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PHILADELPHIA � For years, it seems, corporate law departments have been discussing offering alternative fee arrangements and curbing overall spending. But according to a recently released survey of law department spending, it’s all talk. The Altman Weil and LexisNexis Martindale-Hubbell survey found an overall increase in law department spending of 7.9 percent to an average spending of $914,000 per lawyer for fiscal year 2005. The two main drivers of that growth, Altman Weil consultant James Wilber said, were an increase in outside legal expenses and an increase in internal hiring by law departments. Outside legal costs rose by 5.5 percent to an average of about $602,000 per lawyer. The survey also found a 19 percent increase in internal hiring with lawyers per billion of revenue rising from 2.93 lawyers per billion in revenue to 3.49 lawyers per billion in revenue. The internal cost of running a law department rose by 2.6 percent to about $333,000 per lawyer. Some of the factors that caused costs to grow in 2005 may have been out of the control of general counsel, according to Dennis Schoff, senior vice president and general counsel of Lincoln Financial Group and president of the Delaware Valley Association of Corporate Counsel. He said he was a bit surprised by the increase in overall expenditures. “I would think people would be able to control it more than that,” he said. There are a few factors, however, that are important to look at when reviewing the survey results, he said. The beginning of 2005 included the tail end of companies’ efforts to comply with Sarbanes-Oxley regulations, Schoff said. For companies in heavily regulated industries, that added up to a lot of extra outside counsel expenses, he said. The survey results found that industries such as computer and electrical manufacturing or chemical manufacturing had the highest outside counsel expenses for 2005 while the insurance industry had the lowest. Increases in the size — and expense — of a law department, Schoff said, may often be related to the expansion of the company as a whole. For example, Schoff said, his company is in the midst of completing a merger and will now employ a law department of 54 attorneys. Another major factor in the growth of law departments, Schoff said, is the growth of external costs. “You’re seeing a lot of increases in outside counsel billable rates,” he said, adding that it is in part because of the increase in associate salaries. When he has to pay more for outside counsel than he would to hire someone in-house, Schoff said he will bring another attorney into the department as long as the area isn’t too specialized. Schoff said he accords little weight to the ratio of lawyers to billions in corporate revenue because the necessary number of attorneys per law department can vary greatly by industry. Schoff also said increases in size of most law departments have come at a slower rate than that of companies’ growth. One of the ways to curb outside legal costs is through the oft mentioned — yet, apparently, rarely implemented — alternative fee arrangement. According to the survey, 40 percent say they never used alternative fee arrangements while an additional 35.6 percent say they use the practice for 1 to 20 percent of their fees. Schoff said the practice receives a lot more “lip service” than it does implementation. “We’re still seeing so much more talk about getting away from hourly billing than we do see action,” Wilber echoed. One of the main reasons alternative fee arrangements aren’t being used comprehensively is that law firms are doing well financially and are in good bargaining positions, Wilber said. Other reasons include the fear of the unknown and the fear that it would simply take a “tremendous investment of time” in looking at old data and seeing what type of arrangements may work, he said. One way to temper the costs of outside counsel is through a more extensive review process of the firms a company uses, Wilber said. According to the survey results, about 25 percent of law departments formally evaluate their outside counsel. All law departments employ an average of 54 law firms and larger law departments with 26 or more attorneys employ on average 136 firms a year, according to the survey. “Law departments could be doing a lot more to manage outside counsel than they are,” Wilber said. Schoff said he is in the middle of reviewing the outside law firms because of the merger of the two law departments. He said reviews are more frequently driven by external factors like a merger. Even after his department shortens the list of outside counsel, Schoff said he still expects the number of firms used to be over 100. The main reason for the high number is the geographic reach of the company, he said. When looking at which outside counsel to choose, most firms look first to results, then knowledge or expertise followed by cost, according to the survey results. “Despite convergence efforts, law departments are still employing a wide variety of outside law firms,” LexisNexis Vice President and General Manager Barry Solomon said in a statement. “And they’re still being guided by the bedrock standard of firm expertise in making those selection decisions.” Law departments reported some of the largest relationship mistakes made by outside counsel as lack of responsiveness, over-billing and “over-lawyering.” The survey also found that 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. The use of e-billing systems that allow outside counsel to submit invoices electronically went up a little fewer than 3 percent from 10.3 percent for 2004 to 13 percent for 2005, according to the survey. The results also show that the average compensation and benefits — the largest internal expenditure — was at $258,205 per lawyer. 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 reflect fiscal year 2005. Gina Passarella is a reporter with The Legal Intelligencer, a Recorder affiliate based in Philadelphia.

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