What’s Behind the Upsurge in Corporate Legal Departments’ Outside Spend?
Consumer spending is on the rise, driven by rising prices at gas pumps, grocery stores, and numerous other businesses. Likewise, corporate legal departments are spending more for the work outsourced to law firms.
According to a recent survey conducted by the Corporate Legal Operations Consortium (CLOC), spending on outside counsel came close to doubling from 2020 to 2021, and median external spend hit $14.5 million in 2021, up from $7.9 million in 2020. Inflation and current economic uncertainty are thought to be contributing to the continued rise in legal spending. A report from Wells Fargo Bank revealed that law firms increased billing rates nearly 6 percent in 2022, and should inflation remain at current levels, billings rates won’t be able to keep pace.
As the economy has continued to rebound, the pressure on law firm pricing has eased somewhat. However, in-house teams are still putting pressure on law firms to keep costs manageable, and are closely scrutinizing legal invoices in an effort to ensure that the proper level of work is being completed by the right level of outside counsel.
What In-House Teams Want
Generally, in-house teams want to work with a core group of law firms that understand their business but also feel the pressure to keep costs down. To rein in costs, some legal departments are moving lower-risk matters to less expensive law firms and bringing in niche firms for more complex matters, such as cybersecurity issues.
Corporate legal departments were sending more work to fewer law firms as a way to control costs and build stronger relationships for many years before the pandemic hit, further accelerating the trend. However, after the pandemic, in-house leaders may have realized they could make do without the firms that they stopped working with during the pandemic and effectively “ghosted” them instead of formally ending the relationship.
A 2021 Deloitte survey of general counsels found that vendor management remains a top priority, even though CLOC’s survey found that only 27 percent of legal departments routinely conduct a formal review of law firm performance and in the absence of evaluations and guidelines, how can an accurate return on investment (ROI) be determined?
Why Outside Counsel Guidelines (OCGs) Make Sense For In-house Departments
One way legal departments can continue to outsource work to competent law firms without blowing their budgets is to create outside counsel guidelines (OCGs) with outside counsel – if they are not already in place – and ensure that law firms are compliant with them.
OCGs benefit both in-house teams and their third-party law firms because they formalize the financial and operational details of the business relationship. OCGs should always serve as helpful guidelines, not strict demands from in-house legal teams to their outside counsel – orders (as opposed to recommendations) are rarely effective and can often further erode an already tenuous relationship. Instead, OCGs should provide a framework on which to build a productive relationship between in-house teams and outside counsel. To accomplish this, they need to be instructional, beneficial to all parties, and never take the place of critical discussions between in-house lawyers and outside counsel regarding fees, responsibilities, and expectations.
The goal of OCGs should be to lay out the most critical points of the relationship to maximize the likelihood that the guidelines will be followed. But no matter how well-written your OCGs are, they won’t be helpful if your outside counsel doesn’t read and comply with them. That is where third-party bill review comes in. These services put human eyes on every line item of every legal invoice, examine them for errors and inaccuracies, ensure that all entries add value, and demand compliance with OCGs – so in-house legal departments don’t have to.
How Should Legal Departments Handle Bills From Outside Counsel?
When legal departments receive an invoice from their outside counsel, they have several options. These typically include:
Pay the invoice without thoroughly reviewing it, no questions asked (probably not the best option).
Wait to pay the bill until after reviewing it personally to ensure that it is accurate and free of mistakes (better, but time-consuming and not particularly cost-effective).
Send the invoice to a third-party billing analyst for review before paying it (the recommended way to go if an in-house team wants to save time and money).
Whether or not a legal department already has an eBilling system in place, professional bill review is a smart addition to an organization’s process and a win-win situation for everyone involved. This is because law firms will most likely accept adjustments suggested by professional third-party reviewers. Once the necessary modifications have been made and the negotiations are complete, the invoices will be paid – on time.
Third-party Bill Review Saves Time and Helps Keep Outside Counsel Costs in Check
Because most of a typical corporate legal department’s budget is allocated to outside counsel expenses, spend management software is focused on E-billing, which manages the bills received from outside counsel. These systems allow in-house departments to produce budgets, establish billing rules, gather and pay invoices electronically, and provide real-time information about the progress of specific legal matters.
However, there is more to legal spend management than creating budgets and managing invoices. As a result, more and more legal teams are utilizing both AI-powered legal management systems and third-party bill review by humans to:
Lift the burden of invoice review from in-house staff
Consistently enforce outside counsel guidelines already in place
Gain a greater understanding of the work being done by outside law firms
Provide in-house departments with more time to focus on substantive legal issues (instead of scanning invoices for errors)
Reduce the spend on outside legal counsel without taking on heavier workloads or surrendering value
When in-house departments can understand, manage, and control their legal spend more efficiently, they can successfully bring down costs without sacrificing quality. Contact LegalBillReview.com to find out more about how results-based legal spend analysis will increase the efficiency of your department and help you bring down costs, even in this increasingly expensive legal landscape.
