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Some fissures in the comparison of internal fully-loaded rates to average rates of outside counsel

A co-panelist with me recently mentioned that her law department regularly compares its fully-loaded hourly billing rate for lawyers with the average rate charged by outside counsel. The comparison has a fair amount of validity, but some faults can mar the match (See my post of June 29, 2009: insurance company’s calculation of savings based on fully loaded costs.).

The internal load needs to be full, that is, to include all the costs of internal lawyers (See my post of Aug. 27, 2008: fully-loaded cost per lawyer hour with 31 references; and March 9, 2009: fully-loaded with 7 more posts.).

The chargeable hours estimated or tracked for the internal legal group must be legitimate (See my post of May 21, 2009: internal chargeable hours with 12 references; and Jan. 5, 2011: internal time tracking with 9 references and one metaposts).

Administrative time demands on in-house counsel need to be accounted for (See my post of July 22, 2009: administrative time with 3 references and 18 metaposts; and April 9, 2008: quasi-legal tasks with 14 references.).

The comparison needs to try to match or adjust for expertise levels (See my post of May 1, 2006: inexperienced inside lawyers can’t assess value of outside counsel; June 10, 2007: complaint by partner about novice lawyers “in charge”; May 21, 2008: inexperienced insiders managing veteran litigators; Sept. 1, 2008: more experience in larger law departments; May 21, 2009: compare costs based on equivalent experience; Sept. 9, 2009: do it yourself too much makes no sense; and Feb. 4, 2011: rising costs of expertise delivered by hand.). Perhaps direct reports to the general counsel correspond to partners at law firms. Or you could align lawyers inside and out by years out of law school as a proxy.

You need to be sure that the law firms whose effective billing rates you compare are representative of your group of firms on a use-weighted basis (See my post of Jan. 29, 2009: if a department uses very expensive firms, its hourly costs will look better.).

The difficulty and the complexity of matters handled need some degree of correspondence. Internal lawyers handle a full range of matters, from trivial to monumental. External lawyers tilt toward large cases and more gnarly, specialized issues which implies more expensive talent (See my post of Jan. 23, 2009: qualitative differences between internal and external hours.).

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