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Handing down decisions on legal expenses.

Hal O. Carroll is a practicing attorney and president of The Carroll Group, a litigation and management consulting firm in Ann Arbor, MI.

Legal expenses have long been been one of the most difficult business costs to control. Companies and governmental agencies are favorite targets of plaintiffs' lawyers, and their deep pockets arouse little sympathy from jurors. The freewheeling litigation system in the United States exacerbates the situation. One European-based multinational manufacturing company sells less than 25 percent of its products in the United States. Yet approximately 90 percent of its legal and insurance expenses are incurred there. Likewise, there are 30 times as many lawsuits per capita in the United States as in Japan.

The cost of legal defense significantly affects American competitiveness in the global market. It adds to product costs and contributes to the fear of exposure to catastrophic jury awards, thus distorting product development decisions. In a recent Conference Board survey, 47 percent of the companies contacted reported having discontinued at least one product line due to liability litigation concerns.

Attempts to address the problem include imposing caps on awards, limiting plaintiffs' lawyers contingent fees and changing liability rules. Although these are legitimate proposals, they would have little effect and would meet stiff opposition from a legal profession well represented in state and national legislatures. Even if the changes were successful, they would only reduce the need for legal services, not eliminate it. Lawsuits would still be filed and defended, and costs would not change dramatically.

Setting Expense Policy

Most litigation expense lies not in the judgments or settlements paid to the plaintiffs but in the cost of mounting a defense, especially legal fees paid to the company's attorneys. Frequently, the only control imposed on legal costs is the legal department's budget, a crude method that does little more than slow the increase. However, these are costs management can, and must, control. One way to accomplish that task is to have risk and senior managers adopt new policies and procedures relating to legal expenses.

Why should the initiative come from outside the litigation department? Unlike product development, the handling of litigation is not entirely within the corporation's control; the plaintiff's attorney and the trial court judge control much of what happens in a case. Also, lawyers, whether on staff or from outside firms, tend to focus on the immediate goal of getting current cases settled or tried. Litigation management, like crisis management, involves a comprehensive approach, which staff attorneys are not accustomed to taking.

Also, staff attorneys, as service purchasers, and outside attorneys, as suppliers, tend to settle into comfortable but costly business patterns. In addition, the intricacies and arcanities of law and litigation act as a barrier to any manager who tries to improve how legal services are managed. Finally, fear of being responsible for a large adverse judgment is inhibiting.

There are ways companies can lower and eventually control costs while preserving or improving the quality of their legal services. The following suggestions refer specifically to litigation, which usually requires the broadest range of services and has expenses that are hardest to control. However, the approach outlined here can be applied to all legal services.

Solicit bids and hire more than one firm. Insurers have solicited bids on legal costs for decades. But many companies that expect and get substantial discounts on the purchase of large quantities of equipment pay the full rate charged by expensive law firms. Yet law firms will often reduce their hourly rate by 30 percent or 40 percent in exchange for a minimum amount of work.

Soliciting bids introduces a welcome element of competition into the process, but it is only a beginning. If the bid is awarded to a single firm, price competition ends as soon as the bid is awarded and the firm makes itself indispensable. The experience of the military with sole-source contracts illustrates the folly of giving all legal work to a single firm, even one selected by a bidding process.

Avoid excessive delegation. Companies that face litigation in many states often employ lawyers in each state as well as one or more national or regional supervising counsel to coordinate everyone's work. This is quite wasteful. Coordination should come entirely from within the corporation, thus eliminating one layer of administration. Indeed according to management theorist Peter Drucker, most American companies suffer from too many layers of management, a problem that affects the purchase of legal services.

Control litigation in-house through policies and guidelines. Eliminating national supervising counsel skims away a layer of bureaucracy, but does not facilitate control of legal services inside the corporation. Outside lawyers often have almost complete autonomy to decide which services the client will buy and how much it will pay. This formula has done much to put the cost of medical care substantially beyond the control of those who pay for it. The

company must adopt detailed criteria for when specific work should be done, how long it should take and what it should cost. Departures from these criteria should only be permitted by in-house attorneys.

Institute a legal triage system. In the medical profession triage is the sorting of injured persons according to the seriousness of their injuries. Seriousness in litigation is a function of the size of the possible verdict or settlement and the probability of that outcome. The precise categories depend on the nature of the litigation, but generally, they can be sorted into three categories according to exposure risk.

Low-exposure cases offer opportunities for quick settlement without any attorney involvement. These cases involve small claims and are typified by breach of warranty cases with no personal injuries. In-house paralegals can be trained to handle these cases and given authority to settle them up to a specified amount.

Midrange exposure cases can be handled by new attorneys. These cases involve a less extensive preparation than high-exposure cases. Having them handled by less experienced outside attorneys saves money if the firm bills at a lower rate, thus laying the foundation for long-term savings. These cases become a training ground for new law firms, which will first bid against one another, then eventually compete with more experienced lawyers to handle high-exposure cases. Competition in the bidding process is thus increased.

High-exposure cases should be assigned to experienced trial counsel. In these cases, as in the preceeding cases, more than one law firm should be involved to preserve competition. Also, risk managers should participate in these particular settlement decisions. In addition to introducing a broader perspective, this involvement underscores why legal cost control is not the exclusive domain of the legal staff.

Help set litigation defense policy. A lawyer who wins a lawsuit is popular with the client; a lawyer who loses is not. The question, therefore, of what a lawyer should do to win a case seems easy to answer: Do everything possible. While this strategy makes sense if the company or agency has only one lawsuit, it does not work for a company with a wide range of legal problems.

Defending every case results in legal fees that are disproportionate to the exposure. On the other hand, settling every action will quickly identify the corporation as an easy mark, and settlement costs will subsequently increase. There is no formula for striking a perfect balance, and decisions will still be made by lawyers in individual cases, but risk managers should help set the company's overall strategy for litigation defense, with a full awareness of and participation in the risks involved.

Establish a budget for each case. Every staff attorney should set up a budget for each case that projects future work and anticipated costs. These budgets cannot be rigid because an intransigent plaintiff's attorney or an inflexible judge can destroy the best laid plans, and strict adherence to one is a false economy in a crisis. But the budget serves as a general plan and keeps the importance of cost control in the minds of the staff attorneys responsible for managing the cases.

Implement a computerized cost monitoring system. A company can perform detailed time and cost analyses by requiring law firms to submit standardized invoices generated from specialized billing software. Each law firm can be given the software, and invoices, drafts and memorandums can be sent electronically or via diskette. The program will make it possible to evaluate the invoices, comparing the cost of similar services by different firms or by the same firm in different cases or at different times in the same case. The invoices should be categorized by services such as meetings, pleading preparation, motion hearings, research, witness preparation, depositions and preparation of answers to interrogatories.

In the short run the program assists staff attorneys in tracking conformity to budget projections, thus making the budgeting process more precise. It can also spot variations in past behavior patterns or in other law firms' practices and helps assess the cost-effectiveness of various law firms. In the long run the system helps conduct a detailed analysis to identify tasks that can be better handled by restructuring the information flow, bringing some tasks in-house or contracting some outside the corporation.

Conduct a detailed analysis of all defense tasks. Some tasks are best performed in-house, even if the case is being handled by an outside law firm. A good example of this is the discovery process, the litigation phase before trial when each side can get information from the other. The traditional approach often involves many steps. Outside counsel and staff lawyers first meet with technical personnel to discuss what information is needed, then technical personnel return to their departments to assemble the information. The lawyers and the technical personnel meet again to discuss the information and how to frame the responses. The outside lawyer then drafts the responses, sends copies to the staff lawyer, and the lawyers meet once more with technical personnel to discuss the responses. This process can be repeated almost indefinitely.

It is often possible to replace this time-consuming, costly procedure with a simpler one in which basic information is gathered in a central place and model responses are prepared. If this is combined with the use of a well-designed computer system, paralegals can do most of the work. The cost savings for this part of the litigation process can easily exceed 50 percent, with an actual increase in the quality of the work.

"Most litigation expense lies not in judgments or in settlements, but in the cost of mounting a defense"

A detailed analysis is one of the most productive, and most ignored, areas of cost control. A good place to start one is to count the number of meetings outside attorneys hold at the company. Multiple-attorney meetings are expensive and not always necessary. An attorney usually calls the meetings to get information that can often be packaged and sent to the attorney's office. Some meetings are necessary; for example, when discussing strategy in a complex case. However, the analysis should not be limited to work done within the company. The details of how the work is handled in each law firm should also be reviewed to find ways of saving time and money.

Automate work. There is a tendency to think that the only way to automate work is via computer. But this is not true. In fact, relying solely on computers to automate litigation support can create a black hole that draws in endless resources. Less expensive forms of automation can often be more effective. These include a centralized document collection with an index in a ring binder, a set of production packages containing commonly used documents, and technical reference files for in-house staffers and outside attorneys who need information on topics germane to the litigation.

Consider non-traditional work arrangements. Work that involves information use and transfer is changing dramatically. Litigation is an information-assembly business, and companies and governmental agencies that cling to the ways business was done in the 1970s and 1980s are indulging in expensive nostalgia. The electronic revolution, surplus of lawyers and availability of well-trained paralegals have changed the face of the legal profession. Some 10 million Americans now work out of their homes, and the concept of moving people to work at a central location is becoming an anachronism. Indeed, moving the work to the people is often cheaper and more efficient.

Tasks once performed by in-house staffers can today be contracted to outside parties. This not only cuts overhead and fringe benefit costs but adds flexibility by having additional service suppliers. For example, research can be contracted to an assistant law librarian, and the preparation of draft responses to pleadings and discovery requests can be contracted to paralegals.

Monitor the process. When a system for purchasing and using legal services in a rational and controlled way is in place, the cost management and budgeting processes will provide a continuous stream of information that fine-tunes the system. Still, legal department management and risk managers must oversee the process, perhaps with an annual review of the state of the legal department, to identify long-term trends or changes in the litigation process that need to be addressed. Controlling legal expenses involves not only the legal department; risk managers must also take an active role reviewing how the work is handled, finding the most cost-effective approach and monitoring the results.
COPYRIGHT 1990 Risk Management Society Publishing, Inc.
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Title Annotation:risk managers
Author:Carroll, Hal O.
Publication:Risk Management
Date:Nov 1, 1990
Words:2218
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