Law Firms are Still Learning How to Hold Down Litigation Costs to Please Corporate Clients
Posted Aug 28, 2005 2:00 PM CDT
By Terry Carter
As litigation firms go, Chicago’s 55-lawyer Bartlit Beck Herman Palenchar & Scott is a very odd duck.
The boutique was launched 10 years ago by 18 lawyers who left Kirkland & Ellis with the idea of bare-bones staffing for bare-knuckle battles. The lawyers at Bartlit Beck aren’t geared for drawn-out discovery in anticipation of settlement--they go to trial.
And they have to prepare efficiently. Bartlit Beck chooses to feast when it wins and diet when it loses, eschewing the comfort of time-based billing. The firm’s most common fee arrangement, with the likes of DuPont and Bayer AG, is to bill a fixed monthly fee with the client holding back 20 percent. If the firm wins, it gets the 20 percent and likely a bonus of multiples of that.
“We started out with the intention of moving all work off the hours,” says managing partner Sidney N. “Skip” Herman, “and we’re very close to zero now. We have one [hourly rate] matter left.”
So it brought a smile to Herman’s face recently when the Richmond, Va.-based firm McGuireWoods put playfully aggressive advertisements targeting the Chicago market in prominent business publications during the spring. One ad showed a heavyset bald man leaning back in his chair, blowing bubbles, accompanied by this text: “Law firms that charge strictly by the hour are about to have their bubbles burst.”
McGuireWoods was trying to get more work for its 175 lawyer presence in Chicago, nearly two years after growing beyond its foothold there by acquiring the city’s venerable Ross & Hardies.
Those advertisements notwithstanding, Bartlit Beck isn’t expecting much competition in the fee game anytime soon.
“When we started out I thought it would take three or four years for people to realize what a great way this is to practice, and we’d have the window for that long,” Herman says. “And now 10 years along, I don’t see the window closing.”
But the view from windows at general counsel offices in corporations around the country is changing on the subject of litigation costs--and efforts by firms like Bartlit Beck have been gaining notice.
This shift in thinking might best be encapsulated in a slight variation on one of the more acute political rallying cries of recent years: It’s the money, stupid.
And litigation, with its unpredictable nature and the huge front load of discovery, is the money pit.
General Counsel said their No. 1 concern is reducing outside legal costs in each of the past four annual surveys conducted by the Association of Corporate Counsel along with Serengeti Law, a provider of electronic billing and matter management services.
Not simply controlling costs, but rolling them back.
Corporate executives tend to see in house law departments solely as cost items, like overgrown weeds among the revenue centers in their flower beds. Greater competition and the push for increased profits and returns to shareholders are driving cost concerns. Corporate law departments get squeezed, and they do some squeezing in turn.
The most recent ACC/Serengeti survey, released in 2004 reporting data collected in 2003, showed that general counsel have begun imposing budgets 67.4 percent of the time for litigation matters, compared with 46 percent in business transactions.
Last October, Tyco International entered into an arrangement with multi-office law firm Shook, Hardy & Bacon to handle all of its product liability work in the United States without hourly fee arrangements. The company makes a wide range of products, from medical supplies to fire-dousing sprinklers, and previously had 167 different firms handling various parts of that legal work.
“I think it’s the wave of the future,” says John F. Murphy, chairman of Shook Hardy. “At a meeting of managing partners recently, someone asked if we were seeing much work outside the straight billable hour, and I was surprised by the fact that we’re seeing it much more than others.”
Hourly rates charged by many major law firms left inflation behind long ago. Rates charged by some senior partners have surpassed $800.
“If you give me a $700-an-hour lawyer who knows a matter cold and can give me an accurate assessment, that’s very cheap compared to the $550 senior partner who has eight or nine associates at $350 to $400 an hour doing God knows what,” says Michael Roster, executive vice president for Golden West Financial Corp. of Oakland, Calif.
“I think the billable hour has remained entrenched because it’s just so easy to get your arms around,” Roster says.
Advances continue to be made in efforts to control litigation costs, albeit in fits and starts.
Over the years, a number of likely new waves have flat-lined.
Flat rates and other forms of alternative fee arrangements were touted a decade ago as a big part of the solution. But for the most part they didn’t take.
Volume discounts and task based billing made some inroads. The Uniform Task Based Management System developed in the mid 1990s, with 116 specific task codes for billing much as physicians do, flopped. Critics said the task codes were unwieldy because there was too much raw information and no way to make sense of it. New software has helped foster some renewed interest in task code systems.
Third-party reviewers of legal bills never became widespread, in part because they get paid according to savings. What little presence there was has been fading, largely out of dislike for the nickel-and-diming damage to relationships between clients and their law firms.
Overarching schematics and themes have come and gone over the past decade or two, such as total quality management (supplanted in part by six sigma and its formulaic approximations of perfection) and core competencies.
Electronic billing and so-called matter management have started catching on and could significantly shape and direct the future of legal fee arrangements.
In the meantime, convergence--the winnowing of rosters of outside law firms used by a company--seems on its way to becoming the norm.
“If you sat in on a meeting of general counsel--and we don’t like to say this publicly--it’s not necessarily the hourly rate that’s the problem when all is said and done,” says Roster, who is also Golden West’s general counsel. “It is how the matter is managed.”
Roster says in-house law departments have gotten much wiser, especially in the past decade or so, in part because many good lawyers have moved over from private practice. “They know the inefficiencies when they see them,” he says.
As far as holding down or cutting litigation costs is concerned, says Anastasia Kelly, executive vice president and general counsel for MCI Inc., “The first thing is driving discipline into the law department and outside counsel’s budgeting process.”
In her first in-house job, after leaving a partnership in 1995 at what is now Washington, D.C.’s Wilmer Cutler Pickering Hale and Dorr, Kelly was surprised at what she found when she arrived as general counsel at Fannie Mae--or rather, what she did not find.
“I couldn’t even get a run of my litigation costs,” she says, “and no one in my law department knew how much litigation we had as far as monthly expenditures, et cetera.”
Now Kelly, who co-chaired the ABA Commission on Billable Hours when it was created in 2001, ensures that every jot and tittle is noted. And the process begins at the beginning: the agreement letter with outside counsel.
MCI sends each firm the same basic letter, which requires that a litigation budget be set within a certain period after the outset of the case, prohibits the firm from raising its hourly rates unilaterally (which firms often do annually) and asks for the names and billing rates of all lawyers who will be working on the case.
“We even stopped doing business with certain firms that were not willing to sign on to the key terms,” Kelly says.
Her watchword comes from a former boss: “You are what you track.”
Better Billing Through Technology
Behind the concepts and strategies for holding down litigation costs, technology is probably the biggest driving force for change.
Everyone at Bartlit Beck, including legal and clerical assistants, is issued a laptop computer and is expected to use it. And anyone not fluent with certain programs beyond word processing soon will be.
“Everything is done through the machines,” says managing partner Herman. The computers carry documents, spreadsheets, transcripts, depositions, graphics and annotations, and most of it the lawyers do themselves. There are no formal memos and reports on letterhead, even in communications with clients--everything is memorialized via e- mail.
Bartlit Beck litigates with small teams sharing lots of information, categorized and retrievable in seconds. Everyone is geared to remote access. The firm rarely sends to court more than three or four lawyers, who regularly go up against three or four times that many.
It is not uncommon during trial to hear a portable printer cranking out documents under the Bartlit Beck counsel table to provide previous testimony for impeaching what a witness is saying at that very moment.
And while there are plenty of lawyers who are fluent with PowerPoint or other types of canned presentations in the courtroom, Bartlit Beck lawyers are able to leave such linear, sequential presentations and flit among whatever documents or graphics might seize the moment.
“We haven’t yet run into opponents who live and breathe technology like this,” says partner Peter B. Bensinger Jr.
Technology also is making electronic billing more viable. A snapshot from the 2004 ACC/Serengeti survey of corporate counsel: One in five in house law departments was considering a changeover to electronic billing, while 8 percent of them already had done so and another 3 percent were starting out.
“This is a real game changer,” says Thomas L. Sager, vice president and assistant general counsel at the Wilmington, Del., headquarters of E.I. du Pont de Nemours & Co. “For the first time, in house counsel and its team have control over the billing process.”
DuPont has been an influential leader in corporate efforts to cut legal costs since introducing its model for do ing so about 12 years ago. The DuPont legal model began to radically change the game almost immediately. More than 160 other companies and government agencies have contacted DuPont to study its approach, and there are variations in place around the country.
The DuPont model includes strong emphasis on early case assessment, but probably the most significant aspect of the company’s strategy to cut legal costs is its embrace of the convergence concept, which technology makes possible. DuPont winnowed its outside firms looking for the best fits and the best deals--from 350 down to the current 42.
DuPont continues to fine-tune its model. Earlier this year, the company announced that law firms seeking rate increases for the work of certain lawyers must disclose whether they are equity or nonequity partners. The reasoning is that nonequity partners probably should be billing at lower rates.
Sager estimates that through 2004, DuPont saved more than $162 million after introducing the program.
One key to convergence is having everyone on the same page--DuPont even wants the law firms to buy its carpeting-- and alleviating duplication of effort. Electronic billing facilitates that and more, particularly in conjunction with matter management software, which produces data such as hourly rates or other fee structures, the names of lawyers and other staff assigned to matters, budgets and projections, and all manner of detailed and nuanced measure.
For example, Sager says, DuPont had an East Coast firm and a West Coast firm collaborating on a litigation matter, and the billing and matter management software found an interesting pattern. The West Coast firm was using more associates while the East Coast firm was putting more partners on the job. DuPont determined that fewer senior lawyers were needed for some of the work.
“And these were New York rates,” Sager says. With electronic billing, he says, “You can dig below the surface and talk about staffing.”
The data below the surface can also help with predictability and budgeting, which, for DuPont, point more and more often away from hourly rates.
“We’re approaching the point where 50 percent of our billings are alternative fees,” Sager says.
Competition Encourages Efficiency
For law firms, efficiency is the key to thriving--and maybe surviving--in this environment.
Shook Hardy is a preferred provider for both DuPont and Tyco. The law firm has 10 offices around the country, but the mother ship is in Kansas City, Mo., where the living is less expensive and the billing rates are set accordingly.
To keep an edge, Shook Hardy cuts costs--its own and those of its clients--wherever possible without sacrificing quality.
The firm also manages and budgets cases as carefully as any general counsel. Such is the incentive of the flat fee. For example, the firm often uses national court reporting and trial consulting services because it gets volume discounts.
The client-driven push for early case assessment that has become so common in recent years is turned on its head: Working on a flat fee, Shook Hardy has no interest in a matter taking months to reach the same settlement that could have been achieved early on.
And staffing of cases is scrutinized from the beginning by the firm’s own financial experts and administrators. “Paralegals are a critical part of this, particularly in alternative fee arrangements,” says firm chairman Murphy.
Shook Hardy also uses a variety of case-management software that it usually customizes to create databases for particular clients and their matters. That includes electronic billing.
According to Murphy, the firm and its clients have “just scratched the surface of how we can both use it to evaluate where we are going, particularly when there is some task-based billing involved, maybe see where we’re over budget. We expect at a minimum to have monthly budget reviews.”
Some law firms, while still largely living by the billable hour, have begun accepting more alternative fee arrangements because of the efficiencies that accompany experience from working with specific industries.
And the best start toward that is to thoroughly know the client and the industry. That’s how it worked for the Dykema Gossett law firm, which has branched out from its roots in Detroit handling product liability matters for auto manufacturers. The firm now does work for other industries, such as consumer financing and pharmaceuticals.
“We can come in and say, ‘Last year you spent $1.6 million on your consumer finance class actions with 12 law firms in 20 states, and we’ll do that for you for $1.2 million,’ ” says Dennis M. Haffey, Dykema Gossett’s director of litigation.
Roster says more widespread use of electronic billing and matter management will bring “the real breakthrough” for such change.
But technology giveth and technology taketh away. “The issue that threatens to swamp everything else on cost controls is electronic discovery,” says Scott J. Atlas of Houston, a past chair of the ABA Section of Litigation. “Figuring out what you need to preserve and what to pro duce, just the process of reviewing it for privilege, can dwarf all other costs.”
When Jones Day set out a couple years ago to find the best way to deal with the crush of electronic information, it estimated that the average corporate executive had accumulated between 1GB and 1.5GB of records. That figure has jumped to 4GB and is climbing, according to Montgomery N. Kosma, an associate in the firm’s Washington, D.C., office who works on antitrust matters.
A gigabyte of information equals about 45,000 to 50,000 pages of documents, he says, or about 25 to 30 boxes full when ready for litigation.
Weeding Out Documents
Much of the software for electronic discovery is very good at finding needles in haystacks, Kosma says, which is particularly useful for plaintiffs lawyers. But he wants to find concepts and information clusters.
“There is such a huge volume of electronic data in a corporation that is uncategorized, and what is needed is more like building different haystacks in which to look for needles,” Kosma explains. “Then you can figure out which documents in this vast universe of documents are potentially responsive to a subpoena or document request.”
For example, in working on the Nextel Sprint merger, Jones Day wanted to weed out documents having to do with Nextel’s NASCAR sponsorship because most of them probably were irrelevant to antitrust review. But they also needed to be sorted in a way that left in the fraction of those documents that might somehow mention or relate to Sprint.
“You refine the search, and you quickly and confidently get to documents that are not responsive to any requests, such as Nextel’s communication with NASCAR people about the tour,” Kosma says. “You sweep those away and move on.”
The efficiencies can be dramatic. In defending against one recent class action, Kosma figures the firm saved the client about $2 million with streamlined electronic document review.
“In a process where we might have had three or four months of work for 50 contract lawyers,” Kosma says, “we completed it in three months with eight or 10 associates on the matter.”
Meeting Specialized Needs
At least one law firm has developed its expertise at document review to the point that it sometimes is hired by other firms or their clients to work as special discovery counsel. Seattle’s Preston Gates & Ellis now has more than 200 lawyers and other professionals in its Document Analysis Technology Group.
Preston Gates launched a business in 2001, now known as Attenex Corp., to provide software for dealing with electronic discovery. It was the Attenex software that Kosma selected for Jones Day.
From the outset, Preston Gates intended the software for use by others as well as its own lawyers. Last spring, a venture capital company bought an interest in Attenex and the company is now only partially owned by the law firm.
“We do work for our own clients and for those of other firms,” says Martha J. Dawson, who heads the firm’s document analysis group. “Without efficient ways to handle the explosion of electronic documents, I think litigation would come to a screeching halt.”
For the time being, the vanguard pushing for control of litigation costs is what the 2004 corporate counsel survey refers to as an “activist minority” of about one fourth of in house law departments, most of them in the bigger companies.
“They’re the ones who are able now to cost things out over a number of years,” says Robert E. Hirshon, who, as ABA president in 2001-02, created the ABA Commission on Billable Hours. Hirshon is CEO of the Tonkon Torp law firm in Portland, Ore.
The commission’s primary mission concerned quality-of-life issues stemming from 2,000-hour-or-more billable hour requirements in law firms. But it surveyed the landscape of alternative fee arrangements and recommended moving to them whenever possible.
Time-based billing is unlikely to disappear, the commission states in its report, and in many cases “is an appropriate and necessary tool.”
But, the report says, “With no gauge for intangibles such as productivity, creativity, knowledge or technological advancements, the billable hours model is a counterintuitive measure of value. Alternatives that encourage efficiency and improve processes not only increase profits and provide early resolution of legal matters, but are less likely to garner ethical concerns.”
The legal profession’s goal, states the commission report, “should be to adopt innovative billing methods that provide an accurate measure of value to the client and, at the same time, make the practice of law more fulfilling and enjoyable.”
Terry Carter is a senior writer for the ABA Journal.