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Clamping down on legal costs.

For a CEO or senior manager of a financial institution, hardly a day goes by without giving some attention to cutting costs. Declining revenues and narrowing profit margins during the past few years, combined with industrywide consolidation, have left cost cutting as perhaps the last bastion for improving profits in many organizations. The business strategies favoring wholesale lending operations and servicing specialists inherently take advantage of cost-cutting techniques designed to reduce overhead costs and emphasize economies of scale. Although most executives undoubtedly think that by this time almost every avenue for cutting costs has been explored, an often-over-looked area is legal expenses.

Very few CEOs review their company's legal expenses as carefully as the more familiar fee-generating-business functions such as servicing or production. Why? Often the reason is simply a lack of understanding about how to evaluate legal expenses. After all, this is is a very specialized area that has not been typically viewed as having a significant impact on the corporate bottom line. Although perhaps justifiable in very small companies, for large companies that have legal budgets measured in millions rather than thousands of dollars, neglecting legal expenses can be a costly mistake.

When legal expenses are scrutinized, the primary focus is typically on "head count" (for companies with and in-house legal staff) and outside legal fees, the two "big-ticket" items in any legal budget. Although budget reductions are dutifully made after such a line-item analysis, legal budgets are typically exceeded (often substantially) because of a changing business plan or unexpected litigation. Unfortunately, this cycle tends to repeat itself year after year with no net reduction, and often a net increase, in corporate legal costs.

If any of this sounds familiar, don't worry-your company is not alone. Breaking the cycle of increasing legal costs in not easy, but it can be done by making legal cost control management priority and developing a strategy to attack the problem. Legal departments in large corporations use a vast array of specialized management techniques to keep their legal costs under control. There in no reason why mortgage companies - even those without in-house lawyers - can't adopt some of these techniques to reduce their legal costs.

As a starting point, I have developed the following 10-point checklist to help assess how well your company's legal expenses are managed. Review the checklist items with your general counsel (or outside attorney) and pinpoint areas for reducing costs. You may be surprised at the results.

Make your company's lawyer a partner in reducing legal costs - The CEO and other senior managers must take an active interest in the company's legal affairs and work closely with their general counsel or senior outside attorney to understand how legal issues affect the company's operations. Management must go beyond individual lawsuits or transactions to learn how the legal function contributes to the company's bottom line by scrutinizing legal expense as carefully as those of other departments.

Communicate with your lawyers regularly and keep them informed about the company's business plans and strategies. This will allow your lawyers to anticipate the company's legal problems and resolve them at an earlier and less-costly stage. A carefully drafted contract, for example, that clearly reflects each party's intentions is much less likely to result in a legal dispute than a contract thrown together at the last minute by a lawyer who doesn't understand which business issues should be part of the deal. Companies pay dearly for legal crises, so minimize them by using lawyers effectively.

Develop a meaningful legal budget - You would be surprised at the number of companies that don't have a meaningful legal budget. Yet effective cost control dictates that the legal function become an integral part of the budgetary process, not an afterthought. It is important to treat the legal function as a separate cost center. Anticipate staffing needs and outside counsel expenses based upon the current business plan. Monitor variances on a regular basis as you would with other departments. This will force your legal counsel to explain why variances occur and will lead to an evaluation of expenses to determine how they can be avoided or reduced in the future.

Negotiate legal fees upfront - Avoid the temptation to give legal counsel a blank check even during a crisis situation. Law firm fee arrangements have become increasingly flexible in recent years as competition for clients has heated up. Take advantage of this new attitude by negotiating feed and obtaining at least a rough estimate of costs before retaining outside counsel.

Effective negotiation requires both an understanding of law firm fee arrangements and the nature of the legal work involved. The most common fee arrangements use either an hourly or a fixed rate. Hourly fees are calculated by simply multiplying the hourly rate of the individuals performing the work times the actual amount of time needed to complete the project. This approach works best when the time and mix of individuals (partners, associates or paralegals) needed is not known in advance.

A fixed rate is typically employed when both the time and staffing needed to complete the project are known in advance. Legal fees for foreclosures or certain types of legal opinions, for example, are typically quoted at a fixed rate. Other types of fee arrangements, such as contingency fees, are used by law firms but they are not common in corporate practice.

Companies should attempt to negotiate the most cost-effective fee arrangement for the type of work that the law firm will perform.

Transactional work, for example, can be extremely costly if billed on an hourly basis. With certain types of transactions, such as loan sales, which recur on a regular basis, you may be able to negotiate an hourly rate for the first transaction and a fixed rate for subsequent similar transactions.

Don't be afraid to be creative. Negotiating fees upfront reinforces the company's cost consciousness, makes budgeting legal costs more accurate and is likely to lead to lower outside legal fees.

Adopt standard legal billing procedures - To ensure that the company is getting its money's worth from outside counsel, adopt standard billing procedures that address such issues as billing rates and format, who will do the work, payment for incidentals, guidelines for travel expenses and frequency of bills. Outside counsel should estimate their costs for each project upfront and agree that any amounts billed in excess of the estimate must receive prior approval from the company.

Because it is very disconcerting to receive a hefty legal bill months after completion of a project, reach an agreement with each law firm on the frequency of billing. For firms that do very little work for your company, agree to be billed quarterly or only when outstanding fees exceed a specified amount. For the company's key outside counsel, agree to monthly billings. Remember that the purpose of standard billings is to make it easier to manage outside counsel costs and to avoid being charged for unnecessary expenses.

In this regard, the company's billing procedures should state clearly which expenses the company will pay for. For example, the procedures could state that the company will not pay for secretarial overtime (unless authorized); first-class plane travel; word-processing costs; and training of associates.

Communicate your company's procedures to outside counsel in writing at the time of retention. This will reinforce the importance of following the procedures and minimize misunderstandings.

Review legal bills carefully - It is surprising how often legal bills contain errors or fail to reflect the agreement that was reached with your counsel. Review each bill carefully to ensure that the charges conform to corporate billing procedures. Even if there are no obvious errors but the bill appears high, discuss any concerns with your counsel. Law firms recognize the importance of good client relations and have become increasingly willing to writedown fees for valued clients in today's competitive atmosphere.

Design a corporate compliance program - There is a direct relationship between reduced legal cost and early detection of legal problems. At least annually, legal counsel, working closely with management, should review the company's operations and procedures to ensure that they comply with applicable laws and regulations. Often called a "legal audit," this process should include discussion with management concerning business practices, a review of corporate records, contracts, forms and procedures as well as the creation of checklist and questionaires focusing on specific legal issues. Consumer credit laws (Truth-in-Lending and Equal Credit Opportunity, for example), state licensing laws and employment-relations matters are particularly good candidates for legal audits.

As part of the overall compliance program, management should review the audit results with its legal counsel and correct any deficiencies that are discovered. By developing a corporate compliance program, supported by an annual legal audit, potential legal problems can be identified and resolved at an early stage. Litigation and contractual disputes can thus be avoided, saving invaluable management time and expense.

Use standards forms for recurring transactions - A tremendous amount of legal time and expense, not to mention management effort, is expended negotiating and documenting business transactions. A primary function of the corporate compliance program should be to identify transactions that occur on a regular basis and to standardize their terms and documentation. Loan sales, servicing agreements and compensation plans are only a few of the likely candidates for standardization.

A standardized agreements on the company's work-processing system is far less expensive to produce than one that must be drafted by legal counsel. In addition, it is easier to negotiate a standard agreement, the basic terms of which are clearly understood by management. The legal advice associated with negotiating such an agreement can then focus on exceptions to the standard agreement - a far less time-consuming and more cost-effective alternative.

Settle first, litigate last - Managers and lawyers alike hardly need to be reminded that lawsuits are incredibly costly and time consuming. Yet alternatives to litigation, such as arbitration and mini-trials, have historically failed to get the attention they deserve. The tide may be turning, however, as an increasing number of companies are embracing such alternatives to reduce legal costs and avoid multi-year delays from crowded court calendars. Even the courts themselves have become more aggressive in enforcing early settlements in civil litigation.

Alternatives to litigation can take a variety of forms. Early involvement of legal counsel in drafting contracts can help minimize the possibility of later disputes. Customer service initiatives and customer complaint procedures can focus on resolving business problems before they result in a lawsuit. Contracts can contain arbitration or mini-trials clauses.

One of the most effective ways to reduce litigation costs is to reach a settlement at an early stage of the dispute before legal fees and management involvement become prohibitive. If significant legal fees are incurred, a party is more likely to go to trial in hopes of recovering a settlement large enough to offset the additional legal costs.

Also, don't forget to factor management's involvement into the equation. It is important to consider whether or not key executives must be tied up for days in depositions or other litigation matters. The discovery demands of litigation can also interfere with the operations of an office or department.

Always make a settlement determination by weighing the costs of litigation against the benefits and risks of continuing the lawsuit. This often requires putting aside matters of principle and concepts of justice for a moment to look solely at economics. Litigation can have tremendous financial impact on a company, so cost-conscious organizations should avoid the gamble of going to court unless; they have a very strong case; the opposing party has unreasonable settlement demands; or if the costs involved are outweighed by an important business need.

The most expensive lawyer is not always the best lawyer for the job - Not every legal job required the services of the most prestigious law firm available. Although specialized circumstances often dictate retaining a "name" law firm, it is cost effective to compare law firms to determine the proper mix of legal representation for your company. Some companies are most comfortable with large law firms that provide a broad range of specialized legal services, while others prefer smaller firms that may offer basic legal service, generally at lower rates.

Remember, too, that billing rates can vary widely within the same firm The "name" partner with whom management has become accustomed to working may not be the best person to handle a particular problem. Be certain that a junior partner or associate is assigned to the job if that is the most effective approach.

Finally, consider using in-house counsel once your company incurs annual legal fees in the six-figure range. Not only is the hourly cost less, but in house counsel is particularly well-equipped to manage outside counsel in a cost-effective manner. Plus, in-house counsel will develop an understanding of the company's business operations and will develop working relationships with managers that an outsider can't match.

Use paralegals effectively - Paralegals can perform a variety of legal and administrative functions as effectively as lawyers at far less cost. Corporate governance matters, state licensing, bank-cruptcy filings and document preparation are only a few of the tasks that a paralegal, under the supervision of an attorney, can effectively handle. Evaluate your company's legal operations to determine what functions can be performed by paralegals.

Use this 10-point checklist to start evaluating the cost-effectiveness of your company's legal representation. Bring your lawyer into the company's business planning process, make an effort to understand the financial implications of your legal operations and establish clear procedures for controlling legal costs. Incorporate as many of the suggestions as possible into your company's business plan, give them time to work and evaluate the results. Legal costs should decrease, but even if they don't, management will understand why and be prepared to develop a strategy for reducing future costs.

Edmond R. Browne, Jr., practices law in Washington, D.C. where he is Of Counsel to Levy Lybeck & Bertele, P.C.
COPYRIGHT 1992 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Internal Management
Author:Browne, Edmond R., Jr.
Publication:Mortgage Banking
Date:Mar 1, 1992
Previous Article:A crack in the foundation.
Next Article:The Secondary Mortgage Market (computer-based training program).

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