legal costs

The Litigation Dilemma: Managing Costs When Circumstances Change

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Businesses need certainty. They rely on budgets to function. And because they have to, lawyers reluctantly will provide clients some form of litigation budget to win the business.

So what’s the problem? The problem is, this is what lawyers really think of those litigation budgets:

  • “Completely f***ing not accurate.”

  • “Total junk.”

  • “May as well be throwing darts at a big board of numbers.”

I will never reveal the sources of those statements, but I assure you they are real.

What happens when (not if) reality ends up being nowhere near budget? Too often, the answer is a blank check for the client and/or a big write-off for the firm. This happens because the budget wasn’t detailed or transparent enough, which means there is no way to manage the lawyers – or the client — to budget when the circumstances change. Once the “we didn’t anticipate X,Y,Z” statements start, the initial budget gets thrown out altogether and the client becomes frustrated with ever-growing bills that they cannot control.

Here’s an example of how this dynamic works. Client asks for a budget. Law firm says “you never know what will happen in litigation” but they expect the case will be $1MM. Lawyers may also give a number for each phase, e.g., $100,000 for initial investigation, $200,000 for pleadings/summary judgment; $400,00 for discovery; $300,000 for trial. However, the budget does not say how many depositions, gigabytes of documents, experts, court conferences, discovery motions, trial days, etc. the lawyer expects or how much each of those individual things is expected to cost. Next thing you know, something unexpected happens (which it always does) and the client receives a bill that is 2-5x their expectations. Hours upon hours will be wasted in back-and-forth over what happened, and the law firm will end up having to write off some percentage of the time.

In other words, everybody loses.

To prevent this downward spiral, start with a clearer, more detailed budget that allows everyone to see what the firm’s assumptions were and how those assumptions affect the budget. This detail creates accountability on all sides. For example, if the lawyer says “we weren’t expecting 50 depositions”, the client can see if that is true and also calculate for herself how much that extra work should cost based on the original budget. And if the client insists on scorching the earth, that additional expense associated with that strategy will be obvious as well.

In other words, everybody wins.

Legal Budgeting 101: How Litigation Budgets Are Made

Leaving a top-tier law firm to start a software company may seem like a risky move, but in fact I am a very careful and deliberative person. So, before starting Digitory Legal, I spent a lot of time researching how other lawyers handle budgeting to make sure I was not missing anything. In this post I share some of the insights I learned from that research and explain the budget-making process from the litigator’s perspective (approx. 90 seconds to read).

Lawyers Budget Like It’s 1999. I wrote my first litigation budget in 1999. Since I was a second year associate with no clue what I was doing, I asked my mentor for advice. His words of wisdom: write down everything you can think of and how long you think it will take, then double it.

Seventeen years later, not much has changed.

Every lawyer I know creates budgets in Word or Excel. Some firms have created elaborate Excel spreadsheet templates to help standardize the process, but most individual lawyers make up their own format and then repurpose the same spreadsheet or word document again and again. As a result, even budgets from the same firm will come in all sorts of different shapes and sizes.

Given the high-tech age we live in, you would think legal budgets would be based on sophisticated data analytics from past invoices. Nope. There are basically two methods lawyers today use to get budget numbers (described below), and neither of them are particularly scientific.

Method 1: Percentage of Time Model. 

Sometimes called the”burn rate” or “supply side” approach, this is the easiest and most pervasive budgeting method by far. The lawyer writing the budget (hereinafter, the “budget master”) decides who will work on the matter, approximately how long the matter will take, and the percentage of time each timekeeper will dedicate to it over time. For example, if the budget master expects that case will take about a year and a timekeeper will spend 50% of their available time on it, they will budget about 1100 hours for that person (assuming 2200 billable hours per year).

Once the budget master has the total number of hours for each timekeeper, those numbers get sliced-and-diced to fit into whatever format the lawyer likes or the client asked for — generally a spreadsheet with quarterly spend and/or the five phases of litigation set by the American Bar Association (Case Assessment, Pleadings, Discovery, Trial, Appeal).

Based on my anecdotal research, the percentage of time method can give you an impressive-looking budget, but the final numbers will be a LOT lower than the actual cost. Accuracy improves if the budget is for small chunks of time in the near future (e.g., the upcoming quarter) rather than a full matter.

Method 2: Task-Based Model. 

Some of the lawyers I spoke with told me they create task-based budgets. This means they define the tasks in the case (e.g., 10 depositions, 3 discovery motions, etc.) and estimate how much time each timekeeper will spend on each task.

Overall, I was most impressed with the budgeting prowess of the lawyers who systematically consider the tasks involved in matter. This is a more time-consuming process than just estimating percentage of time per timekeeper, but these lawyers were less haunted by budget horror-stories.

Clients Are In Control. On this all lawyers were unanimous: lawyers will provide whatever form of budget the client wants. This should not be surprising; after all, the amount of time and money law firms will spend to win business is staggering. So, clients, if you want to get more detail in your budget, all you have to do is ask for it.

Digitory Legal’s software incorporates the best of both models by combining a detailed, task-based budget structure with timekeeper summaries. We provide sample budgets and numerous copy and customize features to speed up the process and provide guidance on the cost metrics.

Buyer Beware: “Low Ball” Legal Budgets

SAN FRANCISCO - May 4, 2016

Businesses need certainty. They rely on budgets to function. And because they have to, lawyers reluctantly will provide clients some form of litigation budget to win the business.

Mid-market companies are particularly likely to receive low-ball budgets because, while they often have significant one-off cases, they do not have enough recurring legal work to secure volume-based fixed fee deals from big firms. In addition, their inside counsel may not be familiar with the tasks and costs associated with the specific matter at issue.

Low-ball budgets are bad for clients and hurt the profession as a whole. But there is a straightforward solution: clients should demand – and lawyers should provide –more detail in their budgets.

Lawyers need to provide detailed budgets to demonstrate why their numbers are realistic but the competitions’ are not. For example, a friend of mine recently told me the most experienced M&A lawyer in his office knows that a deal will cost $200-$400k and will tell clients that a budget lower than this isn’t real. Unfortunately, this response is not terribly helpful for a General Counsel who needs to understand and explain to management why the company should hire a lawyer that looks far more expensive than the other contenders.

By contrast, if the lawyer’s budget provides information about the tasks involved, who will be doing them, how long they will take, what the average costs-per-task will be, and the variables/assumptions that affect the budget, then the GC has all the information she needs to make the right decision and justify it.

Here’s the rub: creating a detailed, realistic budget is hard. It takes time to do it right. But giving clients what they need to make an informed decision is the key to winning the business AND keeping a happy, loyal client.