The Business of Litigation Support


Litigation support, it turns out, is no more confined to expert witness testimony than the solar system is to Earth. Earth is what we know most about and it's where our understanding begins. However, everything doesn't revolve around us and we're steadily becoming an incrementally smaller part of something much larger that's constantly expanding.

So it is with litigation support services, which have evolved far beyond the realm of expert witnesses. Today, litigation support includes the prevention of litigation, the uncovering of litigation, the organization of litigation, the post-judgment or post-settlement administration of litigation-particularly class action litigation-and the reconstruction and reorganization of businesses affected by litigation. "The life cycle of the litigation support business is very different from what we saw in the 1980s," says Frank Vettese, who heads litigation support services at Deloitte & Touche Corporate Finance Canada Inc.

In other words, the days have long passed when litigation support consisted of private investigators, accountants and university professors responding to last-minute calls from counsel as an adjunct to their primary activities. Nowadays, litigation support is a multi-million dollar business that adds investigative services, business valuation and damage quantification, forensic accounting, computer forensics (the who, what, when and where of computer usage), interim management services and evidence management to its historical role of providing expert witnesses.

A Growth Industry

"This is an industry growing by leaps and bounds in a rising tide in which everyone who can is trying to participate," says Michael Beber, the Torontonian who is executive vice-president for strategic development at New York-based Kroll Inc.

No one has capitalized on the opportunities more successfully than Kroll. In 1998, Kroll's revenues were less than $100 million. By December 31, 2002, the company had 2,300 employees in 60 offices on six continents, a $1.1 billion market capitalization and $120 million in the bank. Profits totalled $24 million on $410 million in revenues from 39 per cent revenue growth. For 2003, the company predicts revenue growth of 43 per cent to $586 million and a profit increase of 78 per cent to $42 million. Others agree. Bloomberg chose Kroll as one of five companies with the greatest potential for revenue growth this year.

It is a spectacular success story for an enterprise that relied on investigations for 100 per cent of its revenue as recently as five years ago. Today the company has five different income streams: investigation and intelligence, forensic accounting, business valuation and economic damages, corporate advisory and restructuring services and consulting. The product mix is counter cyclical, meaning that it shelters company revenues against changing economic and political conditions. "Our divisions operate together, but are reported separately," says Beber, who is in charge of Kroll's mergers and aquisitions (M&A) strategy.

The company's growth has been built on 14 rapid acquisitions that would make it a prized client for any law firm. The June 1998 purchase of Toronto's Lindquist Avey MacDonald Baskerville, Inc., the well-known forensic accounting firm, spearheaded Kroll's expansion of its risk management services strategy. "As pure investigators, clients were calling Kroll in on an episodic basis when they really had mission critical problems," says Beber. "We realized that there were many more things we could be doing for these clients, and forensic accounting was the way in."

Later in 1998, Kroll acquired Hong Kong-based Fact Finders Limited, which specializes in intellectual property investigations. In the spring of 1999 came two business valuation firms in Philadelphia and London. Arguably the most growth-driving moves, however, were the acquisitions in 2002 of Ontrack Data International, Inc., the largest data-recovery firm in the United States and New York-based Zolfo Cooper LLC, the top corporate restructuring and interim management firm. Zolfo Cooper's name partner Stephen Cooper is currently running Enron on an interim basis for an annual salary of $1.9 million. Arguably, the business of litigation support is as much about M&A and initial public offerings (IPOs) as it is about experts.

Not Just Support For Litigation

Although some might argue that Kroll's growth has little to do with traditional litigation support, they would be missing the point. Litigation support is no longer traditional and litigation no longer operates in isolation, divorced from the rest of the business world. "Litigation support is not just a matter of supporting litigators," says Beber. "It involves whatever services are associated with mitigating the risk of their clients, whether it precedes litigation, occurs during litigation or follows in the aftermath of litigation. Our job is to address risk problems where the corporate response to them is led either by general counsel or external law firms."

Enron is a classic example of the way litigation support has evolved. The need for advisory and restructuring experts is a no-brainer in the context of scandal, insolvency and 70 lawsuits against the company and its advisors. Because terminations are the order of the day, the company also requires security advice, personnel and procedures to ensure that those dismissed don't take important evidence with them or destroy it. Background screening is de rigueur for all new employees taken on in the restructuring.

Then there are the forensic accountants who must respond to the allegations against Enron. They frequently need backup from investigative teams. Finally, there are hundreds of thousands of digital documents that must be extracted or recovered from servers and hard drives all over the world, not to mention coherently analyzed and organized. And all this needs to be done in the context of a comprehensive document retention strategy implemented in anticipation of litigation.

"Clearly, not all of this is traditional litigation support, but the services are all provided in the context of a company at risk, which is why we call ourselves a risk management company," says Beber. Seen in this light, Kroll is the largest such organization in the world outside of the Big Four accounting firms, and the only firm of any comparable size devoted exclusively to it. The Big Four, however, have taken note.

Cross-Selling

As the Enron example demonstrates, the marketing of litigation support services is amenable to cross-selling. For instance, 30 per cent of Kroll Ontrack's engagements in the fourth quarter of 2002 came from other Kroll business groups.

Cross-selling is a business strategy the multi-national accounting firms have long refined. To be sure, the heightened sensitivity to business and legal conflicts exemplified by the Arthur Andersen debacle and Sarbanes-Oxley has introduced limitations. No longer can the Big Four blithely rely on audit retainers to bring in all kinds of consulting business. But litigation support services mesh so well with each other that they provide almost seamless leverage for growth. Some aspects of litigation support also mesh extremely well with traditional corporate advisory services, meaning that cross-selling can go both ways: business valuation, as critical to M&A activity as it is to quantification of damages, is a prime example.

With top Toronto experts charging between $400 and $650 hourly, forensic accountants and business valuators charging between $300 and $600 an hour in Montreal and $250 to $350 an hour in Atlantic Canada, the rewards are well worth the promotional efforts, especially because litigation support fees can easily outstrip lawyers' fees in complex cases. In the highly publicized Syncrude trial of a few years ago, for example, the parties called 250 experts. In Superior Propane, a landmark competition case, the government called 74 experts.

"Litigation support brings in an average of $2 to $3 million dollars of business for each partner in litigation advisory services," says a Big Four partner who spoke on condition of anonymity. "That means a major accounting firm in the United States is doing several hundreds of millions of dollars a year, Canadian majors are doing between $40 and $50 million and the typical Canadian boutique shop runs from $5 to $20 million."

The financial numbers for the accounting firms are probably conservative. The reason is that the Big Four use classical cross-selling techniques to trade on their status as full service professional firms. This means a core of partners focused on litigation support effectively act as co-ordinators in bringing together the appropriate firm resources to a particular case. So when a tax or audit partner is recruited to bring his or her expertise to bear on a litigation support matter, the litigation support numbers may not reflect their billings.

Indeed, it's hard to find a Big Four department or practice that bears the name "litigation support," because the business strategies of the accounting firms treat all their accounting and consulting expertise as a source of litigation support. "We don't go to market with litigation support services under one umbrella," says Helen Mallovy Hicks, a Toronto-based partner in PricewaterhouseCooper's Canadian financial advisory services (FAS) group.

Approximately 20 partners in this group-primarily partners in the dispute analysis and investigation and valuation and strategy advisory sub-groups-represent the "core" or "co-ordinating" groups for litigation support. Another 10 FAS partners have considerable expertise in litigation support and work in it on a regular, as-needed basis. PwC complements the expertise of these 30 partners who have a direct focus on litigation support by accessing industry, service and regional specialists on a case-by-case basis. "Nowadays, timing is more critical than ever in litigation, so service providers must have the ability to amass the right team of specialists very quickly," says Mallovy Hicks.

Similarly, Vettese co-ordinates Deloitte & Touche's litigation support strategy in his role as national practice leader for the firm's valuation services practice and its dispute consulting and forensic services practice. "More and more of our department's job is working with people inside the firm and sometimes others outside the firm in putting together the building blocks that make for successful litigation," he says. "When we take on litigation support, we can put forth an integrated team that could include industry experts, tax experts, computer experts, forensic accountants and investigators."

Notwithstanding the breadth of services his firm offers, Vettese is quick to point out that Deloitte's business strategy does not focus on extracting the largest fee from each engagement. "We try to offer only those services to which we can bring strategic value. For example, we offer document management and cataloguing services, but it's not necessarily something we do better than law firms. On the other hand, where a case turns on investigative tools-say in terms of looking at the consistency of documentation in a major tendering case-we can add strategic value in terms of the sophisticated digital search techniques we have at our disposal. And because the way documents are classified and recorded is critical to the effectiveness of the search techniques, we may become involved in their management or in systems management at an early stage."

Practice Group Management

In the end, it's all about "practice group management"-the latest buzzword for professional services firms, including lawyers. Effective practice group management means leveraging all available firm resources on a national, continental and international scale. To accomplish this, Vettese invests considerable time on internal global committees relating to his practice areas. "Many of our litigation support services start out as local matters, move to having national partners involved, and then engage the firm globally," he says. "Our whole emphasis is on getting larger files by broadening what we offer."

Resources must be mobile, so it's not unusual for firms like Kroll, Deloitte or PwC to have domestic or international experts based in half a dozen cities as part of a particular litigation support team. "It's a question of who has the best qualifications," says Vettese. "For example, our two or three top computer forensics people come from different parts of the world."

Trading on their international reach, many of the world's top consulting firms also offer litigation support services. Indeed, three academics with excellent reputations as expert witnesses-Frank Mathewson, Michael Trebilcock and Ralph Winter-came together about four years ago to set up the Toronto office of Charles River Associates Incorporated, the international economics, finance and business consulting firm. All three originally operated as independents in the litigation support field. "The association with Charles River gave us a presence outside the university, allowed us to spread around our fixed costs, and offered advantages on the marketing side," says Mathewson.

The firm now employs a dozen experts and consultants in its Toronto office, all of whom have access to Charles River's vast international research bank and network of experts. Like Kroll, PwC and Deloitte, the firm emphasizes its ability to provide litigation support and business consulting services seamlessly. Charles River works with "business firms, law firms, accounting firms and governments in providing a wide range of services." Still, Mathewson says, "Our CEO regards litigation support services as the jewel in the Charles River crown."

At A.T. Kearney, Inc. whose experts offered vital testimony on distribution logistics and transportation systems management in Superior Propane, litigation support services are also important. "They are not core to what we do, but they are certainly one of our strong offerings," says Brian Irwin of the firm's Toronto office. Again, what makes the offering strong is the reach of A.T. Kearney's resources. In Superior Propane, the firm involved personnel from Toronto, Chicago and Atlanta.

Small Firms, Big Players

All the emphasis on reach, however, might suggest that only the big firms can be effective players in litigation support. Nothing could be further from the truth.

"I avoid the biggest players when I'm looking for litigation support, because I've never received the same kind of service from them that I get from the boutique shops or the specialty people," says Neil Finkelstein of Blake, Cassels & Graydon LLP, the litigator who won Superior Propane.

In that case, Finkelstein relied heavily on Stephen Cole, the name partner in Cole & Partners, the Toronto business valuation and damage quantification boutique that has 14 professionals and 10 support staff. "There's no case in which you need a critical mass of more than 20 professionals," says Finkelstein. "You certainly don't need a firm of three hundred professionals to be effective in providing litigation support."

Finkelstein draws an analogy between Cole & Partners and litigation boutiques like Toronto-based Lenczner Slaght Royce Smith Griffin: "Litigation boutiques can take on pretty well any case that the national firms can. Unlike the nationals, they don't need to cover 15 areas of law for their clients. They simply have to have a network that draws on the expertise they don't have in-house. Lenczner Slaght gets that expertise externally. The large law firms get it internally."

Kroll's Michael Beber agrees. "This business has a lot to do with networks and support groups. A large part of our work comes after we tell clients we don't have the expertise they need. Frequently they hire us to find and co-ordinate it."

And so it is with firms like Cole & Partners, Toronto rival Low Rosen Taylor Soriano and Montreal-based Wise, Blackman. These firms concentrate on business valuation and damage quantification. Their work includes commercial litigation, competition cases, intellectual property damages and shareholder disputes relating to oppression and fairness, and even family law disputes involving business and property assets. When the need arises for supplementary expertise or litigation support-for example, real estate appraisers or private investigators or computer forensics types-they can and do rely on the connections and strategic alliances they have developed.

"The resources available to us are dramatically greater than ever before because access has become so much easier in the Information Age, making community members much more conversant with each other," says Cole. "The result is that our practice has become incrementally international in nature and increasingly interactive with industry specialists, particularly from the United States and the United Kingdom."

On one recent retainer that involved valuing the CBC archives, Cole brought in the world's leading firm in the area, which happened to be from California. In a transfer pricing dispute, he involved experts from the United Kingdom, the United States, Vancouver and Winnipeg.

The result is that people like Howard Rosen at Low Rosen, and Richard Wise at Wise, Blackman are co-ordinators as much as they are experts these days. "Experts tend to be poor at integrating reports, so we help them with their drafting and then we integrate and co-ordinate the different reports," says Cole. "We also help prepare experts to testify."

Conceptually, however, the model isn't that different from the one in place at Deloitte and PwC, apart from the fact that the boutiques are more reliant on external resources. But both Rosen and Richard Taylor of Low Rosen believe that resort to external resources gives boutiques several advantages over the large firms.

According to Rosen, the relatively tight infrastructure of his boutique allows the firm to charge hourly rates that are 25 per cent below those of the Big Four. And, Rosen adds, evidence can have more credibility when it is based on a number of independent reports from experts at different firms. "We're not tied to an expert within our firm," says Taylor. "We can go out and hire the best sub-consultants in the world."

Because experts need to have the evidence properly before them to provide a sound opinion, the co-ordinator role played by the boutiques has caused some of them to move into evidence and document management in large cases. "We can do both the conceptualization of the document management plan and the input at our office," says Cole.

An important benefit of the exposure of boutique practices to national and international expertise is that it attracts national and international business. For example, although Wise, Blackman has but a single office in Montreal, its 11 business valuation and forensic accounting professionals do only 35 per cent of their business in Quebec, with the rest spread across Canada and the U.S. Similarly, a significant portion of Low Rosen's revenues comes from the U.S., Europe and Asia.

The Future of Litigation Support

What's clear, then, is that litigation support services are expanding so fast and in such variety that there is room for a number of successful models in the business. But what is it that has turned litigation support into such a big business, and what does the future look like?

To be sure, litigation support started as an exercise in expert testimony. The first big boom occurred when the federal government implemented an extensive tax reform programme in the early 1970s. The legislation required all business to have their assets valued as of a fixed day known as "V-Day". Disputed valuations ended up in court, and the valuators who prepared them went right along as expert witnesses.

The litigation support business got another shot in the arm around 1975 when the federal government amended the Canadian Business Corporations Act to give minority shareholders broad dissent rights and oppression remedies, all of which entailed a "fairness" valuation. In the mid-1980s, major changes to family law incorporated the notion of equalization payments, with an attendant increase in the demand for valuators. About the same time, amendments to the Competition Act aligned Canadian procedures much more closely with the adversarial model found in the U.S. Economists and industry specialists began to play a larger role as competition cases became big-time litigation.

The 1990s brought class actions to Canada, and by the turn of the century, the basic structure of litigation had changed. Multi-million dollar cases were no longer the exception in Canada, so much so that just the fee awards to plaintiffs lawyers could and did exceed $50 million. But lawyers were simply not equipped to administer the complex judgments involving hundreds or thousands or millions of class members. Instead, class action settlement managers, like Kitchener-based Crawford Adjusters Canada Inc., emerged. "The view going forward is that class actions will be a significant growth area for the litigation support business," says Vettese. "We haven't even touched the tip of the iceberg there."

The 1990s also brought a new emphasis on the value of intellectual property (IP). "Companies began putting in place sophisticated measures to ensure that they were extracting the appropriate value for the risks they had taken in developing a product or a process," says Vettese. "And the more sophistication you have, the greater the need for value-added professional services."

In the IP area, this translated into a need for investigators, forensic accountants, computer forensic experts, valuators and other experts and evidence managers to benchmark royalty rates and then monitor and measure revenues. As IP dealings rose to new levels of complexity, royalty investigations and disputes proliferated, as did patent, trademark and copyright infringement cases. International trade cases involving complex macro-economic issues, like the softwood lumber dispute, also became fertile ground for litigation support services.

In all of these areas, a corresponding need arose for creative dispute mechanisms, the complexities of which required ever more sophisticated litigation support techniques and opened up arbitration and mediation opportunities for litigation support firms.

Not surprisingly, many of these developments originated in the U.S. Canadian lawyers learned from the mature litigation support practices their American counterparts had embraced. "The Information Age has narrowed the sophistication gap at both the business and professional levels because it allows best practices to be shared very efficiently," says Vettese. "So litigation support in Canada is quickly catching up to litigation support in the United States."

The result is that lawyers engage litigation services much earlier in the process, partly because the experts might have already been involved in the risk prevention process.

In a case that involved the insolvency of a large multi-national, for instance, PwC was asked to consider the merits of a claim against directors and officers, and to provide an answer within five business days. The firm assembled a diverse valuation team to formulate a broad assessment of potential loss across a range of businesses and jurisdictions; a team of insolvency experts reviewed the merits of the liability argument; and a crew of computer cybercrime forensic experts examined a slew of electronic databases in search of supporting evidence.

Similarly, litigation support experts appeared early in the history of the massive tainted blood enquiry, setting up the computer and document management systems that allowed the lengthy, complicated multiparty proceeding to move on coherently.

"The litigation bar has recognized that 80 per cent of the information, which is now used in litigation is sorted electronically and that computer forensic experts are required to do that sorting," says Michael Beber at Kroll. The next stage, Beber says, is getting the remaining 20 per cent of the evidence into a format that can be scanned and coded. Ultimately, he says, litigation support experts will make all evidence available in digital form through a Web-based interface. Evidence management, he predicts, is the next big growth area for litigation support services.

The sheer proliferation of large, complex litigation in Canada, ensures continuing rapid growth in litigation support. But measuring the future of support services solely in relation to litigation statistics would be to seriously underestimate its growth potential as a big business. A more instructive guide is the extent to which modern Canadian business has become litigation driven in response to the ever harsher demands of the regulatory environment, growing general and special damage awards, and the emergence of big ticket class action claims.

Seen from the regulatory perspective, for example, the spotlight may be on corporate governance these days, but avoiding litigation and preparing for it are the real drivers behind the preoccupation with compliance, reporting and disclosure issues. And if this turns out to be the case elsewhere, Frank Vettese's prediction of 20 to 30 per cent growth in the litigation support practice at Deloitte & Touche over the next few years might be conservative. In short, this is a big business that is going to get even bigger.