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Tips for managing outside counsel spend

To run your law department more like a business
Sterling Miller
Hilgers Graben PLLC

The business typically sees the legal department as a cost center and a place for potential cost cutting.  This means it is important for in-house counsel to be on top of spending with outside counsel.  Demonstrating that you are managing costs properly — and are thoughtful about what you are spending and why — makes cost conversations with Finance much easier.  In-house lawyers who run their matters, teams, or department like a business have more credibility at budget time and during those tough times when the business is looking for deeper cost-cutting measures.

Below are some things you can do to reduce or better manage outside counsel spend:

Use an e-billing tool and use a monthly forecast to predict and control spend

The cost of e-billing tools has dropped dramatically. Even the smallest legal department should have an e-billing tool if for no other reason than to automate the invoicing and payment process. If you must do it by hand, that’s fine too. Regardless of “how” you track invoices, implement a monthly process where you ask outside counsel to tell you what they just spent in the prior month and what they estimate they will spend in the current month.

For example, at the beginning of May ask all your outside counsel to tell you, what did we spend in the preceding month and what do you forecast we’ll spend in May? This gives you simple but very accurate look at spending. This is different than a matter budget as those focus on the entire cost of that matter (which is important but not always useful in the short term).

A monthly budget forecast gives you precision and allows you to exercise proactive real time reductions or change priorities in spending if necessary. It also causes you to talk with your outside counsel about what is driving costs. Outside counsel are generally happy to discuss spend and ways to reduce it — they would rather have those proactive discussions versus an unhappy client.

Alternative fee arrangements

While the billable hour is the way most firms bill, there is room for alternative fee arrangements (AFA). There are many flavors of AFA, including discounted rate cards, discounts tied to average hourly rate for the city or location, retainers, blended rates, contingency, mixed hourly plus incentive, volume discounts, caps on rates, and so on. 

The most effective alternative fee is a flat fee or fixed fee — this provides absolute certainty as to the cost. It is also difficult to obtain because law firms are (rightfully) afraid of making an error and losing money on your matter. It takes cooperation on both sides to make it work; be willing to agree on key assumptions and be flexible if those assumptions are wrong. An alternative is a cap on the matter overall or caps by phase. This can give outside counsel some flexibility. 

Find the right firm for the work

Nothing gets you cost savings faster than being willing to move work. If you are unhappy with the firm — or simply made a mistake in terms of sending a low-value project to a high dollar firm — move the work to a firm better suited for what you need and offering cost savings that justify the change. You may wish to give the current firm a chance to retain the work if they can match the cost savings. 

Next, build up your stable of niche and boutique firms. In-house lawyers often send matters to certain firms without really thinking much about the match between cost and complexity or risk. Be sensitive to which work goes where and why. There may be reasons other than cost as to why you want to use a certain firm or lawyer and that’s fine; just think it through before hiring the firm. Not only will you make a better decision, you will start to train the next generation of department leaders about how and why to make such decisions. 

Create a list of quality “niche” firms and make an effort to push a certain percentage of your yearly legal spend to those firms. Then make the list from your own experience or from speaking with colleagues at different in-house departments. A niche firm is typically a smaller firm that specializes in a particular area of the law and is usually staffed with lawyers who moved away from the larger firms. 

Use outside counsel guidelines

If you do not have an outside counsel billing policy, put one in place and send it to counsel with every new matter, or as a yearly update. This policy will make it clear what you do and do not pay for. For example, do not pay for online research tools, car services, or food unless someone from the company was present or it was cleared in advance. Also, reserve the right to reject any bills not received within three months of the work be performed. Nothing kills budget planning like getting a bill in November for work performed back in January.   

Set expectations upfront with outside lawyers

If you tell outside counsel you want something, they will move heaven and earth for you to get the answer. That can be very expensive, especially if you just want a little dirt shoveled. Set your expectations up front with your outside lawyers.  It can be a cap on the amount of money you are willing to spend or on the number of hours you are willing to pay for, or just making it clear you do not want a formal memo with the answer — an email or highlighted copy of the relevant case will suffice). 

Make it clear that you only want so many lawyers involved (“one riot, one Ranger” as they say in Texas). Doing these things will provide clear guideposts for counsel. And, of course, encourage counsel to come back to you if they think you need to spend more or get more people involved but make sure they know you expect them to justify why it is needed.

Other

A couple of easy ways to reduce costs include getting a number of free hours per attorney for them to get up to speed on your new matter, for example, 10 of “up to speed time” on the firm’s nickel. Likewise, most law firms should be willing to provide you with free hours every month to take short phone calls and answer quick questions. If not, you should rethink your law firm choices.

Finally, cut a deal with your firms that first-year lawyer work is free or at substantially reduced costs. Sure, they need training, just not on your dime. And free summer associate hours can provide you with an extra pair of hands to help with time consuming projects that free you up to work on more valuable tasks — and the summer associates will love the client interaction).

There, of course, are more ways to save money.  It starts with a willingness to change past behaviors and to have honest conversations with your outside counsel   Believe or not, they will welcome the latter. And, if not, there are plenty who will.  As you start to implement changes, keep track of the impact. Two easy things to do: a) track on a monthly basis how you are doing against your budget or forecast (and if you are tracking “over” that tells you it’s time to start cutting spend somewhere; and b) create a short summary presentation showing cost savings (monthly or quarterly is best).  Keep things simple and make sure you can reasonably support any assumptions or assertions you make in the report.  The report can show things like the following:

  • Spend vs. Forecast/budget.
  • Cost savings based on using lower-cost counsel, or based on deals you struck to shave costs off standard hourly rates.
  • Costs avoided (legal), e.g., cost savings because you won the case, settled a case quickly, or settled under settlement authority.
  • Costs avoided (business), e.g., cost savings when management does not have to prepare and give a deposition or attend a hearing/trial because of things the legal department did. If the CEO does not have to spend 20 hours in depo prep, that is a huge cost savings
  • “Money In” – i.e., if you win and the other side has to pay your company, or pay your attorney’s fees, or you were able to avoid paying a tax

You can also get your outside counsel to help quantify savings (they will be happy to show you ways they are cutting costs!). 

Nothing is in stone

Not every situation lends itself to cost savings or easy management of outside counsel.  Some cases or deals are just too complex, too important and too risky.  The circumstances will matter, so don’t feel bad if you just have one of those deals or cases that do not fit.   

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