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The Good, the Bad & the Ugly: the Evolution to Fair Legal Fees

October 31, 2012

Since the advent of the billable hour as the main way that attorneys have calculated their ever-increasing legal bills, clients have been overcharged fistfuls of dollars. Who’s to blame for this?  Your attorneys?  Maybe.  But let’s be honest, isn’t it you – the client?  Who else has been signing off on these huge bills, and as a result, making many senior partners very wealthy individuals. The bad news.  You are pretty much S.O.L. getting any of those armored truckfuls of money back.  Ah, c’est la vie.  The good news, thanks to technology, globalization, and BigLaw leaving their backdoor wide open, there are now a veritable smorgasbord of options available to smart and informed clients, to not only significantly lower their legal spend, but to do so AND increase the quality of their legal services.  But first, let’s have a quick look at how we got into this mess…

The Ugly:  The vast majority of modern legal work is performed by a high dollar per hour attorney and/or team of attorneys.  This is how the majority of clients have been billed by their attorney(s) and/or law firm for at least the last 25 years.  All work, from true high-level work, to the most menial of tasks (which could be easily accomplished by a good receptionist) was billed out at various attorney rates, or if you were lucky, paralegal rates.  And if the truth be told, a majority of the work performed could be performed by persons working at rates less than the billing attorney.  At a BigLaw firm today, those rates can range from $1,000 per hour for the lead partner, down to $200 for a paralegal.  Heck, some of these firms are charging $335 for a summer associate!  Don’t believe that is possible?  Click here.  Teams of associates are assigned to hundreds (and thousands) of hours of document review and discovery battles, complete with never-ending meet and confer negotiations and time-consuming motions.  Let’s not forget the ubiquitous continuances and the resultant stream of back-and-forth scheduling emails, which of course, you are all billed for.  Add all this up and you see seven-figure attorney fees far too often.  Ugh.

The Bad:  Some clients began to catch on that their trusted fiduciaries seemed more interested in the client’s checkbook than their best interests.  Maybe that time came when clients started to notice that their attorneys were driving nicer cars than them . . . or maybe the Great Recession forced them to search for greater cost-savings.  Whatever the reason, clients started to challenge (rather timidly) their attorneys.  Discounts, billing guidelines, task code billing, fixed fees, etc.  The problem.  Very few of these actually worked to lower overall legal spend.  The white-shoes didn’t get rich by being pushovers.  A $50 per hour “discount” was countered by adding a paralegal to the case.  Hourly rate down, hours up.  Billing guidelines, e.g., no more than 3 hours research without approval, were simply billed out as “further preparation of motion,” rather than “research.” Fixed fee cases suddenly settled when the hours expended matched the fixed fee.  In other words, what was giveth, was taketh.  And law firm profits kept soaring.

The Good:  Thank your lucky stars for evolution (if you don’t believe in evolution, you’ve got bigger problems than saving on your legal fees).  For smart clients, the present is a day of wine and roses.  A tipping point has been reached.  Real, cost-effective, quality legal options abound.  An informed client can now wrest back control of their own legal issues.  A hypothetical is in order. Let’s assume a wrongful termination action that in the past (“the Ugly” days) cost a company $1 million in legal fees and settled on the courtroom steps for $100,000.  $600,000 of the legal bills were spent on discovery, with the majority spent on document review.  Total outlay to the company is $1.1 million.

Under “the Bad” scenario above, a discount was negotiated up front, litigation guidelines were put in place, budgets were requested, and proper staffing was closely-watched.  The original $500,000 budget was quickly exceeded – opposing counsel was engaging in an aggressive discovery battle (you have no way of verifying this, so there goes the budget).  The billing partner makes sure to carefully tailor the bills to your guidelines (no research over 3 hours) and paralegals and junior associates are used on most of the document review.  I’ll assume you kept an eye on the backdoor, and managed to save 10%, but you still settled on the courtroom steps for $100K.  Total legal spend equals $1 million.  Pat yourself on the back, maybe ask for a bonus.  I just don’t think you deserve it.

Ah, but now you are finally ready to be “the Good” client.  Time to take the bull by the horns.  This is your company, your problem and your hard-earned cash.  Early on, keep the matter in-house and only use outside counsel in an advisory role.  Conduct an aggressive and early case assessment.  Is the case against you strong?  50-50?  If so, include likely litigation costs into the equation and aggressively pursue non-litigation options.  Offer early mediation, attend in good faith, and bring settlement authority of at least $100K.  If it works, you are out the door for about $125K.  Quite a savings.  Okay, so you don’t want to set a precedent, or the ex-employee overvalues the case.  So it’s off to court you go.  Again, explore options.  Can you bring in an Axiom or Conduit Law “temporary” lawyer?  This will save a boatload of cash and offer more control.  Or call Valorem and ditch billable hours altogether.  Okay, too radical for you?  Then find a specialized boutique firm that is ready to “put some skin in the game.”*  You already did your early case assessment.  Have frank discussions of what the company’s expectations are and prepare a comprehensive and detailed budget with specific and pre-agreed performance milestones and success bonuses.  Require the use of new technology.  If document review is necessary, demand that it is outsourced to a proven provider like Blackstone or Novus (success story here).  Total hard budget up to trial is $500,000, based on company signing off on less aggressive discovery, law firm agreeing not to pursue certain “inefficient” motions (like demurrers and motions to compel), and use of LPO for document review.  Worst case scenario under this plan:  settle on courthouse steps for $100K.  Total legal spend $600,000.  Better scenario:  do early and limited discovery and pursue real settlement discussions.  If impasse is met, suggest “baseball” style resolution where each side offers a “final” offer and judge or arbitrator must pick one offer (no splitting the difference) after a one-day non-jury trial.  You’d be amazed how close the final offers get under this process.  You even “lose” the one-day trial and now owe $125,000.  But your legal fees were only $150K and you owe a $100K success bonus to the firm for coming in well under the $500,000 budget.  Total legal spend equals $375,000.  I think you’ve just earned yourself a few days on the sand somewhere in the Caribbean!

We all know litigation is uncertain and involves risk.  There are innumerable scenarios that can play out, but this is no excuse to default to the reign of terror known as the unchecked billable hour.  A far better approach is to have real and open communication with your attorney(s), and to have full agreement beforehand on how to share risk and incentivize positive outcomes.  And remember, just because your law firm looks warm and fuzzy while they are raiding your cookie jar, they can be more ornery than a rabid wolverine when their fees and integrity are called into question . . . so if you need help, get it.

For a couple of other great perspectives on innovative ways to successfully manage and control your legal spend, I recommend:

2 Comments leave one →
  1. November 1, 2012 2:12 am

    Your topic and your site are excellent as the whole billing issue needs to be transparent and debated, but the article is a little simplistic. There is a huge difference between big law firms and smaller ones, and many lawyers do see things from a client perspective. Clients also need to understand that net profit on an hourly rate can be as little as 25%. Not complaining, but £250.00 an hour does not mean £250.00 profit per hour.

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  1. Value-Fee Agreements – Issues for Legal Consumers and Attorneys to Consider | thelegalreformer

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