It is well recognized that internal law department costs consist mostly of compensation and benefits. The data from ALM’s latest metrics collection corroborates that belief. In fact, it comes up higher than some general rules of thumb. Based on the numbers reported by about 70 U.S. legal departments, 86 percent of their internal spend went to the direct people costs of salaries, bonuses, equity awards, and benefits.

For every $21 of compensation and benefits spent, $1 (about 5%) was spent on occupancy costs and $37 dollars on comp for every technology dollar (about 3%). “Other” was 8% – perhaps CLE, travel, lawyer conferences, subscriptions, expert witnesses, consultants and the like. To learn more about the Law Department Metrics Benchmark Survey of ALM Legal Intelligence, click here for ALM’s website.

A column in the ACC Docket, Dec. 2011, at 24, by an unabashed proponent of offshoring who invests in companies that provide those services, went too far. He recounts an ABA panel which “showed that outsourcing legal work is more than a trend among law firms and corporate legal departments.” The panel of a professor, a general counsel and a law firm partner had discussed issues and examples, but to my reading had offered no proof of the columnist’s claim that this technique has moved beyond “trend.”

Promoting his view further, his next sentences ends with bravado regarding outsourcing legal work: “It is a new standard in our current legal environment, and has become a permanent fixture among corporate legal departments and law firm users.” No, offshoring and outsourcing are not standard practices among U.S. legal departments nor anything like a permanent fixture. Offshoring (and near-shoring) is one evolving tool that some departments have tried for certain needs and met with varying degrees of success.

Enterprise Strategy Group (ESG) recently surveyed 48 law departments (about a quarter of the respondents were general counsel) representing midmarket organizations (500 to 999 employees, 17%), larger companies (1,000 to 2,499 employees, 10%) and enterprise-class (2,500 employees or more, the remainder).

ESG was dismayed to find that in 2010 almost two out of three of those law departments did not “track e-discovery related expenses (i.e., document review fees, outside counsel fees, technology investments, etc.).” Perhaps they should be less surprised given who responded and the size of many of the companies – and thus their volume of lawsuits that justify tracking discovery expenses.

One out of three respondents was in a company with less than $1 billion of revenue, which would suggest less than four or five lawyers. Indeed, one quarter of the law departments had 1-10 total employees and a third had 11-24, which translates typically into 5 to 13 lawyers. Since it is fairly common to have one-to-two lawyers per 1,000 employees, even the largest midmarket respondents might have only a single lawyer (See my post of Dec. 2, 2010: lawyers per thousand employees.).

Smaller companies may have very little litigation, let alone of enough documentary bulk to require much e-discovery management, and thus no need to drill down to a component cost of it. In short, is the sample large enough of knowledgeable participants and litigation-intensive companies to draw a responsible conclusion about what spending information is tracked?

The report adds a methodological point not usually included in survey results: “After filtering out unqualified respondents, removing duplicate responses, and screening the remaining completed responses (on a number of criteria) for data integrity, we were left with a final total sample of 48 general counsel, attorneys and legal department executives.” I applaud the quality control, some form of which all benchmark surveys should apply, but wish there were more transparency regarding how they assessed “data integrity.”

Any comments by me on insurance coverage tread dangerously close to a topic where my total ignorance almost outweighs my desire to write about topics of law department management. Almost. In Executive Counsel, Dec. 2011/Jan. 2012 at 20, Peter Selvin pselvin@rainselaw.com describes a number of ways that comprehensive general liability insurance as well as D&O insurance might provide coverage in patent infringement suits. The article goes beyond patent suits, covering misappropriation of trade secrets and some statutory claims, for example. It also covers several kinds of insurance products that might soften the courtroom blows.

My point is not about arcane insurance laws, policies, and rights, but about the role of in-house counsel to find insurance coverage that saves the corporate client money. The law department can tangibly benefit its client if it uncovers Rembrandts in the attic or insurance to claim against should the Rembrandt be damaged or lost.

Sophie Ross of FTI wrote recently that “many analysts estimate that the cost of legal review comprises about 70 to 80 percent of total e-discovery costs.” This is from Met. Corp. Counsel, Dec. 2011 at 15. sophie.ross@fticonsulting.com Earlier, she states that Fulbright & Jaworski found recently that “on average a corporation spends $3 million per legal case.” The quote about review costs follows, implying that about 75 percent of the average $3 million case goes to document review, or something over $2 million per case. Clearly, the implied and extrapolated conclusion is unsupportable.

The Eighth Annual Litigation Trends Survey Report of F&J (at 21) found that 47 percent of the 275 U.S. companies it surveyed spent less than $1 million on litigation annually. After all, as seen on page 5 of the report, one third of the respondents had only 1-5 lawsuits in 2010 and another quarter had 6 to 20. Only about one-half of the companies had revenues greater than $1 billion. Thus, at typical figures of a half percent of revenue going to legal expenses, the other half of the survey population would have been unlikely to spend in total more than $5-6 million, of which two-thirds or so went to external counsel and vendors. So half the survey population came nowhere near spending $3 million per lawsuit.

Moreover, the most common causes of litigation pending against U.S. companies (at page 11), were disputes over contracts (about 44%), labor and employment (46%), and personal injury (23%). Few suits of those kinds incur costs in the millions of dollars.

Marsh & McClennan’s Michael Caplan, who manages the finances for that company’s legal team, spoke at length recently about accruals: “Technology to manage un-billed fee estimate accruals from law firms is critical and we put a process in place to capture un-billed fees monthly from our top 50 firms. We also have a report that lets us know what invoices remain with which lawyers for 30, 60, 90 days. In the last three months, we haven’t had anything sitting there for more than 60 days.

How we manage spending for our business partners ties very much to what’s in the system but also what is not in the system. And it’s not just a dollar amount that’s important; the matter categories are also important.” Caplan has put his finger on two important aspects to law departments of accruals: timeliness and comprehensiveness. For the full interview, here is the URL.

The size of the U.S. legal services industry, the term used in a Rand report just released, “Innovations in the Provision of Legal Services in the United States,” remains undecided. Rand’s study has more data that might clarify the number. Rand cites the Department of Commerce’s Bureau of Economic Analysis estimate in 2009 that the legal services industry generated almost $282 billion in output.

It would be squaring the circle to reconcile all the estimates I have collected just this year for the U.S. legal industry (See my post of March 27, 2011: market concentration of spend – perhaps $70 billion by the Fortune 500 and $60 billion to US law firms; Oct. 25, 3011 #2: $60 billion global and $200 billion U.S. litigation figures; Oct. 28, 2011: $100 billion U.S. corporate legal market as 20% of global market; and Nov. 21, 2011 #3: Jomati Consultants – “American legal market” generated around $255 billion.). Someday I may try to reconcile the various estimates and their methodologies.

Jeff Hodge, Executive Director, Corporate of matter management and e-discovery vendor doeLEGAL, wrote December 13th on the company blog about the growth of the electronic document discovery (EDD) market.

“Starting at about $40 million in revenues in 1999, the market appears to have grown to approximately $70 million in 2000, and then $150 million in 2001. We estimated that the total 2002 domestic, commercial market for EDD services was at least $270 million. (George Socha and Thomas Gelbmann, "The Size, Scope and Growth of the Electronic Data Discovery Market: Survey and Results", 2003).” Hodge then refers to more current research from IBISWorld that found the EDD “industry has grown at an annual rate of 5.6% over the last five years to an estimated $786.5 million in 2011.”

My expertise does not extend to e-discovery, but it would not surprise me that spending almost tripled from 2002 to 2011, and that $800 million might be this year’s total e-discovery spend. If the U.S. corporate spend on legal is around $100 billion, with $60 billion of that going to external service providers, and $36 billion of that related to litigation, to estimate on the order of three percent in there for EDD sounds almost conservative.

Hodge muses: “An interesting side question, but one not addressed here, is whether the volume and complexity of litigation during the same time period might warrant such growth.” Numbers of law suits, I’m not sure, but trials, the costliest part of litigation, have dropped in frequency significantly (See my post of Dec. 20, 2011: decline in trials.).

A cloud of companies surround law departments and seek business from them. Here is an illuminating slice of the cottage industry. For the Council on Litigation Management’s annual conference, 3 premium, 14 platinum, 19 gold, and 20 silver sponsors signed on. Nine of them are law firms. The remaining 47 represent a sprawl of companies that law departments might retain directly or pay through the law firms that represent them.

Matter management system vendors were the most plentiful. I noted Acuity (nee Trialnet), Bottomline Technologies, CSC, CT TyMetrix, Datacert, Legalbill, LegalEye, and LexisNexis CounselLink.

Medical malpractice defense had the next largest showing (MedAllocators, Med Legal, MedSave, and Medval) along with court reporting services (Atkinson Baker, First Choice, McCorkle, and US Legal Support).

Records management included three providers (a2six, Keais Records Service and MCS Record Services) as did e-discovery (ACT, T-Scan, Unisource).

Several niches had two representatives each: post-accident technical experts (Forensic Economic Studies, LWG), general consulting for insurance companies (Deloitte, Nolan), disaster restoration services (BMS CAT, SRM Servicemaster), networks of law firms (ALFA International, Your House Counsel), ADR services (ADR Systems, Resolute Systems), and legal fees and audits (Meckler Bulger, Stuart Maue).

All the rest of the sponsors appeared to me to be single representatives of what are likely to be populous fields: temporary staffing (Esquire Solutions), translation (Legal Language Services). insurance industry information for institutional investors (Cagney Research Group), trial consulting (Clarity Partners), Medicare set-aside software (Crowe Paradis), offshore support (Pangea3), environmental consulting (WCD Group), wholesale brokerage and specialty lines underwriting (U.S. Risk), structured settlements (Ringler Associates), investigative services (ICS Merrill), claims services (Pace), and other (Philips).

Fronterion’s recently released Top Ten Trends for Legal Outsourcing in 2012 is worth reading. One point it makes relates to the increasing frequency with which law departments will retain LPOs and insist that their law firms rely on the work of the LPO. Law departments will butt into their law firms’ concerns about quality and professional liability.

“In the coming year, however, in-house legal departments will increasingly contract directly with legal vendors creating conflicting concerns for law firms. For example, how can law firms oversee, and be responsible for, services provided by a vendor with which the firm is not even contractually engaged? These new structural relationships and resulting work products are often beyond what the law firms’ insurance policies were designed to cover.”

Neither concern, I submit, either quality of work or insurance coverage for it, will slow the trend. The full version of the report is at Fronterion’s website.