Ten Ways to Effectively Manage Outside Counsel Spending
Even though the post-recession darkness has been illuminated by the Dow-Jones surpassing 18,000, the pressure on in-house counsel to manage and control the efficiency, predictability and cost effectiveness in the delivery of legal services has not lessened. The good news for in-house counsel is that over the past seven years or so there has been a dramatic shift in the relationship from a sellers’ market to a buyers’ market and there is now a fiercely competitive market for legal services.
Nonetheless, a relationship with outside counsel requires trust and mutual respect to be effective, and the goal of any legal cost control program should be cost-effectiveness, not the lowest legal fees. After all, nothing is more expensive than a cheap lawyer. Fortunately, today the knowledge and technology exists to create legal cost control programs that effectively manages outside counsel spend and makes law firms account-able for cost effective legal representation without sacrificing quality.
To achieve long-term savings, legal cost control cannot be addressed in a piecemeal fashion, without any discernible pattern. Based on more than twenty years in the legal cost control industry, I have learned that in-house counsel needs to make a commitment to a comprehensive program that involves some or all of the following tools, but at a minimum, clients need a billing policy, budgets and compliance monitoring to effectively manage outside counsel spend.
1. Historic Review of Law Firms’ Efficiencies and Billing Practices
Before clients take bold initiatives or even modest ones, they should know how wisely they have spent and are spending their legal dollars. This information will enable a client to determine what improvements are needed to more cost-effectively consume legal services and will be the quickest and most cost-effective manner to jump-start a comprehensive program.
The historic review should focus on (i) whether, and to what extent, outside counsel has overcharged for inefficient or improper billing practices and/or inappropriate disbursements charges, (ii) deviations, if any, from corporate attorney billing guidelines, (iii) the patterns or practices that each law firm engaged in that artificially increased legal fees, and (iv) the steps that must be taken to prospectively reduce legal fees and, if appropriate, receive immediate profit recoveries.
2. Billing Guidelines
Billing guidelines are essential for any consumer of legal services. It gives your law firms an explicit understanding of your expectations regarding the delivery of legal services. The billing guidelines should address billing formats, record keeping, billing rates, staffing issues, appropriate use of attorney and paralegal time, reimbursable expenses and other issues that affect legal costs, such as when travel time and clerical tasks can be billed. Billing guidelines should also contain a provision that says if there is an inconsistency between a retainer agreement and the billing guidelines, the billing guidelines will control. Billing guidelines should be sent to counsel with every new matter. If you have billing guidelines, it may be time to update them to make sure that they are consistent with current trends. For instance, most billing guidelines, consistent with recent case law in many states, contain a provision that companies will not pay for online research, such as Lexis or Westlaw.
Clients should require law firms to estimate the costs, fees and other expenses of any significant legal project on a quarterly basis. With budgeting, your company is able to anticipate legal expenses and make informed and timely judgments about case strategy and settlement options. The exercise will also increase the cost-effectiveness of the law firm. A basic budgeting form should include, at a minimum, the identification, billing rates and status of all timekeepers anticipated to work on the matter; the overall estimates of cost and duration of a matter; anticipated number of hours (broken down by partners, associates and paralegals) for each phase of the matter; motions contemplated, their estimated hours and fees, and their likelihood of success; and a narrative explanation for anticipated or current budget excess.
Do not expect any budget your firm provides to be written in stone as expenditures for attorney time cannot be judged as objectively as the components of an information system or locked into a schedule as predictable as a construction project time line. Few litigations and business deals are without surprises and unanticipated expenses. A company that is reluctant to make adjustments in the case budget may suffer in the long run. Just make sure that a law firm gives a detailed explanation for deviations from the budget and amends the budget to reflect any anticipated overruns.
4. Compliance Monitoring
A billing policy and budget that is not monitored will have little effect on legal fees. All too often I have seen excellent billing policies and detailed budgets ignored by law firms. A company can perform basic monitoring in-house, if that function is assigned to an employee who will regularly review the legal bills for deviations from the billing policy and who will see there is appropriate fol¬low-through for non-compliance. Even rudimentary compliance monitoring will keep a law firm at¬tuned to your concern about legal cost; but, a more serious commitment of time and talent is necessary to keep legal bills trimmed down. When reviewing legal bills for policy compliance, managers of legal services should:
• Test for mathematical errors or internal inconsistencies in legal bills,
• Check for compliance with the billing guidelines,
• Perform detailed analytical reviews focusing on, among other things
o lack of contemporaneous time journal,
o work performed at inappropriate billing rates
o duplication of efforts,
o excessive internal communication,
o premature, unfocused or generic research (research that should have been in the firms files), and
o billing for clerical tasks, such as copying, faxing, organizing files, proofreading, scheduling and the like.
Benchmarking is the process of finding, adapting and implementing outstanding practices. Unlike legal auditing, the goal is not finding and correcting inefficient practices. Rather, the goal is isolating superior performances that can be shared by all of your outside counsel. Benchmarking can be used to compare and measure one organization or individual against an ideal standard or exemplary model. It is a systematic and ongoing measurement process that strives to identify the best in class. Through benchmarking, companies can improve the cost-effectiveness of all law firms, target areas in need of improvement, achieve realistic cost reduction goals, enhance litigation management and show how even the best can become better. The benchmarking study should compare, among other things, billing rates and blended rates, billing methodology, staffing policies, efficiency, management style and complexity of the matter.
A benchmarking report that contains an analysis of these components gives a company the opportunity to encourage law firms to be more efficient than "average," identify law firms and individuals in need of improvement, determine if legal expenses are "out of kilter," create realistic legal budgets based on historical data and intelligently explore alternative legal fee arrangements.
6. Alternative Fee Arrangements
I’m not a real proponent of alternative fee arrangements because, for the most part, legal service consumers are better served using typical management techniques such as requests for proposals, billing policies, budgeting and compliance monitoring if they want to see quality legal services and a significant decrease in their legal spend. In essence, all billing arrangements are based in whole or in part on hours. For instance, fixed fee arrangements (with or without a bonus) are predicated on the amount of hours anticipated to be spent by the various billers at their then current billing rates. Unfortunately, firms have been known to skimp on hours, ignore subtle or complex problems and give work to attorneys with insufficient experience or knowledge to handle the matter.
That being said, there are some limited cases that are well suited for AFA’s (i.e., routine, repetitive work such as patent prosecutions, routine real estate or loan closing) where the client has benchmark data for the appropriate fee. Once clients know not only what the matters have cost but also what they should have cost, they are in the position to negotiate for the appropriate fixed fee.
7. Negotiate Billing Rates
Billing survey, such as Billing Rate Reference 2014 by Law360, would have us believe that rates are rising to unprecedented levels, topping off at $1,500 per hour for a BigLaw senior partner handling bet-the-company matters, with an average of $724 per hour for a senior partner at a firm with 400 or more lawyers. But, in large part, these rates are merely aspirational “vanity rates” and are not the rates that are actually being charged. These published rates are often discounted and recent studies have shown that the realization rates for law firms have been declining steadily.
So, when negotiating billing rates do not take the published “retail hourly rates” as the gospel and bear in mind that these rates are typically discounted. Getting discounted rates is a good first step, but remember that billing rates are only one component of legal fees. Equally and perhaps more important is billing methodology, management style and appropriate allocation of work among timekeepers.
8. Insist on Proper Staffing
Give your outside counsel clear guidelines for your expectations on staffing. As the client, you should be actively involved in choosing the individuals who will be working on your matter. You can and should insist that two or more partners will not work on a given case that is not large enough to support such staffing and you should not allow a first year associate to bill time to your matter. If you have a continuing relationship with a law firm, you should try to make sure that there is continuity of staffing on your matters. Of course, keep an open door and if counsel thinks they need more people, let them plead their case and justify why it is needed.
9. Strategic Allocation of Work
Assigning work to the right firm is one of the most important decisions a client will make. A client should consider the cost, complexity, exposure and risk before assigning a case to a law firm. A low value project should not be handled by a high dollar firm; not all cases need to be handled by top Am Law 100 firms, which are largely New York centric and command premium rates. Just engaging a firm in the Am Law Second 100 will make a dramatic difference in the legal fees, and consideration should be given to quality “niche” firms and regional firms, which will result in even greater savings.
10. Requests for Proposals
Whether a client is starting a new project or considering moving existing work, getting competitive bids (“RFP’s”) is an effective way to assess and select a law firm. Since all responses will be in a uniform format, clients will be able to make a meaningful comparison of price, abilities, experience, references and willingness to conform to the client’s security, technology and billing requirements. Chances are you will get better rates and may even get some free analysis of the problem at hand as firms will exhibit their abilities and expertise. Client should give their current firms an opportunity to participate in the RFP and if they will match the cost savings, it is usually a good idea to stay in place. If not, clients may want to negotiate for some upfront free time for the firm to catch up to speed.
Using some or all of these tools will provide the opportunity for significant savings without undermining quality. In-house counsel can do more than slow the growth of legal costs, they can reduce them.
By Accountability Services IncABOUT THE AUTHOR: Judith Bronsther
Expert Testimony on Reasonable Legal Fees
Expert Testimony on Reasonable Legal Fees
Ms. Bronsther is the President and one of the founders of Accountability Services, Inc. Since its inception in 1992, Ms. Bronsther has reviewed or overseen the review of over a billion dollars in legal fees and has testified nationwide in jury trials, bench trials and arbitrations. In addition, she has lectured and written extensively on the issue of legal cost control and reasonable attorneys’ fees.
Ms. Bronsther began her career in 1979 as an associate with Finley, Kumble, Wagner, Heine, Manley & Underberg. In 1984, she joined forces with a client, Empire Securities, a brokerage house specializing in oil and gas transactions, and became Executive Vice President and General Counsel. In 1989, she joined Kaye, Scholer, Fierman, Hayes and Handler. Ms. Bronsther graduated from University of Rochester, magna cum laude, and New York University School of Law.
Copyright Accountability Services Inc
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.