Articles Posted in Outside Counsel

During a session with a leading e-billing vendor, I learned that one of the most common reasons why law departments challenge bills is that the time record description is inadequate. Whoever recorded 2.4 hours as “Attention to the file” simply did not provide enough detail for the reviewer to assess the reasonableness of that time charge. One could call that bill review by induction, because the aggregation of individual items that are rejected for insufficient particularity builds up to the total amount challenged.

My view advocates bill review by deduction. Better, I propose, for a lawyer to assess the overall reasonableness of the bill in light of the achievements during that month. If the law firm is within its budget or if progress made during the month was demonstrable, why bother with line-by-line scrutiny? My basic premise is that the highest and best use of in-house lawyers is not reviewing bills at the level of timekeeper daily submission. Far better to spend time giving good, clear direction before the work is done and recorded than pouring over billing detail afterwards (See my post of June 16, 2006 on the time required.).

One forte of e-billing software is that they can check whether a law firm timekeeper is an authorized timekeeper and whether that person’s billing rate is the proper one. The savings that result and the increased management control can be considerable.

The price, however, of software that can police timekeepers and their rates is perpetual effort to maintain the correct information. If a law department has scores of law firms and hundreds of timekeepers, this seemingly innocuous updating can become a full-time activity for someone. The time required to do this is part of what is generally referred to as “system maintenance.”

I have a feeling that when people tout the savings that law departments can obtain from e-billing, they may not net out the full overhead costs of system maintenance (See my posts of May 1, 2005; May 14, 2005 on e-billing savings and ROI; and Feb. 7, 2006 on regression to the mean.).

Until I heard a comment during a recent presentation, I had thought that a law department considering a bonus for a law firm would deliberate based on whatever the law department’s lawyers recollected of the firm’s performance and however the matter had resolved. Someone at the presentation from DataCert suggested an alternative.

A different approach would be to ask the law firm to state its case, briefly, for why it should deserve a bonus and in what amount. Then the law firm would have to introspect and pick out what aspect of its services were above and beyond or what results were significantly better than might have reasonably been expected. Much like self-evaluations by lawyers in a law department at the time of an annual performance appraisal, the law firm’s response will be self-serving and well-spun, but it will push the law firm to assess itself somewhat realistically. The firm’s observations will complement the assessment done by the law department’s managers. They will help the law department come to a conclusion about the appropriateness of a bonus payment (See my post of Aug. 4, 2007 on a bonus arrangement.).

My view for several years has been that UTBMS codes in law-firm bills have rarely resulted in cost savings for law departments (See my posts of April 23, 2006 and Dec. 1, 2006 that criticize UTBMS efforts; and April 22, 2007 regarding updates to the system.). Either the law firms code sloppily or the law departments never collect the code data in a useful way or the law departments fail to analyze and act on the codes to make a difference in law-firm costs. All the efforts on either side go to naught.

At a recent talk, however, one participant described how his law department had challenged a bloated bill. The task-code information, according to him, was decisive in showing the inefficiency or inappropriateness of the law firm charges on that large bill or set of bills.

I grant that anecdote, but my retort would be that a law department has the right to challenge any bill that seems disproportionate to the effort expended by the law firm or the results obtained. No in-house lawyer needs to back up a challenge with task code specifics. Meanwhile, on most matters and bills, much low-value time is frittered away without any payoff.

A disproportionate amount of attention is paid to alternative fee arrangements; perhaps because they are disembodied control mechanisms (See my post of April 19, 2006 on depersonalized decisions.). It is appealing to law departments to think that a fee arrangement brings discipline and savings on its own. The cruel fact is, however, that arrangement on bills probably stands about fourth in a list of what effectively controls outside counsel costs.

From my experience, the first line of managing costs is to retain an experienced partner whose team is busy. The second most effective tool is an inside lawyer who manages the matter actively, creatively, and boldly. Budgets, carefully reviewed and thereafter enforced, are one tool of the active managing lawyer. Third is the most common source of outside counsel spending – litigation – is an effective program for the scourge of discovery. If any of these three steps are taken poorly, don’t expect the fee arrangement to bail you out.

When a law department and a law firm agree on bonuses for the law firm if the firm accomplishes certain objectives, it is to be expected that the law firm will try to perform such that it earns the bonus. All well and good, unless it becomes apparent later in the matter that the sought-for objective no longer benefits the company. Success on a motion for summary judgment may make sense as a goal at the start of a case, but as events turn out may cease to be a desirable objective. The law firm’s pursuit of its financial well-being should not thwart the client’s emergent best interests.

Even with this caveat about alternative fees, we should recognize that hourly billing serves also to drive strategy and firm performance. That which takes longer to accomplish may look more attractive to the firm; research into legal nooks and crannies has its appeal; and avoidance of early settlement may cut against the financial interests of the client.

In short, money changes behavior and you may get what you wish for.

Ron Denton, the Business Services Manager for the Legal Department of ConocoPhillips, is the subject of an interview in Met. Corp. Counsel, Sept. 2007 at 56. The interview struck me as an advertorial for a particular e-billing vendor, but it does contain the following quote by Denton: “Our focus has been on reducing litigation lifecycles because that is really the best way to manage cost.”

The best way? Are efforts to close cases even particularly meaningful? A corporation that is a defendant mostly can certainly disgorge large settlements promptly and claim victory on “cycle time,” but that is silly. Sometimes the defense does not want to awaken a somnolent plaintiff. Most crucially, it costs money to push aggressively. I agree, if a case just hangs around, with the tap of billing turned on even at low flow, it is wise to finish the matter off. But to single out how long cases last as a crucial cost driver?

Or perhaps I am focused on the wrong end. If a company can shunt many claims into ADR, and put off the day of litigation even starting, perhaps that is what is meant by shorting litigation length.

An effective technique to create incentives for a law firm is to have the law firm hold back 15 to 25 percent of its standard-fee billings. The law department will agree to restore some or all of the held-back amount, depending the results achieved or the effort invested.

The law department can think of restoration as a reverse bonus. If the law firm achieves above average success, such as resolution of the matter in less than 15 months, it becomes entitled to a complete restoration of the held-back amount. If the outcome is less satisfying, the restored amount is correspondingly less (See my post of Aug. 4, 2007 on an example of a bonus arrangement.).

As I see it, a holdback might be recovered partially or completely by a law firm; amounts given up by a discount are gone forever.

In the guidelines for outside counsel that I have reviewed, law departments are all over the place on billable travel time.

Some let outside lawyers bill time only if they travel during business hours. Others let them bill only while working on their matters, even though that “guideline” is completely unenforceable. A third possibility lets lawyers who travel bill two hours (or some number of hours) to a matter – simple, and perhaps a balancing of the equities.

A more lax view allows clients to bill for travel time at half of their hourly rate or some other percentage. Yet another variation is that only one person may bill for their time on whatever the arrangement is (this is akin to the notion that only one person at an internal meeting can bill for the time of the meeting).

To craft a fee arrangement that makes a difference, law department managers needs to think hard not only about the outcomes they seek in a matter but also the likelihood of achieving those outcomes. Bonuses for the law firm that achieves a particular goal, such as a resolution of a case before substantial discovery begins or completion of a transaction by a certain date, need to be in line with that probability.

If there’s reason to believe that the odds of that outcome are less than one in four (25 percent or less) a bonus might be sizeable, such as up to 50 percent of fees billed. Whereas, if the company is likely to prevail substantially on a motion for summary judgment or complete the zoning approval by the year end, the bonus for that success ought to be negligible. Whether or not, the bonus as percentage of fees is not the only standard. An absolute dollar amount might also work its charms.

In other words, don’t promise a bonus for the inevitable; reward outcomes that on the probabilities known at the start are exceptional.