For corporate law departments, controlling the cost of outside legal counsel begins with detailed financial and operational metrics that reveal opportunities to improve performance, support sound decisions, and enable innovation.
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Moving to optimized and predictive
Advancing diversity and inclusion
Charting a course
Cost control is a critical issue for corporate law departments today. In the most recent Thomson Reuters State of the Corporate Law Department report, 69% of general counsels globally said they are under moderate to significant cost pressure from business leaders.
Corporations may very likely continue putting budget pressure on their in-house legal teams as they look to them to realize the benefits of artificial intelligence (AI). “The emergence of AI in general, and GenAI in particular, was viewed as the most likely area for transformational change in the legal profession,” according to the report. “More than 4-in-10 respondents (42%) said that they anticipate AI to transform the legal profession.” With that transformation, budgets could very well shift.
Spend management sophistication can be seen as a ladder, from least organized to most:
- Chaotic: Legal invoices are maintained outside the department’s e-billing system and the legal team lacks the ability to report on spending in a consistent manner.
- Reactive: E-billing is used effectively and able to generate basic spending reports.
- Proactive: The legal operations team has established billing guidelines, invoice audits, and processes for managing timekeepers and matters.
- Optimized: This stage is characterized by centralized management of rates, use of RFPs and competitive bids to set rates, internal processes focused on driving down costs, and advanced reporting on law department performance.
- Predictive: Operations actively manages matters in collaboration with attorneys and outside counsel. Also, sophisticated financial data management and metrics deliver detailed matter budgets, performance benchmarks, and budget predictability.
For many law departments, improving their spend management can feel like a journey. They may decide to implement progressively more sophisticated elements to their approach, rather than changing everything all at once. They might start by using RFPs and competitive bids to select law firms and set rates, then start aggressively pursuing discounts, then take advantage of improved capabilities to forecast spending and report on law firm performance.
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None of these shifts are possible without dependable underlying data from a software solution like Legal Tracker. Legal Tracker manages e-billing, matter management, and performance analytics — while also empowering legal ops teams to create and report on essential metrics.
The top five target spend metrics used by corporate legal departments are total spend by law firm, total spend by matter type, forecasted /budgeted spend vs. actual spend, total spend by practice group, and total spend by business unit, according to the latest Thomson Reuters Legal Department Operations Index report. The comparison between forecasted and actual spend has moved up from fifth place to third since 2020, suggesting departments are putting a greater priority on forecasting.
These metrics are a great starting point for conversations with outside law firms. They can inform decisions about whether to reallocate work from one firm to another, consolidate work with fewer firms, or shift work to in-house lawyers.
Moving to optimized and predictive
While these five metrics are a great starting place, they are not enough for a law department to become an optimized or predictive operation, however. To reach that level, more optimized and predictive departments dig deeper to assess matter-specific spend, as well as internal spending, in order to gauge the success of their cost control measures.
For example, one legal department asked its law firms to provide discounts of 10% to 20%, to focus solely on essential work and to accept slower payment of invoices to help improve the company’s cashflow.
By reporting on litigation spend by firm and looking at trends, the department was able to see the impact the discounts were having on spend and communicate the firms’ willingness to work with them with finance and company leadership.
You can also evaluate high-spend matters to identify those in which spending is accelerating or surpassing established budgets. Some departments have used the data to see the higher spend compared to similar firms and switching from one to another when costs justified a change.
More predictive departments are also able to automate the review of invoices to find errors, flag those that deviate from billing guidelines, and surface timekeeper rates that were not pre-approved. The software can put a hold on invoices that violate guidelines.
Advancing diversity and inclusion
Many legal departments analyze outside counsel staffing data and metrics to ensure the law firms they work with reflect their companies’ commitment to diversity and inclusion.
Some legal teams even add language to their billing guidelines that expresses their commitment to diversity and inclusion and their expectation that the law firms they engage share that commitment. Companies like this can detail the requirements in their RFPs and captures law firm staffing data in Legal Tracker to confirm and enforce those expectations.
Looking forward
The ability to track sophisticated metrics and conduct deep-dive analyses enables law departments to be more predictive in budget setting and to rely less on past performance as a baseline for future needs.
Optimized and predictive legal departments can hold regular check-ins with the finance department to reconcile spending, address financial challenges as they arise, and identify opportunities to contain costs and improve performance. None of this would be possible without sophisticated, automated financial data management and metrics.
In the future, legal departments will put even more emphasis on strict enforcement of billing guidelines, more automated and streamlined workflow processes, expanded use of automated invoice auditing and reduce-or-reject functionality, and the collection of law firm staffing demographics.
Sophisticated metrics provide a clear picture of law firm spending and a clear path to exemplary cost management and service delivery across the spectrum of law department spend management and decision making.
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