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Bar News - October 6, 2006

Corporate Law Survey: Outside Counsel Expenditures Up

Total legal expenses per lawyer up 7.9 percent over the previous year, according to the recently released 2006 Altman Weil Law Department Metrics Benchmarking Survey, published in partnership with LexisNexis Martindale-Hubbell. “Despite all the talk about finding ways to reduce outside legal spending, some law departments still appear to have a difficult time walking the walk, since the largest part of the increase was attributable to external legal fees and expenses,” said Altman Weil principal James Wilber. “After holding the line on expenses for the past several years, we’re now seeing a significant jump. General Counsel can only do so much in response to billing rate increases, and there will always be critically important work that is predominantly price insensitive.”


Law Department Expenditures

        Total law department expenses in all companies surveyed averaged $914,229 per lawyer, up 7.9 percent in fiscal year 2005.

        The internal costs of operating an in-house law department rose to an average of $332,823 per lawyer, a 2.6 percent increase over the prior year. Lawyer compensation and benefits, which was reported as the biggest internal expenditure, averaged $258,205 per lawyer.

        Outside expenditures rose 5.5 percent to $602,070 per lawyer on average for all corporate law departments nationwide. The computer/electrical manufacturing and chemical manufacturing industries had the highest average outside counsel expenses: $1,017,948/lawyer and $935,402/lawyer respectively. The insurance industry had the lowest at $292,134/lawyer.


Outside Counsel Relationships

        Despite rising costs, only 25.2 percent of law departments formally evaluate their outside counsel. Those that do evaluations indicated that “Results” was the top evaluation criteria, followed by “Knowledge/Expertise” second, and “Cost” and “Responsiveness” tied for third.

        “Performance metrics are a critical component of managing outside counsel costs,” noted Barry Solomon, an attorney and vice president and general manager of LexisNexis Martindale-Hubbell. “Client reviews also give in-house counsel the opportunity for a dialogue with their outside advisors on what’s working and what’s not. Adding transparency and candid communications about strengths and weaknesses can only improve the relationship.”

        Asked about serious relationship mistakes made by their outside counsel, law departments pointed to lack of responsiveness, over-billing and over-lawyering as the top three problems.

        When selecting outside counsel, law departments consider firm specialization first by a big margin, followed by responsiveness, cost and prior history with the company.

        Nationally, law departments employ an average of 54 law firms, and large law departments (of 26 or more lawyers) use an average 136 firms each year.

        “Despite convergence efforts, law departments are still employing a wide variety of outside law firms,” noted Solomon. “And they’re still being guided by the bedrock standard of firm expertise in making those selection decisions.”


Law Department Staffing

        Lawyer staffing in corporate law departments was up in 2005, with the key measure—lawyers per billion of revenue—rising to 3.49 lawyers/billion compared with 2.93 lawyers/billion in 2004. This increase was reflected in both the number of management lawyer positions and the number of general lawyers.

        “The size of this increase (19 percent) is a bit surprising. We’ll have to wait to see if it denotes an upswing in the hiring of in-house lawyers,” Wilber said.

        In looking at the average distribution of lawyers by practice areas within the law department, the survey reports 23.8 percent of in-house lawyers specialize in commercial and contracts law, 9.4 percent are litigation specialists and 7.8 percent focus on intellectual property law.


Operational Issues

        Perhaps related to the difficulty controlling outside legal expenses, law departments continue to favor the more traditional billing arrangements with their outside counsel. Most frequently used methods are hourly billing, reduced hourly billing and time and expenses. Of the reporting law departments, 40.2 percent never use alternative fee arrangements, while an additional 35.6 percent report negotiating non-standard fee arrangements for only 1 to 20 percent of fees.

        The use of e-billing systems that allow outside counsel to submit their invoices electronically continues to increase slowly. In 2005, 13 percent of law departments reported using e-billing, up from 10.3 percent the previous year.


The Survey

        The Altman Weil Law Department Metrics Benchmarking Survey is published annually in partnership with LexisNexis Martindale-Hubbell and tracks U.S. law department expenditures, outside counsel relationships, operations and staffing.

        The survey includes data from 138 companies, reported by sales revenue, number of corporate employees, industry type and law department size. Data were collected in the spring of 2006 and reflects fiscal year 2005.

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