Laying down the law on legal fees - includes related article on cutting legal costs

Nation's Business, Oct, 1988 by Jane Easter Bahls

Laying Down The Law On Legal Fees

Our legal bills are horrendous," says Frank Banholzer, president of Republic Savings & Loan Association in Milwaukee. With hourly fees for attorneys often exceeding $120, business large and small must deal with the runaway costs of legal services.

"We have to have counsel," says Banholzer, "but for many of the issues that come up, the cost of legal involvement is more than the matter is worth."

Though some companies try to save money by simply hiring in-house counsel, it is almost impossible to find a lawyer who has the expertise to cope effectively with all the complex transactions, tax planning and lawsuits that a growing company faces. Some matters still require a law firm.

Moreover, when more than one person in a company has the authority to hire outside counsel, legal costs can climb steadily. Zealous employees may call an attorney to collect every little debt or insist on pushing each lawsuit to the limit. When legal bills come in, executives may be unsure which matters were involved. A company with no policy for controlling legal work may simply pay the bills without question.

For more and more companies, however, the days of paying legal bills without question are over. Control Data Corporation, the Minneapolis-based computer company, and Travelers Corporation, the Hartford-based insurance giant, have both instituted far-reaching programs to hold the line on the cost of counsel. Their programs may serve as models for smaller companies swamped with legal bills.

"It's like anything else: If you don't manage it, it'll get out of hand," says G. Edward Martin, manager of legal administration for Control Data, which has kept legal expenses level over the years, even as revenues have increased. Martin, who has spearheaded Control Data's program of legal-cost containment, makes sure the goals for each legal matter are clearly defined. "We tell the attorneys how much we want to spend," he says, "the check with them when it's 50 percent spent, compared to when the job is 50 percent completed." In addition, he says, "we define the level of expertise we need. We may need only a junior associate instead of a partner."

Control Data also negotiates a discount on the hourly fee, based on the volume of work in a given area. "If we're going to give all our workers' compensation to one firm, we expect them to be very efficient at it," Martin says. "Everyone should feel comfortable negotiating fees. It's a buyer's market, and attorneys know that."

Control Data informs newly hired attorneys that the company expects to be billed within 30 days or at each major step. "We don't want them to come back six months later with a bill for $200,000," Martin says.

The billing policy also specifies a particular in-house attorney who is responsible for supervising the outside attorney's progress on the case. The outside attorney sends bills to the inside attorney, who negotiates a more reasonable charge if he thinks the outside attorney's fee appears to be out of line.

"It used to be verboten for anyone to call a law firm and ask for details on a bill," says Martin, who notes that legal bills once said only "for services rendered." like many companies in recent years, Control Data insists on knowing who worked how long on what matter. "Law firms are happy to share that information," Martin says, "because in a buyer's market, if the company is unhappy, that law firm is out."

To limit which matters are referred to outside counsel, Control Data for the past 15 years has used a legal request form, similar to a purchase order. Anyone in need of legal services fills out the form, which is processed through the legal department. The six-digit project number on each form is matched with the bill when it comes in, to avoid uncertainty about costs. Martin notes that the amount spent is classified by law firm, by in-house attorney, by subject matter and by organization within the company: "If one area gets too high in requirements, we may decide to put two attorneys there, or hire someone inhouse in that area."

As thoroughgoing as Control Data's system is, Travelers goes a step further. "Our civil-justice system is inefficient," says Senior Vice President Richard Marrs of Travelers. He maintains that many attorneys thrive on conflict. For example, he says, attorneys needing information from the opposing party could simply ask for it persuasively but are more likely to file a motion demanding it--resulting in more time and higher costs.

"I tell the lawyers we work with that they should root out these inefficiencies," Marrs says, "and then I'll have no problem with their fees."

Travelers has "a policy that says the least expensive lawsuit is the one you avoid," says Marrs. In many cases--including claims where only the amount that the company will pay is in dispute--Travelers proposes what is known as alternative dispute resolution: arbitration or mediation.

Arbitration involves a third party who listens to both sides and dictates a solution; mediation involves a third party who helps the two sides work out their own solution. Both systems were previously reserved for relatively personal disputes such as divorces and problems with home contractors. Travelers has found, though, that alternative dispute resolution saves the company an average of $1,000 per case, all in legal fees. Multiplied by the thousands of cases the company handles that way each month, the savings have quickly mounted into the millions.