Legal Expenditures, Value and the Three-Legged Stool Approach

Expenditures are always a spotlighted area, but especially so in this economic climate. When looking at the amount of money that some clients pay to have legal services performed, I often wonder: What do they get in return?

Companies pay millions of dollars annually for litigation services. Historically, a good result was the best a client could hope for. However, if an entity has to pay for litigation, a cost of doing business, then why not get something more than a result … why not start building processes so that they next time litigation presents itself the company can build upon what was done in the prior matter to cut costs moving forward? Processes are created, responses are stored, material is archived, knowledge is retained, the decision-making process is enhanced (and more reliable) … these are company assets that can be modified and improved moving forward without reinventing the wheel every time. Short term, heads of litigation are in a position to forecast or budget future litigation. Long term, the money spent on litigation actually creates assets that can consistently benefit the company. This is the mindset in our Litigation Support Division: What is truly in the best interest of the company? Is it a big matter or a small one? Because when we are all looking for value -- and what are we getting in return for the money paid – can we really afford simply to pay a significant amount of money and not create something that can save us money in the future?

A few weeks ago I met with a client, an attorney who is former GC of public company, who is now in charge of operations for several divisions, including legal. During the discussion we were talking about the need that every company has to continue to make budgetary cuts. This client has worked with Counsel On Call for several years and discussed how, based on his experience, this is where he sees the future of the in-house legal department: In-house attorneys, outside counsel and outsourced attorneys making up the legal team (the “three-legged stool approach” referenced by another client a few months ago). Some in-house leaders have seen the value of this approach for several years, but it is certainly becoming more mainstream in today’s business world.

Yet, when one says outsourced I still believe there is a caveat … are you building relationships with the outsourced attorneys? Are they part of your team? Counsel On Call attorneys choose to work with our company, this is the way they choose to practice law. They were with us before the economic downturn and will be with us when it passes. Thus, we have experienced and well-credentialed attorneys who work with the same client, in-house legal departments or law firms, for years. The cost savings are staggering and the value received is real – someone who knows you, your business, your issues, and possesses the skill to get the job done correctly, and who is available to work whenever you need. This value and flexibility makes them integral to the team’s success. The word “outsourced” doesn’t necessarily capture that sentiment – it’s almost a divisive word. But that spoke of the wheel is equally important when building a cohesive legal team with well-defined roles.

All of this being said, one of the most common questions I get is, “So, how does it work?” Many people simply don’t know where to begin, which is easy to understand. Labor is often the No. 1 expense for our clients, so it’s good to start by assigning value to that enormous expenditure:

  • What are you getting in exchange for the money paid?
  • What are your in-house attorneys doing? Is that a good use of their time based on the total amount being paid?
  • Could you have someone else do some of the lower-level work and free up your in-house attorneys to do more complex matters?
  • What are you paying outside counsel to do? Are you getting real value for the money paid?

To the last questions regarding outside counsel, often the answer is “yes,” but more often is it “sometimes.” The implication is that things can be done better, or more efficiently, or more cost-effectively. So once this bridge is crossed, it becomes a matter of shaping a new, collaborative approach between in-house counsel, outside counsel and Counsel On Call attorneys working together in the best interest of the client.

Assuming times stay tough for a while longer, in-house counsel aren’t simply going to be able to continue sending things to their traditional outside law firm for reasons like, “that is what we have always done” or “we just do not have the internal resources to get it done.” The stakes are too high and there are proven, high-quality and cost-effective ways to accomplish the same tasks. Most involve collaboration, and there are numerous “pain-free” ways to implement this approach. Like the client I was meeting with the other day, I too believe this is the future model for in-house legal departments (and, quite honestly, law firms ... but that’s a topic for another day).
 

Legal Budgeting: It's The New Black

Remember your days as a law firm associate when you were told the exact number of hours you must bill to receive a bonus? You focused your attention on the research memo, brief or closing binder at hand and only looked up to count up your weekly hours to make sure that you were hitting your billable quota. You didn’t pay attention to your receivables or whether the partner wrote off your time (you’d worry about those business-related matters later, perhaps during your 7th or 8th year of practice when you were up for partnership), because you knew that if you met that magical 2200 hours at the end of the year, your annual bonus was as good as deposited in the bank.

However, for corporate in-house counsel (and even those same law firm associates just one year later), those days are quickly fading into the rearview mirror. We are now entering the Golden Age of Legal Efficiency -- meaning that an attorney now needs equal expertise with Lexis, Westlaw and Excel.

Budgeting is a huge part of in-house counsel’s struggle for legal efficiency. There is no endless supply of revenue coming into the legal department; there are no bottomless pits of outside counsel spend. Every dollar is under a microscope these days; the ends must justify the means; and we all must do more with less – all points echoed in an article in Metropolitan Corporate Counsel magazine. This trend has had a notable effect on all facets of the legal profession: as an attorney or legal services provider, you better understand your client and know the actual cost of your services in order to survive this tightening of the belt.

Litigation is a great example of the legal-efficiency trend because it’s an enormous line item for many in-house departments. There is so much more data available to in-house counsel now that it has become relatively easy to break down costs and identify areas of savings throughout process, particularly in the discovery phase. The number of documents to review, processing costs, software platforms, attorneys’ review rates, hourly bill rates . . . these all are areas for significant cost savings. And when in-house counsel focuses on getting the work done properly and efficiently, it causes all of his or her partners/vendors to budget properly or risk losing the business. With everyone on the same page (or spreadsheet) and keeping an eye of the bottom line, it helps the client budget for future matters more accurately and to make prudent business decisions on every piece of litigation going forward.

The point is that there are many items that can now be budgeted that previously weren’t observed with a honed eye. You want to charge $200 per hour for your associates to conduct the review? That’s fine, but show me the actual benefit, don’t just pitch me on the law schools they attended. You want to use your preferred hosting company? OK, but give me the cost analysis. You want to handle our litigation moving forward? Give me detailed estimates on all the costs involved and explain to me how you’re going to make our process better and less expensive for the next case.

The emphasis on budgeting is by no means specific to discovery. Due diligence, trademark and copyright, contracts and employment matters, among others, are each just as conducive to scrutiny. It is no longer good enough to simply say, “Sure, we have great attorneys who can handle these cases” or “We can do that for one-third what you’re accustomed to paying.” The service providers who are differentiating themselves are the ones who demonstrate, “Yes, we have the experienced attorneys who can handle these cases. Here’s how many hours we expect it to take, here’s the data to back that up, and here’s what we can do to make it work for your budget.”

Transparency in budgeting and in project execution are here to stay. It is a much better starting point for many clients, or should I say the only starting point. I recently read an article where a senior partner at a large multinational firm in D.C. stated, “I’m not really interested in the business of the law,” explaining that as lawyers focus more on the bottom line their role as a trusted advisor diminishes in value. Well, in my opinion, it’s possible to do both – serve as a trusted advisor, while also recognizing and planning for the costs involved in the legal representation. And if you don’t believe me, just ask an in-house attorney – most of them have to do it every day.
 

Maximize Resources, Achieve 'Value'

You can’t scan a legal rag nowadays without seeing an article predicting the end of the billable hour, or the revamping of the business of the practice of law, or some other projection of how the practice is going to look at the end of this recession. Some insights are better than others, like the recent Law.com article about in-house departments requesting their outside counsel to reduce rates or present an alternative fee arrangement. Patrick Lamb’s commentary on the matter on his blog also really drew my interest – I think he hits the nail on the head.

Undoubtedly there is some room for firms to reduce rates and I believe, in time, the market will bear that out (I love the anecdote from a lawyer who told Susan Hackett at ACC that $700/hour was a “suicide” rate). But what’s more central – and the article skims over this while Patrick calls attention to it – is that hourly rates are really only a small part of the equation and that efficiency and quality are the key elements. I'd add one more factor to this cost-saving/value formula: maximizing resources.

Based on hundreds of conversations I’ve had with in-house attorneys in recent months, there really isn’t as much pushback on the partners’ high hourly rates. Sure, clients would like them to be lower, but they also understand you have to pay for great legal counsel. The real problem is at the associate level, where it’s much tougher in some instances to defend the value received. In many cases they’ve turned to smaller or regional firms to get the rates they seek across all levels.

But where we’re seeing in-house departments achieve budgetary success is in conducting an audit of the work that needs to be done and overlaying that with the available resources. Here’s a rudimentary example of how the process works for a fictional department that has (only) three operational units: litigation, contracts and labor and employment:

Litigation

Old Way
Call outside counsel to handle; review might be outsourced and marked up, then the documents re-reviewed by first-second year associates; law firm controls the entire process

New Way
Call outside counsel and discovery team for a planning session; discovery team controls costs and productivity in a transparent manner, liaises with technology vendors, and works closely with law firm(s); law firm handles strategy; in-house department controls the process

Savings: 30-75% or more, typically in the millions annually

Contracts

Old Way
All matters that can’t be handled in-house are sent to outside counsel, including simple matters, such as routine leases, costs $300+ per hour, 10-15 hours of work per week


New Way

Most complex matters are still handled by outside counsel; routine matters like leases and overflow work handled by experienced contracts attorneys billing less than $100 an hour, supervised by in-house attorney(s)

Savings: $150,000+ per year

Employment

Old Way
Routine and EEO matters and trainings are handled by law firm associates for $400+ per hour; such work is sporadic, but typically averages 10 hours of work per week; monthly trainings are required in different areas of the country


New Way

EEO matters are handled by attorneys with 10+ years of experience for less than $100/hour; trainings are conducted by the same attorney(s), who know the company’s policies well, for the same hourly rate or an agreed-upon flat rate

Savings: $150,000 per year on EEO matters; $35,000-$50,000+ on trainings


So while this is far from a detailed example -- and many in-house teams have more than three operational units -- it provides a glimpse of how many of our clients are approaching their legal work now. There is always going to be a significant amount of work that needs to go to outside counsel; there is always work that will need to be done in-house; and there's a growing recognition of this middle ground of work where costs need to be cut, and that's where a lot of value is being discovered.

It also shows that it doesn’t take wholesale changes or eliminating outside counsel to achieve significant cost savings – just maximizing resources and reaping the resulting value.

In E-Discovery, It's Not About The Hourly Rate

The billable hour has received a lot of attention in recent months as it relates to associate salaries and the value the client receives, among other issues. But it has been especially relevant in the e-discovery field in recent years, as more in-house departments have realized that much of their discovery work can be done for under $65 an hour versus the $200-400 they were accustomed to paying.

So now that this is the norm in our profession – paying $45-65 an hour for e-discovery work – the real question becomes, ‘What am I really getting for that money?’

Once you’ve driven down costs to the $45-65 per hour level for e-discovery, I would argue that the hourly rate makes little, if no difference, on your bottom line. The most important factor is the review rate of the attorneys. In fact, it’s really very simple math.

Let’s take a medium-sized matter: 30 gigabytes of data, or 400,000 e-mails.

Using a traditional (linear) review tool, an average review rate would be approximately 50 document decisions per hour for an attorney. By increasing the attorney review rate by 20 decisions per hour, the cost savings over the life of the project would amount to $125,000 and cut the project’s time by 25-40%. That more than compensates for a $20 per hour difference in an attorney's hourly rate, too.

That’s also a very conservative answer, because many companies now utilize a content analytic review tool that clusters documents together by topic versus a linear tool that only organizes data chronologically. Using the content analytic tool is likely to produce a 300-500% increase in the review rates, which saves in excess of $300,000 and 70% in time on that same 30GB of data. Content analytic tools cost more, but you can see where that difference can be accounted for.

So if you can accept this concept, it truly becomes a question of what you’re getting for your money. Many in-house departments have $48 an hour attorneys handle their e-discovery work, but ultimately the work is re-reviewed by outside counsel, there’s no fluid process in place and the client has no idea what kind of productivity the attorneys are generating. How would they know if they could be doing it better?

The question really becomes about how to increase review rates and thus productivity. There are many ways to do this, but it starts with experienced attorneys who know e-discovery and the technology. It’s supported by proven processes and talented project managers. Everything must be transparent: work closely tracked, benchmarked and learned from. It’s a collaborative, highly communicative process with outside counsel. And it can be repeated from matter to matter, creating more opportunities for learning and efficiency.

Focusing on the process and maximizing productivity -- not the hourly rate -- is where money is truly saved in e-discovery. The math really will speak for itself; all a client has to do is ask for it.
 

Document The Legal Savings

Most of us are facing uncertainty unlike anything that our generation has ever experienced. This manifests itself in several ways for our clients, many of whom are being told to cut positions and budgets (20% seems to be the "magic" number). Several are being told that they cannot fill vacant positions. Salary freezes are common. And the amount of attention paid to legal cost containment has reached an unprecedented level.

One of the reasons I started Counsel On Call in 2000 was because I felt there was space in the legal profession for great attorneys do what they enjoy -- good legal work -- at low rates, to be able to practice remotely, and provide a more flexible approach to meet the needs of clients. In the best of financial times, there are benefits to this approach; today it is even more relevant.

As our company and the profession has evolved, I have witnessed several in-house colleagues move from simply managing outside counsel -- often at firms where they used to practice -- to the mindset of setting and managing budgets and really scrutinizing the value received for the money spent. We have worked with many of these individuals who now understand how and why the "three-legged stool" -- outside counsel, in-house counsel, and Counsel On Call -- works so well together.

Here is my point: This year, many of our clients -- both in-house and law firm partners -- are being asked to cut even more, regardless of how well they have been doing on this front in recent times. This is making lawyers feel like they have to demonstrate their value like never before.

Understanding those pressures is the first step, and historically we have provided our clients with reports containing various items that enable them to respond to financial concerns, including accurate metrics that can be used in future budgeting. Over the past few months, we have added a few things to the report. One simple addition is that we now include the money spent and saved by working with Counsel On Call. This single step provides our clients the data needed to demonstrate the value they provided to their clients throughout the year or on a particular matter.

As with many matters we already track – whether it’s an attorney’s review rate or determining an accurate amount of time needed for a complex matter – this seems like a very natural and easy step to take. By regularly documenting the cost savings we’re providing in a straightforward manner, hopefully we’re enabling our clients another avenue to objectively demonstrate the value they bring to their company or clients.

'Fundamental Transformation' in the Legal Profession

“This car is leaving with or without you.”

I almost could hear my mother’s voice in my head as I read an article in last week’s ABA Journal Weekly Newsletter reporting that the legal profession may be on the cusp of a "fundamental transformation." While many law firms have experienced increasing profitability over the last two decades, they now are being forced to lay-off associates and other staff as their work (and revenues) dwindle. According to Richard Susskind, legal futurist and author of The End of Lawyers?, this change is being promulgated by law firm clients, who are becoming increasingly more sophisticated and discerning when farming out their legal work.

Legal costs are a line item that is an easy target. While other departments of many corporations have benefited from the use of new technology and efficiencies for years, a legal department’s MO has remained relatively unchanged – until recently. Susskind explains that clients now outsource much more of their legal work and are forcing their traditional law firms to collaborate with other legal services firms and vendors. He even suggests that there could be a trend internationally towards more non-lawyer management of legal businesses, which would likely result in the integration of online legal services and the automatic generation of documents.

Many clients, who remain anxious about sending their legal work overseas, are turning to domestic businesses like Counsel On Call to provide attorneys at a fraction of the hourly rates of traditional law firm lawyers. And, unlike law firms, we are accustomed to integration and better positioned to offer flexible, tailored solutions to corporations interested in taking advantage of new technology and efficiencies. As Susskind says, "clients [now] see that legal services can be delivered more cheaply, efficiently, quickly, and to a higher quality using new methods and business models."

That being said, often the toughest question to address is “I know I have to cut costs, but how do I actually do it?” It’s difficult to know where to start, but that’s where we come in. I have been meeting with a lot of in-house department heads and GCs in recent weeks, taking an hour or two to go over spending and budgets and identifying areas where we can create savings and efficiencies in 2009. If you do the same, it will undoubtedly be the most profitable time you spend all year.

Just remember, you’re driving the car. We’re there to make sure it’s a good ride.