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Corporate law departments are finally getting connected, for sizable savings.
Julie Carrick Dalton, CFO Magazine
February 1, 1999
From his computer, Sam Eberts, associate general counsel for Allegiance Healthcare Corp., has online access to 10 million legal documents related to the hundreds of lawsuits his company fights annually. Allegiance's law department, in fact, is an 80 percent virtual environment when it comes to handling paper. Lawyers bypass photocopies, hard-copy invoices, and Federal Express to jump onto a private online network and link up with outside counsel--and the 10 million documents.
While the technology it is using isn't rocket science, McGaw Park, Illinois-based Allegiance is a pioneer of sorts. Unlike most vendor-driven departments, corporate law offices have been slow to jump on the technology bandwagon. Part of their reluctance stems from concerns over protecting attorney/client privilege. There are also security issues involved. And, of course, outside law firms resist sharing information, for competitive reasons. "Law firms have been woefully slow in adopting technologies. Their cultures are still in the process of adapting to the pressures of technology," says John Hokkanen, a law-practice technologist with the Atlanta law firm Alston & Bird LLP.
For companies willing to adapt, the upside is obvious. "So far, we've seen a 65 percent reduction in the cycle time for managing legal processes," says Eberts. "That adds up to millions in savings."
Such savings explain why some law departments, especially those that deal with multiple outside firms, are beginning to use legal auditing software, electronic billing, and extranets. With legal costs averaging 0.2 to 0.6 percent of revenue per year, the benefits of technology are difficult to ignore. In addition, outside corporate pressure to bring best practices to legal departments is finally being felt. "Most of the pressure to be more efficient is coming down from the CFO, who puts pressure on the general counsel's office," says Daniel Mahoney, former manager of DuPont's law firm partnering program, which oversees the purchasing of all outside counsel services. Mahoney is now principal of The Mahoney Consulting Group, of Wilmington, Delaware. "CFOs have been scratching their heads for years, wondering what they are spending their legal dollars on. Technology is giving them the ability to see it and control it."
Slicing and Dicing
Heeding the call to control costs is Robert Reese, senior vice president and general counsel for Hershey Foods Corp., based in Hershey, Pennsylvania. For years he wondered, "Are we getting good value for our money?" But, he says, he couldn't answer that question, because he was unable to compare the practices of different outside counsel or even to decipher the invoices he received. Typically, he says, invoices were arranged chronologically and not separated by project, making it difficult to budget for individual cases. The result, he says, was "a nagging desire to know exactly what we were getting for our money."
Reese's solution was DefenseNet strategic management software, from Rancho Santa Fe, California-based Golden Triangle Ltd. One of several legal performance packages now on the market, DefenseNet allows Reese to slice and dice billing data, compare law firms to determine best practices, compare invoices to expected costs, and scrutinize overbilling. Although Reese will not say precisely how much the software has saved Hershey, he says the savings far outweigh the cost. "On top of the savings, we are now trying to eliminate chunks of our hard-copy files, which eventually will help us save more money.
" DefenseNet, like most of its counterparts, is based on the Uniform Task-Based Management Standards (UTBMS) developed by Price Waterhouse and the American Bar Association in 1995. The system assigns a code to every task performed by a law firm, from photocopying to writing briefs.
In addition to finding instances of overbilling, software based on the system generates management reports and compares the time and money spent on the same tasks by different law firms. For instance: Why does one firm spend more time on assessment than it does on discovery? Why do some firms send more than one high-priced attorney to meetings when only one attorney is necessary?
The packages can also be a deterrent against fraud. James d'A. Welch, vice president, litigation management, for Reliance National, a New York-based insurance property and casualty company, is working with Philadelphia-based Legalgard Information Solutions to develop software that would enable lawyers to organize their bills by projects rather than by chronological descriptions of services. "Lawyers can use vague descriptions as a device to cover up inflationary practices," says Welch. "They can either overwork a case or engage in fraudulent billing." While Welch believes most firms bill accurately, the incidences that slip through the cracks are too costly to ignore.
Other companies, such as Westport, Connecticut- based Legal Review International LLC and Houston-based PeerPoint Technologies, offer various types of legal management software. Legal Review International, for instance, offers itself as a service provider to Fortune 2000 corporations and insurance companies, analyzing their invoices against customized guidelines and rules. Pricing varies depending on such factors as the amount of bills processed or the size of the company and its legal expenses. Other price structures are based on how much customization is needed.
While auditing software has been available for a couple of years, companies have only recently required outside counsel to invoice electronically. "The ground swell really started in 1998," says Chicago-based Matthew Petrich, a principal consultant for PricewaterhouseCoopers's law firm and law department consulting group. "The Web is part of practically everything now, and E-mail is so inexpensive. Plus, internal IS departments have put the company law departments on their networks already, so it's not even a separate bill." Legal management systems, he adds, typically cost a midsized corporate law department with 40 to 50 users about $175,000 to set up, but they quickly pay for themselves in the saved costs of paper, photocopying, and overnighting documents.
Eberts, of Allegiance Healthcare, agrees. Since converting to electronic billing, Allegiance has saved $350 per lawsuit per year in handling fees--a significant amount, considering the number of suits Allegiance litigates annually.
But just as important as the quantifiable savings are the efficiencies that are gained. Prior to using electronic invoicing, Allegiance reported a 15 percent error rate in retrieving and filing invoice documents. But since the company converted to a 100 percent electronic billing system this past November, Eberts says the error rate is near zero. That's because documents are never physically handled.
No Simple Conversion
Although the results are encouraging, making the conversion wasn't easy. Initially, for example, some documents were classified incorrectly and were therefore difficult to find.
The biggest challenge, however, was convincing outside counsel to buy into the system. Allegiance conducted training sessions and instituted a six-month gradual roll-out. Still, some outside counsel did not show up for the training and continued to ignore the system. In response, Allegiance is requiring makeup training to be paid for by the individual attorneys. "We have to have some sort of disincentive in place. Now we are disallowing fax and FedEx charges. They can use E-mail instead. I'm simply not reimbursing them anymore," Eberts says.
To increase buy-in, the PricewaterhouseCoopers law firm and law department consulting group has just developed a set of electronic- invoicing standards. The standards would allow all law firms to use the same protocol when submitting electronic invoices.
"Law firms want the least number of protocols possible," explains Aileen Leventon, a partner in the New York office of the PricewaterhouseCoopers group. "The burden on them can be just extraordinary. The perfect solution isn't quite there yet, but there is definitely an appetite for it."
Companies such as DuPont have also developed an appetite for extranets, on which inside and outside counsel post all research, briefs, depositions, and governmental and regulatory information. "This summer was the big turning point. We've seen a transition in the awareness of corporations, and the corporations will bring the transition to the law firms. Extranets are going to become commonplace in 18 months or less," predicts Hokkanen.
One of the main benefits of legal extranets is the elimination of duplicated efforts. A company may hire dozens, sometime hundreds, of outside law firms to handle suits. Although the suits are geographically diverse, the issues overlap. As a result, multiple firms bill hundreds of hours to produce the same research. "Lawyers are hugely guilty of reinventing the wheel. We save money by paying them not to reinvent research. We told our law firms, 'If you want to do business with us, this is the environment we want to work in,'" Eberts says, noting that its outside counsel paid for the technology upgrades in order to keep Allegiance's business.
"The cost savings range from significant to monumental," says Daniel Mahoney. Just in the two years of its extranet project, DuPont, with approximately $150 million in legal expenses, reported a 25 percent reduction in outside legal fees. And Timothy McCarthy, counsel for Hartford-based Travelers Property and Casualty Corp., which recently launched an extranet through T Lex, a Boston- based company that builds law department extranets, notes other advantages. Take preparing cross-examinations of expert witnesses, for example. "We can look up transcripts from previous cases to get an idea of what we should expect from each expert," says McCarthy.
Still, some companies and law firms remain unconvinced that technology is a solution. "It's a cultural issue, a psychological barrier. Many lawyers consider themselves craftspeople of words and documents. The legal profession tends to think of law as an art, rather than as a process that can be managed," says Leventon, who also is a lawyer. Once lawyers and clients get over the hump and embrace the idea that law can be managed similarly to other corporate functions, the technology falls into place more easily, she says.
In addition to cultural barriers, law firms and their clients fear security leaks, despite the fact that online platforms contain several layers of security and all data can be encrypted. "Lawyers get themselves tied up in knots about security over the Internet. Until there are clearly established judicial pronouncements regarding expectations of privacy with these technologies, there will continue to be a concern," says Leventon.
Concerns also persist over how attorney-client privilege will be protected if all case data is posted on an extranet. Hokkanen points out that decisions about who has access to sensitive information and what information should be left off line must be addressed before building an extranet. Eberts did just that at Allegiance, and ended up restricting access to some parts of its extranet. "Everyone has access to what they need. But everyone does not need access to everything on the system," he says.
Despite such safeguards, many lawyers continue to resist technology, which is prompting Corporate America to get tough with them. Forrest Morgan, former associate general counsel at Westinghouse Electric, for example, combated the resistance of Westinghouse's 25 outside law firms to electronic invoicing by cutting off business with the naysayers. The unusual move earned him the title of Corporate Counsel from Hell from the National Law Journal. But Morgan, now a partner at the Richmond, Virginia, law firm McGuire Woods Battle & Booth LLC and the architect of Allegiance's extranet, says law firms still need that kind of impetus to warm up to technology. "In the past, law firms have had no incentive to keep costs down or to implement new technology," says Morgan. "Now they aren't being given a choice."
Julie Carrick Dalton is a freelance business writer based in Woburn, Massachusetts.
LEGAL COSTS: WHICH WAY ARE THEY GOING?
Depending on which survey you read, corporate legal expenses are either going up or going down. Last June, the Wall Street Journal published an article saying legal spending was down, then ran a piece in September entitled "Lawyers' Fees Rise, and Clients Pay Up."
Both, as it turns out, are right. Total corporate legal spending is increasing, but as a percent of revenue, it is flat, according to the latest Pricewaterhouse-Coopers legal department spending survey. In other words, says Aileen Leventon, a partner with the firm's law firm and law department consulting group, the strong economy has boosted overall corporate revenue, but legal expenses have not increased at the same rate.
A similar study of smaller companies, however, conducted jointly by Co-Counsel, a legal staffing firm, and Corporate Legal Times, found different results. The 139 companies with average revenues of $2.1 billion reported an 11 percent decrease in total legal spending from 1996 to 1997 and an 11 percent decrease from 1997 spending to estimated 1998 spending.
Conflicting data aside, the prevailing wisdom is that legal expenses are skyrocketing. The perception comes in part from media attention to class-action suits and well-publicized settlements, lawyers say. But as companies bring more work in-house, consolidate the number of firms they work with, more carefully scrutinize legal bills, and implement new technologies, they may actually be bringing their legal costs in check.
Still, that doesn't mean legal costs shouldn't come down further. Traditionally, law departments have gotten away with spending habits that would never fly in other departments. Lawyers, for example, bill by the hour. All entries--such as the identity of the person doing the work, descriptions of the work, and the amount of time charged--are then arranged in chronological order. The result is that it is difficult to ascertain how much a particular project is really costing the company, says James d'A. Welch, vice president, litigation management, for Reliance National, a New York insurance company, who is working on a system that would require project-based bills rather than chronological invoices.
Until recently, it was typical for companies to return to the same law firms over and over again because they had strong personal relationships with the individual attorneys. Today, relationships still count, but not if the law firms' rates are not competitive.-- J.C.D.