Check out our exclusive video about cutting costs, featuring Audrey Rubin, chief operating officer of Aon's law department.
A recent survey from the American Cleaning Institute, which represents the U.S. cleaning products industry, found that 89 percent of Americans said they were very or somewhat likely to do some spring cleaning this year. Some plan to tackle the grime that’s built up in their kitchens. Others want to scrub their windows to a shine. Whatever cleaners have on their to-do lists, they likely are aspiring to restore order and calm to spaces that have become messy and stressful over time.
Shouldn’t law departments do the same?
Many legal consultants say yes. But they’re not necessarily recommending that lawyers break out the mops and buckets. Rather, they say in-house departments should clear away clutter in order to streamline their operations—and save money.
Although tidying work processes to reduce spending may be easier said than done, experts say counsel who take a big-picture approach to trimming costs can make significant strides. To do so, in-house teams must scrutinize their overall responsibilities, business partnerships and procedures instead of just focusing on one area in which to decrease spending. This allows legal departments to boost operational efficiency while spotting unnecessary or exorbitant expenses, and discovering ways to reduce or eliminate them.
On the following pages, experts discuss three ways legal departments can effectively control and cut costs.
Joy Saphla, managing director at Huron Legal, says that legal departments panic all too often when it comes to reducing spending. Typically, she says, their knee-jerk reaction is to shrink their internal headcounts or immediately ask their law firms for steep discounts.
“But that’s kind of like if you have a balloon and you push it on one end, it’s going to enlarge the other end,” she says. “You haven’t really accomplished cost reduction—you’ve accomplished the appearance of cost reduction. You need to take a step back and take a methodical look at it. It needs to be sustainable.”
Likewise, Jonathan Bellis, managing director at HBR Consulting, has seen other lukewarm cost-cutting attempts. “I’m not impressed by legal departments that eliminate travel and things like that,” he says. “I don’t see how that enhances the long-term talent and value of the department.”
Experts say the most effective way to reduce costs is to conduct workflow analyses, which essentially study how tasks are distributed within and outside of the law department. The goal of such analyses is to help in-house teams logically redistribute work to maximize its value, implement the correct processes so they can effectively manage their work portfolios on an ongoing basis, and better estimate and plan for their projected legal spending. To begin, consultants recommend that legal departments conduct a soup-to-nuts examination of how work enters and exits a department, as well as what types of work a department handles.
“You have to look inside and figure out what they’re doing, why they’re doing it and whether it should be done,” Saphla says. “You have to look at the work in terms of its value to the corporation and the effort it requires to do the work.”
Dan DiLucchio, a principal at Altman Weil Inc., conducts work samplings by asking lawyers, paralegals and support staff to keep track of what they do, who they work with and how they spend their time over a two-week period. “For a lot of organizations, and for the individuals doing it, that is revealing,” he says. “It highlights ways to be more effective and more efficient in what you’re doing. One client we worked with realized that about 15 percent to 20 percent of the lawyers’ time was spent doing paralegal-type work.”
Bellis says in-house lawyers often accrue nonlegal work because they are filling voids for their clients, who may have cut back. “The clients look at the lawyers and say, ‘You’re smart, you can negotiate. I’ll let you run with the whole contract, not just the legal terms. I’ll ask you to draft the press release even though that’s going beyond legal review and input,’” he says.
After ascertaining who currently is doing what work, legal teams should categorize all tasks to determine what work is high-effort or high-risk, which lawyers should handle what work and what tasks are commodity-type assignments that paralegals or support staff could handle. Teams also must be honest about what work they’re doing out of habit as opposed to necessity. This helps them decide what work they should push back to the client, assign to other appropriate internal employees, allocate to automated technology resources or delegate to outside legal service providers.
The next step in the clutter-busting, cost-cutting process is for legal departments to take a hard look at their relationships with outside law firms and work to knock dollars off of the hefty bills they regularly receive from them. Experts say most companies in the Fortune 1000 spend 60 percent of their total legal spending on outside counsel.
At Medtronic Inc., a Minneapolis-based medical technology company, most outside counsel expenses concern big-ticket IP and product liability litigation, and government investigations. Although outside counsel spending is Medtronic’s biggest expense, Senior Vice President, General Counsel and Corporate Secretary Cameron Findlay and his law department successfully shaved tens of millions of dollars off the company’s legal bills over a two-year period, cutting total outside legal spend by nearly 40 percent.
Findlay says his company’s strategy was neither brilliant nor novel. Rather, it was common sense. “The first thing we did was to sit down with the firms that did a lot of work for us, show them the volume of work they were doing and ask for substantial breaks off the rates they were charging. That by itself—good negotiation with partners—netted a lot of savings going forward,” he says.
Then, Findlay and his team reduced the number of law firms Medtronic used from several hundred down to a network of 15 core firms. These firms now constitute the Medtronic Preferred Provider Program, or MP3. “We sat down with those firms and negotiated what we regard as ‘most favored nation’ deals that give us good rates and control over who works on matters,” Findlay says. “It really established a win-win partnership with the law firms so that they are assured of some volume [of work] and we are assured of getting the best lawyers, the best rates and good treatment.”
Recently, Medtronic also has been exploring alternative fee arrangements such as contingency and risk-sharing arrangements on litigation, and fixed fees on deals and defensive litigation. For one MP3 law firm, the company created a portfolio of matters, including an expensive defensive matter and an offensive IP matter. “We paired those matters and got a fixed fee on the defensive matter that saved us millions of dollars a year, but then we gave the firm a little bit of extra contingency on the offensive matter in exchange for that,” Findlay says.
Findlay says the cost-reduction project has paid off in a big way. “If you ask me how we got our costs down so much, it really was negotiating in good faith with our law firm partners and trying to come up with a mutually beneficial arrangement,” he says, adding that in-house counsel shouldn’t hesitate to call the shots with their firms. “You really shouldn’t be ashamed to ask your law firms to partner with you on something as important to you as the costs of their services. Negotiation is something that’s accepted in all facets of business, and there’s no reason it shouldn’t be accepted in legal service as well. Don’t be ashamed to be commercial.”
It’s no secret that in-house lawyers hate astronomical e-discovery costs. A recent FTI Consulting survey reveals that 94 percent of them find the cost of e-discovery “frustrating.”
“Nowadays, 90 percent of all new information is created electronically,” says Alvin Lindsay, co-chair of Hogan Lovells’ Electronic Discovery and Information Risk Management practice and chair of the advisory board of the Association of Certified E-Discovery Specialists. “Of that, very little gets printed out onto paper. It’s all stored on some server somewhere. It’s expensive to identify, collect and process into a form where it can be reviewed, and it’s very expensive to review it.”
And unfortunately, it’s an expense most legal departments can’t avoid. “E-discovery is the primary driver of cost in litigation in this country right now—and that’s assuming you’re doing it right,” Lindsay adds. “The cost of e-discovery can be even more for the party that gets it wrong and fails to preserve the data, identify what’s privileged and what’s responsive.”
The sanctions for getting it wrong range from fines against lawyers and the parties in a case to adverse jury instructions to terminating sanctions for intentional destruction of data. “The Sword of Damocles hanging over your head for getting it wrong is very bad,” Lindsay says.
So what can inside counsel do to reduce their risk and their e-discovery costs?
Some legal departments bring part of the process in-house, collecting and reviewing documents themselves. This can result in substantial savings, but there are pitfalls for the inexperienced and unwary. For instance, sometimes in-house teams will accidentally lose metadata—or data about data—tied to a document, and if that metadata is critical for a case, they could be accused of spoliation.
Another cost-cutting option is to use contract lawyers to review data that is collected and processed. “They charge $35 to $45 an hour, which is a lot less than what can be $350 or up for associates at major law firms,” Lindsay says. However, using contract lawyers might not be appropriate for complex cases. “I do a lot of specialty cases involving aviation and construction of sophisticated things like power plants or petrochemical plants, and in those cases, if you have associates who work with you again and again on those types of matters, they really develop an expertise, and it may not be cost-effective to have contract lawyers reviewing those types of documents,” Lindsay says.
Counsel also have been experimenting with cost-shifting, through which they attempt to get the other side in a case to pay for their e-discovery expenses. Lindsay says there are two hooks that defendants tend to hang their hats on.
One is Federal Rule 26(b)(2)(C), or the Proportionality Rule, which essentially says the cost of discovery should be in proportion to the amount at issue in the case. “If you can come up with an argument that what [the other side] is seeking is going to burden you far in excess of the amount at issue, you can ask the judge to force them under this rule to pay or subsidize in some degree your cost in doing this,” Lindsay says.
The second cost-shifting strategy concerns a federal statute called 28 USC Section 1920, which allows parties to recoup costs of photocopies and electronic copies used in trial. “In some cases, parties have used that to cost-shift essentially the entire e-discovery burden onto the losing party,” Lindsay says.
Lindsay says his personal strategy for safeguarding against added e-discovery costs or sanctions is to take advantage of the Rule 26(f) discovery conference, which, since 2006, has required parties to discuss e-discovery, including preservation and production of data. Lindsay says too many lawyers don’t anticipate e-discovery problems and neglect to address them in this valuable meeting.
“The advisory committee that drafted the rule drafted that section’s amendment because they knew that a lot of the big-sanction cases that had come about between 2003 and 2006 involved cases where a big tranche of backup tapes or previously undisclosed data was found literally on the eve of trial, in some closet somewhere,” Lindsay says. “And that precipitated severe sanctions. So the drafters thought if they could get people to address this stuff early in a case, it will prevent these kinds of last-minute problems.”
Prior to a discovery conference, in-house teams should make sure their outside counsel know everything about the company’s data storage architecture and custodians who may have relevant information concerning a specific period of time. Then counsel can make it clear to the opposing side at the conference what documents the defense will be saving, from what period of time and from which custodians. Counsel also should always submit the conference records to the court.
“Anything you can do to reduce the scope of the volume of what you’re having people look at saves vast sums of money,” Lindsay says. “If you can legitimately reduce the date range by even a couple of months, you might be saving having to review 10,000 to 20,000 documents, and that can be significant savings.”
Burford Group CEO Christopher Bogart—who formerly was the GC of Time Warner Inc. and a litigator at Cravath, Swaine & Moore—discusses specialty litigation financing.
Q: Talk to me about your company and how you help legal departments manage their budgets and save money.
A: When I approached this concept of litigation finance, it started from the premise that when you think about corporate legal departments and their budgets, and you think about the corporate profit & loss (P&L), there have not traditionally been a lot of options for corporate general counsel and corporate CFOs to manage litigation expense. It was pretty much a feature of going to their existing law firms, maybe trying to get discounted rates, or maybe trying to get some sort of alternative fee deal. But of course the business model of most law firms is not about taking balance-sheet risk and putting themselves on the line for results. They have an hourly, paid business model—that’s how they operate.
So what Burford really does is bridge that gap for people. We provide specialty finance that’s available for companies that are involved in litigation. What that means for a corporate general counsel is effectively that by using our capital, you almost create what I call a synthetic contingency. And that means you are not paying cash out of your own budget, and you’re not having the litigation expense hit the P&L, while the case is ongoing.
Instead, Burford is taking that risk for you. In return for that, if and only if the case is successful, Burford takes some portion of the ultimate recovery. In a world of increasing litigation expense and decreasing corporate budgets, it’s an attractive proposition for people who either can’t or don’t want to have litigation expense running through their own organization.
Q: What types of companies have you worked with?
A: Burford’s the largest provider of specialty litigation finance in the world. We have devoted more than a quarter billion dollars of financial capital to this over the last couple of years. We’ve worked with more than half of the Am Law 50. In terms of corporate clients, they run the gamut from publicly traded firms to small venture-capital-backed firms.
Q: Tell me a “success story” of a company that you’ve worked with that was aiming to cut costs and successfully did so through third-party litigation funding.
A: This example is not only a real-life example, but also a classic illustration of when this is desirable for people. The company in question is called Gray Development—it’s a large real-estate developer in the Western U.S. It was in a protracted piece of litigation with another large real-estate developer. It was represented by Simpson Thacher. It had actually paid for its own litigation costs for the first couple years of this case. But the case—surprise surprise—took longer than expected and cost more than expected. At the same time, the real-estate market was under pressure, so the company was hesitant to be selling real-estate assets for the sake of raising money to pay for its litigation costs.
Rather than putting them in the position where the only way they could raise money for their litigation expense was by selling assets at a low point in the market, we stepped in and provided them with the financing to enable Simpson Thacher to finish the case. Simpson Thacher ultimately won that case for them—a $110 million jury verdict. And everybody was happy with that result.