Spending on litigation might not rise during the economic downturn

My expectation that companies sue or are sued more during recessions found no support in a recent survey of 191 in-house senior legal attorneys. The LexisNexis CounselLink study, entitled “Effects of the Current Economic Downturn on U.S. Law Departments” 2009 at 8, shows the rank given 11 “effects of the current economic environment on law departments.” “An increase in litigation matters” came dead last.

The respondents chose reductions in budgets, accountability pressures, increases in transactional work, and other effects more commonly that more lawsuits. Three quarters of the respondents did not mark it at all. Litigation, therefore, appears not to be counter-cyclical, rising as revenues fall. The costs and risks of a lawsuit bulk larger as the cash register stills. Litigation being the largest component of outside counsel spend, general counsel would be fortunate if pressure to reduce costs finds a systemic solution.

Concept toolboxes, bundles of instruments that make a broad concept actionable

I keep wrestling with how to differentiate “tools” from other management ideas for general counsel, such as “concepts,” and “processes.” While pondering the distinctions, I realized a fourth category exists, which I have come to call “concept toolboxes.” A concept toolbox comprises many aids and instruments – tools in the toolbox – that accompany and give usefulness to a broad management concept. Examples of concept toolboxes include benchmarks, business process re-engineering (BPR), change management, financial calculations (Net Present Value [NPV], nominal changes, Return on Investment [ROI], and compound annual growth rate [CAGR]), Organizational Development (OD), project management, Six Sigma, statistics, surveys, and Total Quality Management (TQM).

Each of these concept toolboxes boasts many tools that translate the breadth of the idea into operational usefulness. For each of them, specialists write books, teach courses, offer accreditation, and extend the toolbox. This blog offers supplemental comments on each of them (See my post of May 29, 2008: benchmarks other than individual metrics with 28 references.).

A few posts have mentioned BPR in passing (See my post of Nov. 2, 2006: “ratio of law department business processes undergoing automation/business processing reengineering/Six Sigma — TQM — other quality improvement”; Aug. 28, 2005: future state of a reengineered process; Aug. 31, 2005: reengineering leases at Food Lion; May 11, 2008: whether e-billing leads to reengineered processes; Aug. 16, 2006: end-to-end process for contract management; and May 18, 2008: process re-engineering as one of a dozen cost-control tools.).

The other concept toolboxes mentioned , covered in varying degrees here, are cited in alphabetical order (See my post of Dec. 21, 2008: change management with 16 references cited; Sept. 25, 2006: distinguishes performance management, training, coaching, mentoring and organizational development (OD); June 24, 2007: project management with 5 references; Feb. 13, 2008: Six Sigma with 18 references; Jan. 20, 2007: statistics with 28 references; May 31, 2006: statistics; July 21, 2008: survey methodology with 40 references and 25 internal references; and March 7, 2006: TQM tools such as cause-and-effect diagrams, fishbone analysis, logistic regression, process mapping, root cause analysis, and value-added analysis.).

Law department software that helps manage fees paid – not necessarily lagging usage

Met. Corp. Counsel, Vol. 17, June 2009 at 11 (Marcus Linden) concludes that “lawyers are slow adopters of management technologies, with the greatest number of respondents still employing manual systems and paper invoices (40.8 percent).”

The survey of 191 in-house senior legal attorneys on which Linden relies found that 36.1 percent use a commercial e-billing system, 27.2 percent use spreadsheets, and 35.1 percent use “homegrown software solutions” (See my post of March 29, 2009: Access database used by one company; and June 9, 2009: SharePoint with 6 references.).

Before you agree that law departments are technology laggards, note that almost half the law departments in the survey (44.2%) support companies that earned less than $1 billion. Those departments support between one and six or seven attorneys, skewed toward the smaller end as are all size distributions, who thus may feel they need less fancy invoice software. The combination of a spreadsheet and information from accounts payable may well be enough for one-to-three lawyers (See my post of March 8, 2009: rely on A/P for spending figures.).

Data analytics for departments of law — sensitivity analysis compared to multivariate regression

I wrote about the article by Bill Turner of Womble Carlyle on Monte Carlo simulations, and emailed him with some questions (See my post of June 26, 2009: Monte Carlo and sensitivity analysis.). One was about law departments that have used the firm’s Monte Carlo capabilities. While unwilling to disclose the name of a specific law department that has used the software, “we have used this tool to develop value-driven alternative engagements for some clients.”

Turner also wrote clearly about multivariate regression. “In multivariate regression, you’re often testing to see how much of a variable, X, contributed to the forecast Y, and whether X is significant in the model, overall. The Monte Carlo tools perform sensitivity analysis by creating rank correlation coefficients between the assumptions and the model forecasts while the simulation is running. These coefficients indicate the strength with which the assumptions and the forecasts change together. The coefficients are squared and normalized to 100%.

One of the key differences between using these techniques vs. multivariate regression is that multivariate regression analysis is usually run against actual data (where variables are then tested for significance, multicolliniarity, heteroskedasticity, auto correlation, etc.) whereas Monte Carlo analysis creates the data (and then runs the sensitivity) based on defined parameters. In principle, the concepts are similar, though the sensitivity analysis demonstrated in the paper involves how much the model assumptions contributed to the variation in the forecast rather than how much the assumptions contributed to the forecast itself. The goal is to measure risk.”
(See my post of Dec. 31, 2008: regression statistics with 6 references.).

Thank you very much, Bill!

Five key sourcing tactics to help the legal department lower external legal costs

Asked to pick five techniques that a procurement group should advocate the legal group to follow, here are my choices. I am assuming a legal department of approximately 10 lawyers or more, which would likely mean a minimum of $5 million dollars spent on at least 30 law firms.

  1. Prepare a table of expenditures for the past three years that show by law firm the fees and disbursements paid them during the previous three fiscal years by various subject matters (See my post of March 25, 2008: a spend-by-firm table.). The cutoff could be something like a minimum of $10,000 paid to a firm in two out of the three years.

  2. Either draft guidelines for outside counsel or revise the existing one to keep up to date on such techniques as e-billing, discount levels, formats of bills, and incentive arrangements (See my post of July 11, 2008: guidelines for outside counsel with 16 references.).

  3. Set a policy of competitive bids, in whatever form is mandated, for all retentions where the spending is expected to exceed, say, $50,000 in a quarter (See my post of Aug. 15, 2008: competitive bids with 35 references.).

  4. Develop policies regarding when lawyers (and which lawyers) can instruct outside counsel (See my post of July 2, 2007: guidelines for how and when to retain external counsel.).

  5. Set more formally and enforce procedures for invoice review (See my post of April 13, 2009: bill review with 6 references; and March 2, 2008: bill review with 25 references.).

Perplexities that surround the term “foreign law firm” and some data

From a recent survey of 191 in-house legal managers based in the U.S., we learn that “nearly three-fourths (73.1 percent) supervise one or more foreign firms.” This factoid from Met. Corp. Counsel, Vol. 17, June 2009 at 11 (by Marcus Linden) rests on the definition of a “foreign law firm.”

If the legal department of a US corporation retains the Berlin office of White & Case, does that not count as supervising a foreign firm? If the same department retains Clifford Chance’s New York office for a trans-Atlantic deal, is that a foreign firm (Clifford Chance writes on its website, “Our New York office traces its origins back to 1871 and ranks among the 15 largest in the city, according to Crain’s New York Business.”)?

My thoughts about a definition are that a legal department should count a “foreign law firm” if it (1) has the largest portion of its lawyers in a country other than the United States, (2) had its partner in charge of the matter in a non-US office, and (3) the matter substantially involves non-US legal issues and facts.

Data over time on the number of Fortune 250 companies with legal departments of 60+ attorneys

A fascinating chart about Fortune 250 law departments appears in a chapter of Laura Empson, ed., Managing The Modern Law Firm: New Challenges New Perspectives (Oxford Univ. Press 2007) at 92 (by Brian Uzzi, Ryon Lancaster and Shannon Dunlap). From 1992 to 1994, about 20 of the Fortune 250 had more than 60 lawyers (10 percent); from 1995 to 1997 the number crept up to about 40. Then, within the two years from 1998 to 2000 the number spiked to 100 – 40 percent of the largest 250 companies in the United States had 60+ attorneys, where the number vacillated the next two years between 80 and 120.

My supposition is that the rapid expansion in departments of such size resulted much more from mergers of companies and their legal teams than from organic headcount growth, or from a dramatic increase in legal volume or complexity (See my post of Jan. 16, 2009: layoffs after mergers with 9 references.). Some of the expansion may be due to lower-cost lawyers added in offices outside the US who swell the numbers (See my post of Sept. 21, 2005: arbitrage labor rates in different offices.).

How much do general counsel push their law firms to open offices, form practice groups, merge, etc.?

It is common to read that law firms have merged, opened an office, or started a specialty area because of “client demand.” For sure, some general counsel may have urged a partner to do something to match the changing needs of that client, and perhaps eventually the firm obliged. But I doubt any frequency of cause and effect.

My vote goes to a more firm-centered, less client-service explanation. Firms make a strategic move, such as the above or bringing in a group of laterals, because the firms believe it will strengthen them in the market, the entire market, not because it will pleases the claimed clamoring of clients.

It sounds much better to implement an associate training program because “our clients have asked us to stay on the forefront of specialized legal training,” but only the decision makers can know if the real motivation was otherwise. It is high-minded, professional and accommodating to announce the new environmental conservation drive “in response to the many urgings we have had from our clients.” Who doesn’t admire the exemplary motivation and look past the grubbier possibilities?

A firm’s leadership wants to gild its actions in nobility and responsiveness, when it serves their purposes. Cherchez the optics, politics, and marketing!

A neglected but high priority to nurture and support your high-potential staff

According to Hewitt Associates, “under-recognition of high potentials is one of the single biggest issues companies face.” This claim, an overstatement by a firm that consults on talent management, nevertheless makes a good point.

talent mgt., June 2009 at 17, adds that when executives treat specially their very best talent, many “worry about alienating or disengaging others in the organization. Or conversely, they over-reward average performance in a misplaced effort to acknowledge everyone’s contributions. These both send wrong messages.” (See my post of July 29, 2007: high potentials with 10 references.). General counsel should pay heed.

Six minus two observations about Six Sigma and law departments

A recent piece in the Daily Report, June 12, 2009 by Katheryn Hayes Tucker, provides four items that add to our understanding of Six Sigma principles deployed in corporate legal departments (See my post of Feb. 13, 2008: Six Sigma with 18 references.).

  1. The Home Depot and ING are adherents to Six Sigma. Later, the article mentions Gulfstream Aerospace.

  2. Six Sigma tools are most applicable to “high-volume, time-consuming and expensive legal work such as document review and electronic discovery.” I would think that contract management would be a good candidate.

  3. A white paper on “Six Sigma, The Discovery Process In The Corporate Legal Department” presented to the ABA Litigation Section earlier this year.

  4. Many people think of Six Sigma as a method to root out defects but it is also a technique for project management (See my post of June 24, 2007: project management with 5 references.)