In-house Insights Ideas For Managing Your Law Department Better

The Inside Insight of the Month: Pick up Compliance Counselor 5-35


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Translate legal spending into cents per share?

Two

Global departments often have small outposts and lower percentages of lawyers at "headquarters"

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Size of law firms used as it relates to size of client company, and its law department

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Do you need a signed confidentiality agreement before you send a firm an RFP?

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Microsoft's savings from using offshore patent support


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The Inside Insight of the Month: Pick up Compliance Counselor 5-35



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1. Translate legal spending into cents per share?

A senior lawyer in a law department spoke recently about how the litigation expense of his group amounts to "one or two cents per share." That is a novel perspective for a legal benchmark. All legal costs could be divided by the number of shares outstanding.

The metric does not appeal to me because the shares available to the public of a company may change or be out of whack, such as before a stock split or after shares are issued for an acquisition, but it does have the advantage of being a denominator familiar to CFOs and other executives. Companies report on earnings per share (EPS), and indeed that is a signal indicator of whether a company or segment of a publicly-traded market is over or under-priced.
[Rees Morrison]

Sound Practice Byte: Use this ratio to talk within your company in a formulation that others frequently use: the cost of something per share. Eventually, calculate total legal spending per share and see how well that ratio correlates with total legal spending per unit of revenue.

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2. Global departments often have small outposts and lower percentages of lawyers at "headquarters"

At companies with geographically dispersed in-house counsel, some locations have only a handful of lawyers or even just a single lawyer. There are on average around five lawyers per non-headquarters office of McDonald's. Or consider General Electric's Asia-Pacific group, which has about 140 lawyers in 13 locations. In only three do more than 10 lawyers sit in the same building complex. Johnson & Johnson has something like 140 lawyers in 34 locations so some of them may be solo in their location, or only one or two stationed together. British Petroleum's legal group has many foreign offices, some as small as one lawyer.

A general counsel who tries to place local lawyers near local businesses inevitably ends up with multiple offices and sometimes with tiny legal outposts. Those general counsel confront some management challenges that geographically centralized law departments do not. [Rees Morrison]

Sound Practice Byte: The larger companies of the world will have decreasing percentages of their total legal headcount based in their largest (presumably headquarters) location and their general counsel will need to pay particular attention to how to maintain a unified law department.


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3. Size of law firms used as it relates to size of client company, and its law department

The listings of "who represents corporate America" give a broad-brush sense of which law firms big law departments favor. Much more revealing would be data on proportional amounts spent on those firms. It is fine to list Big Firm A, Mega Firm B, and Prestigious Firm C as your go-to outside counsel, but that disclosure misleads us if Firm A gets one percent of the law department's spend, Firm B gets two percent, and Firm C a mere three percent.

The metrics-freak in me wishes we could get a listing of firms retained as ranked by fees paid over a three-year period – to lessen the distortion of the one-shot matter where huge fees went out. I suspect that law firm size correlates positively and reliably to company size. Smaller law departments lack the negotiating power to drive down rates much, so they seek out smaller law firms, which for the most part have lower rates than their bigger brethren. [Rees Morrison]

Sound practice byte: Scan the league tables of firms named as representing clients with a large grain of salt. You should choose firms based on how individual partners fit into your needs for external counsel.


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4. Do you need a signed confidentiality agreement before you send a firm an RFP?

General counsel instinctively want to clothe their request for proposal in the armor of a non-disclosure agreement. "Upon penalty of legal annihilation, you must preserve the confidentiality of this document, selection process, and its conclusion."

To a slight degree, the general counsel may want to thwart a deluge of solicitations from law firms. That worry is misplaced. The firms that have been included will not want to open the gates for other competitors, so they won't talk. Other firms that manage to find out will recognize that you have already invited a set of firms and that they face an uphill struggle to be included. A more important objection is that you want to choose a good firm, so why not let hopefuls present their favors?

A general counsel might impose silence on recipients of the RFP because of some belief that the methodology of the process is more clever than others have achieved, and its disclosure would fritter away a trade secret. Unlikely, I submit, as many big companies have opened the kimono afterwards to spell out every step of their process

The strongest argument for confidentiality is the proprietary information in the RFP about the company and its legal affairs, such as the number of product liability cases pending, or the leasing activity of the company in the Northeast. Such information deserves to be protected, although the more aggregated the data is the less the need.

Even if the RFP issuer has studded the RFP with complete historical information, what risks do you incur if that information were published on the front page of a newspaper? Little, I suspect, except perhaps mild embarrassment. Forward-looking estimates have more legitimate sensitivity. [Rees Morrison]

Sound practice byte: The bother, time and logistics to obtain an executed confidentiality agreement from each firm amounts to overkill. State clearly in the RFP that all information in it – even the document itself and the process it is part of – are confidential and may not be disclosed and leave it at that.


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5. Microsoft's savings from using offshore patent support

Marty Shively, Associate General Counsel and Director of Worldwide IP Operations has stated that "This fiscal year [2007 I think] Microsoft will spend about $3 million on its patent LPO [legal process outsourcing] services in India. The services include patent proofreading, prior art searching, and docketing. In a vendor's promotional piece, Shively estimates that the same work would cost about $9.5 million at US prices, so he claims that his law department has saved $6.5 million.

The offshore team supporting IBM's IP practice has grown to 30 engineers and six support executives." If we broadly assume they each billed 1,850 hours during the previous year, a total 54,000 hours, their effective rate, ignoring disbursements, ran about $45 an hour. The US cost of equivalent work, on these numbers and the ratio between $3 million and $9.5 million, Shively must think would have been about $142 an hour. It seems that a fair amount of the services are paralegal level such as proofreading and docketing, so the $142 an hour for US paralegal work feels high. The explanation may be that the offshore provider has improved the processes involved and uses specially trained personnel. [Rees Morrison]

Sound practice byte: Keep exploring the offshore market for legal services, as it is continually growing in sophistication and experience.