Know thy process

Know thy process
Illustration:Matthew Daley

When Dean Scaletta became director of litigation for Manitoba Public Insurance in 2009, he was astonished to learn the company didn’t have a retainer agreement for the lawyers it hired to defend hundreds of auto insurance claim cases across North America each year. Litigation — often minor, but sometimes costly and complex when fatal accidents are at issue — is the Crown corporation’s core business. Yet until 2009 it simply sent case files to outside counsel along with a letter saying, “Send us your bills.”

Scaletta brought down the budget hammer, drafting a tough-minded retainer agreement that now specifies how files will be staffed (generally one senior lawyer, one junior, and one paralegal), requiring pre-approval and spending limits for any legal research, and listing all the items law firms can’t charge for. “We’re not going to pay a paralegal .2-of-an hour to open a file,” says Scaletta. “We’re not going to pay you an hourly rate to prepare a budget. We’re not going to pay you to prepare an invoice. If it looks administrative then my red pen is going through it and we’re not paying for it.”

Such changes reflect the growing discontent in recent years among North American businesses over the cost of litigation, and the increasing demand by commercial clients for more certainty in legal budgeting. But how can lawyers prepare budgets with any accuracy when litigation, particularly trial work, is inherently unpredictable?

“Ten years ago when times were booming, companies were less focused on all expense items,” says James Doris, a commercial litigator and partner with Davies LLP in Toronto. “With the economy in the state it is, everyone’s drilling down their expenses, and legal costs are for some companies a significant expense. They’re trying to make sure they’re spending their dollars wisely.”

Says Scaletta: “When a statement of claim lands on a CEO’s desk, they and their CFO are increasingly going to ask, ‘How much is it going to cost?’ They’re going to have that kind of hard discussion with whoever they hire. And ‘shrug, I don’t know, we’ll bill you by the hour’ probably isn’t going to go over very well.”

It doesn’t help that budgeting itself has always been an unhappy process for most lawyers. “Lawyers are afraid of numbers,” says Melissa LaFlair, who has practised as both an in-house and outside commercial lawyer, and now runs a Toronto-based legal management consultancy. “Understanding the numbers is really important today, because numbers are what drives business. You don’t have to be a mathematician or an accountant — just having an ease with the basics is very powerful, and allows you to really address your client’s needs in a way you can’t if you’re just focused on the legal material.”

LaFlair says the best way for litigators to prepare — and adhere — to budgets is to approach cases with the same rigour and discipline as their commercial clients handle their own business: using a strategy broadly known as project, or process, management. In the legal world that means breaking down each case into distinct parts, and then analyzing the cost-benefits and pricing out each one.

LaFlair advises lawyers to begin with a “file initiation checklist” that compels counsel, at the very start of litigation, to work closely with a client to understand their needs: What is their risk tolerance? Their overall business objective? Are they familiar with litigation or is this their first time? Do they understand the potential costs of going to trial?

“Lawyers are not trained how to manage. They’re trained how to analyze every possible risk,” says LaFlair. “But in the real world, clients don’t want you to identify every risk, they want you to identify what’s relevant to their situation. My observation is that most lawyers don’t. So drill down and focus on the core of the task at hand, which is why there should be a file initiation checklist — let’s get this focused from the beginning.”

After zeroing in on business objectives, lawyers should ask clients to consider investing some money up front, on a detailed pre-litigation assessment, said Kahn Scolnick and Marcellus McRae, partners with the U.S. firm Gibson Dunn and Crutcher LLP, in a recent online seminar from the Practical Law Company on litigation budgeting. How many documents and witnesses might be in play? they ask in their seminar notes. Are there class plaintiffs to be notified? Can the facts be verified? What are the strengths or weaknesses of claims? Are outside experts necessary? What is the litigation history of opposing counsel? What’s the financial stability of the opponent? Such information can help determine how hard to fight, or whether it makes more sense to settle early or opt for mediation. “If you’re not willing to spend 10 hours at the outset of a case really understanding what the potential claims are, who the players are, charting what the case would look like in a hypothetical opening and closing statement, then you’re not serving your client well, even in a small litigation department,” said Scolnick .

If the decision is made to proceed with litigation, McRae says a budget should be prepared by monetizing every step in the process: motions to dismiss, the number of witnesses to be deposed, the volume of documents, the cost of preparing summary judgment motions. Also consider non-lawyer fees such as outside experts, class notification, electronic document retrieval specialists, mediators, and even jury consultants.

Budgets fail, and financial surprises await, when lawyers only think “high-wave about a case,” says McRae. They’re not "down in the weeds." You have to get specific. Each module has to be broken up into different outcomes and monetized. It’s hard work, and some people have an aversion to it, he adds. Also some lawyers know if they do this work [and deliver] a higher budget, the client will get sticker shock and they won’t get the job.

LaFlair says during her time as in-house counsel for DRI Capital, a Toronto private equity firm, she was astonished to learn many lawyers had “absolutely no sense of their own cost structure. If you asked them, ‘What is your typical case in this type of action,’ they can’t say, ‘Oh it’s one with five motions and a couple of pleadings.’ So they can’t give guidance to their clients on budgets, because they aren’t aware of the general cost structure of their own practice.”

That kind of imprecision, plus the constant rise in the billable hour — now being challenged in some quarters by a move to alternative fee structures — have contributed to the current concern over litigation costs and the demand for better budgets.

Manitoba Public Insurance tries to address the issue not only with its strict rules on billing in the retainer, but also with a series of provisions, or “philosophies,” that are issued to all outside counsel. “We want every task performed at the most cost-efficient staffing level, without compromising quality,” says Scaletta. “So if a paralegal can do something, that’s who we want doing it. But if it requires a lawyer’s input and it doesn’t need to be done by a partner, then we’d like it done by the junior.”

Another provision asks counsel to conclude each case as quickly and inexpensively as possible. “So if you don’t need to depose all 15 of the doctors who treated the victim of a traffic accident, don’t. If you can get a good picture from deposing three of them, do that. But get us to the conclusion as quickly as you can.”

Technology is also now being used by clients across North America to assess the validity of legal invoices. One such third-party service, Serengeti Tracker (also a Thomson Reuters business), analyzes one firm’s fees by comparing them to invoices for similar services, among a database of anonymous invoices submitted by thousands of Serengeti subscriber corporations and law firms. Outside counsel use the service to check their cost competitiveness. Clients use it to check the fairness of the bills they’re asked to pay.

Of course, even the most careful, cost-conscious lawyer will come upon surprise developments in litigation that push a budget out of whack. “There’s always stuff you can’t control as a lawyer,” says LaFlair. “If the other party is unbelievably litigious, or they have an unruly counsel that’s trying to make things difficult, you can’t foresee that. But you learn pretty early in a case if that’s going to happen, and that’s when you go back to your client and say, ‘OK, this is not what we scoped, they’re out to make things difficult and that could quadruple the bill. Are you still interested?’”

Commercial clients and their in-house counsel also need to remember, says Scaletta, that a good legal relationship is a valuable thing and needs to be nurtured. Excessive pressure for predictable budgets and cost containment — including the use of third-party, computer-driven bill-checking programs — can jeopardize lawyer-client relationships. “It seems to me,” he says, “the reason we’ve hired many of our outside lawyers is because there’s an element of personal trust and satisfaction with how they do their work. Amid all the financial pressures, we need to remember why we’ve been paying them all these years for the work they do.”

Editor's note: This article has been updated to correct the names attributed to certain quotes as well as clarifying certain quotes and adding links to the Practical Law Company webinar quoted in the article.

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