What Do Legal Spend Management Software Tools Get Wrong?
One of the main goals of any corporate legal department is to increase efficiency while reducing unnecessary effort, leading many to outsource certain tasks to outside legal counsel. Although contracting with third-party law firms can provide access to additional expertise in specialized matters, it is sometimes a significant impediment to maximizing productivity due to unrealistic expectations, miscommunication, excessive charges, and ambiguity in legal invoices.
While lax management of legal expenditures can quickly lead to skyrocketing expenses, overly tight supervision can strain vital relationships between in-house teams and their outside counsel. Although the task of reviewing invoices from outside counsel is often time-consuming and costly, it is usually considered a necessary evil.
When cost containment becomes an issue for CEOs and CFOs, in-house law departments are challenged to find ways to increase efficiency, track and identify opportunities to reduce costs, and accurately predict and budget legal expenditures. In response, they often develop legal spend management strategies to manage resources and optimize financial outcomes. These strategies frequently include standardizing the billing with outside counsel guidelines (OGCs) and implementing legal spend management software. Unfortunately, spend management software sometimes fails to deliver on promises to reduce legal spend.
Why In-house Teams Should Track Legal Spend (and What They’re Actually Spending)
According to the Thomson Reuters 2021 State of the Corporate Law Departments report, almost 60 percent of the law departments surveyed saw a surge in work during the pandemic; however, nearly 30 percent were required to tighten their budgets despite a heavier workload. This forced them to reexamine their relationships with outside counsel and make controlling outside counsel costs a top priority. Tracking legal spend enables in-house legal departments to set budgets and address issues before they escalate. In addition, measuring legal spend as it relates to revenue allows in-house counsel to track spending trends relative to organizational growth.
But what are legal departments currently spending? According to the Thomson Reuters 2022 State of Corporate Law Departments Report, global organizations with revenues of more than $1 billion spend an average of 0.12 percent of revenue on legal services provided by outside counsel. This rate varies considerably according to region (North America has the highest rate and Latin America the lowest) and revenue band - U.S. organizations below $250 million in annual revenue average 2.03 percent of revenue in legal spend. In comparison, U.S. organizations with income exceeding $6 billion average spend only 0.16 of revenue on legal services.
Where is Legal Spend Management Software Falling Short?
Because most of a typical corporate legal department’s budget is allocated to outside counsel expenses, spend management software is focused on E-billing – the management of the bills received from outside counsel. These systems allow in-house departments to create budgets, set billing rules, collect invoices electronically, and provide real-time information regarding the financial status and progress of specific matters.
However, there is more to legal spend management than managing invoices. Here are some of the ways that legal spend management technology might be missing the mark:
Relationship Building
Most in-house legal departments want to build strong, long-term relationships with their outside counsel. Although legal spend management software can do many things, creating solid relationships with law firms is not one of them. Although these platforms automate paper billing and provide insight into how much an organization spends on legal services, they do not possess the ability to have uncomfortable conversations with outside counsel about errors and discrepancies on their legal invoices.
Legal Spend Reduction
After legal spend management software tools are purchased, organizations typically must still pay a licensing fee for the software and routinely experience numerous “soft costs,” including paying employees to receive training to learn how to use the tools, analyze the output of the software, and individually negotiate bill reductions with outside law firms (technology won’t do that). According to one survey of in-house counsel, 89 percent of those who use legal e-billing software find it to be “not effective” or only “somewhat effective” in reducing their monthly spending on outside counsel.
Compliance Enforcement
Just because in-house departments put a set of detailed outside counsel guidelines together, that doesn’t necessarily mean outside counsel will read and follow them. OCGs can help in-house teams manage billing expectations, avoid billing discrepancies, and minimize disputes. However, legal spend management software programs won’t help an in-house team develop and refine their OGCs and enforce compliance under those guidelines.
The ‘Think Like an Attorney’ Factor
Legal spend management software can track an organization’s legal spend electronically by automating the invoicing and approval process. However, a computer program does not have a licensed attorney’s capacity to know what to look for on a legal bill, interpret time entries in the context of each legal invoice and the representation as a whole, and communicate critical findings to outside counsel tactfully and persuasively. To accomplish those tasks, human expertise is required.
Why Third-Party Bill Review is Often a Better Option
Because legal spend review management software can miss many crucial things, in-house legal departments are increasingly contracting with third-party bill review services to assess invoices from outside counsel. Some of these services utilize experienced attorneys to analyze charges on bills received from outside counsel personally, not only to ensure that each time entry adds fair value but also to be prepared to negotiate bill adjustments when appropriate.
More and more in-house teams use both an AI-powered legal management system and third-party bill analysis by human reviewers to:
Lift the burden of invoice review
Consistently enforce outside counsel guidelines
Gain a greater understanding of the value outside firms are providing
Give in-house lawyers time for more critical responsibilities
Streamline bill review
Intelligently reduce outside counsel spend
Billing should not be a source of conflict between in-house legal teams and their outside counsel, but automating the process is often not enough to reduce legal spend. However, when in-house departments combine human expertise with artificial intelligence by utilizing a “people and process” bill review service, they can understand, manage, and control their legal spend more efficiently than ever.
