How to manage external legal spend

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

In-house legal teams are often viewed as cost centers, making it crucial to demonstrate strategic value to the overall business. A fundamental way to do that is by effectively managing outside counsel spend. Demonstrating that you are managing costs properly — and are thoughtful about what you are spending and why — makes cost conversations with the finance team much easier. In-house lawyers who run their matters, teams, or departments like a business often have more credibility during budgeting and other challenging times when the organization is looking for deeper cost-cutting measures.

Here are some tips for optimizing both internal and external legal spend while increasing your value to the finance department.

Predict and control external legal spend with the right technology

Billing management solutions provide the backbone for effective outside counsel spend management — and they aren't just for big firms anymore. Even the smallest legal departments can benefit from the automation and insights e-billing solutions provide. With the right data, you can get wiser about your external legal spend patterns, improve employee efficiency, and accurately forecast needs. 

Legal departments, according to recent research from Forrester, can save nearly $400,000 by tapping e-billing tools to more easily analyze spending trends and pinpoint areas for optimization. One legal specialist noted that, with the use of spend management tools, "We have visibility into our legal spending, and its features help us control that spend as much as we can."

Regardless of how you track invoices, implement a monthly review process. Automated review processes can save significant amounts, with Forrester noting savings of up to $746,000 by catching billing errors and ensuring compliance with your agreed-upon rates. Don't underestimate the power of monthly forecasting; it ensures proactive communication with outside counsel, highlights potential red flags, and helps with strategic decision making.

It also encourages you to talk with your outside counsel about what is driving costs. Outside counsel are generally happy to discuss spending and ways to reduce it — they would rather have those proactive discussions up-front than an unhappy client later.

Explore alternative fee arrangements

While the billable hour remains standard, consider negotiating alternative fee arrangements (AFA) to improve cost predictability and align incentives. There are many types of AFA, including discounted rate cards, discounts tied to the average hourly rate for the city or location, retainers, blended rates, contingency, mixed hourly plus incentives, volume discounts, and caps on rates.

The Forrester study highlights that AFAs can save companies up to $2.5 million annually on lower timekeeper rates. A billing management solution providing detailed benchmarking and analytics allows for better negotiations. Plus, auditing features can easily catch billing errors, saving an estimated 2.5% in annual outside legal spend. 

AFAs come in many forms, but — when possible — a flat or fixed fee is generally the ideal approach for absolute cost certainty. While firms understandably want protection, building flexibility around key assumptions makes flat fees more achievable. Making it work requires cooperation on both sides, clear communication, and a willingness to find mutually beneficial arrangements. 

Select the right law firm

Don't hesitate to move work if your needs don't align with an outside firm or the firm isn't the best fit for a project. Instead, find a firm that provides the right expertise at a more suitable price point, then give your current firm a chance to match the cost savings. 

Next, build up your stable of niche and boutique firms. A niche firm is typically a smaller firm that specializes in a particular area of the law, usually staffed with lawyers who moved away from the larger firms. There may be reasons other than cost as to why you want to use a certain firm or lawyer; strategic use of niche firms can help you maximize cost optimization. But be sensitive to how you choose your outside counsel and why.

Finally, use your billing management solution's benchmarking data to identify the firms that best suit your needs and budget within your specialty and region. One legal operations specialist noted that using an e-billing tool allowed them to "compare a firm with their peer firms and what other clients are paying. So, we can use that as the benchmark when we set our rates with our firms or grant their increases. Otherwise, you’re just kind of throwing darts out and don’t have anything to compare them to.”

Use outside legal counsel guidelines

Creating outside counsel guidelines is a powerful tool for managing external legal spend and avoiding unexpected costs. If you don't currently have these in place, prioritize them and distribute them with each new matter and through regular updates. 

Include the following:

  • Billable vs. non-billable. Define which expenses you will and won't cover, such as research tools, travel, and meals. 
  • Deadlines. Set deadlines for invoice submissions to ensure accurate budgeting and avoid surprises. 
  • Feedback. While your guidelines set the ground rules, be open to feedback and adjustments from outside counsel to ensure a partnership that benefits you both. 

Your e-billing tool can help you manage, track, and audit your guidelines. "We’ve been saving a lot of money on these things that firms think they can charge us — copying or scanning or other administrative tasks," one subject matter expert said. Forrester predicts that organizations will save 0.5% to 2.5% of total outside legal spend by automating billing guidelines enforcement. 

Set expectations upfront with outside legal counsel

Be proactive in your communication with outside counsel from the outset. Clear expectations about the scope and deliverables not only prevent misunderstandings but also directly impact your external legal spend. The Forrester study emphasizes that tailored approaches lead to better compliance and significant savings, including:

  • Define the deliverable. Do you need a formal memo, or will an email with critical highlights suffice? Be specific to avoid unnecessary work and overbilling.
  • Set limits. Consider caps on spending or the number of hours allocated for a specific task.
  • Right-size the team. Communicate how many lawyers you expect to be involved in any given matter.
  • Be open to revisions. Encourage outside counsel to consult with you if they believe the scope or budget needs to be adjusted, but emphasize the need for strong justification.

It's not about micromanagement but aligning expectations to achieve the best possible outcome at the right price point. 

Other considerations for managing outside legal counsel spend

Beyond the core strategies discussed, additional ways to optimize your outside legal spend exist. These tactics involve negotiation, strategic use of resources within firms, and leveraging the power of data tracking.

For example, a couple of easy ways to reduce costs include getting some free hours per attorney for them to get up to speed on your new matter, for example, 10 hours of "up-to-speed time" on the firm. Likewise, most law firms should be willing to provide you with free monthly hours to take short phone calls and answer quick questions. If not, rethink your choices.

Finally, negotiate free or heavily discounted rates for first-year associate work. This tactic provides a win-win situation: they gain experience and you save on costs. Free summer associate hours can provide you with an extra pair of hands to help with time-consuming projects, freeing you up to work on more valuable tasks — and the summer associates get valuable client interaction.

These strategies, similar to the others discussed, are most effective when combined with an open, collaborative approach with your outside firms. Positive vendor relationships often lead to greater compliance and more favorable rates. As you start to implement changes, keep track of the impact. 

Two easy ways to achieve this:

  • Track every month how you are doing against your budget or forecast. If you are tracking over, that tells you it's time to start cutting spend somewhere.
  • Create a brief summary presentation showing cost savings — monthly or quarterly is best. Ensure you can reasonably support any assumptions or assertions in the report. 

The report can show things like the following:

  • Spend versus forecast or budget.
  • Cost savings based on using lower-cost counsel or deals you struck to shave costs off standard hourly rates.
  • Legal costs avoided, such as cost savings because you won the case, settled a case quickly, or settled under settlement authority.
  • Business costs avoided, like cost savings when management does not have to prepare and give a deposition or attend a hearing or trial because of actions taken by the legal department. If the CEO does not have to spend 20 hours in depo prep, that is a substantial cost savings.
  • "Money in," 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!

Every situation is different

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

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