Legal Spend Management: How In-House Lawyers Can Cut Costs Without Sacrificing Quality
Today’s organizations must deliver nothing less than high-level results. As a result, corporate legal departments must do their share to develop strategic plans, create comprehensive budgets, utilize efficiency-enhancing tools, leverage talent, and manage vendors effectively – in other words, operate like a business.
According to the Altman Weil 2018 Chief Legal Officer Survey, “Chief Legal Officers (CLOs) spend 37 percent of their time advising their organizations’ executives, 22 percent practicing law, 20 percent on other corporate responsibilities, and just 18 percent of their time managing the law department… However, despite the limited time allotted to the role, CLOs describe a growing expectation from CEOs that the law department will be run like a business unit.
Medium to large-sized legal departments may process thousands of invoices from outside counsel annually, and without legal spend management processes in place, risk errors, wasted time, and overpayments. Suppose your legal department outsources any work to outside law firms. In that case, you need to use legal spend management to help control costs, manage firm selection, and gain insight into budgeting and future spending to effectively cut expenses without sacrificing the quality of legal services.
What is legal spend management?
Legal spend management is the process of planning, tracking, reviewing, controlling, and reporting the costs incurred by in-house legal departments. Various to ask when assessing the effectiveness of an organization’s legal spending include:
Are realistic budgets being created, updated, and maintained?
How much are we spending outsourcing legal work to law firms and alternative legal service providers (ALSPs)?
How much time do we spend reviewing and approving bills and managing who does what?
Have we done a comprehensive comparison of a law firm’s personnel, rates, and expenses?
Are we monitoring and enforcing outside counsel compliance?
Have we identified and corrected overcharges and inefficiencies like excessive time, unnecessary work, and inadequate detail in time entries?
Does the organization use a standardized billing format?
Are we flagging charges that potentially violate rules and exceed budgetary limitations?
Legal spend management is nothing new – larger organizations have been using such systems for over a decade. However, effective legal spend management that will maximize in-house budgets requires creating and maintaining strategies that will track how money is being spent and what corporate legal departments are spending on outside counsel.
A Corporate Legal Department’s Costs – An Overview
The 2022 State of Corporate Law Departments Report found that the total legal spend of global organizations of $1 billion or more averages about 0.12 percent of revenue. U.S. organizations with less than $250 million in annual revenue average 2.03 percent of revenue in legal spending, while those with over $6 billion spend an average of 0.16 percent of revenue.
All that data raises the question: What do in-house lawyers spend all this money on?
The most significant share of the typical corporate legal department’s budget is usually allocated to outsourced services, primarily to outside counsel for legal fees. A smaller but still noteworthy percentage goes to alternative service providers (ASPs) like eDiscovery vendors, document review specialists, due diligence providers, and IP management services.
Without an effective legal spend management system in place, in-house counsel and staff will typically spend excessive hours responding to payment inquiries and communicating with outside counsel to resolve issues. In addition, when essential documentation and invoices are spread out among various systems – spreadsheets, email, cloud drives, individual servers – trying to gather everything necessary for billing review is often burdensome, inefficient, damaging to morale, and a distraction from substantive legal work.
Enforcing Billing Guidelines and Negotiating Rates
One of the major causes of inflated costs for in-house legal teams occurs when outside counsel raises their rates without obtaining client approval. Since these charges can quickly add up, staff attorneys are required to spend substantial time checking the billed rates against the agreed-up rates based on firm-specific guidelines. Unfortunately, certain discrepancies are often overlooked, resulting in considerable overspending. These include:
Missed opportunities for volume discounts
Invoicing errors
Line items that are non-compliant with billing guidelines
In prior decades, law firms often got away with billing to “further work,” and corporate clients blindly kept on footing the bill. However, that is no longer realistic or feasible in today’s competitive legal market and as a result, legal departments are increasingly negotiating with outside counsel to boost efficiency and control costs. Some of the financial details that may be subject to negotiation include:
The potential for multi-year portfolios of legal work rather than for single matters
Alternative fee arrangements to encourage efficiency and innovation in the delivery of legal services
Performance or innovation fees as part of hybrid alternative fee arrangements
A commitment to detailed matter planning to manage the number of hours budgeted before the firm works them
Service level guarantees with key performance indicators
The speed of payment and how it relates to price
Annual review and adjustment processes based on work type and volume
One crucial thing that legal departments need to remember when sourcing outside counsel: Not all law firms need to be retained year after year, and while it may be advisable to keep certain matters with these firms during the initial period, continuing work should always be allocated to the most efficient, transparent, and successful firms.
Improving Your End-To-End Legal Spend Management Process
Consero’s 2020 Corporate Legal Operations Report states that 74 percent of legal operations professionals named cost control their top priority, but how can this be accomplished? One way: improve your organization’s legal spend management process by doing the following:
Look at the type of work your outside counsel is doing for you and the value they are bringing, including the quality of work. If firms are performing mediocre work, take the opportunity to look for other partners, including alternative service providers.
If you work with specific outside counsel for each area of practice, examine the quality of each one. At least once a quarter, grade them on their quality and how they are doing from an administrative perspective. Ask yourself, “How easy are they to work with?”
If you haven’t already done so, implement outside counsel guidelines and ensure that they are being enforced. Review every invoice for errors and discrepancies and watch for sudden and unauthorized rate increases.
Manage your relationship with outside counsel to create transparency so that both teams know what is being billed and why. Implement training protocols for both in-house and outside counsel to ensure everyone is on the same page.
Examine your existing spend and explore value-pricing, volume discounts, and opportunities to bring work back in-house, if feasible.
Combine technology and human expertise to collect the information, analyze it, and gain insight into how your organization could more efficiently manage systems and vendors.
According to recent research, nearly three-quarters of in-house counsel report being concerned about overspending on outside counsel, and more than 25 percent are “very concerned” or “extremely concerned” about their current level of legal spending.
Just a few years ago, the only way legal departments could reduce spending on outside law firms was for in-house counsel to directly question outside firms, resulting in uncomfortable conversations for everyone involved. However, legal spend management experts can give legal departments the ability to ensure that they receive full and fair value from law firms. They can also provide the in-house departments with the tools needed to reduce legal spending not just now but over the long term.
