Articles Posted in Non-Law Firm Costs

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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.).

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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 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.

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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. 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.

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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.

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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.

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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.

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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).

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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.

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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.

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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.