Legal Commentary

The Lie Of Litigation Budgeting

By Patrick J. Lamb

A client walks up to a litigator and says, "I have a lawsuit I need you to defend.  I don't expect there to be more than 5 depositions.  The contract involved has just three provisions, and there are probably only 500 pages of relevant documents.  There is a single legal issue.  If I give you $5 million, will you handle the case?"  Does anyone believe there would be a shortage of lawyers lined up to handle the case?

Okay, we've established that you can fix a fee on litigation.  No more of this sophistry that you can't figure out how much a piece of litigation will cost.  The only issue is what is the margin of error and how do you deal with it?

Actually, it's not quite that simple.  Figuring out the margin of error is not that simple.  The first impulse is to figure out how many hours it would take, multiply the hours by the applicable hourly rates and, presto, you have your benchmark.  Of course, those hourly rates have a staggering profit margin built in.  The first goal needs to be to understand cost, because a fee above cost ensures profit, with the only question being how much profit.  Then, once your fee is set, you have a strong incentive to lower cost to increase your profit margin.  That serves you and your client well, so long as your effort to lower cost does not reduce quality or effort.  To ensure against that, a performance incentive (holdback or bonus) can be implemented as part of the fee. 

There is one further point.  There are few businesses that are guaranteed a profit.  Lawyers tend to view themselves differently, although I cannot fathom why.  But even if a lawyer knows her cost structure cold, there is no rule that says a budget must be in excess of the cost.  Obviously that is sound business, but bear in mind that a budget is simply an agreement to not spend more than a specified sum.  While the client--the payor--presumably hopes its service providers make a profit, the important number is the budget--the amount it pays.  And using that definition, everyone can provide a number.

So, moral of the piece:  everyone can provide a  budget.  Everyone can live with a budget.  The real questions are whether lawyers will agree to do so and whether clients will walk with their wallets when lawyers don't.

Full post as published by In Search of Perfect Client Service on August 21, 2008 (boomark / email).