Budget Busters

A bill from outside counsel arrives.

It’s a lot more than you expected, which means you have a lot to explain to your CFO.

And making a bad situation worse, your relationship with outside counsel sours.

Loss of control over legal costs is the nightmare every in-house lawyer wants to avoid.

One solution: Make your outside lawyers submit a budget before they work on a matter and keep their feet to the fire to make sure they stay within spending limits. This technique is gaining traction around the country, but, like anything else, there are more effective ways than others to obtain the best results.

Deal Dashboard

An innovative approach used by LeBoeuf Lamb taps the power of the Internet to let inside and outside counsel track the progress of a matter 24/7.

The firm has developed web-based software called the Deal Dashboard. Each client and outside counsel handling a matter receives a username and password for each matter. When they log onto the system they see a graph with the budget compared to actual dollars spent, a graphic showing the percentage of the task completed, an estimation of how much the actual final cost will vary from the budget, a cost monitor graph and a graph showing cost by stage of the deal.

The software allows inside and outside counsel to record their communications in real time, reassigns the lead lawyer on each task as decisions are made, and make changes to the budget as necessary. Changes are made in Dashboard immediately after decisions are made so every time either in-house or outside counsel logs into the system, it’s an accurate depiction of the budget and the state of the matter.

Molly Mugler, associate general counsel of Old Mutual Asset Management in Boston, recently used the Dashboard to handle a smooth multi-million dollar acquisition.

“The Dashboard has a lot of different portions,” Mugler explained. “One portion is budget, one is document control and another is issue control. You can post to the web the issues that are outstanding, whose job it is to resolve it, and what the status is. You can also post the current version of documents. There can be 50 or 60 versions of hundreds of documents, so that was really, really, helpful.”

She keenly appreciated the ability to monitor how much her company was spending on the acquisition, both in reality and hypothetically. For each twist and complication that arose, LeBoeuf Lamb could estimate what it would do to the budget, post it to the Dashboard and Mugler could see the result.

“It helps the inside lawyer rein in the business people,” she said. “When they get excited with a new twist on the transaction, it’s helpful to say, ‘Yeah, we can do that, but here’s the additional documents it will require … and here’s what it will cost. [The Dashboard] lets you understand how you’re making a deal more or less expensive.”

Byron Kalogerou spent 14 years in-house with Tyco International before joining the Boston office of LeBoeuf Lamb. Part of Kalogerou’s motivation in leaving his in-house position was to develop this new project management approach to mergers and acquisitions.

“People don’t do the planning up front,” he said.

His goal: “Identify the tasks and drop it into a management tool that increases transparency and facilitates collaboration between inside and outside counsel. The goal is cutting time and costs to signature closing.”

Kalogerou adds: “The bill doesn’t become the vehicle where you convey where the process has gone wrong. You [as outside counsel] don’t want the bill to be the communicator.”

Reality Check

Creating a legal budget can be complicated from the outset by the fact that relatively few outside lawyers have worked as in-house counsel. They’ve rarely been the purchaser of legal services, instead only the provider. Because they’re never been responsible for spending money on legal services, they have little appreciation for the pressures faced by in-house counsel.

This can create tension in the relationship between in-house and outside counsel – sometimes even mistrust and antagonism.

When preparing a budget, inside counsel must first give outside counsel enough information to actually create the document. For litigation, this includes describing the parties involved, the claims and defenses, and, most importantly, what the objective is -settlement, winning at trial, or creating a delay tactic so another business matter can move forward and clear a particular hurdle.

This gives outside counsel a sense of what the battlefield is and how challenging the issues are.

In-house counsel should expect to pay outside counsel for setting up a budget.

“This is not a free service,” said Ed Poll, a law firm coach and consultant based in Venice, Calif.

But don’t think of it as wasted money. It forces an early evaluation of a case, said Alana Bassin at Bowman and Brooke in Minneapolis. A budget makes outside counsel break a matter down into parts, which should sharpen their focus and overall representation.

Once in-house counsel provides the relevant information, outside lawyers should, very simply, sit down with a calculator and add up the estimated hourly fees and expenses that will be involved with each task and each phase of the case.

Bassin suggests breaking down the costs of a case into smaller line-items – depositions, experts, motion practice – because knowing where smaller sums of money are going is much easier for the client to stomach than one large bottom line.

“But that’s not enough,” said Rick Morgan, also of Bowman and Brooke’s Minneapolis office. “You have to think to yourself, ‘what is the value that is coming up in this budget? Is it really reflective of what the case is worth to the client?’ What you’re trying to do is give an accurate picture of costs and help them prioritize those costs.”

It needs to be a collaborative process throughout – with in-house communicating expectations and outside counsel providing realistic numbers.

“Both parties have to come to the table with a view on the one side that you’re not going to get the highest fee possible, and on the other that you’re not going to get the cheapest lawyer in town,” Poll says. “If the parties can’t trust one another, if these two people are adversaries with one another, then there’s going to be difficulty in representation and difficulty in the collection of the fee by the law firm.”

Morgan encourages in-house counsel to “give good push-back. If they get a budget that’s not consistent with their litigation budget, they need to let us know that. Maybe there’s something we can do to push cases off, or do things in a leaner fashion or adjust strategies.”

Outside counsel must consistently communicate with inside counsel once the project is underway. It’s not enough to be on the phone talking about depositions and documents – outside counsel must keep clients apprised of the costs of the matter and the overall legal bill.

Whole or Parts?

Opinions are mixed on whether entire projects should be budgeted at the outset or as it progresses.

Joe Faber, formerly associate general counsel at Millennium Pharmaceuticals in Massachusetts and now at Faber, Daeufer & Rosenberg in Boston, says it’s okay to leave parts of a transaction-related budget undone when it’s unclear how a deal will be structured. His firm often offers a term sheet for a fixed price and then later budgets the drafting and negotiation of the definitive draft and agreement.

“Perhaps it starts as a license and turns into an asset acquisition. Because it’s unknown it doesn’t make sense to price it early on,” Faber said.

Poll, in contrast, says the sides should try to work out as much of the budget – if not the full budget – as early on as possible.

“If you don’t do that, then you’ll think, ‘Gee, I’m only spending $5,000 in this preliminary stage, I can handle that.’ But when it turns out to be a $195,000 piece of legal work, that may not be acceptable from a business perspective,” he observes.

Most experts agree it’s the responsibility of outside counsel to monitor the budget and let in-house counsel know if it begins to stray or looks like it needs to be revisited. In-house counsel should approve changes in the budget before work proceeds.

While budgeting is an effective tool to control costs and surprises, it doesn’t lend itself to all projects.

A complex transaction may require significant negotiations to convince the other side of, for example, the benefits of a particular business structure. The risk that this will consume considerable time is within the control of the company, which chooses the target and drives the deal structure. Asking outside counsel to do a budget in that context may be counterproductive.

However, “if you have a series of transactions that are similar, in that situation you may want outside counsel to give you a fixed fee so that you have some confidence that you’re not going to be charged $10,000 for one project and $5,000 for another when they’re really very similar in terms of value,” he continued. “The projects don’t have to be identified, but if they’re similar and there are enough of them, the law firm can spread the risk among the projects. From the client’s perspective, they’re entitled to expect consistency.”

Be Flexible

Perhaps the best advice is to be flexible. Inside counsel should assume some line items within the budget will change as project circumstances change. They should understand that when outside counsel says a project will cost a specific amount, that figure is often based on an assumption that negotiations won’t drag on for several months, or the structure of the deal doesn’t change several times.

With litigation, outside counsel can control only so many things. Co-defendants create issues, plaintiffs’ attorneys create issues, and judges create issues. “You actually have to have some dollars built in for the unexpected,” Morgan says.

He suggests tracking expenses quarterly and going over those expenses with in-house counsel. From there the sides can determine whether the budget still makes sense or ought to change.

Also, be open to changes so outside counsel is comfortable broaching the topic, Morgan suggests. Give outside counsel feedback throughout the project so the firm is clear on whether it’s meeting expectations.