An in-house lawyer punches the clock after a week of negotiating contracts, finalizing commercial work, and even a little litigation — but who picks up the tab, individual departments for which the tasks were done or the corporation as a whole?
There isn't a hard-and-fast rule but generally, the bigger the in-house team of lawyers, the more likely individual departments foot the expense on their own.
David Allgood, Toronto-based executive vice president and general counsel for the Royal Bank of Canada, says its 150 in-house lawyers bill individual divisions in quarter-hour increments for their work in litigation or product development. The cost of internal legal tasks for one of Canada’s biggest companies, such as shareholder meetings or raising capital, are allocated based on the amount of billable hours per department. “You could say the overhead costs should be allocated equally over four [business units], for example. The price of being in the enterprise is paying your share of the overhead costs as well. We’ve picked ‘your share is the same as you consume otherwise,’ I think our approach is the cleanest way of doing things.”
Allgood says some components of its annual budget, such as public company documents required by regulators, simply can’t be pinpointed to a particular division.
“At the end of the day, we’re a cost centre. To determine the business [divisions’] profits and losses appropriately, you need to allocate the consumption of their costs. The profit and loss of each division should add up to the profit and loss of the corporation as a whole. You have to allocate your functional costs like law to your business.”
Allgood says it’s simply not practical to have each division run on its own without centralized functions because some lawyers spend all of their time working for particular parts of the business while others split their time among different operating units.
He says less than a decade ago, legal costs weren’t allocated on an hourly basis at Royal Bank. They were doled out based on revenue, not the actual use of legal services. The bank could very well have used similar models based on profit, net income before tax, or net income after tax, he says.
“If you had a much smaller legal department, you might [have each division run on its own]. It might be that each lawyer worked completely for one business, so you wouldn’t need to allocate. But once you have more than one [division] and you have true overhead costs, you have legal costs that you can’t really say relate to a division but relate to the fact you’re a company.”
One of Canada’s mutual fund giants takes a different approach to billing. Donald MacDonald, Winnipeg-based vice president and counsel at Investors Group, says it doesn’t bill individual departments because the purpose of the legal department is to assist the business, particularly with laws and regulatory matters.
“We don’t want people to be deterred from calling the legal department on a matter that could have significant regulatory or risk issues because they think they’ll get billed for it."
From an in-house lawyer’s standpoint, MacDonald says the strong preference is not to bill because time sheets are administratively burdensome, and bickering with particular departments about the amount of legal services they actually used gives off bad vibrations. “It wouldn’t create an environment of teamwork that we strive for,” he says.
Bruce Bowman, vice president of legal and general counsel at Canada Safeway Ltd., says with just two lawyers working at the Calgary-based grocery giant, billing individual departments isn’t necessary. “It’s more relevant for larger operations with a [sizeable] staff of lawyers that are performing a lot of transactions. It gives a better picture of where and how legal expenses are being incurred.”
The flipside, he says, is to have lawyers accountable for their productivity and what they contribute to the overall operation. The irony is many lawyers move in-house to avoid the “drudgery” of time recording. “A lot of lawyers get in-house and say, ‘my God, you’re going to ask me to record my time? I thought I was getting away from that.’”
Bowman says there’s often an underlying irrelevancy to the amount of time taken to perform a task and its value to the firm.
“You can spend half an hour on one thing and save the company a million bucks or spend all day on something else that’s worth a few hundred dollars."
Some companies prefer not to pick one strategy over another. Manitoba Hydro, for example, uses a hybrid approach. Ken Tennenhouse, general counsel and corporate secretary, says his team of a dozen lawyers records where they spend their time, the majority of which is passed through to the electrical or natural gas sides of the business.
When they perform significant tasks for particular projects, such as negotiating a construction contract to build a new plant or handling a regulatory hearing, those costs are charged to the specific projects. “It makes sense to me that we would charge the big projects, that’s part of the cost of the project. The rest of it is just the amount of effort you want to spend recording your time and billing your time,” he says.
Gary Hannaford, CEO of the Institute of Chartered Accountants of Manitoba, says billing individual departments for legal services used is the most accurate way a company can determine the profitability of its separate parts.
“What it really does is try to get as many of the specific costs that pertain to a division allocated and properly absorbed [by the division]. It becomes a user pay system. The user of the legal services is paying for the services as opposed to the [legal department] being one giant cost for the corporation.”
Hannaford likened the situation to a company giving employees their own code for the photocopier. “As different departments use the same copier, the cost of the copies is allocated to the division [making them] as opposed to being picked up by the whole organization.”
He says the larger the company, the more likely it will want to allocate portions of all costs, including heat, light, and power, to the specific divisions using them. Finding out the true profit or loss of a department can help upper management decide whether changes are needed, such as reducing expenses to help an unprofitable division get into the black or cutting out a department altogether.
MacDonald says departmental billing has been on the rise in corporate Canada so individual divisions will recognize they are the recipients of scarce and expensive resources.
“We prefer education, so we promote that departments contact the legal department on any matter they need. We also do training on other things to [help them] recognize that we are a scarce resource, but departments need guidance on legal matters.”
He says the Investors Group legal department has considered billing separate divisions but it’s never gone beyond that stage. “Every year we put together a business plan that we review with the finance department and at no point have they said, ‘you should be billing other departments.’ We would prefer our lawyers spend time solving problems rather than billing departments we work with on a daily basis.”