A recent Law.com article by Nathan Wenzel of SimpleLegal Inc., “5 Cost-Cutting Strategies For Corporate Legal Department,” reports on legal cost measures for corporate legal departments. This article was posted with permission. The article reads:
Corporate legal departments have long been focused on reducing legal spending. The emphasis on cost-cutting has only increased in 2020 as the economic uncertainties of the pandemic have caused companies to scrutinize expenses across the board.
According to a recent report from the Corporate Legal Operations Consortium, 61 cents of every dollar spent on legal costs in 2020 goes to external legal costs — a 15-cent increase from 2018. This uptick, 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.
While there's been a lot of 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 request the hours worked so they "know that the fixed fee was the right price," then we haven't really made the change to fixed fees. It is a difficult transition 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 time. 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 spending start with asking yourself the following questions:
What am I spending now, on what and with which providers?
How does my current spending compare to past spending?
How am I allocating my legal work?
What metrics am I using to measure cost control?
Are there other cost considerations I'm overlooking?
1. Understand where you are now.
The first step of implementing a change is to understand the current state. Reducing legal spending first requires knowing where you are right now. This means not only keeping up with the total dollar figure of your spending, 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 an 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 insight, you'll start to see where you can actually have an impact on spending.
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 seem like a good idea because the partners at your primary firm have very high billing rates. But if only 5% of your annual spending goes toward compliance work or if the primary compliance firm effectively leverages associates and paralegals, your efforts won't translate into real savings for the business.
When you track data and analyze legal spending details from your e-billing system, you'll be better equipped to start a real conversation about reductions. You can identify the practice areas and firms where your efforts will create real returns.
2. 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 things change 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 send $2 million worth of business to a firm and now spend $5 million with that firm, that's a powerful position for starting rate and price negotiations.
Additionally, if your team uses multiple firms for similar work, you may benefit from consolidating that work with 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 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 that you have a history of allocating work among several firms, ask those firms what they would be willing to do to earn a greater share of that work.
3. Understand how you're allocating work.
After you have an understanding of the dollar value of your legal spending, you need to know how you're allocating different types of work, to whom and why. How you're assigning your legal work certainly depends on finding the provider with the right expertise but should 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. Or it might 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 about high billable rates 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.
Too many companies simply send the rest of their work along with their high-impact work without stopping to see if smaller matters would be better handled by a lower-cost provider. There are a variety of suppliers beyond the Am Law 100, such as specialty firms, alternative legal service providers, nonlegal consultants and your in-house team.
Your low-impact, low-complexity work probably doesn't need to go to the premier firms. Specialty firms, alternative legal service providers, consultants and solo practitioners may not have massive staff and unlimited support resources, but they can still provide 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 is commercial contracts.
For customer contracts, any delay in reviewing costs the company revenue. An 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 through 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.
4. Use the right metrics.
You can't manage what you can't measure. You get what you incentivize. These two classic business statements tell us that we need to measure savings with the right metrics.
How are you measuring cost savings today? Is it through average hourly rates? Adjustments to bills based on guidelines? If you measure discounts on rates to determine savings, you're going to focus on high hourly rate firms that 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 not 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 nondisclosure agreement review, it might appear to be a driver of cost even if it created hard dollar savings from external counsel and soft dollar savings — i.e., efficiencies — from allowing in-house counsel to spend time on high-impact, high-complexity work. With the right metrics, you can show the true return on 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 for 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 Association of Corporate Counsel benchmarking studies and Altman Weil Inc. surveys. It is well understood and trusted by chief financial officers 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.
5. Monitor compliance with your billing guidelines, consider automation of certain legal tasks and standardize workflows.
The preceding four steps are the critical actions that build on each other to significantly trim legal spending. It's a journey. You don't need to take all the 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 let your firms know 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 that 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 low-complexity, low-impact legal tasks and standardize workflows. Automation of basic document review by artificially intelligent contract review tools can be a big time and money saver. As an example, nondisclosure agreements 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 the legal team 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 five or six specific business and legal terms to review before sending to the legal team.
Automation and standardization improve speed of delivery and reduce cost of delivery for the business.
The Path to Lower Legal Spending
It's time to shift the perspective on cost reduction beyond hourly rates and copy charges. As legal departments, you 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 spending metrics to achieve real savings. These steps with effective legal billing guidelines, automation and standardization provide the foundation to match your company's demand for legal services to the right legal service providers to trim your spending while improving delivery.
Nathan Wenzel is co-founder at SimpleLegal Inc.