President's Message: Performance Evaluation of Outside Counsel and Litigation Management Metrics

WDC Journal Edition: Spring 2013
By: Rollin E. Krafft, President, Wisconsin Defense Counsel

I have been hiring outside counsel and managing litigation for over a quarter of a century. During that time not one of my outside counsel has ever asked me how his or her performance would be evaluated. I hire outside counsel whom I perceive to be knowledgeable and skillful trial lawyers. They consistently deliver expected or better than expected results at a reasonable cost. More recently, my company has required litigation managers to rate outside counsel based upon the following survey:


Strongly
Agree

Indifferent Strongly
Agree
Reports were substantive and provided in a timely manner. 1 2 3 4 5
My questions/phone calls received a prompt response. 1 2 3 4 5
The attorney's recommendation on case settlement value was reasonable. 1 2 3 4 5
The attorney's aggressively moved the file toward resolution. 1 2 3 4 5
The expenses incurred on the file were reasonable. 1 2 3 4 5
I am satisfied with the file outcome. 1 2 3 45


Evaluation of outside counsel according to inherently subjective criteria tends to be discounted by the accountants who have risen to prominence at many insurance companies. They currently demand objective, numerical, and quantifiable “metrics.” Accordingly, insurers have tended to focus on defense cost as a line item deserving of much scrutiny and cost control. Indemnity payments are much more difficult to scrutinize, since evaluation of a given settlement is inherently subjective. Indemnity payments are viewed as unavoidable and uncontrollable. Although different insurance companies employ different metrics, many insurance companies employ the following metrics to evaluate their litigation managers and outside counsel:

1) Cycle time;

2) Average defense cost per closed file;

3) Percentage reduction of invoiced defense cost; and

4) Defense cost to indemnity ratio.

1) Cycle time. Cycle time is the time in months that a lawsuit is pending. Insurance companies recognize that the longer a lawsuit is pending the more defense cost is incurred. Cycle time is a tricky metric. Outside counsel who regularly recommend early payment of the demand would have fabulous cycle time performance but would likely not be very useful as defense counsel.

2) Average defense cost per closed file. This metric measures the average cost of closed litigated files. This metric would appear to be useful to compare the average defense cost incurred by one firm or another on files which are relatively fungible. The metric becomes less useful as applied to matters which are not fungible. One could expect very different numbers for auto soft-tissue cases than fax-blasting class actions.

3) Percentage reduction of defense invoices. This metric assumes that all defense invoices have a percentage of “fluff” built into them which should be identified and reduced by the litigation manager. Many years ago a consultant suggested to me that 10% was a reasonable goal for a percentage reduction of defense invoices. I responded that such 10% reduction was only appropriate if I believed that every defense firm was cheating me by 10%, and I didn’t believe that to be the case.

4) Defense cost/indemnity ratio. This metric measures the ratio of defense cost to indemnity payments. I recently heard about a case from a very capable Indiana defense lawyer which illustrates the defense to indemnity ratio. He was hired to defend a rear-ender with a significant causation issue surrounding a multi-level fusion. The pre-suit demand was $200,000.00. He mounted an aggressive causation defense, deposing the treating physicians and retaining a defense medical expert on causation. In fact, he spent $35,000.00 prior to mediation to develop the causation defense. At mediation, the demand ultimately plummeted to $35,000.00. Alas, the litigation manager told the defense lawyer he could not settle at such a low level, as his defense to indemnity ratio would be roughly one to one, an unacceptable ratio.

In conclusion, outside counsel should be aware of how insurers evaluate their performance. A significant part of that equation is understanding how insurance companies evaluate the performance of their own litigation managers. Although litigation management metrics are becoming increasingly important in these evaluations, the defense lawyer who consistently delivers expected or better than expected results at a reasonable cost is likely to be hired over and over again.