Trust But Verify Outside Counsel's Budget Prediction

D. Casey Flaherty

Law Technology News

2013-02-27 10:22:17.0

Editor's Note: D. Casey Flaherty, corporate counsel at Kia Motors America Inc., developed and administers an in-person, technology competency audit for his outside counsel. (Read more about it here, here, here, and here.)

MINI AUDIT

Here is a single topic, mini audit that in-house counsel can administer remotely.

The ask: Request that outside counsel provide you with a budget estimate for a common task, such as an opposition to a motion for summary judgment. When counsel respond that they are unable to construct a budget for a content-free hypothetical, ask that they merely provide you a range of costs for a final budget. If they supply that range, ask how they developed it, and what data it is based on.
What's being tested: Whether your firms use the large quantities of time data they collect for anything other than sending bills to clients.
Why: Most law firms are religious about recording attorneys' time. Time is the key metric in how they bill their clients. Many law firms purport to know, with a high degree of certainty, how much time was required to accomplish a specific task and how much the client owes the firm for that work. Yet, ask for a budget for a prospective task and you typically are fed a word salad about uniqueness, idiosyncrasies, contingencies, etc. In short, you are subjected to most lawyerly of all phrases: "It depends."

It certainly does depend. But your lawyers are not operating in an information vacuum. Presumably, they are your lawyers because they have done this kind of work — whatever it is — many times before. How long did those projects take? How much did they cost?

A budget request is not a demand for predictive perfection; it is probabilistic exercise based on expectations grounded in past experience, much of which has been captured as empirical data. Unfortunately, in too many instances, if you can move counsel beyond waxing eloquently about the contribution infinite variety makes to the subtle majesty of the law, you are given a gutstimate — a guesstimate based on gut feeling — in the hope that you will go away and let them get back to real lawyering. These conjectures are often useless.

Lawyers, as a group, seem particularly prone to the planning fallacy — the systematic tendency to underestimate how long is required to complete a task, despite past experience of similar tasks that ran over budget. Lawyers, as a group, are also less apt to recognize such shortcomings because we are the poster children for self-serving bias — the systematic tendency to attribute our successes to our personal merit, but attribute our failures to situational factors beyond our control.

The lack of data-driven deliberation can be galling, especially because the firms already collect the pertinent data. The numbers are there; firms just need to analyze them in such a way that they can provide in-house counsel with a range and distribution of potential time/cost for commonly recurring tasks. Discrete tasks can be combined to supply a cost range for a phase. And phases can be merged to present a budget for the engagement.

Indeed, there are umpteen ways to analyze, arrange, and present the data. And there any number of software providers and consultants who are happy to offer the 'optimal' method for doing so. I, however, am not advocating for any one approach. From what I have seen (candidly, pure anecdata; please email me to tell me I am wrong), few firms are at the point where it is even worth debating which method is preferable. For now, I would simply be heartened to be presented with any attempt at empirical analysis that is intended to be of use to clients.

The benefits of reasonably accurate budgets do not need to be explained to an in-house audience. But I probably need to be more explicit as to why in-house counsel would rely on law firms for quantitative analysis. Many in-house counsel already have access to all sorts of data about costs incurred on matters past.

First, outside counsel's understanding of the particulars of a specific matter has genuine predictive value. That value is better realized in selecting among evidence-based budget scenarios than in conjuring budget scenarios from thin air. Where outside counsel's experience should come into play is not in substituting speculation for an empirically grounded range of outcomes, but, rather, in predicting where within the distribution a specific matter may fall, making explicit the assumptions underlying those predictions, and pinpointing the key variables.
Second, outside counsel's budget should be of use when it comes time to review the bill. A budget should guide a discussion about reasonable costs, unanticipated exigencies, and value delivered. But a budget cannot serve that purpose if both sides treat it as a work of implausible fiction.
Third, reasonably accurate budget estimates are useful in considering alternatives. They are useful in comparing prospective firms to an incumbent. They are useful in selecting among firms bidding on a new project. They are useful in weighing and structuring alternative fee arrangements. Etc.
Fourth, if you do not measure it, you can not improve it. That aphorism, a paraphrase of Lord Kelvin, is a confederate of Parkinson's law: work expands so as to fill the time available for its completion. Though lawyers operate in a world of inflexible deadlines, many do not face strict time constraints — sleep can always be bartered for additional billable hours. There is nobility in an ethos of getting everything done right and on time no matter what (i.e., how long) it takes. But that mindset too often leads to a reliance on brute force and a valorization of poor time management. How many associates have been heard to brag about all-nighters and weekends sacrificed to labor-intensive busywork?
Fifth, the more extraordinary the matter, the more valuable an accurate budget becomes. Extraordinary might be a function of size. But extraordinary can also be a function of familiarity. In-house counsel has reams of data on the matters they consistently encounter. The data, and attendant comfort, disappear when the matter is outside their norm. In such instances, in-house counsel has few choices but to rely on their outside lawyers' past experience to produce reasonably accurate budget estimates.
Finally, the ability to supply reasonably accurate budget estimates based on empirical analysis of past matters is evidence of a firm's overall approach. Reasonably accurate budget estimates are, of course, something that clients want and need. Giving clients something non-billable that they want and need, signals a firm's commitment to customer service. Likewise, a penchant for empirical analysis is a departure from the tradition-bound, ossified law firms that so many lawyers (including this one) imagine as one enemy of progress in our profession.

D. Casey Flaherty is corporate counsel at Kia Motors America Inc. The opinions expressed herein are his own.

This article originally appeared in Law Technology News.