This article originally appeared on Law360.
Corporate legal departments have long been focused on reducing legal spend. The focus on cost-cutting has only increased in 2020 as the economic uncertainties from the pandemic has caused companies to increase scrutiny on expenses across the board.
According to a recent report from the Corporate Legal Operations Consortium (CLOC), 61 cents of every dollar spent on legal costs in 2020 goes to external legal costs–a 15-cent increase from 2018. This increase, combined with the year’s novel challenges, has many legal departments looking for new ways to control legal expenses beyond reviewing line items which has proven to be ineffective for many companies.
Over the last six months, SimpleLegal has collaborated with numerous corporate legal departments as part of a cost-saving initiative designed to identify potential areas to trim legal spend. In addition to gleaning valuable insights, the initiative has saved the participating departments millions of dollars to date.
While there’s been much chatter in the industry about the need to switch to fixed fees or alternative fee arrangements to reduce costs, these shifts have been slow to take hold. They’re also difficult to measure if we retain a focus on the billable hour. When clients ask firms for fixed fees but also ask for the hours worked so they “know that the fixed fee was the right price”, then we haven’t really made the shift to fixed fees. It is a difficult transition to make and one that will take time. We should always push toward better alignment of price and value, but we need to balance near-term realities with long-term goals.
In the near-term, we need to control costs. Even if that only means focusing on hourly rates. In the long-term, we need to align the work to the right types of providers at the right price where price has very little connection to hourly rates. No one wants to buy hours. We want outcomes, not hours.
To solve for both the short-term and long-term goals, we start with data.
Analyzing and reducing your legal spend starts with asking yourself the following questions:
- What am I spending now? On what? With which providers?
- How does my current spend compare to past spend?
- How am I allocating my legal work?
- Which metrics am I using to measure cost control?
- Are there other cost considerations I’m overlooking?
Understand Where You Are Now
The first step of implementing a change is to understand the current state. Reducing legal spend first requires understanding where you’re at right now. This means not only knowing the total dollar figure of your spend, but how much you’re spending in each practice area and with which law firms or providers. Don’t forget to also investigate the work you currently perform in-house. With the understanding of outside legal spend and in-house legal work, you will have the current picture of how you allocate the demand for legal services from the business to the supply of legal services you have available. With this deeper understanding, you’ll start to see where you can actually have an impact on spend.
Without this data, you risk investing time into an area that looks compelling, but won’t create real savings. For example, reducing money spent on compliance may be compelling because the partners at your primary firm have very high bill rates. But if only 5% of your annual spend goes toward compliance work or if the primary compliance firm (with the very expensive partners) effectively leverages associates and paralegals, your efforts won’t translate into real savings for the business
When you track data and analyze legal spend data from your e-billing system, you’ll be better equipped to start a real conversation about reducing spend. You can identify the practice areas and firms where your efforts will create real returns.
Compare Now to Where You Used to Be
Your business is not static. It’s important to understand where you are today, but it is even more important to understand how that changes over time. After you determine where you’re spending your money today, you need to compare those numbers to what you were doing last year or the last time you negotiated rates and pricing. You may have a reliable history of sending work to a single attorney or team at a firm. You may have increased the amount of work sent to a particular firm or in a particular practice area. If you used to spend $2 million worth of business to a firm and now spend $5 million with that firm, that’s a powerful position for starting a rate and price negotiations.
Additionally, if your team uses multiple firms for similar work, you may benefit from consolidating that work to fewer preferred firms. Larger companies may go through a formal panel selection process annually or every few years. A preferred panel is a great tool to help provide the best legal services to the business at the best price if you have the team and time to implement this type of program. But you can still achieve the benefits of allocating work to fewer firms without a full preferred panel program. You don’t always know what the demand for legal services will be from year to year. But if your data shows you that you have a history of allocating work among several firms, ask the firms what they would be willing to do to earn a greater share of that work.
Understand How You’re Allocating Work
After you have an understanding of the dollar value of your legal spend, you need to know how you’re allocating different types of work, to whom, and why. How you’re allocating your legal work certainly depends on finding the provider with the right expertise, but it should also be equally dependent on its business impact and complexity.
Your high-impact, high-complexity work probably belongs with the more expensive firms. An example of a high-impact matter could be a large litigation that threatens the balance sheet of the company. It might also be a patent for the core technology driving your business. In either case, you might choose to work with the very best money can buy. Every year the legal press makes a big deal of billable rates because it makes for eye-catching headlines. But for your highest impact and highest complexity work, those firms and lawyers are probably a bargain at twice the price. You’re buying outcomes, not hours.
But too many companies simply send the rest of their work along with their high-impact work without stopping to see if it would be better handled by a lower-cost provider. There are a variety of suppliers beyond the AM100. Specialty firms, alternative legal service providers , non-legal consultants, and your in-house team.
Your low-impact, low-complexity work probably doesn’t need to go to the premier firms. Specialty firms, ALSPs, consultants, and solo-practitioners may not have massive staff and unlimited support resources, but they can provide very high quality work at a fraction of the price.
You may also have high-impact but routine work where speed and a deep understanding of business issues are important. The most common example here are commercial contracts. For customer contracts, a delay in reviewing a contract costs the company revenue. Extensive back and forth over mundane legal minutiae could cause your company to miss a quarter’s revenue target. In-house teams will have a better understanding of business priorities and can better deliver the right kind of legal work with speed at the right price.
When you satisfy your demand with the right mix of supply, the potential for savings is much greater than rate discounts alone. Allocating work based on impact and complexity provides far greater cost savings than a 10% rate reduction when the right provider is already half the price.
Use the Right Metrics
You can’t manage what you can’t measure. You get what you incentivize. Two classic business quotes. Both tell us that we need to measure savings with the right metrics. How are you measuring cost savings today? Is it average hourly rates? Adjustments to bills based on guidelines? If you measure discounts on rates to determine savings, you’re going to get high hourly rate firms who discount their hour rates. But, is that really saving your company any money?
Achieving savings by reallocating work rather than by negotiating rate discounts definitely makes sense. But with the wrong metrics it is harder for the c-suite to understand what you’ve accomplished. If you measure and report savings only as the discount on standard rates, the reallocation effort appears to have achieved nothing. In fact, if the work was moved in-house or to a provider with a lower but non-discounted rate, it may appear that you have lost savings because you won’t have a discount to report.
In fact, with the wrong metrics, if you were to implement a routing tool for automated NDA review, it might appear to be a driver of cost even if it created hard dollar savings from external counsel and soft dollar savings by allowing in-house counsel to spend time on high-impact, high-complexity work. With the right metrics, you can show the true ROI of these investments.
To demonstrate the full value of the savings and quality initiatives, you might need to use new metrics. I am certainly not advocating cherry picking data or choosing vanity metrics. To the contrary, the right metrics will actually make more sense to the business, the CEO, and the board. Legal expense as a percentage of revenue has been promoted in ACC Benchmarking studies and Altman Weil surveys. It is well understood and trusted by CFOs and CEOs. Whichever metrics are used to measure legal cost controls, just remember that you get what you incentivize. If you’re going to achieve cost savings, you need to use the right metrics to incentivize your team and showcase results.
The preceding four steps are the critical actions that build on each other to achieve significant savings in legal spend. It’s a journey. You don’t need to take all steps all at once to achieve results. Alongside those major considerations, there are a couple other things to keep in mind to run alongside those longer term initiatives.
The first is billing guidelines. Your billing guidelines are your guide for your firms on what it means to be a good legal partner to your department and a good business partner to your company. Guidelines often devolve into rules about copy charges and not billing excessively for underqualified people (things your firms probably already do on their own to better serve their clients). You should always be monitoring compliance with your billing guidelines and enforcing timekeeper rates. But it is important to remember, ensuring that your firms only bill for work in accordance with your guidelines isn’t actual savings–It only prevents overcharging.
Another way to reduce legal costs and improve response time is to automate and standardize workflows where possible for low-complexity, low-impact tasks. Automation of basic document review by AI-enabled contract review tools can be a big time and money saver. As an example, NDAs are high-volume but typically low impact documents that can be reviewed with the help of AI-enabled tools. In addition to automation, standardized playbooks designed by legal to give other departments a checklist of items to review can also help improve turnaround time and reduce costs. For example, a sourcing manager in a procurement department could be given a checklist of 5 or 6 specific business and legal terms to review before sending to legal. Automation and standardization improves speed of delivery and reduces cost of delivery for the business.
The Path to Lower Legal Spend
It’s time to shift the perspective of cost reduction beyond hourly rates and copy charges. Legal departments need to look at where you are now, how that compares to the past, how you’re allocating your work, and whether you’re using the right legal spend metrics to achieve real savings. These steps with effective legal billing guidelines alongside automation and standardization provide the foundation to match your company’s demand for legal services to the right legal service providers to trim your legal spend while improving delivery.