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Category: Legal Spend

IBM’s Watson Could Help Reduce Outside Counsel Spend

May 19, 2017

A recent the Corporate Counsel story by Jennifer Williams-Alvarez, “IBM Says New Watson Tool Could Dramatically Reduce Outside Counsel Spend,” reports that, a new tool using International Business Machines Corp.'s Watson, notorious for defeating its human competitors on "Jeopardy" in 2011, is hard at work for in-house legal departments with the goal of significantly reducing outside counsel spend.

So far, use of "Outside Counsel Insights," or OCI, has been limited to legal departments in the financial services industry, according to Brian Kuhn, co-founder and leader of IBM Watson Legal.  But with the potential to save as much as 30 percent on annual outside counsel spend, it's no surprise that the tool has piqued the interest of some of the largest companies in that field.

The service relies on cloud-based cognitive computing system Watson to reveal billing insights to in-house legal departments, Kuhn said.  The development of OCI, which became an official offering late last quarter, stemmed from the perceived desire of legal departments to get their arms around this line item on the budget, he added.

"Outside counsel spend is really a significant concern for corporate general counsel," Kuhn said, noting that "on average, corporate law departments spend one-third to 50 percent of their annual budget on outside counsel."

To cut down on these costs, OCI looks at the amount of time a lawyer spends on a task and at line item descriptions in a budget, for instance, and creates a nearly complete automation of the invoice review process, Kuhn said.  The tool also shows how outside counsel are working, he added, which "tells you not just what lawyers did, but in a very granular way, the order in which they did things."

Together, these two features will help facilitate fixed-fee pricing, according to Kuhn, because legal departments will have a very detailed understanding of the work being done by outside counsel and can then dictate price.  What's more, Kuhn said, a future capability of OCI is to extract insights, such as how a judge ruled on certain motions and how specific lawyers perform on cross-examination, in order to "enforce appropriate legal strategy based on the outside counsel who've worked for you."

"There are other tools out there on the marketplace that offer just a pure analytics approach and they can only parse structured data," Kuhn said, explaining what makes Outside Counsel Insights unique.  "What Watson's good at is actually reading like a person, reading language ... and the ability to take narrative descriptions of legal tasks and time entries and understand what a lawyer actually intends by that in the context of a company's billing guidelines, is really how we move the needle and how we use AI.”

While OCI is currently only used in legal departments in the financial services industry, the potential savings are far from insignificant, Kuhn said.  He pointed out that in just the one industry, IBM's analysis shows that the service can provide a 22 to 30 percent savings on annual outside counsel spend after two years.  In one company with over $1 billion on annual outside counsel spend, which IBM declined to identify as the financial services company does not give its name as a reference, Kuhn said the benefits case showed close to $400 million a year in savings after two years.

There are also plans to expand use of the tool in the future to other industries that rely heavily on outside counsel, according to Kuhn.  "This is definitely not a sexy use of Watson," he noted.  "It's about creating efficiency for the lawyers and it's about massively reducing outside counsel spend."

Report: Wells Fargo Was Too Focused on Legal Spend

April 12, 2017

A recent Bloomberg Big Law Business story by Gabe Friedman, “Wells Fargo Lawyers Were Too Cost Focused, Report Says,” reports on the recent abusive sales practices of Wells Fargo.  The story reads:

After taking six months to investigate how Wells Fargo became enveloped in an abusive sales scandal, Shearman & Sterling has produced a 113-page report (pdf) that lays into the legal department for missing the big picture and focusing too much on legal cost containment.  The report was commissioned by the board of directors, which in September retained Shearman to assist an oversight committee in examining the scandal, in which bank employees created an untold number of fraudulent bank accounts in customers’ names in order to meet their sales targets.

The team of Shearman lawyers interviewed 100 people, mostly in senior management, and reviewed 35 million documents, collected from 300 custodians with FTI Consulting providing data analytics assistance, according to a note within the 113-page report.  It assesses each department in the bank, from human resources to audit, for its contribution to the scandal.  Although the law department is far from alone in the blame, the Shearman team repeatedly knocked the department under former general counsel James Strother for failing to see a pattern and recognize the seriousness in a growing number of incidents beginning in 2011 related to improper sales practices.

Right up until September 2016, “there continued to be a lack of recognition within the Law Department (as in other parts of Wells Fargo) about the significance of the number of sales integrity terminations, and the potential reputational consequences associated with that number,” the report notes.  “The Law Department’s focus was principally on quantifiable monetary costs — damages, fines, penalties, restitution.”

It adds, “Confident those costs would be relatively modest, the Law Department did not appreciate that sales integrity issues reflected a systemic breakdown in Wells Fargo’s culture and values and an ongoing failure to correct the widespread breaches of trust in the misuse of customers’ personal data and financial information.”

Former general counsel Strother, who retired last month, also comes up for serious scrutiny in the report including that the board’s risk committee felt badly misled for a presentation he was involved in.  Most notably, according to the report, in May 2015, three weeks after the Los Angeles City Attorney’s Office filed a lawsuit against Wells Fargo, accusing it of setting unrealistic sales goals that created pressure on employees to resort to opening fraudulent accounts, Strother and Carrie Tolstedt, head of community banking made a presentation to the board’s Risk Committee about the matter.

The Risk Committee specifically requested the number of employees that had been fired up to that point related to improper sales practices, which numbered around 2,600 at that point, the report states.  But this number was deleted from the presentation during a pre-conference call between members of the legal department and Tolstedt’s community banking department — for reasons no one could recall, according to Shearman.

Instead, the Risk Committee heard that only 230 employees had been fired and that “the root cause was intentional employee misconduct, not systemic issues,” according to the report. It was the first time that the committee even heard that there were as many as 230 terminations, and members “felt blindsided by the disclosure,” the report says. 

And in fact, the report notes, the actual number of people who had been fired or resigned as a result of investigations was closer to 2,600 at that time.  “Multiple Board members have stated that they felt misled by the presentation; they left with the understanding that sales integrity terminations were in the range of 200-300 and were largely localized in Southern California,” the report states.  “The Board was not provided with the correct aggregated termination data until well into 2016.”

While the report does credit some members of the law department with making “commendable attempts to address the sales abuses … through work on various committees,” it faults its members for not fully considering “whether there might be a pattern of illegal conduct” rather than a series of discrete legal problems.

Already, the report is being held up as a rare inside look at how a law department failed to mitigate a problem before it grew into a full scandal that resulted in major regulatory fines and executive management changes.  “This is the Wells Fargo Investigative Report.  It is well worth reading.  The next in the chronicles from Enron to GM,” Abercrombie & Fitch’s general counsel Robert Bostrom wrote on LinkedIn on Monday.

Amar Sarwal, vice president and chief legal strategist of the Association of Corporate Counsel, agreed that the report is likely to be studied by lawyers in the future.  “Normally you’re not going to have the confidential workings [of a law department] exposed like this,” Sarwal said.

The fact that it is written by a law firm, and critiques a corporate law department for focusing too much on cost containment and not seeing the big picture marks an “intriguing turnaround” from the normal roles, he added.  It is more common to hear corporate law departments critique law firms for being too focused on the billable hour and not spending enough time learning their client’s business.

The Shearman team was lead by New York partner Stuart Baskin, a former federal prosecutor in Manhattan.  Baskin previously represented J.P. Morgan’s board of directors as it dealt with the London Whale scandal, which involved a trader who accumulated an outsized position in the credit default swap market and lost $6.2 billion, raising questions about the bank’s risk management system.

Sarwal said the report puts a spotlight on the fact that all corporate lawyers, both in house and at law firms, face a tension between advising their client on a specific matter, and advising them on how to run their business.  “There’s this idea that the lawyers are the conscience of the company, but they’re not,” he added.

Instead, they operate within the hierarchy of the company and have to work with other executives to identify and solve problems.  He criticized the report for not contextualizing what else the law department had on its plate as the sales abuse problem unfolded, but nonetheless praised it as useful information.  “For GCs, this report is just another reminder that your job involves trying to change a real culture of human beings,” said Sarwal.

What are Best Practice in Outside Legal Fee Analysis?

February 20, 2017

Legal fee analysis is the comprehensive review and analysis of attorney fees and costs in an outside legal matter.  Professionals who perform outside legal fee analysis include attorney fee experts, special fee masters, bankruptcy fee examiners, fee dispute mediators, and legal bill auditors.

The following best practices measures were developed over several years with input and consensus from thought leaders from across the legal fee analysis community.  These best practice measures promote values such as ethics, independence, and professional development.  These peer review driven standards help strengthen the legal fee analysis field by ensuring integrity in the process and and reliability in the results. 

This professional code of conduct is considered the professional mainstream of legal fee analysis.  All our members (i.e. fully qualified attorney fee experts, special fee masters, bankruptcy fee examiners, fee dispute mediators, and legal bill auditors) have pledged to follow Best Practices in Outside Legal Fee Analysis:

  1. Adhere to the proper standard of reasonableness.
  2. Observe a consistent and reliable methodology.
  3. Keep updated on the latest jurisprudence of reasonable attorney fees and expenses.
  4. Keep updated on the latest scholarship on reasonable attorney fees and expenses (i.e. empirical papers, studies, surveys, and reports).
  5. Participate in professional development and CLE programs on attorney fees and legal billing topics.
  6. Do not advertise false or intentionally misleading information or offer any guarantee of outcome.
  7. Do not charge on a contingency basis (i.e. based on the results obtained).
  8. Do not accept a case or client where there is an inherent conflict of interest.
  9. Keep all fee, billing, and work product information in strict confidence.
  10. Utilize technology where possible.

Please note: You don't need to be a NALFA member to follow Best Practices in Outside Legal Fee Analysis.

Best Practices Strengthen Your Standing in Legal Fee Analysis

February 5, 2017

Legal fee analysis is the comprehensive review and analysis of attorney fees and costs by an outside party in a legal matter.  Professionals who routinely perform outside legal fee analysis include attorney fee experts, special fee masters, bankruptcy fee examiners, fee dispute mediators, and legal bill auditors.  Once known as legal auditing, a rather groundless, self-qualifying, and haphazard field, legal fee analysis has now matured and expanded into a new fully developed practice area of law, thanks in part to organization and professionalization.

Any new field of analysis, let alone one that deals with the sometimes contentious aspects of legal fees, requires some manner of professional ethics.  Emerging professions, like legal fee analysis must be grounded by some degree of qualification and some elements of generally accepted principles.  Indeed, professional standards can help ensure that professionals within a given field are qualified, competent, and ethical.

As part of our mission, NALFA has established Best Practices in Legal Fee Analysis.  This professional code of conduct was developed over several years with input and consensus from thought leaders from across the profession.  These peer review driven standards strengthen the legal fee analysis profession by ensuring integrity in the process and reliability in the results.  These best practice measures promote values such as ethics, independence, and professional development.  These best practice measures represent the mainstream of legal fee analysis.

As a 26 U.S.C. § 501(c)(6) organization, NALFA's statutory obligation is to improve the lines of business within the legal fee analysis profession.  Yet some old vestiges from the legal auditing era still remain.  As such, we encourage all professionals who routinely review and analyze outside legal fees or legal billing entries to read, understand, and follow Best Practices in Legal Fee Analysis.  Following these best practice measures only strengthens your standing within the legal fee analysis community.  We'd also encourage clients of outside legal fee analysis to choose a professional who follows Best Practices in Legal Fee Analysis.

For more on Best Practices in Legal Fee Analysis, visit http://www.thenalfa.org/Best-Practices/

Paper: Restraining Lawyers: From ‘Cases’ to ‘Tasks’

February 3, 2017

A forthcoming Fordham Law Review article, “Restraining Lawyers: From ‘Cases’ to ‘Tasks (pdf),’” by Morris A. Ratner, Professor of Law at the University of California Hastings College of Law, argues that law practice is experiencing two parallel shifts: civil procedure amendments are focusing on cost and resource drain, and the private market is giving in-house departments more options to unbundle legal work for lower costs.  A draft version of this article was posted with permission.  The abstract reads:

Developments in the domains of procedure and private contract highlight a continuing shift in authority away from lawyers and towards courts and clients accomplished by a conceptual downshift from “cases” to “tasks.”  The 2015 amendments to the Federal Rules of Civil Procedure limit attorney and party discretion by further empowering the trial court judge to dissect, assess the value of, and sequence case activity, including discovery.  At the same time, in the private sphere, sophisticated clients aided by advances in project and information management are controlling legal spend by unbundling cases into tasks.  From that position, they can source projects to low-cost providers.  Clients are also increasingly demanding litigation budgets and seeking value-based pricing, both of which work best if there is heightened communication between lawyer and client regarding the means to be pursued to achieve litigation aims.  These regulatory and market restraints on lawyers and lawyer-driven adversarialism, while pointing in a similar direction, differ fundamentally in terms of their reach, efficacy, and fairness.  Despite their differences, these developments in tandem have the potential to inspire the creation of new norms and duties calling on litigators to think more deeply and inclusively about the value of litigation tasks from the perspective of court and client.