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In-house counsel and the corporations they work for have to live within budgets. Although firms set their budgets, these budgets must take into consideration the budgets of their clients and not just the desires of the partners to make money. Unfortunately, the legal industry has distinguished itself as one of the few industries that rewards inefficiency: The more hours billed, the more fees collected. For this reason, the industry is being challenged by its clients to budget and to stay within the budget. While litigation budgets were once a novelty reserved for complex cases, budgets have become standard in cases of all sizes. The insurance industry is one of the leaders in cost comparisons by type of case, region and city. Insurance adjusters will not permit excessive legal fees, and in some cases they have refused to permit even a fair fee. Financial institutions also are doing cost comparisons by category. Such comparisons relate to average hourly rate and overall costs. These lenders realize that their ability to attract customers is affected by large legal fees. Fortune 500 firms that are domestic and international also closely monitor legal costs. As a result, some follow the 90/10 or even the 80/20 rule. These rules emphasize that the costs to complete the last 10 percent to 20 percent of a project far exceed the value of the work. Regardless of whether the budget is prepared for complex litigation or a seemingly straightforward transaction, realistic expectations and maintenance of the lines of communication about fees throughout the course of the project are essential. FROM THE START Setting realistic expectations starts from the moment legal work is requested. The right time to address the issue of costs is before the work starts, even though there may not be enough information available to be accurate in establishing a meaningful budget. Anyone who has dealt with a contractor on a fixed-price contract realizes that the correct budget is based on an accurate definition of the work. This is so in the legal industry. The difficult aspect of a budget is estimating the costs that will be incurred as a result of the actions of third parties: the opposing party and counsel, the result of discovering additional facts that necessitate more discovery, the lack of experience of the opposing counsel that may result in wasted time, and the rulings of a court that necessitate more hearings and briefs. While carefully planning the budget is important, both parties must be prepared to review the budget frequently and make adjustments when unexpected matters inevitably arise. This budget adjustment should be up and down. When unpredictable items arise, managing fees becomes a matter of managing expectations. Outside counsel must communicate these concerns with in-house counsel without delay. Both parties should then work together to develop a joint vision of how the case or transaction will be affected. Not all litigation or transactions are best managed through the use of a budget. Counsel should discuss whether a form of alternative billing might better suit the particular situation. All budgets are inherently flawed to some degree because the time to perform legal services cannot be controlled solely by the client or the attorney. Although most clients know of contingent-fee structures, other alternatives might include retainers for a fixed amount of work per month based on historical averages, a fixed fee, a maximum cap on the legal fees, and a reduced rate plus an incentive based on outcome and results. For some litigation, the fees might be structured to include success premiums or discounts for adverse results. Similarly, some transactions might be structured to include discounts for deals that do not close or success premiums for deals that do close. Alternative billing arrangements are not appropriate for all transactions or cases and should be the product of careful consideration and crafting by outside and inside counsel. Whether working with budgets or alternative billing methods, outside counsel and in-house counsel must not hesitate to address the issue. Each month a company board meeting is held that has a line item in the financial reports for legal fees. Inside counsel are judged by their ability to manage the legal work and their ability to manage the costs. By carefully planning the transaction or case, both parties can achieve the proper goals. Timothy R. Brown is a senior partner in the business transactions department of Thompson & Knight in Houston. Jamey S. Seely is a member of the corporate and securities department at the firm.

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