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Category: Billing / Fee Guidelines

Article: What is a Legal Fee Audit?

October 7, 2021

A recent article by Jacqueline Vinaccia of Vanst Law LLP in San Diego “What is a Legal Fee Audit?,” reports on legal fee audits.  This article was posted with permission.  The article reads:

Attorneys usually bill clients by the hour, in six minute increments (because those six minutes equal one tenth of an hour: 0.1).  Those hours are multiplied by the attorney’s hourly rate to determine the attorney’s fee.  There is another aspect of attorney billing that is not as well known, but equally important — legal fee auditing.  During an audit, a legal fee auditor reviews billing records to determine if hourly billing errors or inefficiencies occurred, and deducts unreasonable or unnecessary fees and costs.

Both the law and legal ethics restrict attorneys from billing clients fees that are unreasonable or unnecessary to the advancement of the client’s legal objectives.  This can include analysis of the reasonableness of the billing rate charged by attorneys.  Legal fee audits are used by consumers of legal services, including businesses, large insurance companies, cities, public and governmental agencies, and individual clients.  Legal fee audits can be necessary when there is a dispute between an attorney and client; when the losing party in a lawsuit is required to pay all or part of the prevailing party’s legal fees in litigation; when an insurance company is required to pay a portion of legal fees, or when some issues in a lawsuit allow recovery of  attorneys’ fees and when other issues do not (an allocation of fees). 

In an audit, the auditor interviews the client, and reviews invoices sent to the client in conjunction with legal case materials to identify all fees and costs reasonable and necessary to the advancement of the client’s legal objectives, and potentially deduct those that are not.  The auditor also reviews all invoices to identify any potential accounting errors and assure that time and expenses are billed accurately.  The auditor may also be asked to determine if the rate charged by the attorney is appropriate.

The legal fee auditor can be an invaluable asset to parties in deciding whether to file or settle a lawsuit, and to the courts charged with issuing attorneys’ fee awards.  The court is unlikely to take the time to review individual invoice entries to perform a proper allocation of recoverable and non-recoverable fees leaving the parties with the court’s “best approximation” of what the allocation should be.  The fee audit provides the court and the parties with the basis for which to allocate and appropriately award reasonable and necessary fees. 

Audits are considered a litigation best practice and a risk management tool and can save clients substantial amounts of money in unnecessary fees.  It has been my experience, over the past two decades of fee auditing, that early fee auditing can identify and correct areas of concern in billing practices and avoid larger disputes in litigation later.  In many cases, I have assisted clients and counsel in reaching agreement on proper billing practices and setting litigation cost expectations. 

In other cases, I have been asked by both plaintiffs and defendants to review attorneys’ fees and costs incurred and provide the parties and the court with my expert opinion regarding the total attorneys’ fees and costs were reasonably and necessarily incurred to pursue the client's legal objectives.  While the court does not always agree with my analysis of fees and costs incurred, it is usually assisted in its decision by the presentation of the audit report and presentation of expert testimony on the issues.

Jacqueline Vinaccia is a San Diego trial attorney, litigator, and national fee auditor expert, and a partner at Vanst Law LLP.  Her practice focuses on business and real estate litigation, general tort liability, insurance litigation and coverage, construction disputes, toxic torts, and municipal litigation.  Her attorney fee analyses have been cited by the U.S. District Court for Northern California and Western Washington, several California Superior Courts, as well as various other state courts and arbitrators throughout the United States.  She has published and presented extensively on the topic of attorney fee invoicing, including presentations to the National Association of Legal Fee Association (NALFA), and is considered one of the nation’s top fee experts by NALFA.

Insurer Overpaid Policyholder’s Attorney Fees, Judge Finds

August 25, 2021

A recent Law 360 story by Daphne Zhang, “Insurer Overpaid For Policyholder’s Legal Bills, Judge Finds,” reports that a New York federal judge said that an insurer's decision to stop paying a GoPro accessory maker's attorney fees was reasonable, finding the policyholder's defense counsel billed administrative work at partner rates and logged excessive working hours.  U.S. District Judge Mae D'Agostino denied 360Heros Inc.'s motion for summary judgment against Main Street America Assurance Co., saying the carrier's payment of more than $2 million in attorney fees fully satisfied its defense obligations.

The judge sided with Main Street in finding that 360Hero's defense counsel, Gauntlett & Associates, repeatedly charged "unreasonable and excessive" legal fees in an underlying patent infringement suit with GoPro.  The camera company sued 360Heros alleging the harness maker used its copyrighted pictures and infringed two of its trademarks.  The suit was settled in May 2018. 360Heros sued Main Street in 2017 after the insurer stopped paying for its defense costs.

"Based on Gauntlett's repeated practice of billing excessive, redundant or otherwise unnecessary hours the court finds that a 15% reduction in Gauntlett's fees is warranted," the judge said.  According to the order, a Main Street attorney found in 2017 that the insurer overpaid for defense costs after retroactively reviewing the payment history.  Main Street subsequently stopped paying the policyholder's legal bills, which 360Hero claimed violated its insurance policy.  "The amount of unpaid fees is significantly less than the amount that the court finds were reasonably expended," Judge D'Agostino found, saying that Main Street was fully entitled not to pay because the defense counsel overcharged on legal bills.

Some of Gauntlett's invoices were billed without any tasks designated to a paralegal, the judge pointed out, and the firm repeatedly charged administrative work at partner rates. Gauntlett also charged full rates for travel, which should have been billed at half of their hourly rates, Judge D'Agostino said.  "For travel to a one-day out-of-town settlement conference, [one Gauntlett attorney] billed for $418.48 in meals," she said.

Article: Actual and Necessary: A Guide to Keeping Time So You Get Paid

June 6, 2021

A recent ABI Journal article by Brittany B. Falabella and Allison P. Klena, “Actual and Necessary: A Guide to Keeping Time So You Get Paid,” reports on good billing practices in large Chapter 11 bankruptcy.  This article was posted with permission.  The article reads:

Billing time is one of the most dreaded aspects of private practice in any field of law, but not because it is hard or overly time-consuming.  The extra step of recording discrete, detailed time entries is much more than an annoyance.  For bank­ruptcy practitioners employed under §§ 327, 1103 and 1051 of the Bankruptcy Code and certain credi­tors’ counsel,2 it is a step that cannot be done in a sloppy, haphazard way — at least, if the attorney wants to be paid.

In non-bankruptcy areas of practice, an attorney may have to explain generic, unclear and blocked billing to a client.  However, a bankruptcy practi­tioner’s bills are subject not only to this review, but also to that of multiple other parties, including the U.S. Trustee’s Office, debtors, committees, interest-holders and, most importantly, the court, before the practitioner will be awarded compensation under §§ 330 and/or 331.  Developing proper billing habits from the start will pay for itself — literally.

Although most new attorneys who enter an established bankruptcy practice will have standard forms for fee applications, taking the time to under­stand the law informing a court’s analysis is the first step in understanding how to effectively and proper­ly keep time for easy approval.  The first part of this article discusses the Code sections and cases that likely apply to every fee application.  The second part discusses the common pitfalls that can result in a court reducing a fee request, and easy and practi­cal tips to avoid them.  By making proper billing a habit rather than a dreaded task, the foundation will be laid to get paid in full.

The Laws of Getting Paid: Section 330 of the Bankruptcy Code

Under § 330, after notice and a hearing an attor­ney may be awarded (1) “reasonable compensa­tion for actual, necessary services rendered” and (2) “reimbursement for actual, necessary expens­es.”  On the court’s own motion or that of any party-in-interest, a court can, however, reduce the com­pensation requested.  In making the determination of whether and how much to reduce a request, the court is directed to consider the nature, the extent, and the value of such services, taking into account all rel­evant factors, including:

(A) the time spent on such services;

(B) the rates charged for such services;

(C) whether the services were neces­sary to the administration of, or ben­eficial at the time at which the service was rendered toward the completion of, a case under this title;

(D) whether the services were per­formed within a reasonable amount of time commensurate with the com­plexity, importance, and nature of the problem, issue, or task addressed;

(E) with respect to a professional per­son, whether the person is board cer­tified or otherwise has demonstrated the skill and experience in the bank­ruptcy field; and

(F) whether the compensation is rea­sonable based on the customary com­pensation charged by comparably skilled practitioners in cases other than cases under this title.6

In addition, the court “shall not allow compensation for — (i) unnecessary duplication of services; or (ii) services that were not (I) reasonably likely to benefit the debtor’s estate, or (II) necessary to the administration of the case.”

The Lodestar Method

The lodestar method is a court’s starting point for deter­mining whether fees billed were reasonable.  The “lodestar” equals a reasonable amount of time for the matter multiplied by a reasonable hourly rate.  Reasonable time is the time that the court believes a billing attorney should have spent on the matter.  Then, a “reasonable hourly rate” is calculated with reference to a billing attorney’s experience and skill, as well as prevailing rates in the community for similar services provided by reasonably comparable attorneys.  The sum (i.e., the lodestar) may then be adjusted to account for the specific demands of the case, often with reference to some or all of the 12 Johnson factors.

The Johnson Factors

The Johnson factors are derived from the Fifth Circuit’s decision in Johnson v. Georgia Highway Express Inc., and consist of the following: (1) the time and labor expended; (2) the novelty and difficulty of the questions raised; (3) the skill required to properly perform the legal services rendered; (4) the attorney’s opportunity costs in pressing the instant litigation; (5) the customary fee for like work; (6) the attor­ney’s expectations at the outset of the litigation; (7) the time limitations imposed by the client or circumstances; (8) the amount in controversy and the results obtained; (9) the expe­rience, reputation and ability of the attorney; (10) the unde­sirability of the case within the legal community in which the suit arose; (11) the nature and length of the professional relationship between attorney and client; and (12) attorneys’ fee awards in similar cases.

However, courts have not taken a uniform approach to the Johnson factors.  Some courts view the factors as already subsumed into the lodestar method, while others apply the lodestar method and then look to the Johnson factors to decide whether the lodestar amount should be modified.  Still other courts consider the Johnson factors in conjunction with calculation of the lodestar,  Although these distinctions may matter in some cases, the one- and two-step processes will often generate essentially similar results, especially given that enhancement of the lodestar is a rare occurrence.

Biggest Pitfalls and Strategies to Avoid Them

Even with an understanding of the law, unless time records are maintained in anticipation of bankruptcy court review, a practitioner will often fall into some of the pitfalls discussed below. In many cases, a simple fix can nip errors in the bud.  This avoids the headache of reviewing and editing voluminous invoices at the end of a fee-application period or the end of a case, and, most importantly, permitting the court to allow fees in full and without objection.

Not Enough Detail/Excessive Billing

Vague time entries are virtually always a problem.  A gen­eral, shorthand description might be easy to understand for the time-keeper doing the work and making a contemporane­ous record (it goes without saying to always keep contem­poraneous time).  However, the court and other parties who analyze vague, generic time entries do not have the benefit of the billing attorney’s on-the-spot thoughts.

Time entries should be drafted with an eye toward explaining and justifying why the work was “reasonable and necessary,” and how it benefited the estate or a constituent.  Entries such as “reviewed emails” are certainly insufficient, but even additional details, such as “conference with X con­cerning research and strategy” or “conference with X con­cerning pending matter related to debtor” might not provide enough detail for a court to determine whether the time was justified.  Vague entries can cause the court to spend time attempting to decipher the context, conduct an evidentiary hearing, or simply deny the compensation.

While courts frequently complain that counsel have engaged in excessive billing, the heart of the issue is fre­quently that the court does not understand how the amount of time billed was “reasonable and necessary.” In other words, the billing entry was not specific or detailed enough to explain to the court that the full amount of time delegated to a task benefited the estate or was necessary to the admin­istration of the case.  This issue is often remedied if detailed descriptions are crafted with an eye toward the benefit to the case as previously explained.

Vague and ambiguous entries are a common and costly mistake.  No attorney, particularly a new associate, wants their entries to be the reason that the firm’s fee application is reduced or its approval delayed.  Taking the time to carefully prepare time entries is essential, not optional.

Tip: Have an attorney or professional assistant who is not working on the case review the time entries.  If that person cannot understand the value of the time billed or the task that was completed, more detail should be included until it becomes clear.  If it becomes necessary to bill significant time to certain tasks, make sure the explanation is particularly thorough to explain the circumstances.

Block-Billing

Similar to time entries that are insufficiently detailed, time entries that are block-billed — multiple tasks com­bined in a one-time entry — do not establish for the review­er (1) how much time was spent on a particular task, or (2) whether the time spent on each task was reasonable.  For example, if an attorney records 3.0 hours total for “review of a motion for approval of DIP financing; telephone call with debtor’s counsel concerning alternative financing sought; and email to client regarding financing options for debtor’s continued operation under chapter 11 and recommendation not to object to the filed DIP financing motion,” the court has no idea whether the review of the motion took 0.6 hours (presumably reasonable) or 2.7 hours (perhaps unreason­able absent additional undescribed factors).  According to the U.S. Trustee’s guidelines, while block-billing is gener­ally not allowed, a single daily entry that combines de mini­mus tasks can be combined, provided that the entry does not exceed 0.5 hours.

A consequence of block-billing is that the court may conclude that it lacks the information to trim excessive time from a particular task among those blocked, and may choose to reduce the total time billed by a discretionary percentage.  The goal is to establish that your work was reasonable and necessary.  Do not give a court an “excuse” to question the reasonableness of your time by block-billing.

Tip: Break up time entries so that each task corresponds to the amount of time spent on that task — even if the amount of time is modest.  Making use of time-tracking software or timers and developing good habits can be quite helpful in mastering detailed task-billing.

Not Delegating to Proper Staff/Duplicative Billing

Whether certain tasks are properly completed by senior-level attorneys, lower-level attorneys or support staff is largely out of the control of an associate.  Nevertheless, there will be times when tasks that would be more suitable for a junior-lev­el attorney must be completed by a senior attorney, or where an attorney may need to complete a task that would ordinar­ily be delegated to a staff person.  Similarly, there are times when multiple attorneys must participate in the same hearing or conference, which reviewing courts often view skeptically.

In such situations, courts are more inclined to allow the “double billing” if the exigent circumstances are explained in the entry and such staffing situations are kept to a mini­mum.  When matters are not explained or apparent from the time description, the court is left to question how the time and/or rates are reasonable and necessary.

Tip: While a junior associate might not have much con­trol over the delegation of tasks, associates typically draft the fee applications, so they should keep this issue in mind when reviewing bills and flag any issues with a supervising attorney prior to filing.  A good-faith reduction for certain tasks might go a long way with the court and other parties-in-interest.  At a minimum, make sure your own time is not subject to objection or reduction.  If you find yourself bill­ing time to routine tasks, be sure the circumstances are fully explained in the entry.

Conclusion

Given the consequences of failing to record time properly, it is well worth the time to develop the habit ofrecording specific time entries that are separated by each task performed and that indicate that how the time spent was both reasonable and necessary. With such a “reason­able and necessary” standard as a guide, a professional can ensure that the court and other interested parties under­stand the value being added to the case and that the fees requested are fully warranted.

Defense Firms and Clients Can Boast About Attorney Fee Wins

January 25, 2021

A recent Law.com story by Christine Simmons, “Both Law Firms and Clients Can Boast About Fee Wins,” reports that, several organizations have reported that, despite the Am Law 200’s worst fears, the legal industry enjoyed growth in 2020.  Citi Private Bank Law Firm Group and Hildebrandt Consulting have projected mid-single digit growth in revenue and mid to high single digit growth in profits. 

Last year, large firms managed to raise rate about 5%, according to James Jones, a senior fellow at the Georgetown Law Center on Ethics and the Legal Profession.  That’s remarkable considering the chaotic and depressing environment of 2020, and even more remarkable that the average annual rate increase for firms since 2008 has been about 3%.

But weren’t general counsel in cost control mode?  After all, according to survey data collected in June 2020 from 223 corporate legal departments, 89% of respondents said controlling outside counsel costs was a high priority.  So what gives?  How could law firms push through high rates at a time of such fee pressure?

Reconciling legal departments’ pressing need to cut costs with law firms’ revenue, profit and rate growth in 2020 requires a closer look at law firm segmentation, sector performance and the trajectory of the year.  But in the legal industry, 2020 is also a story about demand and the benefits of close cooperation on fee agreements, allowing both law firms and legal departments to have some bragging rights.

The Conversation

The lucrative year extended up and down the Am Law 100 and likely into the Second Hundred, but it came at different client relations strategies.  For the elite, rate and fee pressure was so little they could give out double bonuses to associates without billable hour requirements.  Wall Street firms and the Am Law 20 saw the benefit of ‘fight to quality” during an unpredictable year in business.  Meanwhile, some law firms did work with their clients on a mix of fee strategies and arrangements, to the benefit of both.

For instance, at Akerman, ranked No. 88 in the Am Law 100 last year, CEO Scott Meyers said collections remained steady last year, although Akerman worked with its clients to help them meet their own budgets while paying their legal bills.  “We’re close to our clients,” he said.  “We reached out to each one to understand, ‘what’s your financial position?  What’s your cash position?  What can you do, what can’t you do?’”  At the end of the financial year, the firm said it had a 6.5% increase in gross revenue in 2020.

Fee pressure, of course, depends on the industry.  And those with insurance industry clients and municipal clients are among those seeing the most discount pressure.  Mark Thompson, president and CEO of Marshall Dennehey Warner Coleman & Goggin, said while the firm’s hospital clients have returned to their pre-COVID payment rates, the firms’ base of municipal government clients haven’t yet returned to pre-COVID fee arrangements as a result of financial distress. “That is going to remain a problem going forward,” Thompson said in a Dec. 22 article. 

But nearly all sectors saw pressure in the beginning of the pandemic. At General Motors, the automaker reached out to the 19 firms on its panel of “strategic legal partners.” The second quarter presented an enormous, worrisome question mark, and the automaker—like so many businesses of all sizes—was looking to preserve cash.

GM general counsel Craig Glidden said the company didn’t know what would happen in the auto markets, which meant asking firms for help. And those firms stepped up, agreeing to deferred billing and alternative fee arrangements to relieve some of the company’s pressure.

The Significance

Yes, law departments are seeking high cost savings.  The 2021 Report on the State of the Legal Market from Thomson Reuters and Georgetown Law said spending on outside counsel did, in fact, decrease in the second and third quarters of 2020.  The report said 81% of legal departments found that general enforcement of billing guidelines, including reductions of invoice fees and expenses, was the most effective way to keep billing down.  Meanwhile, 53% of respondents requested standard discounts; 49% of respondents reduced timekeeper rate increases; and 45% used volume discounts.

At the same time work, the report shows that the average daily demand for law firm services per lawyer, based on billable hours, increased in the second half of the year, picking up in November to almost match the previous two year average.  So what happened to the portrait of the general counsel scrutinizing every line item and grilling firms about rate increase and discounts?

That picture is becoming increasingly faint.  Instead, the portrait emerging from 2020 is one of cooperation and demand.  Clients rushed to law firms for urgent legal advice during the pandemic, including counseling for workplace laws, PPP loans, restructuring and data security concerns.  Secondly, the circumstances from the pandemic gave rise to conversations about pricing, driving both sides of the law firm-client relationship to seek common ground—both in the form of tried-and-true alternative fee arrangements and those that reflect a more innovative approach.

Law firms have some leverage.  Just because a client wants a discount doesn’t mean a firm has to provide it.  “Clients understand the difficulty of onboarding new external counsel,” says McKinsey & Co. senior partner Alex D’Amico.  “There’s a real cost to bringing on a new firm.”

Article: Five Cost-Cutting Strategies for Corporate Legal Departments

October 22, 2020

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.