Law Department Management The Chief Legal Officers Speak And The Answers Are:Costs And Compliance

Saturday, May 1, 2004 - 01:00

By Daniel J. DiLucchio



In spite of the promise of an improving economy, astute corporations continue to address their business fundamentals, positioning themselves to capitalize upon the economic recovery as it accelerates. This corporate focus on economic fundamentals translates into specific mandates for the corporate law department.According to a recent survey of Chief Legal Officers (CLOs)1 the three most important law department management issues that they will face in the near term are:


•Budget constraints;


•Cost control;


•Staffing issues.


Cost control/budgets were named three times more often than any other near term issue.Law departments are no longer a mysterious area where costs are considered unmanageable. The corporate legal function is now viewed by Chief Executive Officers (CEOs) like any other non-revenue producing staff function.Costs must be controlled - both internally and externally. In today's world, CLOs must satisfy the CEOs' expectations to manage legal costs and staffing.

It's All About The Money
@Text = Cost management issues continue to be the topic of discussion between in-house and outside counsel. Fifty-nine percent of CLOs surveyed indicated that they have fired or were considering firing at least one of their outside law firms in 2003. This percentage is up 4.2% from the 2002 survey and over 50% for the fourth year running. The number one reason given for terminating a relationship was "cost management issues." There continues to be a high level of frustration by in-house counsel with law firm billing 'surprises' (unexpectedly high bills for work performed), perceived lack of value for cost, billing mistakes and extreme expense charges.Some law firms continue to frustrate in-house counsel by charging high hourly rates and then attempting to pass on miscellaneous charges such as internal law firm deliveries (moving files from floor to floor in a firm) and other such add-ons.


The other top three reasons for terminating a relationship with outside counsel were "lack of responsiveness," "overworking projects" and "mishandling one or more critical matters." Chart I provides a three-year longitudinal snapshot of CLOs' thoughts regarding law firm relationships.It appears that the frustration level with law firm services continues to be high for in-house lawyers. These concerns are fueled by a lack of responsiveness, high fees, and lack of value for costs. The survey data clearly suggests that there is an ongoing problem that is not being addressed.


When asked about the most innovative practice proposed or instituted by outside counsel this year, the CLOs again focused on their number one issue, cost control. The CLOs ranked fee arrangements as the number one innovative practice - although only 22.6% of the survey respondents were able to identify any innovation at all. The CLO survey result is consistent with the results of the Altman Weil Publications, Inc. 2003 Law Department Management Benchmarks Survey, which reports that of 183 reporting companies, 33.9% continue to pay all of their fees to outside counsel based on hourly rates. Only 27.9% of the reporting companies pay from 1% to 10% of their fees on billing arrangements other than the hourly rate and only 10.9% pay from 11% to 20% of their fees based on other than hourly rates.


As cost pressures increase, law departments are also exploring other methods to manage costs. One traditional corporate law department method of controlling costs has been the 'make / buy' decision.Law departments constantly analyze whether they should internalize more legal work, since traditionally, legal work could be performed more cost effectively by inside counsel or whether they should 'buy' the services from law firms. Chart II reveals that 17.3% of the CLOs plan to decrease their use of outside counsel in the next 12 months while only 15.8% of the CLOs plan to increase their use of outside counsel. This is a significant change from 2001 when 86% of the CLOs responding to the survey planned to increase their use of outside counsel. An explanation for this dramatic change could be the intensity of the economic impact of the recession in 2001. In 2001 CLOs were not anticipating bringing more work in-house since there were hiring freezes in place at the time, so they expected to use more law firm services.


CLOs said that the budget constraints they are under mean that they are being held to state-of-the-art standards on a shoestring budget. They are working with headcount reductions, restrictions and in some cases freezes. Chart III shows the CLOs' view of law department growth.


With the intent to maintain or decrease law firm utilization and no plans for in-house growth by at least 50% of the CLOs, it is clear to see that law departments must find new and creative ways to deliver legal services in a cost-effective and efficient manner.

The Impact Of New Corporate Governance Rules


Corporate misbehavior has led to unprecedented focus on corporate ethics and compliance programs. The passage of Sarbanes-Oxley has had a direct impact on in-house counsel, their role, responsibilities and client relationships. The CLO Survey provided an opportunity to assess the Chief Legal Officers' thoughts about new corporate governance requirements and their impact on law departments.


Over two-thirds of the responding CLOs believe that the new corporate governance rules have not affected the CLOs' relationship with senior management. In some cases, the CLOs believe that the relationship is much improved (perhaps because roles and expectations have been aired and clarified). Only 11% thought that the relationship had been adversely affected.The Chart IV provides a snapshot of the survey results.


Although the CLOs believe the relationship is still strong with senior management, 22% of the CLOs believe that new attorney reporting obligations will make senior managers less likely to seek legal advice for fear of lawyers "tattling" on them. At least one of the CLOs said, "Lawyers are increasingly seen as 'enforcers.' Management is less likely to seek advice for fear that their conversations will be reported to the SEC, if the 'reporting out' rules are adopted."


CLOs think that the new governance rules make senior management at their companies either "definitely" or "a little more" risk adverse than in the past. The survey results are shown in Chart V.


The implications of greater risk aversion by senior management could result in a more conservative approach to making business decisions or significantly more time, money and effort spent in ensuring legal compliance.


In addition to client relationship issues and risk aversion, some lawyers appear to be concerned about the impact of the new governance rules and standards on their own personal liability.Specifically, 36.3% of the CLOs are more concerned about their own personal liability relating to corporate misconduct, while 58% say that they are just as concerned as they always were.


Not surprisingly, when asked to identify the next, most important, emerging client relationship issue that they will face, CLOs named Sarbanes-Oxley compliance as the number one issue. The next two most important issues named by the CLOs were "balancing the relationship with Board and relationship with the CEO" and "privilege protection."

Conclusions


For the fourth consecutive year, the CLO Survey has highlighted, clarified and confirmed some of the trends and changes currently affecting the legal profession. Not surprisingly, in a difficult economy, the number one issue for CLOs continues to be cost control and management.Cost management has been a continuing issue with little apparent concrete solution at hand.Although more recently, the impact of Sarbanes-Oxley on the in-house lawyers and their client relationships also has become a critical issue.


Legal cost controls have been discussed for decades, however, true legal cost control has been spotty. There has been more talk than action about controlling costs by many in-house lawyers. The bottom line for most corporations has been increasing legal fees and double-digit annual law firm fee increases. For those law departments serious about cost controls, the following steps might be appropriate:


•Realize that law firm convergence programs are only the first step in a two-step process. The second convergence step is leveraging purchasing power with the firms that are selected.


•Install and use e-billing technology. This is the best available tool for cost analysis and management. Task based billing did not meet the hype and expectations, but e-billing has the potential to be the needed management tool.


•Manage the cost of each matter, not just the substantive legal issue involved. Realize that by the time a bill arrives on the desk of an in-house lawyer, it is too late to manage the costs.


•Align law firms to the types of matters. Use top firms for strategic legal work and low cost providers for commodity work.


•Evaluate lawyers, in-house and outside, for their ability to manage costs - it is part of their job.


•If you are still using hourly rates, at least insist on freezing annual hourly rate increases.


The CLO Survey has again provided insights on the major trends and has allowed us to better understand the dynamics of a continuously changing business and legal environment.
1 For the fourth consecutive year, The Association of Corporate Counsel (ACC) and Altman Weil, Inc. have joined forces to design a set of questions that provide insights into the operation and thinking of corporate law departments.As in previous years, CLOs attending the ACC annual meeting provided input into the survey.The Fourth Annual Chief Legal Officer Survey contains responses from 137 Chief Legal Officers.Survey data was collected at the October 2003 ACC Annual Meeting.

Daniel J. DiLucchio, Jr. is a principal of Altman Weil, Inc., resident in the Newtown Square, PA office. He has been providing management and consulting services to corporate law departments and law firms for nearly two decades. Contact Mr. DiLucchio at (610) 886-2000 or djdilucchio@altmanweil.com.
Copyright2004, Altman Weil, Inc.