A recent Law.com article by Rosemarie Griffin, “Seven Key Metrics to Evaluate Spend on Outside Counsel”, reports on metrics to monitor outside legal spend.  This article was posted with permission.  The article reads:

Gartner research shows that external spend comprises approximately 45% of overall spend for the median legal department, yet legal leaders often have trouble understanding where much of that spend originates.  Legal leaders continue to invest in spend management solutions to improve their insights into external spend data.  However, many of these same leaders find it difficult to translate that data into insights to inform decision making, even when spend data is accessible in dashboards or reports. 

When it comes to improving how external spend is evaluated, legal leaders should first determine the goals they want to achieve (e.g., reducing costs or improving quality) and then identify and track data to inform strategic decisions.

Gartner experts have prepared seven example metrics that legal leaders can use to inform their external provider management and align it with their organization’s overall strategy.  The following examples provide a framework for assessing needs and working with vendors and/or internal teams to build similar reports.

1. Total Spend Over Time Comparison

Comparing spend over time, especially in a visual dashboard, enables legal leaders to quickly spot trends or instances that could lead to overspending  This type of comparison also provides a holistic picture of historic spend in given periods, allowing for better budgeting.  One of the most valuable means of displaying comparative spend is with total spend per month, compared year over year.

Better historical spending data allows for more accurate budgeting, enabling legal departments to base projected future spending data on similar spending during that period in previous years   Historical spending trends can also help determine potential upticks in seasonal work and how much spending might be expected to fluctuate.  Comparing this information makes it easier to spot outliers when reviewing spend reports.  When legal leaders notice outliers from previous periods, they can analyze individual matter budgets from that period to see if a unique event explains that spending and, if not, adjust future spending, renegotiate with law firms and/or adjust the quantity and type of work sent to external providers.

2. Spend Compared to Budget

Once legal teams create a budget, they can also leverage data to manage that budget by tracking law firms’ spend.  While budgets with law firms are not always accurate, legal leaders should still track budget overages and use any overages to save money by renegotiating the amount billed and increasing scrutiny in future bills with that firm.

If a law firm is consistently over budget on matters, legal leaders should take a deeper look into the matters being billed by that firm.  It may be possible that one matter is significantly over budget, for known and expected reasons, but all matters coming in consistently over budget indicates a larger issue.  This might mean the in-house team member responsible for managing firm spend is not effectively managing a firm, or it could mean the firm is consistently ignoring budgets when making staffing and billing decisions.  Monitoring this data at the macro level can allow teams to proactively address any budget issues without waiting until large matters are completed.

Once a potential issue is spotted, legal leaders should speak with the matter owner(s) in the department working with a firm to see if there is an adequate explanation for the deviation.  From there, they should work with the firm to create a plan to readjust spend or rework the budget if necessary. It is important to track these overage conversations and any improvements on budget compliance to use in vendor evaluations.  Having conversations with vendors about their budget compliance legitimizes the budget and ensures a firm will monitor the available budget when making staffing and billing decisions in the future.

3. Blended Rate

Another helpful tool for monitoring law firm billing is the blended rate.  A blended rate, the average rate of all roles by hours billed, helps clear any confusion and identifies the true hourly cost the firm is billing, instead of just the rates billed by each role at the firm.  An effective report might visualize the average blended rate for top vendors as ranked by their total fees billed.

Understanding the blended rates first helps identify which firms are charging more, on average, per hour.  Using a blended rate ensures firms cannot hide costs by overusing staff with high billing rates.  Legal leaders can then take a closer look at potential over billers to see whether the matters billed by that provider justify the higher billing rate, or if they may be using high-cost attorneys unnecessarily.  Leaders can then negotiate rates or staffing or take advantage of alternative fee arrangements (AFAs).

4. Matter Staffing

To complement the data from blended rates (or provide a proxy, if the department cannot access that data), legal leaders benefit from a breakdown of the percentage of roles (paralegal, attorney, partner, etc.) billing the department from each firm.  If staffing is too senior, the department is paying higher rates than required for a task.  If the staffing is too junior, the work may not be adequate for the quality expected by the firm.  One way to visualize this data in a report is by displaying staffing allocation, by vendor, for vendors that bill the most fees, or a selected list of vendors.

Understanding what type of role executes the work will allow legal leaders to quickly see if a firm may be over- or underusing expensive law firm partners or attorneys for the work billed.  For some workstreams, such as major litigation, extensive use of experienced attorneys may be required.  For these cases, legal leaders may look to ensure partners and high-value attorneys have devoted considerable time to that work.  Blended rates alone cannot provide this information.

However, if a firm is generally used for low-complexity work, significant partner use could be unjustified, leading to unnecessarily high rates.  Visualizing this information is especially useful when combined with data on blended rates and billing guidelines, as blended rates will support an overbilling hypothesis and guidelines allow the legal department to clearly lay out what roles should be executing each type of work managed by a firm.

5. Turnaround Time

Aside from direct costs, another important outcome to report is the turnaround time for individual matters.  Slow turnaround time can delay matters and increase costs. However, if turnaround time, for similar matters, decreases significantly without explanation, it could be an indicator of lower work quality.  Turnaround time alone cannot adequately explain cost overruns or outcome quality, but it can be used as an indicator to take a closer look at a firm’s work.  Legal teams can visualize turnaround time by sorting matters by priority and plotting median turnaround time for matters at each priority level. 

Legal leaders can monitor firms’ work speed and compare them to the previous year to check in when turnaround times are longer than average, meet with firms to diagnose the issue (if times are unjustified), and create a plan to improve performance and maximize value.  This approach can also reduce cost if additional time is leading to more billed hours.  Any significant slowdowns could be from the complexities of a major individual matter or other factors, but it is an indicator that legal leaders should take a closer look at that individual firms’ work to evaluate whether the slowdown is justified.  Turnaround time metrics can be valuable, but they rely on legal staff to close out matters properly for accurate data.  This metric is only effective alongside established expectations for closing matters.

6. Strategy Versus Complexity

Another way for legal leaders to monitor their use of outside counsel is through the distribution of external matters by complexity and strategic value.  While this requires legal staff to accurately gauge and input the information, it can be extremely useful to evaluate the mix of work sent to external providers.  Some departments and external spend management solutions provide legal leaders with the tools to rate matters by qualitative metrics (including strategic value and complexity) when opening a matter and presenting these matters in a grid.

One of the most effective ways of reducing outside counsel costs and increasing the value received by in-house resources is to consider the strategic value and complexity of a matter when deciding whether to send something outside.  Legal leaders should aim to keep matters of high strategic value (other than major litigation) in-house as much as possible, where they have the best knowledge of the business.

Any matters of high complexity and low strategic value are good candidates for outsourcing to law firms, while low complexity, low strategic value matters are good candidates for alternative legal service providers (ALSPs.)  If legal departments see a large percentage of high strategic value matters sent outside, they may reduce outcome quality for the business and reduce the strategic benefit of in-house resources.  At the same time, if low complexity matters are being sent to law firms, then legal departments have an opportunity to insource those matters or shift that work to lower-cost ALSPs.

7. Grid Summary Report

To better compare spend across firms and practice areas, legal leaders can use a grid summary report that displays spending in a grid with the top 10 to 20 practices as rows, and the top 10 or 20 firms as columns.  Ideally, this report would classify rows into tiers of firms.

A grid report typically visualizes the gaps and overlaps and can help inform opportunities for consolidating spend.  At minimum, seeing this grid should allow the department to ask, “Are we making the right allocations?” If the report indicates a law firm is not often used, or is used for only one stream of work, then it may be a suitable candidate for consolidation.  Often, legal leaders report they are unaware that a single attorney is engaging with a firm until they get a complete spend report.  Tiering by practice area allows the department to notice this behavior more easily.

Strong relationships with law firms are valuable, as they will have better knowledge of the business and can provide better opportunities, including bulk discount on fees, secondments, and additional services, such as those provided by a captive ALSP.  These benefits can often be increased (particularly for organizations with smaller overall legal spend) by consolidating work to a smaller number of firms.  If a firm is being underused across practice areas but provides good value for work in other practice areas, legal leaders can also instruct their teams to shift work away from other firms to that firm.  This shift increases the value provided in a practice area while minimizing the loss of relationships that may occur by bringing on new firms for a practice area.

Other Metrics to Consider

The list of metrics above is not comprehensive of all metrics available from spend management platform vendors, or all metrics that may be useful when making strategic decisions on outside counsel.  Other recommended metrics (that may or may not be available from vendors) include spend by firm tier, average vendor rating (from after-action reviews at matter close), and top matter owners by spend.

External spend management platforms can provide some options for reporting, and legal teams can build on these systems to create their own reports to ensure they have the data required to make effective external spend decisions.  These reports can also help legal show the value it provides to the business, by showing how it has increased the efficiency of theory spend or reallocated work to better outcomes.

Rosemarie Griffin is a Senior Research Principal at Gartner.

A recent Law 360 story by Christine DeRosa, “Jones Day and Former Client Spar Over $678K in Fees”, reports that Jones Day and a one-time client have gone to court in competing lawsuits, with the client — Ambassador Enterprises LLC and two of its entities — accusing the firm of charging an unreasonable fee in Indiana and the firm firing back in a breach of contract suit seeking to recover its nearly $700,000 bill in Pennsylvania.  The dispute broke into public view on Nov. 24, when Ambassador filed for a declaratory judgment in an Indiana court claiming that a dispute had arisen with Jones Day based on the firm allegedly demanding $678,025.44 for services it provided during its representation of Hixwood Metal LLC, one of Ambassador's entities, in a federal lawsuit.

Ambassador and its two entities, Ambassador Supply LLC and Hixwood Metal, which are named in both the Indiana and Pennsylvania suits, said in the Nov. 24 filing that the fee is unreasonable and that they were not given information about the charges they would be expected to pay until they accumulated over $400,000 in legal fees within a month.

The private equity firm alleges that it told Jones Day the amount was unacceptable and directed the firm to scale back its time on the case, but the law firm sent another invoice, for $200,000.  Ambassador ended its relationship with Jones Day and retained counsel to represent Hixwood, according to Ambassador's filing.  "Recognizing that it received some benefit based on Jones Day's work, Ambassador has offered to pay Jones Day a reasonable fee for the work completed," Ambassador wrote.  "Jones Day has not agreed to accept a reasonable fee and has threatened to bring suit to collect the full payment, plus interest and costs of collection."

Jones Day then filed a breach of contract suit in Pennsylvania state court, providing more details about the dispute.  Jones Day said it entered into an engagement agreement with the Ambassador entities on June 6 to represent them in a suit against Hixwood Metal and one of its employees by competitor Everlast Roofing Inc.

Jones Day said that it represented the Ambassador entities zealously and that its work included responding to the complaint; conducting employee interviews, which Ambassador Enterprises' in-house counsel attended; drafting documents; and negotiating the scope of expedited discovery.  The firm added that it regularly briefed and sought approval from its client.

Jones Day sent Ambassdor's in-house counsel periodic detailed billing statements by email and, on July 21, sent an invoice for legal services and costs from the beginning of the representation until June 30 for $387,769.34, the complaint states.  The firm said in-house counsel acknowledged that it received the invoice on Aug. 3.  A second invoice for services from July 1 through July 31 for $239,812.50 was sent on Aug. 11, according to the complaint.  On Sept. 8, a third invoice of $50,443.60 was sent for the firm's August work, and in-house counsel acknowledged that it received all three invoices, Jones Day said.

The firm said in its complaint that it made significant write-downs to the July and August invoices despite the write-downs not being agreed upon in the engagement agreement.  After the first invoice, the Ambassador entities became less responsive to the firm's updates and communicated less before informing Jones Day on Aug. 3 that it would be retaining new counsel and wouldn't pay the full amount of the first invoice, the complaint states.

At the direction of Ambassador's in-house counsel, Jones Day stayed on the Everlast litigation through the Aug. 17 settlement conference, where the parties agreed to a stipulated injunction resolving Everlast's motion for a preliminary injunction, Jones Day said.  The firm then moved to withdraw as counsel, which the court approved, and worked to transfer the case file to the new counsel, according to the complaint.

Jones Day said it made multiple attempts to reach an agreement regarding payments of the money it was owed, but Ambassador's in-house counsel ultimately declined to pay the amount owed.  In-house counsel told Jones Day that they were unwilling to pay anything more than $150,000 for the firm's services, according to the complaint.

"The Ambassador entities have never provided any reasoned or detailed basis to Jones Day for the paltry amount they have offered to pay," Jones Day said in the complaint.  "Their only rationale, advanced by in-house counsel for Ambassador Enterprises, has consisted of general complaints that Jones Day's invoices were too high, and that Jones Day spent too much time working on the case."

In the Pennsylvania litigation, Jones Day is seeking $678,025.44, plus interest, and any other relief the court deems just and proper.  In Indiana, Ambassador said it should not be responsible for the firm's charges and asked the court for a declaration that it is responsible for only a reasonable fee, not the fee Jones Day is requesting.