Corporate Law Departments Show Little Progress on Inside and Outside Cost Management
The newly released Altman Weil Law Department Management Benchmarks Survey, 2005 Edition reports that despite years of discussion of cost controls and alternative billing arrangements, the status quo still rules in most corporate law departments.
“Law department expenditures and staffing remain largely unchanged,” notes Altman Weil principal Daniel J. DiLucchio. “And hourly rates remain the predominant law firm method of billing corporations, with the number one alternative billing technique reported as ‘reduced hourly rates’ — which ends up being no alternative at all in many cases.”
“This suggests that law departments are not sufficiently analyzing their costs, nor implementing techniques that will assist their companies in managing, containing and controlling those costs,” DiLucchio adds. “Corporate executives have been looking for more predictability in their annual legal budgets and hourly rates do not serve their objective.”
Law Department Expenditures
Total law department expenses in all companies surveyed averaged $847,599 per lawyer in fiscal year 2004, virtually unchanged from the previous year.
Internal expenses represented 50% of total expenses on average. For all companies participating in the survey, total legal expenses, measured as a percent of revenue, averaged 0.61% in 2004, which is virtually unchanged from the 0.59% reported-last year.
The 2004 cost of operating the in-house law department for all companies rose to an average of $324,547 per lawyer. This is a 2.5% increase over 2003 costs.
Outside expenditures accounted for 51% of total law department costs. The Survey reports the highest percentage of non-litigation outside counsel fees went to general corporate practice (11%). For litigation practice areas, the greatest spending was on commercial/contracts (9.4%) and labor/employment (8.3%).
Law Department Staffing
Lawyer staffing in corporate law departments decreased somewhat in 2004, with the key measure – lawyers per billion of revenue – dropping to 2.93 lawyers/billion compared with 3.5 lawyers/billion in 2003. This decrease was reflected in both a decrease in the average number of management lawyer positions as well as the average number of general lawyers. The average distribution of lawyers by practice areas within the law department remained consistent with 34.1% categorized as general corporate and 13% in litigation.
Staff positions were basically unchanged in 2004 with 0.9 paralegals per $1 billion in revenue reported in 2003 and 2004. In addition, administrative staffing was reported unchanged at 1.8 administrators per $1 billion of revenue for both 2003 and 2004.
The Services industry employs the greatest number of lawyers at 4.02 per $1 billion of revenue, while the Wholesale/Retail industry employs an average of 1.47 lawyers according to the Survey.
Operational Issues
Hourly billing by outside law firms continues to be the prevalent method of charging for legal services as 43.1% of the fees paid to outside counsel are based on hours. For those firms that do use alternative billing arrangements, reduced hourly rates are reported as the most prevalent by 57% of Survey participants.
Outside Counsel Relationships
In spite of in-house counsels’ continuing concerns over outside counsel cost management and service delivery, only 18% of in-house counsel formally evaluate their outside counsel. Although this is a 2% increase over the number reported for 2003, it remains low.
Corporate Compliance Study
A separate Compliance Study conducted by Altman Weil, Inc. and Integrity Research Group, a division of Integrity Interactive Corporation, is included as an appendix to the Survey. The Study reports 66% of its participants have created a distinct compliance function in their organizations. Of those, one-third report to the Chief Executive Officer, one-third report to the General Counsel and one-third to “Others” in the organization.
The Survey
The Law Department Management Benchmarks Survey, 2005 Edition tracks U.S. law department expenditures, outside counsel relationships, operations and staffing and is a companion study to the Altman Weil Law Department Compensation Benchmarking Survey.
The 2005 Survey includes data from 140 companies, 29% with revenues of $5 billion or more. Survey data is reported by sales revenue, number of corporate employees, industry type and law department size. Data was collected in the spring of 2005 and reports on fiscal year 2004.
The Survey can be purchased for $520 from Altman Weil Publications. Orders and inquiries can be made by calling 888-782-7297.
Altman Weil Publications conducts and publishes numerous surveys of the legal profession including the Law Department Compensation Benchmarking Survey, the Paralegal Compensation Survey and the Survey of Law Firm Economics. For additional information visit our website at www.altmanweil.com.
