Nuts and Bolts of Cost-Effectiveness
Author: Richard Stock - CCCA Magazine, Spring 2011, Vol 5 No 1
There is a great deal written and discussed about how law firms could and should improve, if not transform, their service delivery and their effectiveness. The initiatives include : reducing the cost of overhead; leveraging technology for practice management; changing the mix of senior and junior lawyers; and introducing para-professionals for many specializations. The application of legal practice management methodologies and systems to complex legal work helps contain and better configure the deployment of legal and technical resources on a matter-by-matter basis. Clients like that and the firm benefits. And, finally, alternative fee arrangements, designed to promote and reward efficiency and recognize the value of a law firm’s contribution, are finally finding their place.
Not a Law Firm
My experience is that only the well-established legal departments, say those that have been around for 20 years, are asking the same questions of themselves and trying to come up with their own answer. Companies are more multi-jurisdictional than they were 10 years ago. The internal users (read clients) of the legal department turn over so quickly that it seems one has to “start building relationships all over again” every 5 years or so.
Still, a private sector legal department is not a captive law firm. Surveys tell us that 70 % of the legal population in companies is carrying out corporate / commercial work and that about ¾ of the lawyers have 10 or more years of experience. In fact, the level of experience is rising faster than the level of complexity of the work that has to be done. Senior counsel in both large and small legal departments are more likely to be involved in strategic and advisory work than are more junior lawyers and external counsel.
The work week for corporate counsel averages 45 – 50 hours. The interruptions are constant. Teamwork is less apparent, given the comparative shortage of more junior counsel and para-professionals in the corporate legal department. And when they are available in the department, they are too often doing 90 % of the hours on their own files rather than working as a team members with senior counsel. More often than not, it is the case that senior counsel will be personally carrying out junior-level tasks on a matter rather than delegating them to another member of the department or co-counselling with associates from the preferred law firm. Everyone in the legal department seems too busy and regularly functions as an independent practitioner with a significant “book of business” within the company.
I was recently asked to advise a company on what it could do to improve the cost-effectiveness of its 60 lawyers, distributed in 8 locations. The organization was still referring 60 % of its legal work to firms –because of their unique expertise, large volumes, and because it was often more cost-effective for geographic reasons. Still, a good number of internal users were not satisfied with the service levels of the legal department, especially when it came to timely turnaround. The problem was compounded by a spike in turnover within the legal department. A 3-step approach was taken for the analysis of the legal department and to assemble a range of solutions to improve efficiency.
The first of these was to better understand the capacity of the legal department on a number of dimensions. Very few corporate legal departments do timekeeping or billing at the matter level. So then, approaches are needed to find out how much time is put in on advisory work, substantive legal work, and administration and management. Interviews and a detailed questionnaire help clarify the picture. Aside from the General Counsel, one can find corporate counsel spending as little as 60 % of the time doing substantive legal work and others operating at 90 %. Note that the remaining 10 % - 40 % of the time may be a valuable contribution to the company, but it is time that has to be managed as an investment – especially when other work that could be done internally is referred to external counsel. Our general advice is to have experienced counsel spend at least 80 % of their available time on substantive legal work.
The second analysis is to characterize and measure the demand for internal and external legal services at a detailed level with a 2 – 3 year time horizon. One has to know if the lawyers are doing the “right stuff.” The activity is parsed by type of legal work, its relative complexity, its source and timing, and the estimated number of hours. The results are not perfect, but do allow planning assumptions to be developed, and the alignment of lawyers with key user groups. From there, it is easier to manage expectations for timing and turnaround. In addition, counsel can then engage the business unit to better scope the matter involved, regardless of whether it is for internal or external counsel. Fewer than 1 out of 10 legal departments have protocols for intake and for service levels. They simply do the best they can with what they have. With workloads and workflow the way they are, log jams are inevitable and are becoming more frequent. They frustrate the client and the lawyer. Having a reliable forecast means the legal department can better manage and increase its capacity to influence and to service demand. It can do this by dealing with the scope of the work, its timing, and the use of junior professionals and para-professionals. Finally, a good demand forecast is a pre-requisite to any business case for more resources in the legal department.
The third step is to establish the fully-loaded (overhead and indirect costs included) hourly rate for the legal department. A legal department that can reduce the company’s total (internal and external) legal spend is on a better footing when it comes to demonstrating its cost-effectiveness. It is one thing to reduce / control external legal spend, but quite another to reduce the “effective rate” of internal counsel. The unit price of the legal department will typically range between $ 125 and $ 160 per hour, depending on the experience levels of counsel and where the department is located. This number should be about 40 % less than the hourly rate for the same experience mix if the work was to be delivered by a law firm. The weighted rate for the legal department will be high if too many of the lawyers are senior, the proportion of work which is not “billable” (in a law firm sense) is too high, if the hours per week are too low (not much chance of that), or if the support staff ratios are too high.
Is the company getting its money’s worth from internal and external counsel? The answer must be unequivocal, if the second part of the cost-effectiveness equation is to be considered. We surveyed the legal departments of 11 publicly-traded companies last year to see if they conducted a formal client survey. Only two said they did. The General Counsel of most of the others met with the business units and executive management to discuss the contribution and performance of the legal department. In a few instances, the lawyers also self-assessed the overall performance of the department and the findings and differences were discussed.
One legal department recently decided to anchor the evaluation of the department with 6 factors found in ACC’s Value Index, even though this is usually used to evaluate law firm performance. The factors are : understands objectives / expectations; legal expertise; efficiency in process management; responsiveness / communication; predictable cost / budgeting skills; and results delivered / execution. With the exception of legal expertise (one could simply say expertise), each of the factors applies to any management or professional position and very little is left uncovered.
Every General Counsel should measure the cost-effectiveness of the legal department once a year. The findings create opportunities that can only benefit the company and recognize the contribution of each lawyer.