforcement, motivation, and stimulus/response (See my post of Feb. 15, 2006 on what I term cognitive lawyering.)

A company has just been sued or wants to bring suit or has decided on a transaction. It presents two law firms, each capable of handling the matter, with the facts as they are known and asks for one of them to state how much they will charge to represent the company. That firm submits a budget, with a twist.

The twist is that the second firm will review that estimate and can choose to take on the case for the amount. Knowing that possibility, the first firm – the budget-submitting firm – will estimate costs as leanly and accurately as possible. Too fat a budget, and the other firm will snatch the matter; a lean budget and the other firm will pass, which leaves the company contented with the cost.

A variation on this technique lowers the risk of collusion if two firms do this more than a few times. Every now and then, invite a third firm to take part or randomly assign the roles among the three.