In the current economic climate, many in-house legal departments are under pressure to reduce costs. What is the situation in your company?

As a department, we are cost-focused. Apart from money our department recovers – which we track – we are aware that we don’t produce revenue. But, because we also monitor our productivity, we also know how much it would cost to get rid of our lawyers, and outsource the work to external law firms.

Of course, it is always difficult to measure avoided costs, which is one of the main purposes of the legal department. But what we do know is this: in 2001, our company employed eight in-house lawyers, who had a total legal budget of US$13 million. At the time, our company had an annual turnover of US$2.1 billion. Now, it has a turnover of US$ 4.6 billion - but only employs 12 lawyers, with a legal budget of just $10 million. So, the total cost of our services has declined since 2001 – absolutely and as a percentage of turnover – but our clients tell us that we are doing a better job now.

What criteria do you use to decide whether or not to instruct outside counsel?

We start from the premise that the in-house legal function is probably going to be cheaper than instructing outside counsel. We’ve calculated that the fully-loaded cost for one of our in-house lawyers is around $147 per hour. That cost includes staff, premises, IT, subscriptions and travel. If we exclude travel costs – which outside counsel would probably charge us for – our in-house legal team would cost even less. It might be possible to hire outside counsel at that rate, but it would be tough.

When an internal client first approaches one of our team, the first question the lawyer asks themselves is: “Is this a legal matter, or should it be handled by someone else?” If it is a legal matter, the lawyer then asks: “Am I the right person to answer this - do I have the right skills?” If the answer to this second question is “yes”, the final question is “Do I have the time to do this work?” Only if no-one in the in-house legal function has either the time or the expertise do we go outside. As a department, this method of “make or buy” decision-making is almost wired into our DNA.

How does your department allocate its overheads within the company

External costs are billed to the business unit generating the expense. We bill our internal costs back to the company’s departments using a “thumbnail” rather than a scientific approach - it’s one of the beauties of being in-house that we don’t live our life in six minute increments. If we spend around 20 per cent of our time supporting one department or business unit, we will bill that department or business unit around 20 per cent of our internal costs.

When instructing outside counsel, your department uses a 'performance based payment scheme'. How does that work?

Our department has a process known as the “Alliance Counsel Engagement System” (ACES). We’ve used a more complex version of ACES for our litigation work since 1998, and a simpler version for all other matters since 2002. Today, 100 per cent of our US law firm instructions, and the vast majority of our non-US law firm instructions, use the ACES system.

The simpler form of ACES is a report card system, which combines our billing practices with a client feedback programme. When engaging a firm – whether on a fixed fee, retainer, or hourly rate basis – we pay them 80 cents for each dollar of work they perform. At the end each engagement – or annually for larger matters – we give the firm a report card. Depending on how they have performed, we will pay the firm anything from zero of the outstanding 20 cents payment to 40 cents. On average, we tend to pay around 107 per cent the firm’s notional invoice. Firms are assessed on six key criteria: understanding our goals, expertise, efficiency, responsiveness, predictive accuracy and effectiveness.

By and large, the firms we instruct appreciate our ACES system – because it means they can make more money. We’re happy to pay firms more than their standard rates, but we don’t want them to waste time when doing so – we want them to become more efficient and effective.  If firms become more efficient, they can work for other clients using the time that they would otherwise have been working for us. For the firms we instruct, we think our approach offers a “win-win” approach.

The report card system also forces our in-house legal team to explain what they expect from their law firms, and measures the firm against set criteria. In general, this is a lawyer-client dialogue that seldom occurs. Lawyers are often quite funny people – although they may enjoy arguing a point of law, they are fairly introverted when it comes to personal interactions. But our system institutionalises this feedback process – both sides have to take part in it.

You mentioned in the webinar that you use technology to manage your department effectively. Which systems do you use?

We use a mixture of off-the-shelf and specialist technology. For matter management, budgeting and billing we used a specialist product for in-house legal departments. When developing our knowledge management system, we used an e-discovery litigation tool in a novel way, to help us locate resources that were scattered over the company’s server. But, for the actual knowledge management system itself, we mainly use SharePoint, which is a standard Microsoft product.

We also use a software package to assist us with decision tree analysis (DTA). DTA is often used by MBA students, and is particular helpful in relation to litigation – it helps us indentify key issues, and calculate our likely exposure. Having this knowledge means we can make an informed decision of whether to “fight or flee”. We use the DTA in conjunction with an early case assessment (ECA). When instructing outside law firms on litigation matters, we require them to carry out an ECA within the first 90 days. A combination of DTA and ECA encourages a rapid resolution of most disputes.

Does your department also capture knowledge about previous matters it has acted on?

Yes, we have a system known as our “cook book”. The only thing I hate more than answering the same question twice is paying to answer the same question twice.

As a department, everything we do can be broken down into a one-page policy or procedure. This is true whether the topic is: “What should I do if a local sheriff turns up, wanting to speak to a company employee?” or “How do I open a new matter in our matter management system?” Our lawyers understand that, if they don’t know how to do something, they should start by consulting the cook book. And, if they can’t find the answer in the cook book, it is their job to create a new policy for it, once they have completed the matter in hand.