Controlling the Cost-Effectiveness of Legal Services

by Joel A. Rose
 

Controlling the quality and cost-effectiveness of legal services is now being studied more carefully by the management of progressive law firms.  In a private law firm, the cost-effective performances of the principals and employed lawyers need to be evaluated in light of (1) the quality and timeliness of legal services provided; (2) the actual value of the client work performed (by law firm standards); (3) the client’s perception of the value of the legal services; and (4) the cost of the services provided.

The success that a private firm will have in controlling the quality and cost-effectiveness of providing legal services will be in direct proportion to the organization’s ability to manage its personnel, facilities and economics.

Implicit in this is the extent to which the organization and its members (1) understand the organization’s role, i.e., satisfying clients and enabling the lawyers’ organization to achieve its ultimate objectives; (2) establish performance standards or bench marks, i.e., economics, a client case load, quality, timeliness of services; and (3) measure the actual performance in light of the established standards.

Standards to be Set

Standards can be set for virtually every aspect of an organization’s performance.  Quality and cost-effective legal services are but two benchmarks that can be integrated into the lawyer/client relationship through properly developed management techniques.  To implement high standards, the legal organization must be able to recruit high-quality lawyers.

In addition, these lawyers must be provided with opportunities to mature professionally and personally through well-defined career-development programs.  These organizations must also recognize the importance of establishing appropriate compensation plans that consider market competition and reward those especially talented and more highly motivated lawyers.

It is incumbent upon senior attorneys in legal organization to provide an appropriate environment in which newer lawyers can increase their intellectual and practice skills.  This environment includes appropriate office facilities, library, support staff, equipment and management processes.  It is the cumulative impact of the myriad factors comprising this “environment” that determines the effectiveness of a legal organization and the extent to which it will provide quality legal services in a timely and economic manner.

There are “accepted” principles of good management.  The extent to which these may be implemented depends on the historical evolution of the legal organization, the personalities and objectives of the members, the size and geographic dispersion of the organization’s members, the nature and scope of legal work to be performed and the method of assigning and controlling legal work among and between attorneys.

The extent of implementation in a professional organization is also a function of the willingness of its members to subordinate their professional and personal goals for the benefit of the organization.  This “acquiescence” on the part of individual lawyers depends on two factors, namely: (1) how the legal organization and its members are perceived by its clients and the public; and (2) how the individual lawyers perceive the legal organization, its role in achieving overall objectives, “its established standards and themselves within the legal organization.”

Unless lawyers perceive that senior attorneys have the management skills to provide the cohesion that enables the organization to function effectively and that their peers are equal to, or exceed, their professional abilities (at relatively similar stages of development) there will be “no organization.” 

To determine the cost-effectiveness of specific legal services, the recipient must be able to measure the benefits in terms of: economics and value received.  In other words, “How much do I have to pay for these legal services, and how will these services enable me to achieve my objectives?”

In his book, Managing in Turbulent Times, Peter F. Drucker, an influential author and analyst of modern organization and management wrote:

It is reasonable to assume that professional work can at least be capable of being judged.  In measurement, the result one person obtains should be obtainable by anybody else who uses the same measuring stick.  In judgment, the result an informed and qualified person obtains is supposedly going to be reached by any other qualified and informed person.  Judgment presupposes information and some expertise, but it is otherwise as “objective” as is measurement.

In light of Professor Drucker’s observation, many examples can be provided for establishing standards and measuring the performance of lawyers.  In some private law firms, workload standards may be set for measuring the more routine work that is performed for non-business client matters, such as real estate closings, bankruptcies, personal injury matters and preparation of simple estate plans. These standards may apply to the number of cases handled, hourly rates, revenue produced and the number of fee-producing hours that may be devoted to client work.

In more complex legal matters, a lawyer’s performance may be measured on the basis of time devoted to the client problem, effort, responsibility of the attorney, expertise and results achieved.  However, in our opinion, in many legal organizations, the problem is not the hourly rate or expense of the lawyer.  Rather the problem is: (1) how lawyer time and costs are applied to specific client work; and (2) whether the lawyer’s time and related costs are converted into a bill for services that are perceived by the client as fair and, therefore, paid.

For example, a business matter that an experienced specialty lawyer could solve in eight hours at $350 or more per hour may properly be billed at $2,800.  If the matter was handled by a general practitioner 10 years at the bar, but with no experience in that area of law, he/she may require 30 hours, including research and many redrafts.  If the general practitioner’s rate is $250 per hour, he/she may conclude that his/her time-dollar value is $7,500 and bill accordingly.

Clients Know Problems

The business client of today is generally intelligent, well-educated and in possession of an astute idea of the dimension of the legal problem.  This client has often had similar matters and may have a good idea of what the billing should have been.

Assume that the $7,500 bill is now received by the client requesting this service.  If the bill is questioned, the lawyer would be hard put to justify a bill of $7,500 based on time spent on a learning situation at an hourly rate that called for a certain skill and experience level.

The basic principles of law office management and economics are also important from the viewpoint of individual and corporate clients dealing with lawyers in private practice for the judgment of court and for the economics of the legal organization in maintaining a staff of qualified attorneys.

Whether the client relationships exist between an individual or corporation, certain basic arrangements require understanding by the client and the lawyer.  These are: (1) the role of the firm in serving the client’s needs; (2) the specific assignment undertaken by the lawyer; and (3) who, or what level of a person at the legal organization, will work on the matter, including a proper division of skills (senior attorney, specialist, newly employed associate or paralegal).

To ensure the cost-effective delivery of legal services, a lawyer in private practice needs to: (1) operate in a skilled and efficient manner; (2) keep accurate records of time and costs; (3) maintain communication with the client as the matter progresses; (4) inform the client is there is a need for change in the arrangements concerning the scope of the work or fees and expenses; (5) bill clients monthly or quarterly, or as arranged, but promptly in accordance with the arrangement; and (6) maintain an internal rate schedule justifiable to the consumer, and review it at least annually.

Private-practice firms need to provide economically justifiable billings for clients and for their own profitability.  They must set total fees that derive from a well-managed office, providing prompt service, thereby holding the line on billings so that they do not exceed the inflation rate on a given level of skill.

Facing Competition

Today’s lawyer faces increased competition.  Past, current or potential clients have the option of using any of an increasing number of exceedingly well-trained, very bright attorneys.

A client unhappy about lack of prompt handling, cost or legal ineffectiveness may well go elsewhere for the next needed legal representation.

The legal profession is doing a great deal to provide more cost-effective service.  Paralegals at one-third the cost of a lawyer are being used to a great extent.  Automated research and the retrieval of prior efforts have reduced costs significantly.  The certification of specialists and compulsory attendance at continuing legal education programs in certain states has helped improve the quality of legal services.

The final billing for a given service, consisting of the pricing for lawyers, paralegals and improved automation of document processing is now considered more carefully.  In many cases, the bill is lower in terms of real dollars.

Hourly rates of lawyers have risen with inflation and costs that are relatively higher today than they were ten years ago.  Associates’ pay has paralleled economic trends.  The compensation of senior partners has not kept pace with inflation and the tax burden at their high brackets.  Rather, this group has tended to give up real-dollar income in favor of compensating younger and middle partners competitively.

Economic influences and client pressure provide the general guidelines for fee-setting in private law firms.  Fee-setting is influenced by: (1) the economic marketplace for experienced lawyers; (2) the pay provided to new law school graduates; (3) the cost of operation, consisting of overhead expenses and the built-in cost of maintaining a legal staff and adequate facilities; and (4) public responsiveness to cost-effectiveness.

Rates of Partners

Customs of various specialties, or uniqueness of reputation affect the charges of some lawyers, and some may not bill in terms of hourly rates.

But, the possibility exists that the charges may have to be justified as cost-effective in the eyes of the consumer and possibly the courts.  As this interaction between consumer, courts and lawyer becomes more apparent, law firms are growing increasingly conscious of the need to oversee quality, how time is spent, results and billing, the ingredients of cost-effectiveness.  Communication with the client, at the start and during service, is important to ensure understanding through the flow of information to and from the client.

To deliver legal services to corporations more effectively, legal expense budgets and results against the budgets are being watched with increasing care.  Bills are being analyzed for what the lawyers did, what they charged and how well they performed.  In this respect, larger and medium-size corporations are increasing their internal legal capabilities and services performed by employed lawyers, paralegals, secretaries and automation, in combination.

In conclusion, private-practice firms need to provide economically justifiable results for clients.  They must provide billings that are acceptable for their clients and for their own needed profitability.  They must set fees that derive from a well-managed, cost-effective, prompt service, thereby holding the line so that bills do not exceed the inflation rate for a given level of skill.  The public wants results and good treatment.  It wants the legal organization to do its best.  A mismanaged legal office will not provide a cost-effective service and will leave a negative image.

©1999-2017 Joel A. Rose & Associates