An Introduction to the Management of Legal Costs

"Why haven't managers taken hold of [the] problem [of unnecessarily high legal costs]?
. . . It is important for managers to remember that lawyers perform a business function, subject to the usual tests of efficiency."

Harvard Business Review, January/February 1983

It has been almost fifteen years since that observation was made yet legal costs are still far higher than they should be. This is because managers still resist the notion that outside counsel can or, in some cases, even should, be managed. And it is inevitable that legal costs will remain higher than they should be if they are not managed. The fact is legal costs need never have reached the levels they have and they need not remain there.

The resistance to management of outside counsel flies in the face of he in-house legal experience, which has conclusively demonstrated that lawyers can be managed. In-house counsel are no different than outside counsel. It is beyond doubt today that outside counsel can be managed, and so can their legal expenses, without any adverse effect on the lawyer/client relationship or the quality of legal services.

Management of legal costs is a process that improves performance and strengthens relationships. In fact, one of the greatest threats to the lawyer/client relationship is the failure to manage closely the costs of outside counsel. In addition to lowering legal costs, proper management of outside counsel will clear the air of the irritations and suspicions that, when left unspoken, serve to fester and eventually poison the lawyer/client relationship.

And the simple truth is that it really is not difficult to manage legal costs. In fact for the most part a law degree is not even needed. What is needed is information as to the precise behaviors that are creating the inefficiencies that are at the root of high legal costs.

Yes inefficiencies. You see, with rare exception, the reason why legal costs are higher than they should be has nothing to do with the complexities of the law or with any greed, overreaching or unethical conduct on the part of your firms. Quite the contrary, it has everything to do with the fact that in serving your legal needs vigorously and in providing the highest quality legal services, your firms are often strikingly inefficient. And these inefficiencies, once identified, are easily corrected.

This is not to say, however, that there is a magic bullet that, once fired, will reduce your legal bills. Management of legal costs is in large part tedious and time consuming, at least for a period of time. Problems in managing such costs include that fact that the resources typically available to be deployed are limited. Also concerns abound about the effect an improperly executed effort could have on the all important chemistry between lawyer and client. And the list goes on.

However these concerns are overblown at best. And, in any event, the management of outside legal expenses is a task that must be tackled. The current drain on corporate resources is simply too great. If the waste and inefficiency in connection with the delivery of legal services are eliminated, no one should be surprised if legal costs are reduced anywhere from 20% to 50%.

You Need Biases to Manage Legal Costs

But before discussing the information you need to manage legal costs, we should say a word about the biases you should develop. Biases are as indispensable to the management of legal costs as is information. Management is an art, not a science. Successful management requires that you approach the management of each person, problem or issue with biases as to how you think things should be accomplished. Managing outside legal costs is no different. But we don't mean that a manager need know how to do the job of the person managed. A manager need know only how to manage. In other words, he or she must be biased. And you need not be a lawyer in order to develop the biases needed to manage legal costs. You probably have them already.

For example, to begin with you should have the bias that a successful and effective legal cost control management effort is one that devotes less and less time to the management of legal costs as time goes on. This is because the goal of the effort should be to manage your firms to the point that they focus on cost efficiency issues with the same intensity they devote to quality issues. Once that occurs, clearly you can and should reduce the level of management resources you have deployed, as you find that close management can prudently yield to reasonable oversight. At the end of a successful legal cost management day, you should be spending less time managing legal costs than you did at the beginning..

A second bias is that the goals of management of outside counsel, at least insofar as efficiency issues are concerned, should not differ greatly from those applicable to the management of in-house counsel. The problem of high legal costs can be managed and solved using the same management techniques as employed with in-house counsel.

These two biases are examples of what may be called "strategic" biases in that they address your overall approach to legal cost management. You also need to develop "tactical" biases, that is, those you will use in your day-to-day management of your firms. To give one example, you should be biased that legal work should be assigned to the person with the lowest billing rate consistent with the highest quality of legal services. Partners should manage projects and associates and, increasingly, paralegals, should be the "foot soldiers." See What Paralegals Do (and What Lawyers Shouldn't Do?).

This is only one of many biases you need to develop. However you can readily see that with this one bias alone you will have much grist for your management mill as you review how your legal matters were handled. Biases give a focus and direction to your management efforts.

You Need Information to Manage Legal Costs

The other key to the management of legal costs, just as is the case with the management of any cost, is the gathering of relevant information about those costs. This is the information that will permit you to identify and eliminate inefficiencies and to identify and spread best practices. And much, if not most, of it can be found in your legal bills. It is imperative, from a legal cost management perspective, that bills are prepared with at least the minimum information you need to manage your legal costs.

This means that bills should segregate time and disbursements by matter and should indicate the year and billing rate of each lawyer and paralegal. Legal bills should also set forth the amount of time devoted by each lawyer and paralegal to each individual task performed during the day, the date the task was performed, and a description of such task, identifying the project to which it relates (e.g. "drafting acquisition agreement re acquisition of X Co."). And, finally, legal bills should contain an itemization of disbursements and costs, including the date incurred and which attorney or paralegal incurred or requested such disbursement.

The foregoing is just the minimum you should request be contained in your bills. You may wish bills to include other information. However, in suggesting the minimal information about time spent on a matter that should be in your legal bills, we do not mean to suggest that you necessarily should demand task based bills, at least if that is understood to mean bills formatted to report time in rigid categories with rigid codes or wordings required. There are many advantages to bills in such a format, but all we are speaking of here are minimal requirements to assure you have access to the information you need to manage legal costs.

In any event you should not regard as acceptable time reported to you as "worked on [matter]" or "trial preparation" or "research issues." And you should not regard as acceptable disbursements reported to you all lumped together as a single sum under headings such as travel, meals, or photocopies. Such reporting of time and disbursements is devoid of meaningful content.

Why is such reporting of time unacceptable? Consider, for example, the situation where two or more lawyers work on a matter. As a manager, you need to have sufficient information to reach a judgment as to whether each provided independent value or whether they duplicated each other's efforts to any significant degree. You don't want to pay for the same work twice. But, if time is reported as "research issues" or "trial preparation," how would you ever know?

But receiving the suggested information in your legal bills will NOT reduce your legal bills. . . unless you act on it. But how can you effectively and efficiently organize and analyze that information? Do have the resources for the job? And how do you find the time to deal with your firms? And what do you do if you find your best in-house lawyers do not have the best legal cost management skills?

That is where the services and products of The LawCost Management Group, Inc. can be of incalculable assistance in supporting your efforts. No matter how sophisticated your current efforts are, no matter what your management styles are, The LawCost Management Group can be of service. Please browse through the pages of our Web Site to find about the Services and Products of The LawCost Management Group, Inc..

And if you want more information, call us at 1-800-664-6961, or Send Us an E-Mail or fill out the Information Request Form and send it back to us on-line at a click of a button.