To help understand how legal costs can best be managed, it is worth posing a couple of fundamental questions. First, what is the purpose to a business of having lawyers? And second, are they necessary? Many would be surprised by how vague the answers to these questions can be.
The value of some external advisers to a business are obvious. The roles of an accountant and the auditor are essential, if expensive. It is clear why they are there and what they are expected to produce.
But the need for lawyers can often be less clear. Also, it can be less apparent exactly what the lawyers are being paid to do. What is known, however, is that they can be expensive and a business can be confronted with a big legal bill and not quite understand how it came to be.
The tangible outputs of business lawyers can seem slight. There can be a bespoke contract for a specific transaction of only a few dozen pages. This document could cost more than £10,000, compared with a paperback 10 times the size that would cost only £10.
Or there could be advice of only a few paragraphs, which could also cost more than five figures. Businesses that are particularly unlucky could pay lawyers huge amounts and, at the end, not get anything in final form, either as a contract or as advice.
Sometimes in commercial litigation, the fees that the lawyers charge can soon become disproportionate to the amounts that are at stake. In extreme instances, the legal costs can dwarf the value of the dispute. A High Court case in London can cost a party more than £25,000 and still be nowhere near a trial date.
But to assess the value of legal advice purely on the basis of cost or volume of output is a mistake. The most valuable legal advice can be succinct, the most effective legal letter can be one page long. What businesses are paying for is expertise and security. The point of legal advice for a business is to ensure that the right protections are in place and that risks are well managed. The problem with expertise and security is that they are hard to calculate by reference to the size of outputs.
So how does an organisation best manage legal costs? Can technology make a difference?
Some lawyers insist they should be paid by the hour. This can make sense in certain situations where the time a task can take is not certain. In litigation, this form of charging remains the basis of cost recovery by the winning side against the losing side.
Often, however, there is no adequate reason for the hourly rate; it simply suits the law firm. Just as a carpenter would quote on the price for a chair regardless of the hours it will take, so an experienced lawyer should be able to quote a set fee for drafting a legal instrument or providing an opinion. Few things are genuinely so uncertain that an estimate is not possible, even if that estimate needs variation later.
We need no longer be in the days of Charles Dickens, when the law was notoriously loaded in the favour of the lawyers.
The best way for a business to manage legal costs is to be clear what it wants from lawyers and to force them to be clear about what they offer. There is no need for businesses to go along with the old methods of law firm partnerships. For discrete pieces of work, a company can engage individual lawyers at a far cheaper rate than the partner of a top law firm, who would usually delegate the task anyway.
Technology can make a difference to legal costs. Most undertakings — especially processes — can often be cheaper or better controlled. Automation can make expensive exercises such as due diligence and discovery less time-consuming and labour-intensive. Sharing documents and editing in real time can mean limiting the lucrative pantomime of lawyers swapping versions, deleting what the other side has suggested and so on as time runs down. Time recording and project management software can keep track of costs.
But technology can only help so much. To manage legal costs directly needs a change in attitude as well as new hardware or software.
Take, for example, obtaining legal advice on whether a proposed commercial course of action is permitted and how any risks can be minimised. Unclear instructions can lead to extensive advice packed with disclaimers and provisos. Maybe the costs have risen because lawyers keep seeking clarification and information to understand exactly what they are being asked.
Or take transactional work, where lawyers on both sides of a deal negotiate and then provide a suite of contractual documentation for an asset purchase or share acquisition. Costs in high-value transactions can escalate rapidly, with both sets of lawyers repeatedly sending each other amendments and revised drafts that are of marginal, if any, consequence to the deal. It is almost as if such deals were a scheme for lawyers to charge as much as possible.
Legal technology is not primitive magic. It can have a beneficial effect on legal costs only if the will is there. Precision, plainness and purpose are more important. Lawyers can make more money from vagueness and unclear instructions than almost anything else.
The writer is a lawyer and writer
Case studies: managing legal costs
Data driven pricing
By analysing historical billing data, pharmaceuticals company GlaxoSmithKline largely redefined the way it engages external law firms. Its legal team moved to almost exclusive fixed-fee arrangements. Using a technique that analyses the vendor’s business model, and estimating what the appropriate fees should be, the procurement team looks for ways in which using external counsel can be more efficient.
As a result, the majority of GSK’s legal services are now awarded through reverse auctions, with flat fees offered for clearly defined phases. This enables both the legal and procurement teams to move beyond price negotiation and focus on value.
Anglo American and Exigent
Third party resourcing
Under increasing cost pressure, the mining company enlisted Exigent, a legal outsourcer, to develop a legal spending tool that covers the jurisdictions where it operates. Anglo American had frank discussions with outside counsel on the cost of services. In addition, it outsourced part of its legal work to Exigent through a managed services agreement. New long-term agreements with law firms incentivised co-operation between suppliers. An on-site Exigent team helped Anglo reduce spending by 35 per cent in three years and finish contracts seven times faster.
New relationship models
The Barclays legal team has streamlined its panel of external law firms over the past few years. Its general advisory panel is now between 10 and 12 firms, down from between 30 and 40 in 2016.
The focus is on building trust and increasing transparency in the way external law firms charge for services, giving Barclays greater certainty over its legal budgets. It also eliminated two-year panel reviews for partner firms in favour of continuous assessment instead.
BT Group and Elevate Services
BT and Elevate, a legal services provider, designed and set up an external counsel management service to increase value from the telecom group’s spending on external counsel. The project covered all legal matters worth more than £100,000. Over an 18-month period, the system improved consistency in billing, project management and internal negotiation training for BT lawyers and saved more than £2m.
Deutsche Bank and QuisLex
New relationship models
To respond more nimbly to litigation, compliance, audits and regulatory investigations, Deutsche Bank standardised its ediscovery function. With the help of QuisLex, a legal process outsourcing firm, it incorporated artificial intelligence to speed the process and co-ordinate outside counsel, saving the bank an estimated $12m in running costs.
Of more value to the bank, however, is improved risk management and the ability to respond quickly to regulators.
DXC Technology and AdvanceLaw
After the 2017 merger between Computer Science Corporation and Hewlett Packard Enterprise Services, the legal team at the newly merged DXC Technology set out to save on outside counsel fees. It set up a strategic partner programme using AdvanceLaw, a forum of vetted law firms and more than 200 general counsel, which hosts reviews and feedback on law firms. DXC estimates that efficiency incentives and better rates saved it $3m in its first year.
Hearst Corporation and Priori Legal
Third party resourcing
The in-house legal team at Hearst, the US media conglomerate, manages the legal needs of more than 360 businesses around the world. The team previously used smaller, cheaper law firms to help with their workload and keep costs down. However, this process was time-consuming and the quality of work was variable. Priori Legal, a platform now funded by Hearst, helped it find boutique firms and temporary attorneys, reducing the time lawyers spent on administrative tasks by 80 per cent.
Serious Fraud Office and iManage
In a UK Serious Fraud Office investigation, barristers are tasked with weeding out any confidential material. It is a costly and time-consuming process. In the Rolls-Royce bribery investigation, the SFO used artificial intelligence and natural language processing technology from iManage’s Ravn platform to analyse emails, financial records, data tables, photographs and other documents and sift out any information covered by legal privilege.
As a result, the number of documents reviewed daily increased by 2,000 per cent. Ravn reviewed more than 7m documents to establish the evidentiary record for the UK’s largest deferred prosecution agreement. Without the technology, Ben Denison, chief technology officer of the SFO, says it would not be able to afford the time to run these sorts of investigations. Rolls-Royce was ultimately fined £497m for bribery in January 2017.
ShaveLogic and Burford Capital
The shaving products company, founded in 2009, faced an existential crisis before it had manufactured a single razor. After a legal challenge from Procter & Gamble’s Gillette division in 2015 alleging patent infringement, ShaveLogic needed to find a way to fund its defence or face being driven out of the market. It chose Burford Capital, which funded a successful defence while enabling ShaveLogic to pursue counterclaims against Gillette.
Data driven pricing
Shell created a team in 2017 dedicated to promoting fixed and hybrid fee arrangements with outside counsel, resulting in a 20-30 per cent fall in legal spending over 18 months. The team also developed novel approaches to arranging fees for external services, such as a market-adjustment discount tied to the price of crude oil. That can further cut legal fees for Shell, by tying a discount from law firms to a fall in crude oil prices, to be earned back when the spot price rises.
Case studies research: RSG Consulting
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