Highlights of the 2010 ACLA-CLANZ Legal Department Benchmarking Report
Author: Richard Stock - CCCA Magazine (Vol 4, No 4; October 2010)
Why would such an “esoteric” study be useful for Canadian law departments to read? Perhaps not the entire 150-page document, but the highlights are worth noting because the issues, the trends and the innovation apply around the world. Launched in 2008 by the Australian and New Zealand corporate lawyers associations, a revised report was released in July just a few weeks ago. More than 160 organizations participated, with about 40 % of these from the public sector or government-owned organizations.
The effectiveness of legal departments is analyzed with a dozen sections dealing with different aspects of performance management. Defining, capturing and communicating value of the legal services contribution now seem less elusive. There are of course the requisite chapters on legal spend, external providers and fee arrangements.
The relative size of legal departments is discussed. The tendency for public sector legal departments to in-source large amounts of their legal work, including litigation, means that generalizations about department size – either too small or too big – cannot be made. In other instances, global corporations will have some of their work – IP, corporate governance, financing – carried out by lawyers in the headquarters country. This is certainly the case in Canada. Still, the factors which drive growth and the re-configuration of legal departments are discussed and ranked.
Headcount is less useful as a comparator than total legal spend (internal and external) as a proportion of corporate revenues. Internal spend typically includes indirect and overhead costs, but excludes external fees. External spend excludes third-party costs and taxes. The benchmarking report does a good job in comparing the fully-loaded hourly rate for legal departments with that of law firms. That still remains at 40 % - 50 % of what would be paid to law firms for the same type of work as carried out in the legal department.
One of the biggest challenges with comprehensive reports such as this one is to quickly identify the most useful parts and then to find the time to plan and a course of action. The ACLA – CLANZ Legal Department Benchmarking Report offers a head start by offering over 50 Action Tips throughout the report. Some of these are worth sharing.
Legal Department Size
Prepare a multi-year forecast (specialisation, hours) of the demand for legal services and for strategic advisory work before deciding if you are understaffed.
Reporting Relationship of CEO
Add related portfolios of work along side the legal department to ensure the CLO reports to the CEO.
Roles for Other than Lawyers
Add experienced paralegals and reduce clerical / secretarial staff in support of commercial, corporate and regulatory activity, and in aid of litigation management.
Ensure 100 % of lawyers report functionally to the CLO.
Legal Department Seniority
Ensure that the work of senior lawyers in the department is of significant complexity. This requires a re-distribution of work and / or of business unit alignment every three (3) years.
Rotate lawyers’ alignment away from half of their business units every three (3) years for coverage and effectiveness.
Estimate the backlog of work for each lawyer – typically two (2) days - for important and essential items. Focus should be on workflow management rather than on workloads.
Time Recording and Charge-Backs
If you must maintain it, consider time recording for the same three (3) months each year to serve as a management tool.
If you must have charge-backs, consider an annual allocation of internal legal costs rather than doing so on a matter-by-matter basis. Consult the CFO for a formula.
If charging external fees to business units or projects, have law firms identify the charge-back coordinates on the invoice and have them send separate invoices to you for each of these.
Having More Lawyers
In-source legal work from law firms as a fast-track way to save money and grow the department. A minimum of 600 external hours must be in-sourced to cost justify a new position in the legal department.
In-source a greater share of complex corporate, commercial and regulatory work. Measure and report on the savings. It may not be necessary to add lawyers in order to in-source certain volumes of work.
Co-counsel complex legal work with law firms as a way to reduce senior partner time from law firms.
Create 10 % capacity in the legal department with explicit protocols for users of the legal department, tools for users to be more self-reliant, eliminating timekeeping and reducing time in meetings not tied to specific legal work.
Inside / Outside Mix
Send all routine legal work to law firms for a fixed fee by file or for annual volumes. Tender this work every three (3) years. There is no strategic value and very little financial value for private sector legal departments, except for insurers, to do this work internally.
Monitoring and Metrics
Ensure your metrics and reports have more non-financial contribution metrics than financial. If costs dominate the reports, you will be evaluated based on costs rather than on effectiveness.
Costs of the Legal Department
Establish your worked hours based on an average month. Thus, 50 hours per week for 46 weeks (vacation and statutory days removed) is 2,300 worked hours.
Target your fully-loaded hourly cost at 45 % of the average hourly rate for the same mix of work from law firms.
Target your “chargeable hours” at 90 % of worked hours for all lawyers except those holding supervisory positions in the department.
Define three (3) effectiveness indicators for the legal department. These can include contribution to strategic corporate and business targets, increased self-sufficiency for operational support by the lines of business, and improved satisfaction levels of internal users.
Move beyond creating a panel list to making commitments to law firms for a planned, multi-year configuration and volume of work. The commitments are not guarantees but should be relied upon for planning and pricing purposes by the department and its law firms.
Prepare multi-year terms of engagement with your primary firms. These should cover capabilities, performance standards, work type, volumes, price and non-chargeable services. They should also set out what the firms should expect from the law department.
External Spend Controls
Increase use of fixed fee arrangements by matter or by phase of matter to control external legal costs.
Require detailed matter budgets with number of hours by fee earner for all matters with more than 25 hours.
Ensure matter budgets are detailed to the point of showing the number of hours by task for each fee earner. A total maximum cost per matter does not allow an analysis of the proposed distribution of work within a firm.
Pay firms a performance bonus if they do not exceed approved and detailed matter budgets 90 % of the time and the rest of the time do not exceed by more than 5% each year.
There are more resolutions than on New Year’s Day. Something to think about. There is much to do.