Controlling Legal Costs
Once considered taboo, insisting that your lawyer spell outwhat you're paying for is smart business today* * *
It was just the single line "Revise closing memorandum" in a $4,108.40 legal bill that pushed Silicon Valley entrepreneur Kamran Elahian over the edge in October 1989.
"I looked at that and thought, What does that mean and how many minutes did it take?" recalls Elahian. "I wondered if a janitor had performed the service, or had it been a senior partner who jumped through hoops for my company? I called my lawyer and told him if we were going to continue working together, this was not acceptable."
It was an unusually tough stand for Elahian, who had enjoyed a close working relationship with his lawyer, Arthur Schneiderman, for the better part of a decade. The two men had nurtured the technology companies Elahian had founded -- CAE Systems Inc., a design automation software company; and Cirrus Logic Inc., a semiconductor manufacturer -- to success, all without major billing disputes.
"I picked Arthur in 1980 for the quality of the service," says Elahian. "I did not zero in on the cost. I felt that shaving 10 bucks off an hour was not worth getting lousy service."
But saving that 10 bucks means more to Elahian these days. His latest venture, Momenta Corp., in Mountain View, Calif., aims to produce a pen-based portable computing device, a tool he hopes will revolutionize the computer industry and knows will consume mountains of cash in the making.
In its first year alone Momenta raised approximately $12 million in venture capital; legal expenses snared a fair share of that kitty. Closing its two rounds of financing cost the company some $40,000 in legal fees, and Momenta has also formed about a dozen licensing agreements and strategic alliances, legally top-heavy deals because they involve proprietary technology. In all, Momenta spent $119,000 for legal services from August 1989 to August 1990, its first 12 months of operation, and Elahian expects that the company's legal expenditures will continue to be high.
Now, however, he knows precisely what he's paying for. Thanks to that October 1989 phone call to Schneiderman, Elahian receives monthly bills detailed to his liking. The entries are still terse -- "Prepare agreements" reads a line in a July 1990 invoice -- but the bill makes it clear that an associate, at $195 an hour, spent 3.2 hours on the task. For the month, that associate put in a total of 14.5 hours on the company's Series B, or second, financing for $2,827.50 in fees; partner Schneiderman spent only 2 hours reviewing documents, for $530 of the $3,357.50 total bill.
"Basically, everything is spelled out so that I can see at a glance what we are paying for and if there are any errors," Elahian explains. "We request the same good-housekeeping measures from lawyers that we do from any other vendor." When Elahian first hired Schneiderman, in 1980, challenging legal fees and services was largely considered taboo. No more. The gloves have come off as the cost of legal representation has risen, making the once-unseemly practice of combing through a legal invoice a prudent management technique.
Indeed, the careful auditing of bills can prove to be a profitable exercise, says Jed S. Ringel, and he ought to know. A former Wall Street commercial litigator turned entrepreneur, Ringel runs Law Audit Services, in New York City, a venture dedicated to uncovering unnecessary charges on legal statements.
Though he commands $125 an hour for his services and uses specialized software to conduct his audits, some of Ringel's monitoring methods can easily be mastered. Principal among his tricks: he dissects an invoice by activity performed -- not by chronological order, the typical way in which law firms present their bills. Ringel says grouping by activity reveals excesses that chronological listings obscure, particularly when a bill is lengthy.
Take, for example, the audit Ringel performed of the legal fees incurred by a New York City company over a 17-month period in a large litigation matter. After reorganizing the bill by activities, Ringel discovered that the three lawyers who billed the case had conferred, by either in-office communication or memo, more than 600 times, or an average of more than once a day every day, including weekends, for the 17-month period in question. The tab for those conferences alone was $36,000, or 23% of the total fee. Confronted by those statistics, Ringel worked with the billinglaw firm to reduce its charges by $25,000.
A CEO can likewise negotiate a bill when a fee adjustment is warranted, says Nancy Nord, who is the executive director of American Corporate Counsel Association, a professional association of in-house corporate lawyers located in Washington, D.C. "The legal business has become so incredibly competitive that partners want to keep clients happy. Lawyers are approachable. They want to sit down and communicate."
Schneiderman agrees. "I'm not offended when asked to look over a bill," he says. "It's important to address issues on the front end, so that the bill isn't a source of irritation. Lawyers already are enough of an irritation to businesspeople without adding to it."
Elahian may not be banking huge savings by monitoring his legal bills, but he contends the practice helps keep costs in line. "If you study the bills, you pick up the fact that you pay $200 for a half-hour phone discussion. You may think twice before making the call the next time," he says.
Working closely with his lawyers has produced other cost benefits. One of Elahian's venture backers, Fred F. Nazem of Nazem & Co., in New York City, reports that Schneiderman will often attend meetings without billing Elahian's company. "We've told Art Schneiderman that we think the company will become something big, that it will provide a big return in terms of legal work over time, so he doesn't charge us for board meetings. I think that's one of the reasons why Kamran Elahian is ahead of budget."* * *
Nancy Rutter is a San Francisco-based free-lance writer who specializes in business and legal issues.
CUTTING THE BILL
A step-by-step guide
Peter D. Zeughauser, vice-president and general counsel of The Irvine Co., a real estate development company in Newport Beach, Calif., believes that requiring a detailed bill is a way to monitor legal costs, not control them. The control comes up front -- before the bill is even sent -- and Zeughauser, who is chairman of the American Corporate Counsel Association, points to several steps small-business owners can take before hiring a law firm:
* Bid the work out. For major matters, audition lawyers in a "beauty contest," in which several law firms provide presentations on how the matter would be handled. Written analysis is another method; Zeughauser suggests getting at least three law firms to contribute written proposals about how they would approach a matter and what it will cost. For lesser legal issues, simply conduct a telephone poll, calling two or three qualified lawyers for a bid. Zeughauser typically pays for bids that require parties to obtain confidential information about a matter in order to construct a bid; he doesn't pay for phone polls.
* Get a retention letter for all outside work. A retention letter is a contract that carefully spells out what your company expects from its lawyers and what it will pay for. Zeughauser's standard retention letter plainly states that his company will not reimburse lawyers for first-class travel or luxury lodging. Furthermore, the letter specifies which partners and associates will work on the matter and at what rates, and disallows bonus or premium billing.
* Enter into creative billing arrangements. Zeughauser recommends lobbying for fixed or flat fees in some matters -- for example, when a court brief needs to be filed or a deposition taken. Such a fee is negotiated, based on a determination by both parties of the value of the work in question. For more extensive work, a hybrid rate may be established, in which a law firm opts for lower hourly rates but gets a bonus -- or contingency kicker -- at the end of the matter. Companies facing ongoing legal expenses can also strike a low-rate deal in exchange for the promise of a large volume of work.
More cost-cutting ideas
Just when you thought you were out of ideas, along comes 100 Ways to Cut Legal Fees & Manage Your Lawyer, by Erwin G. Krasnow and Robin S. Conrad. Published by an affiliate of the U.S. Chamber of Commerce, the book runs the legal gamut, from how to choose a lawyer to how to act as your own. It includes sample retention letters and other useful tools for controlling legal costs.
To order the book, call (800) 638-6582 (in Maryland, call 800-352-1450). Or send $10.95 plus $1 for shipping to National Chamber Litigation Center, 1615 H St. N.W., Washington DC 20062.