Contingency of contracting lawyers pattern on firm-size variable

Lilea MĂRGINEANU, doctor în drept, conferențiar universitar
Elena MĂRGINEANU, doctorandă ULIM

The objective of this study is to analyze if there are different behavior patterns regarding inside legal office of companies depending on the company size and age. Also the conclusion from this analysis was the confirmation of the hypothesis that contracting lawyers pattern is different depending on firm size, implying that small-size firms do not have enough capabilities to contract outside professionals, nor expand their own human resource department which limits Legal Office per se. Keywords: Cotingency, contracting lawyers, integration, legal office, human resource department.

COTINGENȚA MODELULUI CONTRACTARII JURIȘTILOR LA DIMENSIUNEA FIRMII CA VARIABILA  Obiectivul acestui studiu este de a analiza dacă sunt modele diferite de comportament al companiilor față de oficiul său juridic în dependență de dimensiunile și vârsta companiei. De asemenea concluzia acestei analize a fost confirmarea ipotezei că modelul contractării juriștiilor depinde de dimensiunea firmei, implicând faptul că firmele mici nu au capacități suficiente de a contracta profesioniști din exterior, nici să-și extindă propriul department de resurse umane care limitează oficiul juridic. Cuvinte-cheie: Dependență, contractarea juriștilor, integrare, secția juridica, secția resurse umane.

INTRODUCTION

Every entity, either a living organism like in natural science, either a legal institutional formation like in socio-economic science, needs a concrete structure for its essential functioning. Focusing further on legal entities (firms, NGOs, economic agents, financial institutions etc.), depending on its structure, the entity must adopt different approaches toward its governing method. For the case of firms, its Legal Office manages the legalization process of all its actions, which represents the only way to be recognized by competitors and evaluators. Legal Office is one of the key components of a firm, other being: HR, Accounting Department and Strategy Team.

A firm can employee lawyers (with labor contract registered in HR records), either it can contract outside lawyers (singular professionals or Law Firms). Due to the heterogeneous nature of firms and socio-economic discrepancy between countries, it is understandable that there would be notices differences in patters of employing lawyers as well. Through transaction cost theory it is stated that in particular cases, it is cost saving to contract outside professionals. In the same time, the quality of work is increased (exploration). However the competing logic is that an officially employee (within the organization), will have less freedom of performing job and thus, have an increased level of responsibility toward the firm (exploitation). American companies overall, have a percentage of contracted lawyers compared to number of total lawyers – significantly higher than in other countries. In Moldova the situation is different.

I am interested what is the phenomenon in my origin country – Republic of Moldova on the matter of contracting lawyers pattern. But since firms are heterogeneous by nature, I take the first visible attribute – number of total employees, as dividing criteria for the firms, and try to ask at the question of ”what are the effects of firm size and age (second known attribute) of the firm on the percentage for contracted lawyers?”.

LITERATURE REVIEW

Companies and law firms are two separate legal entities even if legal assistance is the object of their contract. There is a distinction between exclusivity and long-term relationships. While complete interdependence (one company one law firm) can bring huge reverberations at any quality work deviation, interpenetration (several companies several law firms) offer a more stable platform to perform work and maintain the bounding nature of their relationships.1

It is presumed that in line with the Code of Ethics a lawyer is not entitled to consult, to represent or defend more than one client in one and the same matter when their interests are conflicting or when there is a real risk of a conflict of interest. But even if the lawyers and units are different, the fact of their representation under the same law firm (collegiality, also mentioned in the code) might hypothetically undermine the quality work. Therefore it is understandable why companies are mindful on who are the other clients of their contractor.2 Also this is one of the concerning issues when approaching external professionals – probability of information leakage, which favors the arguments of employed lawyers;.3 However this might be representative mostly for bigger companies or firms habituating in a sensible industry. 4

Work reductions can be viewed as a penalty box as it was mentioned in the article, or it can resemble a dilution effect if the ulterior intention is to eventually end the contractual relationship with the X law firm. Even if the mean number of preferred providers remained essentially unchanged, for the cases where was recorded a reduction must be noted that it surely did not imply also a reduction of legal needs of the company. So, the workload was either increased to other existing providers, either insourced. It is surprising that ”some CLOs reported terminating law firms that accounted for more than 50% of their companies ` outside legal spends”;5 but outside legal spending and total legal spending are different, so it might be relevant to see if the rationale behind their aggressive attitude is purely cost-related or the fundament that enables them for radical moves is a strong insourced legal department.

The individual production distribution in any organization conforms to a power law,6 but in the absence of identification the outstanding lawyer within the Law Firm, the hiring criteria would be prior experience and reputation of the firm itself. Subsequently to that, after the legal partner was set, the experience of collaboration with a ”star” lawyer with personal fit and already cultivated a good firm-specific knowledge – would be hard to replicate and can surpass in gravity their relevance (for the company) compared to overall law firm’s name which favors the arguments for contracted lawyers. 7

Now a debatable question would be – whether the contracted lawyer chooses further to get employed as a full time official employee of the firm, due to its familiarity with companies legal issues, either increase the pay-check requirements and preserve its independence? There are clear evidences that contracted lawyers are expensive professionals. 8 Tax Law requires fixed pay for each official employee as well. Especially in East European countries, there is recorded a high labor total tax rate. 9

So there is observed the phenomenon where in U.S.A. the expanding firms are calling an outside lawyer to work on commercial contracts and handle that work-in-house with growing teams of staff attorneys who don’t bill by the hour (The Wall Street Journal, 14.09.2014 article). 10 On contrast, in developing countries like Moldova, the phenomenon is reverse – expanding firms tend to increase their percentage of contracted lawyers.

This could be also explained, from another point of view, though the concept of institutional void – an essential construct in analyzing the markets emerging state.11 This concept points the absence of poor functionality of particular institutions, which in other countries – are on the contrast – rather taken for granted or viewed as natural to display a high performance.

In Moldova, even big firms are prone to have reduced capabilities to employee a new lawyer for every ”x” number of new total employees added to HR register. So it can be assumed that number of contracted lawyers would also increase with firms overall size. Although number of contracted lawyers increases in big organizations, is it also reflected in its percentage? This targets a different conceptual dimension (new dependent variable), but that is highly relevant for analyzing the overall phenomenon for all types of firm size.

DATA AND MODEL – EMPIRICAL ANALYSIS

Through this paper I intend to examine the effects of firm size and age of the firm on the percentage for contracted lawyers.

Data sources

All data collected for this particular study are cross-sectional primary data. The data set contains information of (N=52) firms from Republic of Moldova, with their headquarters in Chisinau capital. The response rate was 86,66% as it was received 53 surveys from 60 distributed. The response rate is very high due to the nature of survey (related to HR and legal department of private firms), however this outcome can be explain via the fact that collection of data was made personally by the researcher and confidentiality was assured. One survey answer was incomplete, thus excluded from the study. All answers were collected via 2 separate methods: (a) law master students currently employed in different private organizations accounted for (N=35) answers and (b) firms contacted separately accounted for the rest of the answers (N=25).

Table 1. Basic statistics description of the data set.

 

The range of firm tenure was from 1 till 25 years (It should be mentioned that official Independence of the country was obtained only 25 years ago, which modified legal system and regulation of the country). The employee number range is between 3 and 238 and this variable is further described as firm size.

As the size of firms consistently differ one from another, in STATA it was created a variable through which I divided the firm size into 3 groups as following:

Firm size 1– Small size firm accounting: N≤10 (number of) total employees.

Firm size 2 – Medium size: 10<N≤100 total employees.

Firm size 3 – Big firm size: N>100 total employees.

Table 2. Summary statistics for small size firms.

Table 3. Summary statistics for medium size firms.

Table 4. Summary statistics for big size firms.

It must be mentioned that, as the dependent variable that should be examined in the model is related to contracted lawyers, through STATA we calculated the percentage of contracted lawyers for each firm.12

The original formula for calculating the percentage:

Table 5. Sum of percentage for all 3 categories of firm-size.

Therefore, we obtained a percentage of contracted lawyers of 5% for small-size firm, 28,69% for medium and 53% for big-size firms. From the first results can be observed that there is a significant difference between the patterns of Moldavian firms for their approach upon their legal department. However simple linear regression and hypothesis verification is mandatory to statistically describe the effects.

FINDINGS

Regression model

Simple Linear Regression model is the simplest type of regression analysis involving one independent variable and one dependent variable in which the relationship between the variables is approximated by a simple strait line.13

The simple linear regression model is deducted from the following logic:

y = β0 + β1x + ε

Where, y: percentage of contracted lawyers;

x: firm size;

ε: random variable referred to as the error term.

Table 6. Simple Linear Regression with firm-size as an independent variable

For the case of Multiple Regression Model, the equation describes how the dependent variable y is related to multiple independent variables x1, x2, …xp.14 Therefore, in our case we have:

Y = β0 + β1FIRMSIZE + β2AGE + ε

Table 7. Multiple Linear Regression with firm-size and age as an independent variables

It was also performed a scatter plot diagram (Graph 1.) to look at the relationship at the variables analyzed in the table 6.

Scatter Diagrams are used to look at the relationship between 2 variables attributed for each of the axes (x, y), in the case were data set has pairs of numerical data and when there is a need to determine whether 2 variables are related such as

— Identifying potential root causes of the problem.

— Either whether the effects that appears are related. 15

CI: Confidence Interval is an interval estimate of a population parameter that is computed from observed data, and the most common used CI is 95%, like in the case exposed above. 16

Hypothesis testing

Together with hypothesis testing we conducted a correlation test between firm-size and percentage of contracted lawyers, and the results were following:

Table 8. Correlation between firm size and contracted lawyers.

As I have divided the firms in 3 categories: small, medium and big, the important question in the research was to identify if different firm categories apply similar strategies related to their legal department, precisely contracting lawyers procedure.

In statistics, for using t test for significance, the hypotheses tested are:

Ho:β1 = 0 and Ha:β ≠ 0

herefore to verify my assumption, I formulated the following hypothesis:

Null Hypothesis (Ho): Contracting lawyers pattern is not different depending on firm size.

Alternative Hypothesis (Ha): Contracting lawyers pattern is different depending on firm size.

Table 9. Excel formulation of hypothesis Ho and Ha

 

By m: is defined the mean for the percentage of contracted lawyers representative for each group, as previously explained for Table 5.

It was also performed t-test to check the significance of firm size in 3 cases:

Table 10A: t-Test mean difference between small-size firms and medium-size firms

Table 10B: t-Test mean difference between medium-size firms and big-size firms

Table 10C: t-Test mean difference between small-size firms and big-size firms

As the rules for rejecting the null hypothesis are: 17

1) Rejection rule using p-Value: Reject Ho if p-Value ≤ α

2) Rejection rule using t-Test: Reject Ho if t ≤ – 2.064 or if t ≥ 2.064

Analyzing the results via second rejection rule it can be observed the following:

Table 11. Summary of t-Test results

Rejection rule using t-Test
Table/case 10A	t	– 2.2695	Vs.	t ≤ – 2.064 or if t ≥ 2.064
Table/case 10B	t	– 2.1044
Table/case 10C	t	– 6.6189

CONCLUSION AND IMPLICATION

Conclusion

It is obvious that in all 3-comparison cases, t ≤ – 2.064, however the effects are significant for Table 11C data: Small-size firms versus Big-size firms.

Even if though in Table 5, the results showed visible difference between the mean for percentage of contracted lawyers for these 3 categories of firms, it was also statistically proven via t-test that the H0 can be rejected.

One of the most important values, R-squared (Table 6.) is 0.2186, which is very low as it represents that the phenomena studies is explained with firms size argument (first independent variable / simple regression) only by 21,86%. Even when an additional independent variable was added (age of the firm), the effect increased unworthy of mention: from 21,8% until 21,9% (R-squared Table. 7).

These results are quite insignificant and do not bring too much value to the proposed question in the beginning of this research.

*Due to low results from assumed important independent variable (firm size), from pure verification purpose, the I chose to run another ad-hoc simple linear regression with a different independent variable: Number of total lawyers in the firm, named simply via term lawyers; (dependent variable percentage of contracted lawyers being obviously unchanged):

*Table 12. Partial representation of the Simple Linear Regression with lawyers (total amount of lawyers) as an independent variable

 

In this case it can be observed that R-squared is 0.4540, which means that total amount of lawyers in a firm explains more which pattern a firm adopted toward contracting outside professionals or not. However, this variable cannot be accepted as it opposes the logics behind stated problem. Contracted lawyers are already included in the category of total lawyers because this is how percentage itself was deducted. Table 13 serves only as an argumentative basis for validity of SATA program’s calculations.

The clear conclusion from this research was confirmation of the hypothesis that:

Contracting lawyers pattern is different depending on firm size. And the biggest difference can be observed between small-size and big-size firms (5% vs. 53%), implying that small-size firms do not have enough capabilities to contract outside professionals, but in the same time, do not expand their own HR department which limits Legal Office per se.

Implication

Although the results were insignificant, the utilized statistical methodology was respected, thus it offers validity to the results (Table 6 & 7). This might further become an empirical basis on which new theoretical assumptions can be drawn.

Appendix 1. Do File from SATA