An informative article co-authored by the general counsel of Alfa Laval appears in the ACC Docket, Nov. 2011 at 39. One portion discusses “risk tolerance,” and gives the edge in risk tolerance to companies that (1) have the money to absorb the worst-possible outcome and (2) encounter the situation repeatedly, so that probabilities bear out. A small company facing a claim of patent infringement might not be able to pay (or settle) a nightmare amount and it won’t face more suits in which to balance out the large payment against many non-payments. Large companies, however, can play the odds and take some big hits. They know that the law of averages will hold in their favor over time, which means that their legal costs will be more moderate since they can be bolder, take more risks, hire more appropriate law firms, set up fee arrangements and systems – reduce total legal costs. Insurance against extreme outcomes can help as might third-party funding.

The authors also note that repeat players, law departments that over time see a number of similar instances, become more adept at estimating the probabilities and consequences of the various outcomes (See my post of Dec. 12, 2011: expected value.). The article treads lightly on the statistical tools that give specificity to variance. As a standby, it suggests column charts or scatter-grams to show the distribution of possible outcomes.

In 2010, a major division of Royal Dutch Shell decided to use zero-based budgeting to reset its cost structure (See my post of July 16, 2007: zero-based budgets; Jan. 2, 2009: advantages of zero-based budgets; March 29, 2009: five steps toward more reality in budgets; April 22, 2009: zero-based staffing decisions by general counsel; and Aug. 11, 2009: along with just-in-time budgeting.). Describing the effort in strategy + business, Winter 2011 at 20, the author sees “continuous improvement in a big corporation as necessary in what I would call managing cost creep: reducing the 3 to 5 percent in additional costs or waste that most large companies seem to generate every two or three years.”

If large companies lard on budget fat at that rate, their functions are doing so. How would a general counsel put the department on a scale and measure the “additional costs or waste” that has built up. Obviously, some costs rise from inflation, but “waste” is a subjective, normative judgment. Someone’s additional subscription; another’s new propensity to take a car service to the airport instead of driving; some laxness on bill review; a subsidy for a new espresso machine; PDAs issued to paralegals, theater tickets added to the All Lawyers’ Conference – what is waste and what is investment or legitimate expense? A budget that defers to no sacred cows and scrutinizes all expenses as if there were no history behind them would be a salutary discipline.

OMC released a report in November that pulls together a formidable amount of data and analysis on legal process offshoring around the world. London-based OMC specializes in advising law firms and law departments on opportunities to have services provided in lower-cost jurisdictions.

Page 15 of the OMC report lays out 32 routine tasks in 6 practice areas that OMC sees as particularly amenable to offshoring. Some tasks use UK jargon that is not familiar to me, such as “SDLT tasks” and “21 day filings” but otherwise it seems to be a comprehensive and understandable list. If you would like to see the entire 16-page report, please write David Ellis.

A stark contrast appeared in a recent survey. Asked to rank five cost-reduction steps in order of importance, one quarter of a group of in-house respondents chose “Hiring freeze or reduction in legal department staff” while at the same time almost the same percentage chose “Hiring in-house counsel or temporary staff to reduce outside counsel.” The data comes from Major, Lindsey & Africa’s survey during the spring of 2011.

One could simplify these responses to highlight the opposing views: fire department lawyers versus hire more department lawyers. It is true that “reduction in staff” doesn’t necessarily mean lawyers and hiring “temporary staff” muddies the second choice. Still, the underlying basics, the steps that clash as opposites, are to skinny down or beef up. The report simply provides the metrics, it does not further elaborate on them. Sonya Olds Som, a lawyer and recruiter at MLA, will be please to send you the report if you write Som.

The HBR Consulting benchmark survey suggests a guideline for what expenses should be included in a general counsel’s budget. It is something like “Do not include expenses that a company would have to pay even if there were no law department at all.” That sounds constructive, and would eliminate annual meeting expenses and the costs to prepare and distribute annual reports, and directors’ fees, for example, since all of those costs would continue even if you shut down the law department.

My problem, however, is that patent registration and maintenance fees would presumably also continue even were a company to have never started, or later ended, its legal department. Yet I believe those expenses properly fall into the law department budget.

If law department managers are to be able to compare their metrics to others’, we need a consistent framework and definition for what’s in and what’s out.

If you need an expert witness in a case, you can ask the law firm you have retained to locate one, or you can use one of the many services that specialize in finding experts (See my post of Feb. 2, 2008: expert witnesses with 9 references.).

When outside counsel locate the expert and conduct vetting phone calls., law departments typically pay for their help at an hourly rate. Boutique services are out there, however, that do not charge by the hour, let alone the hundreds of dollars an hour and lots of hours a law firm might charge. A principal of IMS ExpertServices makes this point in the In-House Defense Qtrly., Summer 2011 at 6 (See my post of Feb. 13, 2008: Round Table Group and its 95,000 experts; and Nov. 1, 2010: allow non-lawyers to assist with expert witness preparation.).

I can hear the objections already: the law firm will duplicate much of the work anyway. And, if anything goes other than as hoped with the expert’s role in the case, fingers will point.

As a columnist for InsideCounsel’s online site, I most recently wrote about the different ways law departments account for costs associated with patents. Sometimes the legal budget absorbs some of those amounts, other times it doesn’t – and everything in between. If you would like to read the entire column, please click on this InsideCounsel patent-cost link.

Several times in the past I have pointed out the swarm of vendors and service providers who market to legal departments. They make up the cottage industry.

In the past year or so, several more posts provide information about more denizens of the cottage. Most concern those who license, implement and support specialized software (See my post of Dec. 27, 2010: seventeen applications commonly used by law departments; Jan. 17, 2011: a patent document management system, First to File; Jan. 23, 2011: patent databases, mapping and classification; April 22, 2011: software for corporate governance, corporate secretarial, and publicly-traded functions; June 15, 2011: software to help handle contracts; and July 11, 2011: five specialized packages for law departments.).

Others posts delve into service providers (See my post of April 6, 2011: ranked list of top-ten trademark services providers; Feb. 15, 2011: mostly small vendors in the legal cottage industry, so rewards and risks increase for general counsel; and Feb. 25, 2008: service providers for bill and regulation tracking.).

I thought it would be interesting to ask senior leaders in the cottage industry(thus, Cottage Industrialists) that serves legal departments – other than law firms – to describe the early history of their company, offer some metrics about it today, and give a specific example from a client about some management practice. Frank Orzo, the co-founder and long-time leader of LTOnline, prepared the first post.

The Lawtrac product was first introduced in 1984. Since its inception, we focused on in-house law departments, and to be candid, this was by accident, and it probably helped that I was not an attorney. My background was in software development. I worked for a national software development company in New York.

When hard drives were first introduced to personal computers, a colleague and I decided that this device could be a useful computing device. We approached several of our existing customers, and one – a large insurance company – said we could help them in their law department. At the time, the only product that offered the functionality that they required was developed for a Wang VS. Since they were an “IBM” shop, this was a non-starter. We agreed to build the product to their specifications for a nominal fee, provided we would retain intellectual property rights. The result: Lawtrac 1.0, based on the DOS operating system. Our customer was thrilled when we delivered a working product, only to then ask us how multiple users could share the information simultaneously. We said, “Oh, you want to share this information? Let us get back to you.” And that is how we developed the first PC-based, networked matter management system for law departments in January, 1985.

Twenty six years later, we are still focused on supporting the needs of in-house law departments. Our largest customer has 400 internal law department users in 22 countries, and we have several law department customers, such as Harpo Productions, with two to three users. We have some customers with over 100,000 matters in Lawtrac, ranging from litigation, contracts, intellectual property and M&A. Over 2,300 law firms submit more than $300 million annually in invoices through Lawtrac’s e-billing module. One customer processes 5,000 invoices per day.

Our client Systemax, Inc., has gone “paperless” in their law department as a result of implementing Lawtrac.. When a paper document comes into the department, it is scanned, and then thrown away. From that point forward, when information or documents are needed, Lawtrac is the centralized source to which law department personnel and their business partners go to retrieve what is needed.

A recent article has much to say about non-practicing entities (NPEs). I have cherry picked from it and quoted several paragraphs.

“Some 20 of the 300 or so known NPEs appear to account for roughly half of all NPE-related litigations, according to intelligence from Patent Freedom (www.patentfreedom.com). In 2008 alone, some 900 operating companies were sued by NPEs.” The article does not mention the number of cases filed (See my post of Sept. 13, 2011: 550 cases in 2010 but no reference to the number of defendants.).

“Some estimates put the amount of capital flowing into NPE models over the past eight years to be between $6 billion and $8 billion. And clearly one aggregator, Intellectual Ventures, has raised massive amounts (reportedly US$5 billion). Others, such as Altitude Capital, Acacia, Techquity and Fortress Investments, are said to have tens of millions of dollars at the ready for patent buys.”

Allied Security Trust: “AST is a defensive-oriented, member-owned cooperative of high-tech operating companies that seek to provide a cost-efficient means of securing freedom of action (FOA) for its members. It operates on the basis of catch and release, never holding any IP for more than a year and always allowing members to opt in/out of AST bidding on portfolios (thereby ensuring that the member cash outlay is applied only to those portfolios truly of interest to that member). Members include, but are not limited to, Motorola, RIM, Ericsson, Philips, Intel, Verizon and Avaya.”

Rational Patent Exchange” “RPX is a for-profit defensive patent aggregator that has a centralized decision-making structure allowing it to make buy/no-buy decisions quickly, on behalf of its members and with a unique degree of deal flexibility. It generally, at least for now, aims to hold/aggregate the patents it acquires. Remarkably, every member receives a licence (term converting to perpetual) for everything RPX acquires, generally speaking. Members include, but are not limited to, IBM, Cisco, Hewlett-Packard, LG, Panasonic, Coby Electronics and HTC.”