By Daniel Iannotti, Esq.
Hourly Rates
Avoidance
Litigation Management
In-source Legal Services
Expense Management
There are lots of things that keep CEOs and CFOs awake at night – falling sales revenue, product quality, motivated employees and, of course, lawsuits. The mere mention of the possibility of a lawsuit instills fear in most executives. Why? It’s because lawyers are expensive and lawsuits often produce runaway legal fees (and involve significant management distraction).
Legal costs are inevitable for any business. But, like any other expense, they can be managed and minimized. Leading companies utilize numerous approaches to more effectively acquire legal services, thereby minimizing legal costs and risks. These strategies may help to effectively control legal expenses.
The starting point is to understand how lawyers bill for services. By and large, most legal services are purchased on an hourly fee basis. Billable hours are the bedrock of any firm, with legal marketers looking for ways to sell more hours to clients.
Virtually all law firms track and analyze daily, monthly and yearly hours billed for each lawyer in the firm. Those lawyers with higher numbers of annual billable hours receive higher compensation (and vice versa).
Clients who acquire services by paying an hourly rate are continuously faced with a dilemma – they understand the need to interact with their law firm to obtain advice but they’re reluctant to do so since they’ll pay for the interaction. Most clients fully understand this “meter is always running” syndrome.
The problem is magnified where more than one lawyer in the firm handles a matter. If two lawyers confer with each other on the matter, the client is essentially “double billed.” Because such an arrangement is usage based, there’s no limit on how much the legal services will ultimately cost.
In competitive marketplaces, including legal services, the market determines the price for a product or service. In most markets, negotiation over price seldom includes an examination of the hours expended by the seller to produce the product or service.
For example, when we purchase a car, we don’t examine how many hours General Motors’ workers have spent in assembling the car. Rather, we look at the value of the car in light of competitive alternatives.
Why should legal services be any different? The truth is they aren’t.
Law firms focused on client satisfaction are increasingly willing to enter into fee arrangements other than hourly rates. For example, regularly occurring legal work – such as preventative law work discussed below – lends itself to a flat rate structure. Companies can accurately budget for total legal costs in a flat rate fee structure.
Other types of fee structures besides flat rate billing that help clients manage legal costs include contingency fee based on a percentage of damages or settlement amount, volume or exclusivity discounts, blended rates, hourly rates with a total fee cap, hourly rates that decline as hours increase, incentives to resolve the matter expeditiously, etc. Each provides the potential to avoid expensive hourly rate arrangements that may lead to runaway legal costs.
In addition, as with the purchase of any product or service, inducing competition into the process usually results in lower prices. Companies should use an RFP process before engaging a law firm for a significant matter. Through that process, each law firm invited to bid will clearly understand that price and terms will be a critical component and that it will have to “sharpen its pencil” to win the business. Even if a company chooses to stay with a traditional hourly fee arrangement, the RFP process usually results in lower costs.
Some companies pursue an “if it’s not broke, don’t fix it” strategy with respect to legal services. That is, they don’t acquire legal services until it’s absolutely necessary. Often, this “penny wise, pound foolish” approach can lead to expensive legal entanglements that may have been prevented by employing even modest legal review at the initial stages of a matter.
With an increasingly complex legal and regulatory business environment, it is not practical for most businesses to avoid incurring legal expenses. At the same time, too much “lawyering” can be expensive and time consuming. The goal should be to find balance between enough and too much legal review, that is, the right mix of “preventative law.”
Preventative law, like preventative maintenance of automobiles, should be used to spot potentially serious legal issues that may lead to expensive problems in the future. Every business has areas that lend themselves to preventative law, including employee and employment policies, contracts and significant transactions, advertising and external communications and customer agreements.
Similarly, companies can employ strategies to prevent disputes from ending up in litigation. In its contracts, for example, a company and its contracting partner can utilize a provision to have disputes brought before an “alternative dispute” forum (such as the American Arbitration Association or JAMS) rather than by filing suit. By avoiding the expensive litigation court process, companies can reduce legal costs for such disputes – and usually end up with a quicker decision.
A plaintiff seeking to file suit doesn’t have to make much, if any, of a financial investment to bring the suit. He or she need only find a lawyer willing to take the case on a “contingency fee” (a percentage of the amount collected). Lawsuits are a fact of life despite best efforts to avoid them. The proper management of litigation, however, can significantly reduce legal costs.
As discussed above, the first step in managing litigation is to retain a firm on an other-than-hourly fee basis. With the hourly fee arrangement, the law firm has financial incentives to extend the suit as long as possible.
All of the alternatives to hourly fees can be utilized as part of engaging a firm to handle litigation. For example, a flat rate for each stage of litigation can be employed – pleadings, discovery, pre-trial motions and trial. Or, a firm can be engaged on an hourly basis with caps to limit fees for each stage and/or bonus incentives to resolve the matter quickly (so substantial hours are not incurred).
In addition, when the company is the defendant, it’s important to keep in mind more than 95 percent of all suits are resolved short of trial. Thus, unless the suit is a “bet the company” action, it’s highly likely it can and will be resolved.
Therefore, if one assumes it will be resolved, it makes sense to explore early settlement so the defendant doesn’t pay substantial legal fees to prepare for trial and pay the settlement amount. Consider whether all or a portion of amounts that would otherwise be paid for legal fees can be “diverted” to the proposed settlement amount to help reach a mutually agreeable settlement early in the suit.
Companies with a regular and ongoing volume of litigation should also explore if it can obtain more favorable fee arrangements by awarding all of its litigation to a single firm. Generally, law firms look very favorably on “volume discount exclusivity” legal fees. Alternatively, if a company has a sufficient amount of litigation, it may be cost effective to hire an in-house litigator.
Although “outsourcing” often saves companies money, the opposite is usually true for legal services. The growth in internal corporate legal departments results from the need to more efficiently manage legal issues and partially offset rising outside legal costs.
Companies with a sufficient amount of recurring legal issues and costs can reduce those costs by employing a general counsel and/or subject matter legal experts (e.g. litigators, employment lawyers, etc.).
Most fee arrangements for legal fees include a “plus expenses” component. For many law firms, “expenses” are extremely profitable. Many “expenses” billed by law firms are billed at more than the actual cost. Phone and fax charges are typical examples. To avoid these “profit centers,” make sure your engagement agreement spells out what expenses will be billed and how those expenses will be determined.
Quality legal advice is a necessary component of any business. While legal advice can be very expensive, companies and their general counsel can effectively manage and control legal costs using a variety of strategies.
About the Author
Daniel Iannotti has over 24
years of legal experience, including experience as the general counsel of
several publicly held companies, both with law firms and as in-house lawyer.
His firm,
Iannotti & Associates PLC, provides general counsel and legal cost
control services to businesses.
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