Successfully Bidding And Managing Complex Litigation Support Engagements

Wednesday, December 1, 2004 - 01:00

Franklin D. O'Toole
American Express Tax and Business Services Inc.

Consultants, like attorneys, often are reluctant to bid fixed fees in the context of a dispute. When required to "come up with a number," the tendency is to err on the side of safety in each component of the bid. You don't want to underestimate, but at the same time, you want the bid to be competitive enough to win the engagement.

When clients impose fixed fees as a condition of retention, developing that fee requires a good deal of experience with similar matters as well as the facts, circumstances and intricacies of the engagement at hand. In this article, I discuss certain techniques that may be used in an engagement letter to encompass those variables that can arise and are outside of your control. I also address some engagement management techniques that can help achieve a cost-effective work product.

Case Study - Background

As an example, I refer to a recent large-scale litigation support engagement that I managed at American Express Tax and Business Services Inc. ("TBS"). State courts had ruled against a Fortune 100 company in a dispute involving overtime pay. The company argued that certain outside salespeople were exempt employees, as recognized by the seven union contracts in force over the 10-year period at issue. Further, the employees received other benefits such as commissions and certain premiums in recognition of their efforts. Despite these arguments, the courts ruled in favor of the plaintiff, the state Department of Labor ("DOL"), deciding that the outside salespeople should indeed have been paid overtime over the 10-year period. The secondary plaintiff was a subset of the employees who formed a class of outside salespeople. Therefore, the case involved three sets of interested attorneys.

Developing The Fee Proposal

These three parties sought to retain a neutral to render an accounting of the back overtime pay and interest due these employees. TBS was asked to propose in a competitive bidding environment. Consequently, planning and efficiency were of great concern in arriving at a fee.

In developing our bid, we needed to invest a good deal of (unrecoverable) time to perform the following procedures:

  • Inquire into and assess the state of the document production;

  • Determine the quality and ease of data-entry for relevant data, mainly available in paper labor and time records;

  • Inquire into the availability and variety of computerized data;

  • Read the union contracts (focusing on overtime compensation rules) to get a sense of their complexities and differences; and,

  • Develop an understanding of the objectives of the desired report.

Throughout the planning highlighted above, we raised a series of questions that uncovered complexities, which, in turn, led to more follow-up questions. Such questioning, as we were later told, demonstrated an understanding (of the required accounting) that far exceeded that of our competition. At a certain point, we felt we had enough information to bid. We developed and proposed our fees, subject to certain specific caveats and assumptions. These were made part of the proposal and, later, referenced in the engagement letter.

Enough work has to be performed to be able to make the assumptions that can eventually "save your bacon." The assumptions must be included in the proposal and engagement letter.

Proposing A Time Schedule

In addition to price, there was substantial pressure to complete the accounting quickly. The completion date would be given great weight in selecting the consultant.

At this point, we were confident in the quoted price (subject to certain assumptions) but not the completion date. We took the risk and included the required completion date in the proposal, again, subject to certain assumptions, but we told the parties in no uncertain terms that the date was unrealistic. The response from the parties was that none of the other bidders thought the completion date was a problem. We told the decision-makers that the other bidders simply did not understand the complexity of the task at hand. We had taken a risk in doing so, but we felt this demonstrated confidence in our experience and knowledge of the task at hand. Nevertheless, the original completion date remained.

Drafters of Requests for Proposal may not understand the complexities and contingencies associated with significant contract requirements. If the professional has done enough preliminary work, or has sufficient experience in similar bids to realize that a contract requirement is not feasible, he or she should make this opinion known to the selecting party, and make it known in as clear a manner as possible. If the requirement remains, you can attempt to deal with it through proposal assumptions, take a chance that the contract can be modified at a later date or simply walk away.

As the selection process neared completion, we were quizzed from all sides with respect to our objectivity. Clearing this hurdle (and assuming that our bid offered either a lower fee or a greater understanding of the task at hand), we were retained.

General Description Of Our Task

The desired end product was a back overtime award for each individual plus that individual's prejudgment interest supported by a complete schedule of his or her working activities over the 10-year period. To demonstrate the complexity of the reporting, the supporting schedule would require 68 columns (in a spreadsheet) for each week of an individual's employment.

The initial step for this engagement involved the conversion of various paper labor and payroll documents into an electronic data format that was consistent and easy to manage. These source documents, never designed to be "computer friendly," were very difficult to encode, with some documents containing contemporaneous pen and ink changes and with others using inconsistent formats and conventions adding to our difficulties. Despite these obstacles, the record conversion needed to be done quickly and accurately. Drawing upon the resources of American Express, we put 250 people in place for the data entry and quality control and completed most of the conversion in about six weeks.

We now had electronic records spanning seven days a week over a decade for approximately 800 individuals. These employees worked in several locations with a variety of rules depending on the contract and conventions for that contract period and location. An employee could be working a different job or shift each day, starting and ending at a different time, with different compensation rules for every pay variable (e.g., premium, holiday, weekend, shift differential, seniority).

While the data was being converted, we were specifying and writing programs under the tremendous time pressure imposed by the parties. As the preliminary data filtered in, we began the error testing and debugging to the extent these tasks could be carried out on partial records.

Initial Scope Changes

After a few weeks of intense work, the scope of the engagement expanded. Certain assumptions listed as caveats in our retention letter changed, and it became obvious to the parties that the original completion date and the scope of the work had to be adjusted.

There are two common strategies for dealing with expansions in scope:

  • Assume that because you are working closely with the client or the client's representative (e.g., in-house counsel), the need for the work is obvious and beneficial to the client's interest. Assume that the client's acquiescence on procedures you both agreed upon are necessary and obvious means that you will be paid for that work, even though it causes a budget overrun.

  • Assume nothing. Notify the client verbally and in writing that the extra work will require extra fees on top of the fixed fee contract.

Although many believe that raising the subject of a budget extension may be counterproductive in such a cooperative setting, in this situation we chose the latter course of action - a choice reinforced by an attorney-friend's experience. His firm had bid a fixed fee on a case with the understanding that settlement was the object. As the settlement talks wore on, his client realized that the other side's position was much weaker than had been expected. The attorney and his client agreed that the matter should go to trial. To the client's good fortune, he received a much larger award at trial than would have been obtained through settlement. But what about the legal fees incurred in preparing and trying the case? Sorry. The client, a large corporation to which such fees would be immaterial, said that it was a matter of principle.

Despite the anecdote above, our experience is that when the attorneys, consultants or experts are doing their jobs, and the bid amount is exceeded, more funds will be made available to the engagement. Client decision-makers generally are fair as long as the work being done is useful, not overburdened with partners or staff, and sufficiently supported by billing records. Also, they look to see that the work is thoroughly planned and performed efficiently, and that there are no surprises.

Good client management dictates that you should provide timely notification of an overrun beyond the fixed fee.

"Budget Busters"

Experienced practitioners know that there are areas in litigation assignments that can become "budget busters." I'll restrict my comments to the potential budget busters that are likely to appear in large-scale, data-intensive litigation support engagements.

Magnetic Media: Retrieving archived data from magnetic media can become an enormous time trap. Problems often arise in trying to obtain this data, typically because the data may be partially or totally lost. Other difficulties that may be encountered include the deterioration of back-up media or incompatibility of historical data with current hardware or software due to changes in hardware, applications, operating systems, database structures or supporting software. In other words, even if the consultant asks whether data is available, it may not be usable because modern versions of databases, software or back-up compression algorithms may have evolved to the point that data is no longer readable or the software can no longer yield reliable results.

When inquiring into the availability of magnetic media, get specific information with respect to hardware, software, release versions, etc.

New Documents: Midway through our engagement, documents that had been previously thought of as unhelpful or redundant were discovered to be useful, a change that would have significant effects on our budget. Fortunately, our proposal had specifically referred to those documents thought to be useful at the time of the bid, meaning that the new documents were out of scope and would require additional budget.

Specifying the documents to be dealt with up front made it clear that the new documents would be handled at additional cost.

Missing Data: Missing data can require significant amounts of time from both attorney and consultant. In my experience, complete historical data is rarely found. Missing data can be especially problematic in a labor engagement, where the absence of complete data required both sides to agree on "workarounds." Workarounds in this context are those procedures put in place to substitute for the missing data. More fully, workarounds include the logic, assumptions and calculations to be employed in the absence of contemporaneous data.

In this case, both sides more or less agreed to the workarounds that we developed. (In a more adversarial engagement, the sides seldom agree - the trier of fact decides whether the workarounds are acceptable.) Because we anticipated gaps in the data, we shared this expectation with counsel before we were retained. Importantly, we disclosed to both sides our preference for a policy biased to one side in the absence of data: we would implement workarounds that favored the employees. Our reasons for the suggested policy:

  • Given the venue and how broad the decision in favor of the employees was, we expected that preference should be given to employees in a case involving the DOL v. a Fortune 100 corporation; and

  • We believed that such a policy would enhance our credibility with employees and in later testimony before the Commissioner.

The suggested policy was accepted by all parties, and it proved very helpful when, in the end, we had to appear before the union members to explain why their award turned out to be substantially less than the amount plaintiffs' counsel had led them to expect with a "back of the envelope" calculation.

The attorney should anticipate workarounds, as well. No matter how good the consultant's intention, the opposing counsel will probably find fault, and negotiations will follow. In this case, we had multiple workarounds because of the complexity of the labor contracts and the number of locations involved.

For example, one type of premium pay relating to weekend work was available to certain job categories under one of the union contracts in some but not all work locations. If the employee's job code was unavailable and labor records indeterminate as to whether he or she worked the weekend, the workaround "awarded" premium pay to that worker provided the amount did not exceed the sum of overtime and double-time pay contemporaneously earned that week by that individual.

Anticipate missing data to the extent possible. Warn the attorney of the implications. Build a contingency for missing data and workaround development into the proposal.

Precedence: Data sources may conflict for a variety of reasons, including errors, changes in systems, differing practices between headquarters and field offices or difficulties transcribing the document to magnetic media. This issue is one of precedence and should be anticipated. In cases of conflicting data, it must be agreed as to which document (or computerized data source) takes precedence. Subsidiary questions of precedence include the time period and location(s) to which the precedence applies.

Quality Control

All of the aforementioned issues demonstrate the need for imaginative and effective quality control in a litigation support engagement. Larger and more complex engagements require significant planning and forethought to be devoted to this subject for these reasons:

  • Flaws in the data may significantly alter conclusions;

  • If flaws are discovered, the consultant's testimony may be impeached;

  • Poor quality control leads to budget overruns; and

  • Poor quality may result in "poor" payment results.

Quality control must be planned for the following areas:

  • Data entry/conversion;

  • Database quality; and,

  • Effectiveness of controls.

Early in the data entry phase of the engagement, we entered data in test batches of 100 for each type of document to determine the entry error rate. In the higher error-rate documents, we implemented a process of key verification, which increased the cost of conversion for those document types and slowed the process in the interest of quality. Despite this effort, the error rate remained unacceptably high. Based on the results of our tests, we wrote small "pre-edit" programs for each type of document. We reviewed the converted documents, applied global fixes, made one-off corrections and identified error trends. These procedures reduced the error rate to an acceptable pre-edit level, a level that could be dealt with by our quality control team.

We wrote a comprehensive edit program, one that compared records from all sources. As a result of this program, we were able to pass errors to the quality control team and simultaneously give feedback to the programmers. Corrected output from the edit fed a database-update program, which, in turn, fed a nightly update-report program. The update program accessed a contract master file, which we had created by reverse-engineering the union contracts. Overnight, this combination calculated the amounts due the workers.

Red Zones and Alarms: Before the digital revolution, a commercial airline cockpit contained an array of analog gauges. Whereas a layperson would be overwhelmed by the complexity, an experienced pilot would simply sweep his or her eyes across the cockpit and know whether all was well. This ease was facilitated by a combination of training, experience and simple standards (e.g., primarily color coding, such as red for "bad," and audible alarms). The quality control challenge in a complex litigation support assignment is to create those gauges and be sure that the "red zones" and "alarms" are obvious to the engagement team.

We designed two-dimensional control totals at very discrete levels. Dimension One summed up the various types of hours, dollars and number of employees, regardless of the type of work week throughout the 10-year period. Dimension One controls took up 32 columns. Dimension Two controls calculated total employee-weeks by category, adding another column to the matrix. The sort sequence was category of weeks, that is, employee-weeks in increasing levels of complexity. The "alarms" matched the complexity of the assignment. Broadly speaking, they highlighted differences in "yesterday's" control totals as compared to today's to facilitate research and program correction, as necessary.

Reporting

Each of the union members involved in the litigation was given the results of our calculations, first on a preliminary basis, then, on a final basis. By agreement of the parties, the workers received the same report we used to check our daily calculations. (The complete matrix for their working days and weeks over the 10-year period.)

Most of the challenges were with respect to the workarounds. In periods where data was unavailable, some workers produced pocket diaries indicating that they had worked in an overtime-eligible capacity that day or week, or had worked 12 hours a day. We accepted reasonable challenges to the data, although these were screened through the attorneys.

As might be expected, the workers had many questions about the methodology and, especially, about the award. In a presentation to them at the union hall, we were able to satisfy most of their queries. As to the pocket diaries, we told them that they would probably be better off to take the amount awarded by the workaround because of the bias mentioned previously. Subsequently, we provided the final information to the Commissioner in as much detail as needed, and our accounting was accepted.

In this setting, each of the parties had to be generally accepting of the consultant/accountant's work. The parties would not reach the required level of acceptance if they were not provided with sufficient detail to test the award themselves. The parties also needed to be convinced of the accountant's objectivity. Without this acceptance, it is hard to envision a satisfactory outcome.

Conclusion

This engagement ended successfully, in part due to planning, management of issues and the competence of our staff. It was financially successful due to the investment we made in understanding the complexities of the task before proposing and including assumptions in the proposal and engagement letter to anticipate damaging contingencies.

Finally, the engagement was successful because of our continued communications with the attorneys and their absolutely essential help and understanding. Without question, despite their differences and constituencies, the attorneys contributed to this success by helping us to correct errors, and being as reasonable as possible in the many instances when compromise was necessary.

Franklin D. O'Toole, CPA, MBA, is the Managing Director in charge of the Litigation Consulting Team in the New York office of American Express Tax and Business Services Inc. He can be reached at (212) 372-1242 or by e-mail at franklin.d.o'toole@aexp.com.