Auditing in Legal Services

Scott Fargason maintains that lawyers waste considerable resources. As a lawyer and a CPA in the U.S., he claims that "there is ample opportunity for auditors to dramatically improve the efficiency and effectiveness of in-house and external legal counsel." He has collaborated with The Institute of Internal Auditors (IIA) to produce a development and practice aid for the IIA, as part of its Preferred Practices Framework for Internal Auditing.

The author is careful to declare this audit as one specifically directed at the legal process, and in particular its efficiency and effectiveness. Still, the very presence of the handbook and the review processes it represents help explain why banks, insurance companies and different levels of government have been more focused and structured in the use of legal resources. Neither internal nor external counsel are exempt. Fargason claims that "organizations that do not employ the use of written "right to audit" clauses for both internal and external counsel are embracing the high risk that the legal process will be sub-optimal and characterized by excessive cost overruns."

Like most audits (of other resources), the methodology of the review process is straightforward and includes a walk-through (or flow-charting) of the legal process, interviews of key personnel, an evaluation of internal resources, external counsel trends and ratios, analyses of legal services and benchmarking.

There is one feature of the "test of controls"-the contract for legal services-which is seldom seen in corporate and government law departments. Fargason suggests that the "contract" between legal (internal and external) and internal clients be documented to allow easy analysis by the client. A few of the characteristics are familiar, but several are noteworthy and evasive:

. the contact be written;

. a clear and defined scope of representation;

. a specified term;

. routine legal matters billed by the product, not the

hour;

. non-routine legal matters negotiated at the time

of the engagement, with clearly defined budgets and

anticipated outcomes;

. standard coding for legal services rendered on behalf of

the organization;

. standard billing format, with a summary bill augmented

by a detailed, itemized billing; and

. a right to audit clause, and coding of legal services and

legal personnel.

Case/matter budgeting, uniform task-based management systems, timekeeping and billing protocols and management reporting systems are the tools of the trade. One anonymous CEO is quoted as saying, "I want data that shows whether the resources spent by the law department are focused on the right priorities and generate value we can measure. Until I get that data, my best option is to keep pushing for lower costs."

The IIA framework is a useful beginning for any law department, and in turn for the law firms that work with them. But effectiveness is also about doing "the right stuff at the right time." It has been almost two years since a group of 20 general counsel met in New York City to identify 17 factors critical to the success of a law department. The factors were published along with a lengthy discussion piece by Stephen E. Nowlan in the fall 2002 edition of Chief Legal Executive. More than a listing of factors, several key elements or indicators were defined for each factor and can serve as the milestones for a self-audit. The following are three examples:

Critical Success Factor #1

Trust and an effective working relationship with the CEO, executive officers and clients. Key elements include:

. the CLO has frequent dialogue with the CEO;

. executive officers are briefed on steps that the law

department is taking to align with the company

objectives;

. CLO creates opportunities for lawyers to work with

executive officers;

. CLO monitors quality of relationships between attorneys

and executive clients; and

. client satisfaction surveys.

Critical Success Factor #4

Effective strategy for integrating lawyers with client management teams. Key elements include:

. significant business-unit management teams include

a lawyer as a participating member;

. formalized role in the new product development process;

. lawyers review and contribute to annual business

plans; and

. legal team reviews major policy decisions before

announcements.

Critical Success Factor #15

Performance metrics system for monitoring the strategic value and contribution of the law department. Key elements include:

. tracking and reporting on high-risk matters, attainment

of preventative law goals, resources to support company

growth initiatives and other non-spending-based

performance measures.

Effectiveness requires innovation and innovation is about asking the right questions, thinking clearly about the answers, and applying common sense. In the last quarter of 2003, this means being accountable and measurable for effectiveness and for efficiency in the use of resources to deliver the results.

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