Legal Fee AUDITS: A Cost Control Primer
Marquess, John J., Risk Management
Over the past 10 years or so, the legal cost control methods available to risk managers have evolved, but without real savings for clients. While other service sectors have been streamlined by technological advances, risk managers have seen few new cost containment methods that offer real benefits. A quick historical overview leads us to conclude that the best way to achieve cost-effectiveness in this area remains a law firm audit from a carefully chosen vendor.
Let's start out with some horror stories: The Cleveland lawyer who charged his client for the suit, shirt and underwear he purchased in the midst of a long trial. The lawyer in Los Angeles who on three occasions turned in 50-hour billing days. How about the New York City law firm that submitted a bill for $500,000, half of which was for educational conferences? Or the Texas law firm with billing requirements of 6,000 hours per year, which, for anyone doing the math, represents 23 billable hours per day?
These are extreme cases of abuse, but they point out the need for risk managers involved in any legal affairs to ensure that the bills they pay are supportable and fair. How best to do this?
The Early Years
In the mid- to late-1980s, there was little or nothing being done by risk managers to control their legal expenses. Legal cost containment typically meant sitting on the lawyer's bill for 120 days and then making payment without any review. Most risk managers had no guidelines for their attorneys as to what types of activities would be compensated or how they were to bill for services rendered.
Later, in an effort to curtail costs, many companies began auditing their law firms, using outside vendors on an as-needed basis. The vendors would pull a cross-section of files, review billings of the selected law firms and prepare detailed reports regarding each firm. This analysis helped risk managers understand how law firms managed the client's legal matters, and allowed them to identify problem areas and develop litigation management guidelines for the firms to follow on issues such as staffing of the case, case phasing and budgeting. The drawback to this system was that to participate effectively, risk managers needed specialized training and education.
With the nineties came the American Bar Association (ABA) task codes. Every legal activity was to be assigned a code that would allow companies to evaluate firms on an apples-to-apples basis. However, the ABA task codes have themselves presented problems.
First, the system relies on lawyers accurately pigeonholing their activities. Second, there is no way to account for certain differences. For example, it would be difficult to assess the efficiency of firm A handling your New York workers' comp matters versus firm B handling California workers' comp.
Next came the advent of turnkey software systems, which claimed to allow the person in charge of paying the bills to properly evaluate the performance of the law firm. These systems have proven to be of little value because they require each law firm to bill all work in exactly the same manner and describe it in the same way. Otherwise, the bill payer is left with an apples-to-oranges comparison.
Most recently, some risk managers send every bill--regardless of size--to a legal bill processing vendor for evaluation, determination and, if warranted, payment. In theory, this frees time for the risk manager's other responsibilities, while assuring company management that an accountability assessment is being done. The vendor usually promises that their fee will be more than offset by projected savings.
Unfortunately, however, the benefits are often overshadowed or lost in an onslaught of paper. The 20-page legal bill has now been replaced by the 40-page compartmentalized report. After reviewing this voluminous paperwork and making the appropriate determination, the risk manager has to communicate the findings to the law firm. …