A survey by Sweet & Maxwell of finance directors at the top-100 UK law firms asked about financial threats the directors foresee. The most pressing was downward pressure on fees, but the second one deserves discussion.

“The second greatest threat identified was the potential cost overrun incurred on legal work paid for with a fixed fee,” according to Managing Partner, May 2010 at 8. That worry depresses me, for several reasons.

One reason is that it suggests that the top financial officers of these large and experienced firms place little faith in their partners’ abilities to project fees reasonably accurately. How experienced and good are the firms?

Another reason follows from the implicit premise that clients – law departments – show little sympathy or understanding if material conditions change in ways that could not reasonably have been predicted.

Third, where is the appreciation that partners can alter the mix of activities undertaken or timekeepers if expenditures strain against the budget?

And, finally, some fixed fee matters ought to conclude below the fee amount and thereby balance some of the overruns. The objective of legal departments is not to have law firms make lots of money on some matters, moderate money on other matters, and at least break even on everything else. Alternative does not always mean remunerative.

It is a risk that some collusion may occur between the inside lawyer responsible for approving the matter budget of a firm and the firm that submits the budget. Neither lawyer nor firm wants to look bad so a fatter budget serves both. But that pattern rolled up for the entire department bloats the departmental budget.

The built-in tension, however, is hard to suppress (See my post of March 24, 2005: what proportion of initial budgets from firms prove to be too high; Oct. 19, 2007: inherent tension between firm and department on budgets; June 11, 2008: matter budgets: inside accountability and the principal-agent tension; March 25, 2008: how to handle budgets from external counsel; March 29, 2009: problem of inflated budgets in anticipation of cuts; Nov. 3, 2009: twists and turns when GCs assess accuracy of budgets; and Nov. 21, 2008: performance in relation to budgets should determine whether a panel firm gets more work.).

Some ideas for you to consider if you want to reduce the incidence and severity of budget manipulation:

1. Compare accuracy of budgets between your in-house lawyers
2. Require inside lawyer to record what could be done to reduce each budget
3. Impose an overall budget on the inside lawyer for outside counsel spending
4. Rely also on burn rates and unit costs rather than just budgets
5. Boost other incentives to control costs so that budgets declined in relative salience
6. Move to fixed fee arrangements or alternatives to hourly billing on budget
7. Implement peer review of budgets, or review by the general counsel

Predominantly, the in-house counsel I speak with like and respect the partners they retain. They do not, by any stretch of the imagination, believe that lots of partners “out there” can do just as well for the same or lower cost. “Jones knows our company, works really hard for us, pays attention to costs, and values the long-time relationship we have had.” That is what I hear. Were it otherwise, in-house counsel stop sending work to Jones.

In fact, when a general counsel tries to cut firms from the roster, there is inevitably pushback. If you like and trust someone, you find it hard to imagine recreating that sense of shared objectives, quality and commitment. Firms are not interchangeable functions, fungible and abstract; they are friends and professional colleagues you rely on and like (See my post of Oct. 4, 2005: myth that firms hold about themselves; Nov. 8, 2005: myth of "buyers' market" for high-end legal services; Feb. 12, 2006: not a buyers’ market in many countries; Aug. 24, 2006: many law firms are viewed as fungible; April 8, 2007: market recognizes differential value propositions; April 20, 2008: not the market envisioned by economists; July 30, 2008: exaggerated finding on “commodity firms”; and Nov. 17, 2008: neither buyers nor sellers are seen as fungible.).

Work may be routine but a person who toils yellow pad to yellow pad with you is not at all a commodity (See my post of Sept. 13, 2006: commodity legal work with 5 references.).

In the first group of 445 participants in the General Counsel Metrics, LLC global benchmark report, 43 of them asked to remain anonymous (less than 10%). They did not want the first release of the report to list them as a respondent. For several reasons, I surmise, they requested anonymity.

Some were not the general counsel, and they might have been concerned about their right to disclose proprietary information. One or two were in the finance function who might not want their brethren in legal to know they were checking on its performance. Some were general counsel who might be unsure whether their metrics will put them in a good light. If your company remains unnamed, no CFO or CEO can get wind of it and put you on the spot for how your spending compares to the spending of other companies in the industry. Some also may have been unsure about the bona fides of an innovative benchmarking initiative and therefore cloaked themselves in secrecy.

Still curious, I dug into the nameless participants a bit more. Eighteen of the 43, at least, are non-US companies. So, aside from levels of authority, considerations about proprietary leaks, and internal politics, levels of cultural comfort caused some of the participants to want to fly under the radar.

Data collected by the General Counsel Roundtable reveals where its members cut costs in 2009. The top six reductions, based on responses from 124 departments, were law firm expenditures (70%), travel (59%), vendors and consultants (21%), IT spend (14%), law department staff (8%), and employee compliance training (6%).

“Travel” probably means cancellations of conferences and more reliance on phone calls and videoconferencing than on flights. The reductions in “vendors and consultants” (gasp!) include deferral of software licensing and other expenditures on management initiatives. “IT spend” probably means such steps as not upgrading laptops, putting off buying Blackberries, and renegotiating maintenance contracts on equipment. The largest savings, by far, I am sure, came from the hides of law firm partners.

Speaking on a panel at the SuperConference, Steve Williams of the General Counsel Roundtable displayed a dashboard for legal departments. One of the items on it was scores by law firms from evaluations they complete on the department. Law firms grade their clients? On this man-bites-dog view of the world, Williams said that “we have lots of clients who do it.”

The idea is interesting and would have merit if a range of firms completed it, if they did so honestly, and if legal departments took effective action based on the comments. But I have my doubts about all “ifs” of that scenario (See my post of Sept. 21, 2009: why partners may evade requests for candid feedback to their clients; and April 25, 2009: part of the ACC Value Commitment.).

Of the 455 legal departments in the first release of the General Counsel Metrics LLC study, 41 are based in France, Germany, Italy, or the United Kingdom. The total internal plus external legal expenses reported by those companies divided by their reported revenue equals 0.49 percent. If we arrange each company’s calculation of total legal spending as a percentage of revenue and sort them from high to low, the middle metric, the median, is much less, at 0.30 percent. Clearly, some large companies have much higher ratios than the overall mix.

Of the four countries, the lowest medians are for Germany and Italy and they are quite close to each other. On the other end of the scale, the median figures for the French and UK participants are also quite close to each other but are more than twice as high as the figures for Germany and Italy. More on this topic appears in the most recent issue of the European GC. Click here to read.

Until the study accumulates more law departments from those countries – and other countries for additional comparisons – we can’t draw definitive conclusions about why legal costs differ so markedly among the four countries. With the data refined, we can start to dig into what might account for the differences.

It would not surprise me that for many US companies, revenue plummeted during 2009 at a faster rate than total legal spending. Customers can decide not to buy faster than general counsel can terminate staff or reduce outside counsel spend. It true, the leading benchmark metric, total legal spend as a percentage of revenue, might have ticked up or jumped during 2009.

To illustrate, if a $4 billion company’s revenue fell 25 percent but its legal spend fell from $20 million (0.5% of revenue) to $18 million (a 10% fall), then its benchmark metric jumped a dramatic 20 percent (to 0.6%).

Coming out of the recession, revenue may recover healthily while legal spend remains somewhat subdued – because of cost-cutting measures taken last year. General counsel will look great when measured against their department’s drop in total legal spend as a percentage of revenue. The corrective is to calculate that nominal improvement after normalizing it by industry-wide changes. If everyone improves, only a relative improvement against peers should count.

On a panel at the SuperConference, Steve Williams of the General Counsel Roundtable shared the results of a survey of its members regarding “why law departments shy away from data.” More precisely, why they don’t do as much as they might with matter and invoice data. Here are the responses, with my estimates of percentages from the slides.

“Lack of good technology to track the data” was selected by 68 percent of the respondents. Hard to believe, for me, with the plethora of matter management and e-billing packages available for license. “Lack of time or staff” was selected by 58 percent, a mysterious “lawyers dislike the process” by 48 percent, and “no team or staff to create reports at 38 percent. Presuming this was a multiple choice question, the results are only as good as the choices.

Other choices could have been “Don’t see the value in collecting or analyzing the data” or “Can get the data I need from accounts payable.”

Thirty years ago on a MetroNorth platform in Scarsdale, NY, I met Joe Bookman, then the President of CompInfo. Soon thereafter, disgruntled with law practice and enamored of PCs and software for lawyers, I joined CompInfo to sell its LawPack program to law departments. Joe and I have been friends since then.

Joe founded and runs PinHawk, which aggregates news from the Internet about law firms, law departments, legal technology and related topics. For a modest subscription you get a daily download, edited and attractive, of material that is relevant to your interests.

With increasing frequency subscribers to PinHawk’s service click through to this blog. Thank you, Joe!