Law Department Management

More horses for courses: clients can choose the best match of personnel within a law firm

McDermott Will & Emery announced it has created a permanent class of staff associates: “lawyers who will be paid less, work less (though still be full-time) and be billed out at a lower rate than the firm’s other associates.” This innovative offering, described in GC Mid-Atlantic, June 2008 at 15, took some criticism in the article, mostly that staff associates will be viewed and treated as second-class, as intellectually damaged goods.

I commend McDermott Will. The more that clients can choose which type of person will do which parts of assignments, the more cost effective the representation. Already law departments can turn to contract or temporary lawyers, offshore resources, non-equity partners, paralegals, secondees and specialists, each of which class of persons travels with assumptions by others about their cost-value ratio as well as their abilities and relative quality. The Rees Morrison blogometer registers many hits on each of these categories of workers:

Contract or temporary lawyers (See my posts of June 14, 2005: retaining former employees as contract lawyers; July 14, 2005: temporary staff; Aug. 5, 2005 and April 9, 2006: differences between contract lawyers and temporary lawyers; Oct. 8, 2005: two contract lawyers at Dial Corporation; Jan. 10, 2006: cost comparisons on temporary staff; Jan. 30, 2006: Purdue Pharma’s use of contract lawyers; Aug. 2, 2006: Sears’ experience; Aug. 2, 2006: 20 contract lawyers with the State of Massachusetts; Nov. 26, 2006: contract lawyers and benchmark metrics; Dec. 17, 2007: temporary and contract lawyers; and Feb. 27, 2008: fees owed placement agencies when temporary lawyers are hired.).

Offshore workers (See my post of June 25, 2008: 27 references to offshoring.)

Non-equity partners (See my post of Sept. 5, 2005: non-equity partners.)

Paralegals (See my post of June 22, 2008: 18 references to paralegals.)

Secondees (See my posts of Sept. 21, 2005: secondments and non-hire agreements; Oct. 26, 2005: reverse secondment of paralegals; June 13, 2006: bilateral secondments; and May 23, 2008 #3: an article on secondments. As noted on this blog, at least six law departments have brought on secondees (See my posts of Sept. 25, 2006: Minerals Technologies; Oct. 30, 2006: Ikon Office Solutions; Feb. 25, 2007: SAB Miller; Feb. 25, 2007: Pfizer; Oct. 21, 2005: South East Water; and Jan. 23, 2008: Starbucks.).

Specialists. Many other roles have evolved to fit specialized needs or cost constraints (See my posts of June 27, 2007: timekeepers other than partners, associates and paralegals; June 24, 2007: project managers in law firms and references cited; Oct. 21, 2005: litigation support consultants in firms; and Jan. 19, 2008: a vast array of other timekeepers.).

A clever idea to deal with travel costs to an exotic retreat location

The organizers of Belgium-based InBev’s 2007 Legal Conference, the seven senior lawyers who manage the company’s 50-lawyer department, wanted to hold the conference in Argentina. As the general counsel of InBev, Sabine Chalmers, writes in Acc Docket, Vol. 25, Sept. 2007 at 16, “The only down side was that business class fares to such an exotic location had the potential of blowing the entire budget for the conference.”

Her legal leadership team came up with a clever idea: “Give attendees the option to travel to Buenos Aires in economy class or to boring old ‘head office’ in business class.” All the lawyers chose the cheap seats to Argentina!

When in-house counsel believe that funds for the $6,000 business-class seat just come from elsewhere, why should they conserve money and fly coach? But if there were some way for those lawyers to fly coach for $1,500 and get a cash rebate (yes, taxed) for, let’s say, half the difference (1/2 of $4,500), I am sure many would prefer the cash and save the law department huge amounts. Or, let the lawyer use a frequent flyer points, and get a cash rebate for half the difference.

Do ethical companies spend less on their legal budgets?

The issue of Ethisphere, Qtr. 2, 2008 highlights the 93 companies that the Ethisphere Institute honors in 2008 as “the world’s most ethical companies.” Of them, 29 are not US companies (and for six of them I have done consulting projects) and 33 industries are represented

What I wish we could know is whether total legal spending by these companies, as a percentage of their revenue, is lower than the spending of their less-ethical peers. It seems plausible that if employees consistently choose to act with integrity and ethical sensitivity, their company will suffer fewer lawsuits, acrimonious negotiations, contract disputes, joint ventures riven with legal tangles, and other malefactions.

A truism for all buyers, over-heatedly applied to buyers of legal services

The Eversheds report, “Law firm of the 21st century” at 5, pronounces a commonplace as if it were a revelation. “The key challenge facing buyers of external legal services over the next ten years is controlling costs and achieving value for money.” (emphasis in original) Of the general counsel, legal directors and finance directors at 50 of the world’s most prominent companies who were interviewed, just over half (57%) mentioned this challenge. I had several thoughts about it.

All buyers try to achieve value for money, without exception, so why is this “challenge” profound? No law department lawyer wants to fritter away money on law firms; they all want to get the most punch for the pound, utility for the Euro, and bang for the buck.

Second, the compound statement – control costs and obtain value for money – complicates the finding. Some respondents might believe that cost inevitably correlates with value: you get what you pay for. Others might believe that some legal services will fall to commodity price levels while other services still command premium payments. Cost and value are not synonymous.

Third, almost half the respondents ranked some other challenge higher. The report does not list the other challenges.

Fourth, the report adds that “Many [buyers] emphasised that internal pressure to reduce their legal budgets was bigger than ever.” But “legal budgets” could cover not just external legal costs but also internal costs of the legal group.

A muddled platitude, at best.

Harbinger of lower litigation costs: an upsurge of circumstances that favor defendants

Panelists at the Fifth General Counsel Roundtable, Dec. 6, 2007, summarized in a publication by the Economist Intelligence Unit at 13, think that some litigation is on the decline. “The pendulum has indeed shifted in favor of defendants," and for several reasons.

One is that stock market gains have been strong for the past several years, and the plaintiffs’ bar has been weakened due to the legal troubles of its two most prominent lawyers. The greatest change, however, has been a series of decisions by the U.S. Supreme Court that translate into procedural or substantive advantages for corporate defendants.

Wouldn’t it be nice if general counsel get some relief from litigation cost pressures, even if the lightening of the load comes from external changes (See my post of May 21, 2007: exogenous forces that influence law department management.)?

Unusual history between a law department and an e-discovery service provider

A paragraph about the law department of Qwest Communications, winner of Corporate Counsel’s Best Legal Department of 2008 award, intrigues me. A consultant worked closely with the legal department of Qwest for four years. "Qwest lawyers helped [the consultant] create a company, Falcon Discovery, that coordinates the company's electronic discovery.” This approach may be superior to creating and maintaining an in-house discovery team.

But my main point goes in a different direction. Evidently, Falcon Discovery is now a freestanding startup. My question is whether Qwest’s law department monetized its investment in the new company (See my post of June 15, 2008: legal department patents and IP rights in inventions.)? Large law departments can provide the equivalent of seed money, not to mention pilot programs and references, for fledgling companies. Legal OnRamp may be an example of such an investment underway right now. In those entrepreneurial situations, law departments deserve a quid pro quo.

GM’s legal department sold four patents it obtained for its technology

Unable to find software that met its needs, the legal department of General Motors created some customized applications. The ideas and coding must have been outstanding since Corp. Counsel, Vol. 15, June 2008 at 104, explains one of the supplemental benefits. "Their work was so innovative that GM obtained four patents on the programs and sold them last year” for “a substantial sum.” GM thereby joined the ranks of several law departments that have obtained management-related patents or economic rights (See my post of Jan. 25, 2006: American Express’ patent on law-firm rate increases; April 9, 2006: Equitable’s license of its matter management system; Dec. 11, 2007: FMC’s patent on cost-management, Microsoft’s patent-classification software, CISCO’s e-discovery software, and Unisys’ TriPoint software; and June 4, 2007: Wal-Mart’s I-9 compliance package.).

I question the inclination of law departments to roll their own software (See my post of May 23, 2007: disadvantages of customized software, and 5 references cited.). But if you do decide to go down the path of customizing software, consider how to capture the value of what you create.

Matter budgets: inside accountability and the principal-agent tension

One problem with matter budgets is how to have inside counsel negotiate tight budgets when they will later be judged on how closely they hit those budget numbers. Perhaps one solution is to uncouple the two efforts. The lower the budget the law firm signs off on, the better, and to some extent play down whatever happens thereafter. Maybe what law departments need to do is hire lawyers from temporary staff agencies to review budgets. This would be analogous to law firm bill auditors.

An inherent tension is between the desire of an in-house litigation management lawyer to resolve the case successfully and the desire of the general counsel to hit a budget number for the department. The line lawyer may give lip service to cost control, but down deep would just as soon open the taps and bring in a successful defense or recovery. Actually, the same principal-agent conflict afflicts a general counsel: It’s no good to tell the CEO that we lost the case but we saved $150,000.

Very high figures for external legal spend by an e-biller’s client base

An ad disguised as an article in Met. Corp. Counsel, Vol. 16, June 2008 at 52, says that DataCert “has completed more than 130 custom integrations” of its software and has “72 Fortune 500 clients.” Assume, therefore, that DataCert has around 130 law department clients.

A sidebar to the article points out that the company “processes in excess of $9 billion of electronic invoicing data on an annualized basis.” Assume, therefore, that 130 clients processed in 2007 $9 billion in invoices from law firms and other service providers. The total legal spending of those clients is no doubt higher, because not all vendors bill through e-billing systems. That means an average of at least $70 million in external legal spend per client.

Very few legal departments shell out more than $70 million in a year, so I must be understating the number of clients DataCert has or not adequately accounting for some with gargantuan legal fees, or both.

Total litigation spend of large American corporations as percentage of profits

“The Fortune 500 corporations spend the equivalent of one-third of shareholder profits on litigation. This cost and the associated risk are not transparent to shareholders.” Met. Corp. Counsel, Vol. 16, May 2008 at 47, blares out this staggering claim by the President of eLawForum.

I decided to test the statement on DuPont, which is probably at the high end of litigation cost exposure. From 2004-06 huge company, beset by product liability and mass tort litigation, spent about $300 million inside on litigation plus $420 on outside counsel compared to $800 million on settlements and judgments (See my post of Feb. 13, 2008: 2004 to 2006 data).

During those three years, the total after-tax profits of DuPont (net income) were on the order of $7 billion (in 2006, $3.15B; 2005, $2.06B, and 2004 $1.78B). Not being a CPA, I do not know whether “shareholder profits” are the same as “net income.” If they are, then DuPont spent less than one-third of its shareholder profits on litigation, assuming $7 billion net income and $1.5 billion on litigation. Closer to 20 percent in fact.

If these DuPont numbers are reasonably accurate, and assuming DuPont is at the extreme end of total litigation spend, then the “one-third of shareholder profit” sounds exaggerated.