Should Procurement and the CFO Be Involved in Legal Spend Management?
Controlling legal spend is frequently at the top of the priority list for many organizations. Since the early 2000s, when the Sarbanes-Oxley Act (SOX) and other new financial regulations took effect in response to several large accounting scandals at Enron, WorldCom, and Tyco International, CFOs have come under greater scrutiny related to companies’ internal financial controls.
Increased enforcement, potentially leading to significant financial penalties and possible criminal conviction, has made the C-suite more and more concerned about departmental compliance with these and other federal regulations. However, because legal teams are understandably more focused on practicing law than managing the business’s finances, in-house lawyers are sometimes the last department to implement systemic financial controls. Herein lies a significant problem – legal departments are frequently unaware of how much they spend on legal services rendered by outside counsel. As a result, they may be unknowingly paying too much.
How Much Do Companies Spend on Legal Services?
Just as consumers have been paying more at the grocery store and the gas station in the last year, businesses have been spending more for legal work performed by outside counsel. According to the Corporate Legal Operations Consortium’s 2021 State of the Industry report, spending on outside law firms almost doubled from the previous year, reaching $14.5 million in 2021 compared to $7.9 million in 2020.
Market intelligence research conducted by legal sourcing specialist Buying Legal Council has concluded that company size (in terms of annual revenues) governs the calculation of legal spend:
For example: A Fortune 500 company with revenue between $4.1 billion and $25 billion spends an average of $173 million on outside legal services (between 0.6% and 4.2% of its revenue), while an organization earning between $501 million and $1.7 billion might spend $31 million (between 1.8% and 6.2% of its revenue) on third-party counsel.
Why Involve Procurement and CFOs in Legal Spend?
Company CFOs are known for being concerned with controlling legal costs, which appear to be taking a bigger bite out of company budgets each year. Yet, when called into question, in-house lawyers that want to improve their departments can find it challenging to justify increasing expenses. However, legal departments can bridge this gap by turning legal process involvement into a value proposition that will resonate with even the most skeptical CFO.
In-house legal teams routinely manage numerous legal matters, oversee significant spending, and handle a high degree of legal exposure. However, they accomplish all this with a combination of Excel spreadsheets, paper files, sticky notes, and rudimentary reports that require manual updates. In addition, most of these critical data sources often reside outside the company at third-party law firms that handle the organization’s legal work.
Due to occasional billing errors and inconsistent updates from outside firms, legal department financial reports are often inaccurate and incomplete and may not survive an audit standard across company departments. As a result, it is exceptionally challenging for many legal departments to gain a comprehensive view of all the legal work being done on behalf of the company.
There are several reasons why it pays to involve procurement when purchasing corporate legal services, according to Buying Legal Council. Not only can legal procurement help companies save millions of dollars by reducing and avoiding unnecessary costs, but these savings will also render considerable savings per share for public organizations. Here are some examples of why procurement and CFOs should be part of any discussion involving legal spend:
Procurement departments are experts at sourcing for the corporation and can develop RFPs and guidelines for hiring services.
CFOs are generally better positioned to analyze costs across the corporation and advise the legal department on spending.
Most lawyers do not have experience running a business but, instead, come from law firm partnerships. Those with financial and sourcing experience are better positioned to offer advice on hiring service providers.
Lawyers aren’t experienced in hiring service providers – they usually provide the services.
Many legal departments do not know how much they spend on outside legal services, and one of procurement’s first tasks is often to provide the answer.
When a law department collaborates with procurement and CFOs to implement a management system that facilitates better business processes, lawyers can find practical ways to apply basic financial management practices to the oversight of legal projects. Once better financial controls are in place, in-house counsel can gain greater visibility into the company’s complete legal landscape and become more effective stewards of the company’s legal spend.
Improved cost reporting, budget performance, and favorable outcomes provide opportunities for in-house counsel to contract with firms that regularly demonstrate value – the combination of low cost, quick resolution, and optimum results. In addition, the efficient collection, processing, and reporting of financial information by the law department will lead to significant savings, improving the company’s bottom line.
A Need For Effective Legal Spend Management System
In the absence of an adequate legal spend management system, in-house counsel and staff typically spend extended amounts of time responding to payment inquiries and communicating with outside counsel to resolve billing issues. In addition, when essential documentation and invoices are spread out among various systems, including spreadsheets, reports, email, cloud drives, and individual servers, trying to gather everything necessary for billing review is often burdensome, inefficient, detrimental to department morale, and a general distraction from what in-house departments are supposed to be doing – substantive legal work.
For these reasons, more and more corporate legal departments are utilizing legal spend management services to evaluate their bills for costly errors, inaccuracies, and discrepancies. These services usually enlist attorneys to analyze each charge on every legal bill from outside counsel to confirm that each time entry adds appropriate value. They also frequently negotiate adjustments to legal invoices whenever appropriate.
Legal spend management services enable in-house legal departments to avoid awkward conversations with outside counsel regarding invoices to enhance team relationships. In addition, minus the friction surrounding financial concerns, clients and attorneys can focus their attention on practicing law, not wasting time reviewing legal bills for mistakes.
