Of the departments participating in ALM’s metrics survey last year, 68 provided data on how many law firms they had retained in 2010 and how many they had retained in 2009. Among that group, contrary to all the talk about dramatic reductions in the number of law firms retained, their aggregate number reported declined from 4,333 firms in total to 4,027 – a decrease of less than 10 percent. Looking deeper, 30 departments decreased their outside counsel rolls, 18 reported the same number of firms, and 17 increased. Obviously, even with the group that stayed the same, there could have been different firms retained but the same total number.
Another perspective is to calculate the law firms retained per billion dollars of revenue. For this group of law departments in the United States, the median was 12 law firms retained for each billion dollars of revenue. The overall data reflects 3.5 law firms retained for every in-house lawyer. To learn more about the Law Department Metrics Benchmark Survey of ALM Legal Intelligence, click here for ALM’s website.
Twenty-nine colleges or universities use the fixed fee retainer program of the National Center for Higher Education Risk Management (NCHERM). Corp. Counsel, Feb. F012 at 20, reports on this unusual arrangement where legal services are outsourced. The founder of NCHERM offers colleges legal advice, training programs and expert witness services for a flat fee.
The founder estimates that 50-to-60% of colleges and universities don't have their own in-house lawyers (See my post of Aug. 28, 2005: trade group for university counsel; and April 8, 2007: first university patent department: University of Virginia's.). The arrangement does not prohibit clients from retaining other law firms for specialized matters. There are plenty of rent-a-GC organizations but this is the first one I’ve run into that focuses on an industry segment and has grown so large.
Academic researchers sometimes use a methodology referred to as a Q-sort to translate complex qualitative observations into quantitative metrics. An article in Acad. Mgt. Rev., Dec. 2011 at 1209, explains research that applied the technique. It occurred to me that the same approach could help us understand outside counsel guidelines issued by law departments in a different way that we now do.
Basically, reviewers would analyze a set of guidelines and give a number, say from 1-9, to describe each of many aspects. “Toughness on budgets” might be one aspect as might “detail of permitted disbursements.” Typically the reviewers consider a set of statements or options and rank-order them, either in groups or on an individual basis (See my post of Oct. 20, 2009 #3: example of Q-sorting operation.). When several raters have completed the process, which may also require a forced distribution of numbers and thereby pressures reviewers to make frequent comparisons, you have converted complicated text to pliable numbers. The metrics that result from a multiple-rater assessment using the same standards and distribution can be analyzed statistically.
A group of outside counsel guidelines Q-sorted today would yield useful insights. To do so with a similar set of guidelines from five years ago would harvest even more insights on the changes in emphasis and style over time.
Burford Group, a lawsuit finance outfit, analyzed figures gathered by American Lawyer magazine. Those figures appeared in Bloomberg BusinessWeek, Jan. 10, 2012 at 42: “the 200 largest U.S. law firms bill about $33 billion annually related to litigation.” I will work with that number here as I have ventured into this thicket before (See my post of June 15, 2008: testing the claim that U.S. big corporations spent one-third of shareholder profits on litigation; and Dec. 1, 2009: flawed claim of $60 billion spent by big companies to prepare documents in litigation.).
To start, what was the total revenue of the AmLaw 200? I found the top 100 earned $64.8 billion while the next 200 earned $17.4 billion. Therefore, of their combined $82.2 billion, 40 percent was related to litigation. Elsewhere on this blog I have cited estimates that 60 percent of the fees paid by law departments goes for litigation (See my post of Oct. 24, 2007: cascade of 60% for components of legal spending; April 11, 2009: matter management company reported about 37% paid for litigation; and July 7, 2009: using earlier data to reach the same conclusion.). That estimate may be too high; from here on, absent better data, I may use 40-50 percent, since I doubt that smaller U.S. law firms account for as much litigation spend from companies with internal legal departments
My second spin on the Burford figure took into account the percentage of in-house lawyers who are dedicated to litigation. A recent survey found that percentage to be 15 and I have reported similar, but slightly lower, figures (See my post of Aug. 27, 2005: about one litigation lawyer per ten inside lawyers; Nov. 22, 2007: practice-area metrics for litigators; March 27, 2009: breakdown of in-house lawyers by practice area; April 11, 2009: distribution of specialty lawyers; July 21, 2009: one-third at the Hartford seems high; and Dec. 3, 2010: ALM survey suggests about 13%.). If 12 percent is a plausible estimate for in-house litigators, then they certainly manage dramatically more in outside fees than their colleagues manage.
A previous post confirmed once again that rates and firm size rise together (See my post of Jan. 23, 2012: four sizes of firms and their average litigation rates paid by financial companies.). The TyMetrix “Litigation Rate Snapshot,” shows data from the Finance, Investments and Banking industry broken out by four sizes of law firms. I looked at the average associate rates paid and compared them to the average partner rates paid.
For firms of 1-50 lawyers, the average was $204; for 51-200 lawyers the average was $414, up 51 percent; for 201-500 lawyers the average was $506 (16% above the size below); and for firms with more than 500 it rose 9 percent to $636. Dividing the partner rate by the associate, it is clear that the larger the firm the bigger the gap. If hours billed could be controlled – a huge if – law departments would be warier of partner time because it grows increasingly more costly in relation to associate time.
A handout from TyMetrix, its “Litigation Rate Snapshot,” shows data from the Finance, Investments and Banking industry. Broken out by four sizes of law firms, the data table presents average litigation associate rates paid and average litigation partner rates paid. The data convincingly show that size of law firm correlates positively to levels of rates.
Take the partner rates. For firms of 1-50 lawyers, the average was $270 an hour whereas for 51-200 lawyers the average rose to $414, a 53 percent uptick. At 201-500 lawyers the average was $506 (22% above the firm size below) and above 500 it rose another 26 percent to $636. Unless this industry deviates significantly from the other industries covered – which was not apparent from looking at their corresponding averages – the size of the law firms you retain makes the most difference in your overall costs (See my post of Sept. 10, 2005: rates correlate to size of firm; Dec. 28, 2006: differentials between partner and associate rates; Jan. 3, 2007: increased rates with firm size; March 24, 2007: overhead costs rise with size of firm; Oct. 25, 2007: average partner rates trend steadily higher as firm size increases; Dec. 5, 2008: bigger firms, higher rates; Sept. 12, 2008: Burger King and lower-cost regional firms; and June 24, 2009: size increases rates at patent firms.).
Who cares about your boast that you exacted a 10 percent discount from a large firm, when its typical rates are 20, 30, or 40 percent higher to start with than a modest-size firm?
TyMetrix has produced the “Litigation Rate Snapshot,” based on its LegalVIEW data warehouse of billing and matter information. Covering $15 billion in fees submitted by 147,000 individual U.S. billers, a table shows average rates paid associates and partners in five industry groups. For three of them (Finance, Investments and Banking; Manufacturing; and Retail), the increment from associate to partner rate is about $100 an hour.
For Insurance and Health Care, both rates are noticeably lower than those paid by the other industry groups and the associate-to-partner gap is half as much. Reversing that, for Technology and Telecommunications the average rates are considerably higher and the gap is nearly twice as much, $200.
Now, draw on some other metrics. In the Fifth Release of the GC Metrics benchmark survey, external spend as a percentage of revenue for Manufacturing (112 companies, about 60% US) is twice that of Retail (44 companies), yet the TyMetrix average litigation rates are nearly the same. Since litigation accounts for 50-70 percent of all external spend, these two streams of data suggest Manufacturing companies face twice as much litigation expense as Retail companies. That sounds right.
TyMetrix has produced an 8-page handout, the “Litigation Rate Snapshot,” based on its LegalVIEW data warehouse of billing and matter information. The full report covers $15 billion in fees submitted by 10,000 U.S. law firms and 147,000 individual billers. The total hours reached 39 million.
At the most aggregated level, therefore, the blended rate for all those fees and hours comes to $385 an hour. That rate reflects all write-offs and approvals, so the submitted blended hourly rate was somewhat higher. Since the counterpart figure for U.S. legal departments comes in just below $200, this appears to put an outside litigation hour at twice the cost of an inside hour.
“Most large law firms have far more lawyers than the availability of client work requires.” Ed Wesemann in the Edge International Communique asserts this.
Wesemann explains that “This is, in part, driven by the law school hiring programs that require firms to predict their staffing needs almost two years in advance. But an equal culprit is the fear by most law firms of having a client come to their door with an engagement and not having the people to do the work. New business is so difficult to obtain that, for many lawyers, the fear of not being able to perform it in an acceptable manner causes the firm to err on the side of excess capacity.” If Wesemann has correctly identified systemic over-staffing, it would seem logical for partners to more willingly explore alternative billing arrangements to keep the surplus labor at least somewhat occupied. Over-staffing breeds over-billing, law department managers should worry, because associates hungry for chargeability will likely rack up hours if given the opportunity.
The “European Briefings” supplement to the ACC Docket, Dec. 2011, at 12, describes how Procter & Gamble’s EMEA law department, 120 lawyers strong in two dozen locations, coped with regulations by the European Commission’s of chemical substances. The department worked closely with Allen & Overy on compliance with REACH, including swapping knowledge. As described, “Given the expertise of each, the legal department and the law firm implemented practices to ‘swap’ various legal and regulatory information and knowledge without charging a fee.”
This is a wonderful idea! In-house lawyers build up deep knowledge in specialized areas of law and practice. That experience has value to a law firm that represents other clients regarding that area. A mutual exchange of documents, checklists, contact names, case studies and other material can help both sides – law departments to contain costs and law firms to expand their knowledge and marketing.
