One of the most popular articles appearing earlier this week on the New York Times website was a story titled: Young Turn to Web Sites Without Rules.  “Popular Web sites like YouTube ande MySpace have hired the equivalent of school hallway monitors to police what visitors to their sites can see and do by cracking down on piracy and depictions of nudity and violence.” the articles starts off with.  So what is the alternative for the young, the rebellious, and the hormonally challenged you might ask?  It’s websites like Stickam where anything goes.  No fear and no rules.

It’s every parents’ nightmare.  So as they worried about the adequacy of the web filters of their computers back home the number of hits on the Times’ article increased, propelling it to the top of the Times’ e-mail charts.

Some young adults who grew-up with computers and a free-wheeling internet culture are learning the hard way how youthful indiscretions memorialized in virtual time and space can come back to haunt them years later.  Take for example the young woman applying for a job with a bank.  Human resources did an internet search on the candidate’s name and lo and behold a picture of the woman popped up on the screen dressed as a stripper at a Halloween party.  At the time the photo was taken it was probably funny and all her other friends were doing it too.  During a job interview, however, for a “real” job it was easily interpreted as an example of poor judgment.

Businesses can face the same problem as this young job candidate.  Every day employees create business documents that can be misinterpreted and create ammunition for trigger happy plaintiff’s lawyers.  They inadvertently create smoking guns.

Merck, for example, has reported that it is spending close to $1 million per day fighting the avalanche of lawsuits filed after the recall of its Vioxx painkiller.  As in all such cases, company documents written years ago are being paraded into court by patients who claimed they’ve been harmed by the product — the proverbial smoking gun.  In hindsight, there are undoubtedly some Merck employees who wish they had written things differently.

A key to keeping legal costs in check is therefore to turn hindsight into foresight.  If you can anticipate how a document can be used against you and your employer you can sidestep the problem.  You can decide how much legal risk you want to accept ahead of time.  You can eliminate predictable surprises.

How?  By following my 12 Rules for Avoiding Smoking Guns.  The rules are based on my observations of more than 25 years of legal practice.  They are 12 easy steps companies can start taking today to stop shooting themselves in the foot and start controlling their legal risk and legal cost.

Getting ahead of the legal risk management curve puts more money in you pocket by keeping legal cost increases from rising unnecessarily.

A new survey conducted by BTI Consulting Group of Fortune 1000 companies finds that corporate legal bills increased nearly 20% in 2006.

Ouch!

More work has been flowing to outside counsel — 65% of total legal spend in 2006 as compared to 42% in 2001 — primarily in the areas of mergers, regulatory work and class action lawsuits.  That explains part of the increased costs.

Higher billing rates explains the rest, and and I’m not just talking about cost of living increases.  I review legal bills as part of my job and every year I’ve seen rate increase requests ranging from the modest (2-3%) to the immodest (30+%).  Ironically, the increases have usually have nothing to do with additional responsibilities the lawyer is taking on on behalf of the client.  No, the work assignment (read value to the client) is the same.  It just costs more.  Why?  Because the lawyer has another year of experience, or they’ve been promoted from senior associate to junior partner, etc.

It therefore comes as no surprise that the American Lawyer magazine reported an increase of 20+% of per partner profits between 2002 and 2005.

In all fairness, that increase in profits is not entirely due to rate increases.  Let’s not forget that the law firm business model is one of time and material.  You can also boost the bottom line by wringing more hours out the billable assets you already have.  But putting young lawyers through the wringer has other costs associated with it — attrition.

According to the NY Post Gen-X lawyers in their 3rd to 5th year of practice are walking away from prestigious law firms leaving more senior lawyers, including partners, to do the grunt work.  Unless these senior lawyers are willing to adjust their rates to reflect the real value of these lower level services outside counsel bills will continue to escalate to unprecedented levels.

Budget issues rank among the top objectives for general counsel in 2007 according to the General Counsel Roundtable.  More specifically, general counsel will seek to partner more effectively with frims to obtain more value for the money and they will continue to revise and streamline their network of preferred vendors.

The confluence of events should be a wake-up call for fat cat law firms.  Particularly since another survey conducted last year by BTI revealed that almost 54% of the corporate counsel surveyed had fired their primary law firm and only 30.7% would recommend their primary law firm.  Clearly the gloves are off.

The fight to rein in legal costs, however, does not begin and end with lawyers.  It really begins with the actions that trigger the need for all that legal work.  If ever there was a time for an ounce of prevention and a dose of Legal Literacy to save a pound of cure — THIS IS IT.

Come back tomorrow for Part 2 when we’ll take a look at what management can do to stem the rising tide of legal costs.