Richard G. Stock - ACLA Journal, Vol 19, no 4 Winter 2009
The June 2009 issue of the ACLA Journal carried two articles which referred to time-keeping by legal departments. Deloitte's Nicholas Adamo reported that the Deloitte-ACLA In-House Counsel Survey of 209 public and private sector counsel found that only 22 % were using time recording or time sheets. Mr. Adamo goes on to say that this "may suggest that time recording is not perceived to be an appropriate measure of the value that in-house counsel add to their organisations."
Duncan Hart's article "Don't Throw Away That Time Sheet" raises many good questions, but does not go so far as to recommend that legal departments should adopt timekeeping and time-reporting practices. The questions deal with productivity, cost-effectiveness, and communicating the value of the department.
The ACLA - CLANZ Legal Benchmarking Report 2008 found (page 26) that 73 % of public sector legal departments do not record time while 85 % of private sector legal departments do not record time. Few reported that they intended to change their practices. Just how does a legal department manage its time, improve its cost-effectiveness and communicate the value of its contribution to the organisation?
Financial pressures and changing corporate or government priorities have accelerated the requirements to measure, to justify, and - often - to reduce legal expenses. A recent North American survey of General Counsel reported that the pressure to reduce legal expenses moved to the number 1 rank of pre-occupations, ahead of regulatory / compliance, and ahead of managing workloads.
In rare instances, the General Counsel is faced with "an unsupportive CFO or CEO" asking the questions that Duncan Hart reported in his article: "What exactly do you do?", "Where and how does the company benefit from the legal department?", "How cost effective are you?", and "Why do you need the extra help?" These questions are not only financial in nature. However, the value proposition of the legal department cannot be communicated without a clear and detailed understanding of the activity and cost of the department.
The Value Proposition for a Legal Department
The Association of Corporate Counsel (see www.acc.com) introduced its Value Challenge in 2008 and the Value Index in 2009 as a way to help General Counsel focus its dialogue with its law firms. A consensus has emerged about six areas which should be part of the evaluation of law firms. Most of these can be applied to legal departments as well:
predictable cost/budgeting skills
It is easier for a lawyer to evaluate the technical aspects of the performance of external counsel then it would be for a company to evaluate the legal skill of its legal department. In addition, legal budgets tend to be centralised and individual users of legal services are rarely concerned with predictable costs at the matter level. The ACLA - CLANZ survey (page 47) reported that only 18 % of Australian legal departments charge all their costs back to the business unit, 57 % charge none, and the remainder charge some. What is important for the legal department is its ability to predict and budget its total legal spend on a company-wide basis.
ACC's six areas of evaluation can be condensed into a practical definition of value or "cost-effectiveness" for the legal department. Thus, Value or Effectiveness = Quality (Service and Results) plus Price. The relative importance placed on service + results + price in legal services varies by company and by matter. Over time, the importance shifts. There is no tolerance for generalisations and theory. General Counsel must find ways for their departments to measure, discuss and report on each element of their value proposition. A few suggestions follow.
Fewer than 20 % of legal departments formally survey their primary users for service each year. A series of 8 - 10 questions dealing with accessibility, efficiency, process improvement and deadlines will generate a key performance indicator (KPI) expressed as a corporate index for service. Some departments target all users which require at least 50 hours of legal work each year. A 75 % participation rate is advisable in such surveys.
This KPI requires an alignment of department resources with specific users or specific projects. In the case of litigation, the results (win or a settlement with a target cost / time frame / probability of achievement) are planned in advance. There is much attention given to service levels and to costs in legal services but too little to defining the results and expectations of the law department in advance. Legal departments are introducing KPIs to capture their contribution to strategic and operational priorities in such a way that key users are now jointly accountable to set clear expectations. This makes reporting on the " results " component of effectiveness much more straightforward
It is important to use the methodology of " total legal spend ' (see ACLA - CLANZ survey, page 51) to capture the price of legal services to the company. External counsel costs should be tracked segregating legal fees from disbursements and taxes. Internal legal costs should include all payroll, benefits, legal department direct costs and share of indirect costs for the department, even if these are not budgeted in the legal department. General Counsel should be evaluated on their success in budgeting and meeting approved total legal spend targets as well as in meeting targets for the reduction of unit costs.
But this does not go far enough because the legal department cannot accurately report on the amount and cost of the substantive legal work it delivers. Surveys suggest that more than 65 % of corporate counsel work 46 or more hours per week. How much of this is advisory, preventive, administrative or other work which can never be referred to a law firm and how much is legal work comparable to that done by external counsel? As noted above, few departments report time or track activity at the detail level. Duncan Hart is correct that activity tracking provides valuable insights to the General Counsel for managing legal resources. A few law departments do this for the same 3 months (not year round) each year as a way to help lawyers improve their time management practices and to better understand the mix of substantive " chargeable " legal work and other valuable functions which corporate counsel do. It is also a good way to establish the cost of a fully-loaded legal hour delivered by the legal department - usually 45 % to 55 % of the cost of one delivered by a law firm. Timekeeping is fine as one of several management tools to help the General Counsel to provide a reliable estimate of the cost of legal services, even though the question rarely comes up when the service and results are great, measured and reported.