LEGAL BRIEFS
Managing litigation costs
with risk-based budgets
Connecting price to value
BY MILO PETRANOVICH
M
any say the Great Recession following the 2008 fi nancial crisis has
caused a “Great Reset” to the “New Normal.” This country has seen the need
to rebuild its middle class by educating its workers with the skills needed to
compete globally. U.S. businesses have redoubled their efforts to innovate
and to produce more efficiently, and they have demanded their suppliers and
vendors do the same. But what about the lawyers? Have they done that?
In the five years before the Great Recession, the total cost of legal services
in the U.S. rose 50% to $250 billion. In the five years since 2008, the total
cost of legal services has remained essentially flat, with a compound annual
rate of change of -0.1%. Hide-bound as we are, lawyers nonetheless have
seen the need to fi nd ways to innovate, to practice more efficiently and to
deliver more value.
Paradoxically, one of the factors that can inhibit a law fi rm’s ability to
innovate and drive efficiency is the manner in which it generally prices its
services — the billable hour, by which the price for completing a transaction or litigating a case is simply the number of hours worked times the
lawyer’s hourly rate. Increasingly, clients claim dissatisfaction with that
“Price is what you pay.
Value is what you get.”
WARREN BUFFETT
2008 SHAREHOLDER LETTER
Here is a simple example of a project by project case plan and
budget, with general judgments of risk and related comments.
PROJECT
BUDGET
COST VS
RISK & RETURN
COMMENTS
Requires significant time investment of high
level company personnel
Preliminary Case
Analysis
$
Low cost —
High risk/return
Complaint/Answer/
Preliminary Motions
$
Low cost —
Low risk/return
With exceptions, some of the early court
work is non-dispositive
Discovery
$$$
High cost —
Low risk/return
Significant cost of company and legal
resources; the marginal return on additional
resources spent on discovery is relatively small
Summary
Judgment/
Dispositive Motions
$$$
High cost —
High risk/return
The last stop before trial
Trial
$$$
High cost —
High risk/return
Both known risks and unknown risks are
actualized here
Appeal
$$$
High cost —
High risk/return
Both known risks and unknown risks are
actualized here
pricing system. Law fi rms and clients have worked together to design
alternative fee arrangements (AFAs): fi xed fees for designated work,
contingent and partial contingent fees, performance-based hold back fees
and so on. To our surprise, although there has been some small increase
in the use of AFAs, businesses report that AFAs now comprise only
about 5% of their total legal spending. And for some types of projects,
such as business or commercial litigation, it is even less. One survey in
the Portland market reports that over the last five years the billable hour
pricing method accounts for 97% of the cost to businesses for commercial
litigation services.
There are probably some good reasons for this. AFAs require lawyers and
clients to accurately predict the cost of a legal project. But a single case involving complex business issues contains many variables that are not subject
to control by the lawyer or the client, making it difficult to predict the total
amount of legal services needed to complete the case. With so many variables
out of their control, neither the lawyer nor their client may want to bear the
risk of mispredicting the services required; the lawyer does not want to end
up too far in the hole, and the client does not want to vastly overpay.
But none of these good reasons change the simple fact that the billable
hour pricing system is a cost plus pricing system where the seller (the lawyer)
largely controls the cost (the number of hours billed and the price per hour).
That pricing system by itself encourages neither innovation nor efficiency;
indeed, in the wrong hands it can encourage the opposite. In turn, it can
cause clients who want to control rising legal costs to focus on the lawyer’s
hourly rate, rather than on the type and amount of legal work to be done in
light of the known risk.
One solution is to break complex business litigation into pieces — then
budget and manage each piece according to the risk to the case outcome
inherent in that piece. The goal is to build a litigation plan, and a budget for
that plan, that reflect the lawyer’s judgment of risk and the client’s available
resources and risk tolerance.
Every case is different. Every complex case is very different. But on the
whole, it makes sense to deploy your assets where they seem to earn the
highest return and spend your time and money managing the riskiest projects. Agree on a detailed case management plan and budget in advance, and,
absent a significant unforeseen event, stick to the budget.
Milo Petranovich is a shareholder at Lane Powell. He has extensive experience in complex civil and corporate litigation, including substantial
trial experience in cases involving securities fraud, antitrust violations,
franchise, health care and corporate governance, as well as white collar
criminal defense in state and federal courts. Milo can be reached at
503-778-2114 or petranovichm@lanepowell.com.
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42 OREGON BUSINESS
11/12.2013