Legal Economics

The upward spiral of legal costs, including the demands of Electronic Database Discovery (EDD) and the impact on early case assessment, puts pressure on departmental legal budgets. Artificial floors created by budgets derived from prior-year expenditures will give way to application of traditional return on investment (ROI) analysis to set appropriate cost levels.

Total Litigation Cost

The relevant metric for cost is total litigation cost (TLC), defined for defense matters as the sum of legal fees, third'party-related litigation costs (fees for experts, EDD vendors, court reporters etc.) and the settlement or judgment paid. To address both the absolute level of cost as well as cost predictability, a targeted approach focused on the interplay between the TLC components and the key cost drivers is superior to rough across the board measures.

Controls must focus on root causes of systemic inefficiencies that drive costs up, not just the outer manifestation. Instead of jawboning, for example, over the size of the annual increase in a law firm's rate schedule or a rebate discount on volume, questioning the paradigm itself could yield far more savings.

What to Ask

Why shouldn't, for example, corporate counsel require firms to adjust rates for individual lawyers on a case-by-cases basis as a function of the complexity, difficulty, and demands of the matter? The common assumption that judicious staffing, appropriate task allocation and quality supervision will deliver overall efficiency and lower costs is belied by recent history. In practice, the client may be left with the Hobson's choice of having a higher-rate lawyer insufficiently attentive to the task at hand, or a lower-rate lawyer lacking the full skill set and experience to strategically weight the firm's time allocations to develop the desired proof.

In addition to challenging accepted paradigms, ROI analytics has to guide and mitigate the temptation to defer or eliminate costs until absolutely necessary or critical. Prudent corporate counsel would not cut early case assessment and related EDD expenses if insight and foresight could demonstrate that a $1 cut in expense would result in more than $1 increase in judgment or settlement cost.

Are the tools available to make such analyses? Poor statistical performance in one baseline indicator would clearly contraindicate a reduction in early case assessment (ECA) expense. Almost all companies today require a budget and initial assessment of the case exposure or value. An agreed-upon litigation management plan (LMP) is the byproduct of that process. Deviation between initially targeted outcomes and case budgets on one hand and final results on the other that is frequent and/or of significant magnitude suggests caution before instituting cutbacks that might cause further deterioration in performance and an increase in TLC.

Significant deviation between projections and results is not the only red flag indicator that a company is not getting sufficient ROI on its legal expense dollar. Many companies rely on metrics developed from careful studies of their overall docket and portfolios of matters within different practice areas. Matters within practice areas such as employment, products liability or environmental can be ranked by severity of exposure, into one of 10 decile categories, 1 representing cases for example with a value of under $100,000 and 10 representing catastrophic exposure.

Historical Data

Historical data can be compiled to reflect allocation of a company's legal budget among practice areas and what the average legal fee, cost, and settlement or judgment paid is as distributed through the severity rankings of different portfolios of matters.

Companies incurring nearly the same average legal fees and costs on matters that have a severity ranking of 3 or 4 as they are on 7 or 8 matters know they are not getting the same ROI on their legal expense dollar and should initiate a change in strategic approach from their firm. Similarly, a difference in average legal cost to handle comparable portfolios of matters between two legal service providers with no corresponding difference in the average settlement or judgment paid demands scrutiny. If the explanation for such disparity is a difference in the average time a case is open on the docket, corporate counsel can demand more aggressive case handling.

Metrics

Proper use of metrics can measure performance, but also can serve, as an indicator of what changes might be necessary to achieve a greater ROI from the legal expense dollar. The example of a company whose internal analysis might reflect a troubling deviation between LMP projected assessments and actual results is a good illustration.

Although most all companies claim to perform early case assessments, there are significant differences in the rigor of those assessments, the skills and experience of the lawyers making the initial raw data analyses that form the basis for such assessments, the specificity of the recommendations, and the degree to which clients brings any “teeth” to the expectation that their lawyers will live by those assessments. Foremost among the variables is the level of detail in which the lead trial partner has his or her eye on the ball during the critical initial stages of the matter. Has, for example, the assigned trial partner interviewed key witnesses at the outset as well as personally reviewed the critical initial document population?

Variance in practice styles is a leading reason for vulnerability to common pitfalls throughout the litigation, which drives up costs. Failure to adequately challenge and explore initial conclusions of forensic experts can lead to poor strategic positioning, unwise alliances and focus or joinder on the wrong parties. Presenting initial witnesses for deposition on factual elements upon which your forensic, accounting, or other professional expert may ultimately rely before a thorough vetting of all potentially supportable expert positions has taken place can make for a quite inauspicious beginning. Staking out a position in pleadings, written discovery or deposition that reconciles internal company inconsistencies with desired proof ' without a full review of “hot docs” from an early-on EDD assessment performed with vendor assistance ' can backfire. Giving short shrift to the early case assessment process and adopting a learn as you go approach often results in a linear checklist type of discovery plan that wastes legal expense dollars on lines of inquiry that may have no impact on the real issues that will control the verdict outcome at trial.

Up-Front Spending

Spending “smarter” up front can save multiples of that expenditure on the back end. Companies would be well served by taking a close look at what kind of early case assessment process they are investing in. Smaller value cases and EDD are challenges to the ECA process but can be addressed by redirecting the focus to the type of information desired to flow from that process to guide future decision making.

Early Case Assessment

In small cases, the product of early case assessment should be a speedy determination as to whether the case should be tried or settled in its early stages. If the case is marked for trial after analyzing the merits and the principles at stake as valued by the company, an LMP needs to be developed proportional to what's at risk. Delaying settlement considerations by waiting until all leverage factors can be brought to bear on an adversary to drive the settlement value down, can result in legal fees and costs increasing the TLC beyond what would otherwise be achieved.

Discovery Costs

A cost-effective approach on EDD (or as is sometimes referred to, Electronically Stored Information (ESI)) should take into account both the strategic needs of ECA and the pragmatic dictates of compliance with discovery obligations. Federal Rule Civil Procedure 26 requires a “meet and confer” between adversary counsel at the onset of a case with the expectation the parties can develop agreed-upon protocols and procedures to facilitate EDD.

Parties in litigation are aware that discovery can eat up to 80% of the cost of litigation with 75% of the discovery cost most likely related to document review. When up to 90% of a matter's document population can be electronically stored information, there is a strong shared interest in taking a pragmatic approach.

Early Interview of Witnesses

Integral to the ECA process, early interviewing of witnesses can help identify the date range, document type, subject matter and author, addressee, copyee information that can be used to model searches for similar documents that will play a pivotal role in the case. Coordination with the company IT staff and appropriate EDD consultants can provide assigned counsel with a grasp of the organization's data map, key custodians, and facilitate initial efforts to organize and group the documents by categories useful to analyzing the issues in the case.

Manual Review of Documents

The practice of conducting protracted manual attorney reviews of successive blocks of documents that may result in classifying as genuinely relevant only 10% of an allegedly responsive document population can be wasteful and unproductive. Even keyword searching document populations on the most typical and popular law-firm database software is notoriously both under- and over-inclusive.

It is often more cost-effective to spend the necessary money up front for a vendor who has proprietary advanced search engine capability along the lines that Google has pioneered, to filter, issue code, and score responsiveness of documents that can then be used to put together a solid LMP from the outset. Rapid identification of “hot docs” and an understanding of where they exist in the data map will facilitate both a more coherent ECA and strategic positioning as well as afford counsel the best opportunity to get agreement on cost-effective EDD protocols at an initial “meet and confer.” The company can then make a more informed decision as to what level of human review and risk they are comfortable with and tailor their cost budget accordingly.

Conclusion

Particularly in these economic times, corporate counsel deserve the highest ROI possible from their legal expense dollar. Achieving that return requires first the internal discipline to quantitatively measure performance and then critically examine the processes that drive cost. Equally important is mustering the political will to see the necessary changes through and overcome the business as usual inertia that typifies many company relationships with their outside counsel.

John F. Brown Jr. is a principal at Brown Law LLC. Until recently, Mr. Brown was a shareholder at one of the nation's largest law firms. He can be reached at [email protected].

The upward spiral of legal costs, including the demands of Electronic Database Discovery (EDD) and the impact on early case assessment, puts pressure on departmental legal budgets. Artificial floors created by budgets derived from prior-year expenditures will give way to application of traditional return on investment (ROI) analysis to set appropriate cost levels.

Total Litigation Cost

The relevant metric for cost is total litigation cost (TLC), defined for defense matters as the sum of legal fees, third'party-related litigation costs (fees for experts, EDD vendors, court reporters etc.) and the settlement or judgment paid. To address both the absolute level of cost as well as cost predictability, a targeted approach focused on the interplay between the TLC components and the key cost drivers is superior to rough across the board measures.

Controls must focus on root causes of systemic inefficiencies that drive costs up, not just the outer manifestation. Instead of jawboning, for example, over the size of the annual increase in a law firm's rate schedule or a rebate discount on volume, questioning the paradigm itself could yield far more savings.

What to Ask

Why shouldn't, for example, corporate counsel require firms to adjust rates for individual lawyers on a case-by-cases basis as a function of the complexity, difficulty, and demands of the matter? The common assumption that judicious staffing, appropriate task allocation and quality supervision will deliver overall efficiency and lower costs is belied by recent history. In practice, the client may be left with the Hobson's choice of having a higher-rate lawyer insufficiently attentive to the task at hand, or a lower-rate lawyer lacking the full skill set and experience to strategically weight the firm's time allocations to develop the desired proof.

In addition to challenging accepted paradigms, ROI analytics has to guide and mitigate the temptation to defer or eliminate costs until absolutely necessary or critical. Prudent corporate counsel would not cut early case assessment and related EDD expenses if insight and foresight could demonstrate that a $1 cut in expense would result in more than $1 increase in judgment or settlement cost.

Are the tools available to make such analyses? Poor statistical performance in one baseline indicator would clearly contraindicate a reduction in early case assessment (ECA) expense. Almost all companies today require a budget and initial assessment of the case exposure or value. An agreed-upon litigation management plan (LMP) is the byproduct of that process. Deviation between initially targeted outcomes and case budgets on one hand and final results on the other that is frequent and/or of significant magnitude suggests caution before instituting cutbacks that might cause further deterioration in performance and an increase in TLC.

Significant deviation between projections and results is not the only red flag indicator that a company is not getting sufficient ROI on its legal expense dollar. Many companies rely on metrics developed from careful studies of their overall docket and portfolios of matters within different practice areas. Matters within practice areas such as employment, products liability or environmental can be ranked by severity of exposure, into one of 10 decile categories, 1 representing cases for example with a value of under $100,000 and 10 representing catastrophic exposure.

Historical Data

Historical data can be compiled to reflect allocation of a company's legal budget among practice areas and what the average legal fee, cost, and settlement or judgment paid is as distributed through the severity rankings of different portfolios of matters.

Companies incurring nearly the same average legal fees and costs on matters that have a severity ranking of 3 or 4 as they are on 7 or 8 matters know they are not getting the same ROI on their legal expense dollar and should initiate a change in strategic approach from their firm. Similarly, a difference in average legal cost to handle comparable portfolios of matters between two legal service providers with no corresponding difference in the average settlement or judgment paid demands scrutiny. If the explanation for such disparity is a difference in the average time a case is open on the docket, corporate counsel can demand more aggressive case handling.

Metrics

Proper use of metrics can measure performance, but also can serve, as an indicator of what changes might be necessary to achieve a greater ROI from the legal expense dollar. The example of a company whose internal analysis might reflect a troubling deviation between LMP projected assessments and actual results is a good illustration.

Although most all companies claim to perform early case assessments, there are significant differences in the rigor of those assessments, the skills and experience of the lawyers making the initial raw data analyses that form the basis for such assessments, the specificity of the recommendations, and the degree to which clients brings any “teeth” to the expectation that their lawyers will live by those assessments. Foremost among the variables is the level of detail in which the lead trial partner has his or her eye on the ball during the critical initial stages of the matter. Has, for example, the assigned trial partner interviewed key witnesses at the outset as well as personally reviewed the critical initial document population?

Variance in practice styles is a leading reason for vulnerability to common pitfalls throughout the litigation, which drives up costs. Failure to adequately challenge and explore initial conclusions of forensic experts can lead to poor strategic positioning, unwise alliances and focus or joinder on the wrong parties. Presenting initial witnesses for deposition on factual elements upon which your forensic, accounting, or other professional expert may ultimately rely before a thorough vetting of all potentially supportable expert positions has taken place can make for a quite inauspicious beginning. Staking out a position in pleadings, written discovery or deposition that reconciles internal company inconsistencies with desired proof ' without a full review of “hot docs” from an early-on EDD assessment performed with vendor assistance ' can backfire. Giving short shrift to the early case assessment process and adopting a learn as you go approach often results in a linear checklist type of discovery plan that wastes legal expense dollars on lines of inquiry that may have no impact on the real issues that will control the verdict outcome at trial.

Up-Front Spending

Spending “smarter” up front can save multiples of that expenditure on the back end. Companies would be well served by taking a close look at what kind of early case assessment process they are investing in. Smaller value cases and EDD are challenges to the ECA process but can be addressed by redirecting the focus to the type of information desired to flow from that process to guide future decision making.

Early Case Assessment

In small cases, the product of early case assessment should be a speedy determination as to whether the case should be tried or settled in its early stages. If the case is marked for trial after analyzing the merits and the principles at stake as valued by the company, an LMP needs to be developed proportional to what's at risk. Delaying settlement considerations by waiting until all leverage factors can be brought to bear on an adversary to drive the settlement value down, can result in legal fees and costs increasing the TLC beyond what would otherwise be achieved.

Discovery Costs

A cost-effective approach on EDD (or as is sometimes referred to, Electronically Stored Information (ESI)) should take into account both the strategic needs of ECA and the pragmatic dictates of compliance with discovery obligations. Federal Rule Civil Procedure 26 requires a “meet and confer” between adversary counsel at the onset of a case with the expectation the parties can develop agreed-upon protocols and procedures to facilitate EDD.

Parties in litigation are aware that discovery can eat up to 80% of the cost of litigation with 75% of the discovery cost most likely related to document review. When up to 90% of a matter's document population can be electronically stored information, there is a strong shared interest in taking a pragmatic approach.

Early Interview of Witnesses

Integral to the ECA process, early interviewing of witnesses can help identify the date range, document type, subject matter and author, addressee, copyee information that can be used to model searches for similar documents that will play a pivotal role in the case. Coordination with the company IT staff and appropriate EDD consultants can provide assigned counsel with a grasp of the organization's data map, key custodians, and facilitate initial efforts to organize and group the documents by categories useful to analyzing the issues in the case.

Manual Review of Documents

The practice of conducting protracted manual attorney reviews of successive blocks of documents that may result in classifying as genuinely relevant only 10% of an allegedly responsive document population can be wasteful and unproductive. Even keyword searching document populations on the most typical and popular law-firm database software is notoriously both under- and over-inclusive.

It is often more cost-effective to spend the necessary money up front for a vendor who has proprietary advanced search engine capability along the lines that Google has pioneered, to filter, issue code, and score responsiveness of documents that can then be used to put together a solid LMP from the outset. Rapid identification of “hot docs” and an understanding of where they exist in the data map will facilitate both a more coherent ECA and strategic positioning as well as afford counsel the best opportunity to get agreement on cost-effective EDD protocols at an initial “meet and confer.” The company can then make a more informed decision as to what level of human review and risk they are comfortable with and tailor their cost budget accordingly.

Conclusion

Particularly in these economic times, corporate counsel deserve the highest ROI possible from their legal expense dollar. Achieving that return requires first the internal discipline to quantitatively measure performance and then critically examine the processes that drive cost. Equally important is mustering the political will to see the necessary changes through and overcome the business as usual inertia that typifies many company relationships with their outside counsel.

John F. Brown Jr. is a principal at Brown Law LLC. Until recently, Mr. Brown was a shareholder at one of the nation's largest law firms. He can be reached at [email protected].