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Corporate law departments

To Manage Outside Counsel Spend, Start with the Right Metrics

The pandemic has directly and extensively impacted legal operations and spending in corporate law departments — most notably in the management of external counsel.

This conclusion is drawn from Thomson Reuters 2021 State of the Corporate Law Department (SCLD) report, which is based on:

  • More than 2,000 telephone interviews in which senior in-house counsel from around the world discussed their legal spending, sourcing patterns, experiences with law firms, and market trends.
  • A survey of 223 in-house legal operations teams, including those supporting 81 companies in the Fortune 1000.
  • Legal Tracker benchmarking data reflecting more than $90 billion in legal spending by more than 1,450 law departments.

The report focuses on the following key findings.

Workloads are growing, budgets are shrinking, and relationships with outside counsel are adapting

Nearly 60% of law departments reported a surge in work demands during the pandemic and nearly 30% had to reduce spending. As corporate legal work changed from business-as-usual to crisis management, in-house counsel helped their companies reinvent their operations and external law firms adapted the ways they provide support.

“Many law firms redirected their knowledge-sharing efforts to help organizations understand the legal impacts of the pandemic and provided both general and tailored advice for clients,” the report says. “Many law firm partners offered their clients hours of free advice . . . to [help them] think through the issues, implications, and potential solutions they were facing. As these conversations were conducted remotely, from home to home, relationships between in-house and external counsel became more personal and were strengthened.”

Demand for outside counsel declined, but spend did not

Corporate law departments’ need for help from law firms fell as many cases and deals stalled, but rate increases and a shift to using more senior partner-level contacts for crisis management caused revenue to grow at most law firms.

Pandemic-driven safeguarding added to workload

“From keeping the organization afloat to mitigating risks emerging from the pandemic, the mandate to safeguard the company became paramount during the crisis,” the SCLD report notes. “More than 40% of law departments have put in place new dispute prevention measures.”

This changing legal landscape means law department budgets are likely to be stretched further, because business-as-usual work is returning to pre-pandemic levels while the increased legal work driven by COVID-19 remains.

Legal ops grew in size and importance

Four out of five corporate law departments said they were hiring for legal operations roles in 2020, up from 57% the year before. These increasingly empowered specialists are responsible for, among other things, management of budgets and outside counsel relations — which are closely linked because half or more of law departments’ legal budgets are allocated externally.

Controlling outside counsel spend

In fact, the SCLD report found that law departments’ top priority was to control outside counsel costs. Drawing on data from the Thomson Reuters 2020 Legal Department Operations Index report, the top 10 ways in which law departments reduced outside counsel spend were:

  1. Enforcement of billing guidelines and reduction of invoice fees and expenses
  2. Standard discounts on proposed timekeeper rate cards, such as 10% off rack rates
  3. Regular review of budgets with comparison to actual spending on high-cost matters
  4. Reduction of invoice expenses
  5. Reduction of timekeeper rate increases
  6. Volume discount
  7. Requiring law firm matter budgets
  8. Blended hourly rates, like offering fixed rate for partners and for associates
  9. Fixed or flat fees with amount set at matter level
  10. Use of preferred vendors/panel program

It’s important to control spending on external counsel, of course, but it’s equally or more important to manage law firm performance and the value they add to corporate legal service delivery. Managing both sides of this coin starts with measurement and metrics.

From metrics to insights to action

According to the SCLD report, the top five metrics used by corporate legal departments are total spend by law firm, matter type, practice group, and business unit and forecasted spend versus actual spend.

These high-level metrics can provide broad directional guidance, but law departments need to drill down deeper into the data — with a tool like Legal Tracker — for specific insights they can act upon. The following are five examples from the Thomson Reuters whitepaper The Right Way to Measure – and Improve.

Manage the budget

Sample metrics: Spend by law firm versus budget, alternative fee arrangements (AFA) by law firm, and AFA spend as a percentage of total outside spend.
Significance: Tracking spend over time enables corporate legal teams to set budgets and establish AFA based on the cost of similar matters historically. Tracking budgets for each law firm and matter reveals those that are over budget, so problems can be addressed before they escalate.

Control costs

Sample metrics: Expense guideline violations, timekeeper rates, and invoice write-downs.
Significance: These metrics provide insights into the cost of matters, catch mistakes and overbilling, and demonstrate to the business the steps the law department is taking to control costs.

Determine where legal spend is occurring

Sample metrics: Spend by practice group, substantive area of law, business unit, and matter type.
Significance: This type of analysis can reveal practice areas, business divisions, and subsidiaries engaged in a disproportionate number of cases or consuming a large percentage of legal resources so that cost management initiatives can be aimed at the right targets. For example, it’s important to assess the external/internal mix to determine whether it would be cost effective to bring more work in house.

Conduct benchmarking analyses

Sample metrics: Hourly rate comparison for similar attorneys and staff ratio comparison to peer group.
Significance: Benchmarking legal spend, law department processes, and performance metrics with results from comparable companies by industry, matter type, geographical area, and other criteria can identify problem areas and patterns that are outside the norm.

Evaluate law firms

Sample metrics: Timekeeper rates, staffing ratios, and diversity.
Significance: These metrics enable law departments to measure the value that external law firms provide — as measured by factors such as cost, performance, efficiency, and responsiveness. For example, tracking timekeeper rates will reveal rate increases that are out of line with norms or violate rate caps and freezes. In addition, law firms are increasingly measuring the diversity of their external legal teams to ensure they reflect their firms’ commitment to diversity, equity, and inclusion.

“Evaluating counsel will allow you to build a repository of data on your external law firms so that when a new matter comes up, finding the best outside counsel to work with is as easy as reviewing that firm’s evaluation data and choosing one of their most highly rate lawyers,” the whitepaper says. “This can be achieved using a simple scorecard and will help highlight other important areas, such as customer satisfaction, turnaround time, responsiveness, and price.”

Conclusion

As COVID-19 continues to impact the work of corporate law departments and their relationships with outside counsel, operational metrics are the tip of the iceberg — a means to an end. The value emerges from detailed analysis; the ability to drill deeply into those metrics to identify trends and patterns, benchmark against industry best practices, and identify anomalies and outliers. These insights will point the way to improved efficiency, effectiveness, and outcomes.