CFOs have long complained about the cost of litigation, and it is not just the perpetual whining about overly generous jury awards. You can win the case, and the litigation costs still will blow the balance sheet.

One source estimates legal costs at Fortune 500 companies at $500 million per year on average. Even with smaller, Fortune 1000 companies, observers aren’t surprised to see costs running $200 million. In 2006, litigation costs amounted to 20 percent of corporate profit, reports Deidre Paknad, CEO, PSS Systems, citing figures from the eLaw Forum. In 2009, corporate profits have shrunk but litigation costs remain high, rising to 35 percent of corporate profit.

Since winning a legal case can be almost as costly as losing one, it is time to shift the decision-making from the corporate counsel to the CFO. Given the amounts of money involved, the decision to pursue litigation cannot be a legal decision. Rather, it is a C-level business risk decision with serious bottom line ramifications.

The corporate counsel can be right on the law and have a rock-solid case. Yet, the cost of litigation can force the CFO to make an odious settlement as the smarter business decision.

Given the high stakes, Paknad recommends three steps to reduce litigation costs:

1. Reduce the amount of data potentially involved. wiredFINANCE addressed this issue in March, in “Delete Data to Minimize Litigation Cost.” The cost of legal discovery has ballooned to 70 percent of the litigation cost, Paknad reports. This requires tools to enforce data retention policies.

2. Reduce the scope of the data involved. The most effective arguments revolve around the disproportionate cost of a discovery request vs. the potential benefit. To make this argument successfully, you will need discovery cost-estimating tools.

3. Make realistic estimates of the cost of litigation. With better cost estimates as litigation progresses through its various stages, the CFO and other C-level execs can make informed business decisions about settling before running up excessively high litigation bills. Base your decision on an information-driven cost-benefit analysis, not ego or moral righteousness. Again, you will be need effective litigation cost-estimating tools.

Many of the tools identified in the Gartner eDiscovery Vendor Marketscope can help to some extent with estimating the scope of discovery, from which you can calculate the cost of discovery and litigation. PSS Systems addresses the cost estimating challenge here. doeLegal, a litigation services provider, offers a litigation cost-estimating model here.

In our society, there is no way to avoid litigation. It simply is a cost of doing business. But that doesn’t mean you can’t take actions to minimize litigation costs. ###