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Legal Fees:
You Can Keep Them In Check

By John W. Toothman

Directorship (April 1995)

    The pressure to reduce expenses during the recent recession has caused many blue-chip business clients, and the law firms dependent upon them for business, to re-examine their legal fees. Several of the resulting innovations are worthy of note.

Unfortunately, some companies with the bargaining leverage to obtain the benefits of these innovations, perhaps including yours, either do not know about them or are still enthralled by their outside counsel. That is a waste of shareholder money. These innovations can save your company 50% or more on legal fees and expenses, even if your lawyers swear their fees have already been cut to the bone. And, if properly instituted with reasonable concern for the interests of the law firm, lawyers are happy to accommodate you just to keep the balance of your business. Indeed, many law firms now market themselves to new clients by advertising their willingness to make these concessions, but they do not advertise them to clients naive enough to pay full rates.

The 1990 recession caused belt-tightening among clients profound enough to lead to stricter scrutiny of legal expenses, previously exempted by many companies from standard budget and management controls. As skeptical clients examined legal expenditures more closely, they were shocked by what they found: over-staffing, padding of hours (or billing for so many hours that the work product was not worth having), churning of cases, hourly rates spiraling beyond reality, proliferation of timekeepers and "expense" pass throughs, incompetence even in the "finest" firms, and inefficiency bordering on the absurd. In the words of the American Bar Association, "One major contributing factor to the discouraging public opinion of the legal profession appears to be the billing practices of some of its members." (ABA Formal Opinion 93-379 at 2.)

Developments in the management of lawyers and legal fees have grown up to meet these problems head on, making longer term solutions possible. If your company is not implementing some or all of these ideas, then you are wasting money on lawyers (and possibly on your in-house legal department, which is supposed to be giving you this advice, not me).

Supply/Demand Realities: Legal services are a buyer's market, as never before. The recession and the glut of law school graduates in the 1980s (attracted by rapidly rising starting salaries) have led to a shake-out of Darwinian proportions. Clients with steady streams of legal work, who pay their (reasonable) bills on time, can extract handsome concessions - the question is simply what concessions to seek.

Audition: To increase competition among firms and make sure that firms stay on their toes (and not take clients for granted), clients audition several firms for each major matter or type of matter or to get on the company's list of "approved" firms. For example, rather than promise all legal work to one firm or even all employment, corporate, or collections work to one firm, several firms might compete for the work, making presentations on their qualifications, plans, and budgets. (Firms grumble incessantly about auditions, a sure sign they are having the desired effect.) As an assistant general counsel of MCI is fond of saying, buying legal services should be like dealing with any other "vendor."

Big Firm Bias: Recognizing that the biggest firms are not necessarily the best, but are necessarily the most expensive, sophisticated clients have jettisoned their bias favoring larger firms. Boutique firms consisting of 5 to 15 experienced "partners" without heavy overhead and pyramids of junior timekeepers are a popular structure. A senior counsel at E.I. du Pont de Nemours & Co. recently told me that, while they have cut hundreds of law firms from their approved list, down to 50 or so, they are including some small, specialized boutiques among their radically reduced list. Experienced, intelligent lawyers can be found almost anywhere -- stripped of their marble foyers and entourage of junior lawyers, they can be quite cost-effective, too.

Alternative Billing Methods: Many of the problems with legal fees and lawyers are caused by hourly billing, which emphasizes quantity of time spent over quality or efficiency. Take away the distorted incentives of hourly billing and replace them with compensation schemes that cause the lawyer's incentives to coincide with the client's, and you have an alternative or "value" billing method. Properly designed, alternative billing methods save money and even reduce the burden of managing lawyers. (That's taken care of by Adam Smith's invisible hand.) Contingent fees, heavily discounted hourly fees (50% discount or more) with bonuses, fixed fees, and many other varieties are now common. Beware, however, of wolves in sheep's clothing. Some alternative fees, especially those pushed by lawyers (including blended rates, fee "caps," and modestly discounted hourly fees) may lead to no real reduction in fees. Nevertheless, major consumers of legal services, like Aetna Life & Casualty, have saved millions of dollars through alternative fees and swear to their advantages.

Client-Oriented Retention

Agreements: Few lawyer-client relationships are reduced to a written agreement, even though your lawyer tells you to get every other deal in writing. Absent an agreement, a client's rights in a billing dispute are quite limited. Even worse, however, are the lopsided or offensive terms dictated by some firms, yet clients sign them to avoid making waves. Clients should draft their own simple, clear, and fair terms. You will get less resistance from firms than you might expect. Smart firms actually prefer to have a fair written agreement because expressing everyone's expectations and duties at the outset reduces conflict later (and speeds payment of their bills).

Aggressive Monitoring: Many clients do not complain about their legal fees until the matter is over. Firms resent this, arguing that clients should speak up sooner or forever hold their peace. As a practical matter, chopping at bills after the fact may identify 25% or more in questionable charges, but the law resolves most doubts in favor of the lawyer that late in the game. Silence lets the disputed amount grow, sometimes to the point that conceding a client's objections would cause the law firm a write-off so large that bonuses and careers might hang in the balance. Much more can be saved on legal fees by early interdiction. For example, with mid-level associates at some firms billing over $40,000 per month, keeping one lawyer off your matter can save hundreds of thousands of dollars that will never have to be written off by a pale-faced partner worried more about his bonus than doing right by the client.

Second Opinions: An outgrowth of monitoring that I've been developing is "second opinions," by analogy with second opinions in medicine and independent audits by accountants. Once a client selects a firm to handle a matter, lawyers are conditioned to follow their noses wherever they lead, which means a client gets one perspective, good or bad. At crucial crossroads, like settlement negotiations, adding parties, beginning discovery, filing dispositive motions, and so on, it makes sense to get a second opinion. Too often a lawyer's advice is tainted by inexperience or a desire to bill more hours-an independent second opinion may save legal fees, let alone prevent mistakes. Second opinions can be obtained without the knowledge of primary counsel. They are also relatively cheap because second-opinion counsel need not re-invent the wheel, just check its alignment.

Legal Bill Reviews and Audits: Bill reviews and audits are inherently subjective, at least in part, but they are quite effective in finding all sorts of problems with bills. In one instance, a New York firm ate its entire bill -- over $500,00 -- once we pointed out problems. In another, a Philadelphia firm dropped $150,000 in fees -- l00% of what the client objected to -- even before we issued our report. After we reviewed a Washington firm's bill, a federal judge cut roughly $260,000 from a $360,000 bill. Our total fees for these three cases combined were less than $30,000 with clients saving roughly $1,000,000. Just knowing that a bill might be audited causes most lawyers to be more careful.

There are nuances to legal management that cannot be explained in a short article, but we have not seen an instance yet where improvement was not possible and, once tried, successful. As we tell all clients, they have more leverage than they think, but they should exercise this new leverage benevolently. The lawyer-client relationship is still one of trust that can be undermined by driving too hard a bargain. A good lawyer will respect a client who is intelligent enough not to be taken advantage of, but who in turn respects the lawyer enough to strike a fair deal.

1995 John W. Toothman


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