The latest post from Jim Hassett’s blog Legal Business Development.
The AmLaw 200 and many smaller firms are in the early stages of trying to improve efficiency and provide higher quality at lower costs. There are three major trends that have led to the ever-increasing costs of legal services and to the segmentation of the legal market:
1) Lawyers have to deal with the rapidly expanding size, scope, and complexity of American and international law.
2) The impact of technology on the law.
3) The nature of the American legal system, with its emphasis on perfect procedure and perfect outcomes, is a decisive element.
Those trends, in turn, have inspired a focus on improving the process of providing legal services, reducing costs, and improving quality. The third point – perfectionism - is talked about a lot, but the first two have inspired far less discussion.
Why do I talk about the size, scope, and complexity of the law? Forty years ago, when I graduated from law school, at least it was a manageable proposition to try to do legal research. Nowadays, with the incredible number of cases, sources, and materials out there, it’s almost impossible in certain respects. Similarly, while there were statutes and regulations at the federal, state, local, and international levels, it was complicated but not overwhelming. In my judgment, it is now overwhelming.
In 1976, when I left law school, there really was no environmental law. There was no healthcare law, no ERISA, and no significant practice in various other areas. Now there are departments in each of the major law firms to deal with these things. Law is more and more complex, so there’s more and more work for lawyers and law firms to handle.
And of course we have a love-hate relationship with technology. Technology allows us to access all of these hundreds of thousands of cases. But the more you have, the more you have to encompass. Technology allows clients to preserve all sorts of data in the form of emails, voicemails, documents, notes, etc. Guess what: discovery in litigation matters is a herculean task. Again, new technology is helping us sort these things out, but every time it helps us solve a problem, it makes other problems more complex.
When I started out, the typical commercial mortgage document was five to fifteen pages in part because it actually had to be typed. Now, it’s not surprising to get a 125- or 150-page commercial mortgage document. One of the resulting problems is that very few buyers can afford to have a lawyer read the whole thing. It takes five or six hours to read one of these documents and actually figure out whether it all makes sense.
If you do read one of them, often you find that some of the provisions don’t jive; that, in attempting to address every potential problem in detail, people have just made terrible problems for themselves. So just a bit of gratuitous practical advice here: if you are writing documents, shorter and simpler is often better.
We have a quest for perfection in America. This virtue is also a vice. We have wonderful procedural protections. We have tremendous appellate rights. If you have a claim, in many respects you have all the time in the world to prosecute it to a conclusion. Unfortunately, it makes the cost of dealing with a legal matter almost incalculable in many situations.
As a result of these factors driving ever-higher legal costs, the marketplace has segmented. Let’s say that you work in a 100-plus person law firm. A relatively modest commercial case comes in the door with a mere $1 million at stake. Since yours is not a mega-firm, but just a good regional firm like some here in Detroit, your clients are only going to be paying a mere $400 or $500 per hour for an experienced partner’s services. They are going to get billed $300 per hour for the second lawyer; perhaps $175 per hour for a legal assistant. You’ll have to hire an expert with similar costs, perhaps several. You’ll need a firm to help you with the electronic discovery simply because we have a few hundred thousand documents to review.
Figure a seven-10 day trial could cost you a mere $150,000. It then probably costs $200,000 to get up to the trial with a complaint, motion practice, and discovery. Now you’ve got a $350,000 budget for your million dollar case. No wonder clients think costs are out of control!
Imagine you’re the defendant in that case. You think you have been wronged, not the other way around, yet the plaintiff is demanding $1 million from you. Your lawyers tell you they are going to charge $350,000 to vindicate you in a situation where you think your liability is zero.
This guest post is an excerpt from Carl Herstein’s thought provoking article “The Changing Legal Market: Some Thoughts for Law Students,” originally published in Of Counsel, Wolters Kluwer, August 2016.
Step 3: Compare planned spending against actual spending at regular intervals
If the firm does have timely information going into the system, the next step is to get it out.
Whatever accounting package your firm uses -- whether it is Elite, Aderant, Juris, Rippe Kingston, or another -- it already has a number of built in features to assist budget tracking. The exact details vary not just from one program to another, but also depend on the version your firm is running, and any add-ons they purchased. Since features are also constantly being updated and enhanced by software vendors, the best way to find out exactly what your firm’s software can do is to talk to your finance staff.
There is no one best solution for tracking. The best answer for you will depend on client needs, the way you like to work, the features of the software your firm already owns, and how much time is required and available for assistance from finance personnel. (Depending on your software, your finance department may simply not have enough staff available to implement a solution which is technically possible but time consuming to set up or administer.)
The need to talk to appropriate personnel is especially strong if you work at one of the many firms that has developed, or is in the process of developing, its own individual custom applications to track and report spending.
During your discussion, you may want to talk about how practical it is to set up features in advance such as:
Then you should discuss the most practical way for you to review the data, such as:
In addition to the features in standard accounting packages, and the custom programs some firms have developed, there are a number of related software tools that firms use to track and analyze financial metrics, such as Redwood Analytics and DataFusion’s Intelliquest family of analytic tools. In the last few years, legal project management software has also started to emerge as a new category, including Prosperoware’s Umbria, the Cael™ app suite from Elevate, and Randy Steere’s Budget Manager. A few years ago, Engage was the leading software in this space, but late in 2014 Thomson Reuters announced that they would stop supporting the product in 2017.
In summary, there are so many options and variations in this area, and they are changing so rapidly, that if you want to know the most practical way to track budgets in your firm, you will need to talk to the appropriate staff.
Step 4: Define a plan in advance to address critical gaps between planned spending and actual costs
We’ve discussed this critical step before in several blog posts. For example, see the guest post by Stacy Ballin, a partner and General Counsel at Squire Patton Boggs, entitled “Scope changes in litigation.” Another related post in this blog is entitled “How to track legal work that is out of scope” and describes how some firms are using special task codes for out of scope work to make lawyers more aware of the issue. The fourth edition of our Legal Project Management Quick Reference Guide, which will come out in October, includes some new resources on this topic, notably an article by JT Stuart Dodds, the Director, Global Pricing and Legal Project Management at Baker & McKenzie, entitled “Establishing a change control process.”
At the end of the day, the details of the system you use to address gaps is less important than the simple fact that you have set some rules in advance.
Tracking and controlling legal costs is one of those topics that would require an entire book of its own to do it justice. This short overview is designed to outline a framework for an effective system. The practical details of how budget tracking works in your firm will depend on the approach of your finance department, and the tools they use.
In many firms, this is an area that is evolving rapidly as clients demand more timely and sophisticated information about spending. If you are not already familiar with the latest budget tracking procedures in your firm, our single most important piece of advice is to stop reading this post and instead talk to your finance or practice development staff about the tools and techniques that are currently available to you, and what is planned for the future.
This two part series provides a brief overview of four major steps in tracking and controlling costs.
Step 1: Define a baseline budget before the matter begins
If you have no idea what the total cost should be at the end of a matter, it’s pretty obvious that it will be hard to know where you stand. Yet we continue to be amazed at the number of lawyers we see who operate without sensible budgets.
If you need to improve in this area, you may want to see the posts from this blog on “Six steps to better budgets”. For important matters, you should ideally develop what we called a “high detail” budget in that series, in which you have estimated the cost for each phase. For example, in litigation you could have separate budget estimates for case assessment, pre-trial pleadings, discovery, trial preparation and trial, and appeal. (As noted in our recent series of posts on task codes, high level phases generally work better than detailed tasks for this, because it is so difficult to get lawyers to accurately code their time entries by tasks.) Many firms now require high detail budgets for all matters over a certain dollar threshold, even if clients do not request them. The threshold may be as low as $50,000 or less, or as high as $250,000 or more, depending on the size of the firm and the amount of financial control that is desired and practical.
Step 2: Obtain accurate and timely information about spending as the matter proceeds
In order to evaluate the financial status of a matter, you need to know how much has been spent to date. In coaching lawyers in LPM over the last several years, timekeeping practices is probably the area where we have seen the most change. Years ago, the standard at most firms was for lawyers to submit timesheets at the end of the month, which occasionally became an exercise in “creative writing.” And if a partner submitted a time sheet a month or two late, no one got too excited. Until the day that time was submitted on a matter after the final bill went out, and the firm had to write off the difference. There are still firms that live with this system, but the number goes down every year.
At the other extreme, there are now practice groups and entire firms that require lawyers to submit their time electronically at the end of every day. The next morning, the relationship partner can get a real time view of exactly how much has been spent.
Most firms fall somewhere in the middle and many are still struggling with systems to encourage timesheets to be submitted promptly. We have seen many approaches used by firms to induce compliance with prompt time entry practices, both “carrots” and “sticks.” The “stick” ranges from continually nagging and cajoling, to systems of either financial penalties (e.g. $50 per end-of week or end-of-month tardy time release) or evaluation penalties (e.g. reduction in the offender’s year-end evaluation for bonuses). The “carrot” systems offer evaluation or dollar awards for compliance.
One of the more creative systems we’ve come across was the CEO of an AmLaw 100 firm who suspended direct deposit on pay day for anyone whose timesheet was late. The individual had to then come to the CEO’s office to pick up a physical pay check. Another creative firm created a contest among administrative assistants, with cash rewards for those whose groups had the best record for meeting timesheet deadlines.
Regardless of the state of timesheet practices at your firm, if you are responsible for keeping a matter within budget, you will need to find a way to get complete and timely information on hours billed to your project. Without it, any subsequent analysis will simply be a matter of “garbage in, garbage out.”
This series was adapted from the fourth edition of the Legal Project Management Quick Reference Guide which will be published in October.
Under-reporting of the status and results of legal matters can result in surprises to the client and unpaid bills. But over-reporting can make clients think that you are insecure or even lack competence. The trick is that different clients draw the line at different places, so whether your reporting consists of weekly phone calls or short monthly reports or something else will vary from client to client. Success starts by talking with each client about what they want.
The first Wednesday of every month is devoted to a short and simple reminder like this to help lawyers increase efficiency, provide greater value to their clients and/or develop new business. For more about this tip, see our Legal Project Management Quick Reference Guide.
For example, DLA Piper asked nSource to manage a “captive operation” for it in an off-site location in Tampa, Fla. Bryant says that some law firm functions that were at first thought of as requiring attorneys on site actually were susceptible to being done off site by contract employees. One of them, in DLA Piper’s case, was conflict checking – a crucial function that a law firm must undertake before it takes on a new matter.
“We distinguished between the strategic and the tactical aspects of conflict checking,” Bryant said, “and we found that the tactical, day-to-day aspects could be done off site. By doing so, we reduced the firm’s costs for this function by 50 percent, and we also achieved a 50 percent decrease in the time required to hire a new conflicts analyst and bring him or her up to speed.”
nSource did this by carefully studying the conflict checking process – what steps were involved, who did them, and how long each step took. After completing this process mapping, it was able to advise its client, DLA Piper, on how to outsource that task.
Bryant said DLA Piper’s leaders were so pleased with the way outsourcing worked in the conflict checking arena that they expanded it to other functions as well, saving money, increasing efficiency and improving the way the tasks were done.
Legal marketing, like conflict checking, has aspects that are highly strategic and can’t easily be outsourced. But, DLA Piper and nSource found, it has many routine aspects as well.
“Although there are some people in marketing who really need to be near the lawyers,” Bryant said, “when you think about all the external and internal communications demands on a marketing team, the RFP responses, the responses to honors and awards submissions, these can be leveraged and done in a centralized way, off site. For DLA Piper, we moved to a factory-like setting, where they really churn these things out. We placed rigor and precision around an area that has historically been chaotic.”
In similar ways, nSource has set up outsourced offices for other functions such as library services and human resources for DLA Piper and other clients.
The new world of legal outsourcing does however raise some new management issues. The challenge of managing subcontractors is familiar in other professions. The 11th edition of Harold Kerzner’s widely quoted textbook, Project Management, has an entire chapter devoted to working with external suppliers. The perspective is interesting, since the chapter makes it clear that a firm using an external source for some of its work on a matter is now in a role reversal. The firm is a client of the outsourcer it has hired, and has the same responsibilities to monitor that outsourced supplier that its own client has to monitor the firm’s work.
If XYZ Corporation has hired your firm for a matter, the legal department of XYZ had the job of hiring you in the first place and has the responsibility to monitor your work. Similarly, if you hire supplier DIS for discovery work, you had the job of hiring DIS in the first place and then you have the responsibility of monitoring DIS to assure that their work product is acceptable. The law firm is responsible for the entire work product, and must make sure that all the parts work.
Lawyers are just starting to become familiar with the idea of subcontracting work, and the use of outsourcers presents new challenges.
As Mark Ross noted in a paper entitled "The Ethics of Legal Outsourcing", “It is clear that to satisfy the duty of competently representing one’s client, a US lawyer engaging a legal process outsourcing provider cannot rely on the provider to evaluate its own work product and must himself or herself be able critically and independently to evaluate the work product received.”
Oversight can be complex. For example, consider the eDiscovery technique of predictive coding. Unlike simpler forms of eDiscovery—such as keyword search, concept searching, and looking for clusters of similar document groups—in predictive coding attorneys train software algorithms to find the most relevant documents by using samples of documents called training sets. According to Predictive Coding for Dummies (p. 8):
The great advantage of this approach is that attorneys will be able to explain the decisions made by the computer, since they worked to train the computer algorithms. This can satisfy the obligation of competent representation, so long as things are properly done. But there is always the danger that things will not be properly done. Predictive Coding for Dummies (p. 11) goes on to say:
The message is clear: A firm that uses predictive coding cannot rely on it as a black box that gives right answers at all times. Not all providers are equal. There must be a procurement process that evaluates and selects an appropriately qualified provider.
Competent representation includes understanding and monitoring the provider’s work. If that does not happen, the law firm may be at risk.
Due to the growth in outsourcing, in 2008 the ABA Standing Committee on Ethics and Professional Responsibility issued an opinion to provide ethical guidance to lawyers about how to outsource in a manner that is consistent with the profession’s core values. State and local bar associations have also offered guidance in this area.
In August 2012, the ABA Commission on Ethics 20/20 concluded that outsourcing did not require changes to the Model Rules of Professional Conduct. However, it did propose new Comments to identify the factors that lawyers need to consider when retaining outside lawyers (Model Rule 1.1) and non-lawyers (Model Rule 5.3) to assist on a client’s matter. The Commission also proposed a new sentence (for Comment 1 on Model Rule 5.5) to clarify that lawyers cannot engage in outsourcing if it would facilitate the unauthorized practice of law.
Like many obligations described in the Model Rules, these proposals were intended to be “rules of reason” and were not intended to preclude consideration of broader legal concerns, such as malpractice and tort liability. But they did reflect the fact that new trends in outsourcing place new demands on the supervising lawyers.
This series was adapted from the fourth edition of the Legal Project Management Quick Reference Guide which will be published this fall.