Spend management strategies for law departments: 5 steps to follow
Legal department budget cuts are nothing new. Now, though, legal departments are getting proactive and predictive about how they manage and assess their spend — before a specific cost challenge hits. In doing so, they can increase the impact of their work and protect their budgets from cost challenges.
Learn more about the difference between a proactive and a predictive law department in our article, Corporate Law Departments are Using Metrics to Manage Spending on Outside Counsel.
Spend management is a discipline that enables businesses to gain full and complete control over their external spend. For corporate legal departments, spend management concentrates on managing spend with external counsel and other legal costs.
A legal spend management strategy considers the goals of an organization and sets the direction for the operations, partnerships, and outcomes of the entire legal department. It helps law department leaders put their budget in the context of the impact the team delivers to the business.
Legal spend management strategies take many forms, depending on the needs and resources of the business. Here are five key steps for developing your spend management strategy:
1. Know the business for improved legal spend management
When you know the strategies, priorities, and opportunities of your business, you can develop a sharp sense of where to focus your team and resources. This enables them to deliver the most impact. They can develop relationships with operational, sales, and financial counterparts so they can make better decisions together.
This improves outcomes across the business, whether you’re deciding how to approach a litigation or working through legal department budget challenges.
2. Manage legal spend through greater resource efficiency
Matter management and e-billing software help you manage legal work, making your team and outside counsel more efficient and effective. What’s more, they are designed to support the complexity of legal matters. They can handle the evolving nature of typical legal matters and pricing, unlike general accounts payable and other finance systems. Ideally, your e-billing and matter management technology will integrate with your business’ finance system to provide clean reporting for everyone.
Managing spend isn’t just about the accounting, though. Legal practice tools can help law departments understand and manage spend, too. For instance, legal know-how solutions help your generalists understand niche areas of law that affect corporations. They can use that understanding to decide which matters to manage in-house and which are better handled by outside counsel or a legal practice outsourcing company.
3. Maximize value of outside counsel while managing legal spend
Look at your network of outside counsel and see if you can identify the specific value they bring to your book of work. Match low-value work to lower rate firms. Make sure the high dollar firms are assigned to work that they are uniquely suited to do.
Of course, there may be reasons other than cost as to why you want to use a certain firm or lawyer. Be sure you can explain your reasoning to your business colleagues and to your team. That way you’ll be able to answer questions about your spend and you’ll start to train the next generation of department leaders.
4. Implement spend-based legal performance indicators
According to the 2020 Legal Department Operations Index, the top five key performance indicators (KPIs) used by law departments are based on spend. These include total spend by law firm, by matter type, by practice group, by business unit, and forecasted spend versus actual spend.
These spend metrics tell one part of the story, but they don’t communicate the value the legal department brings. Nor do they help leaders connect the business needs to their department operations. A growing number of legal departments — those interested in being proactive and predictive — are also tracking metrics that demonstrate the volume and quality of work they do. This includes number of legal matters opened and closed, litigation exposure, and quality of legal outcomes.
5. Establish predictive budget setting for effective spend management
You have your department priorities aligned to the business. You’ve assembled the right tools, outside counsel, and metrics in place to deliver on those priorities efficiently and effectively. Now it’s time to forecast activities, metrics, and impacts.
Legal teams can use their sophisticated metrics and deep-dive analyses to be more predictive in budget setting, relying less on past performance as the sole input for future budget needs. You can be proactive about planning expenses and litigation impacts.
When your team can communicate expenses and potential litigation liabilities ahead of time, you can spend less time in clean-up mode and more time in proactive planning. This ultimately frees you up to contribute your legal insight to the business as it builds forward-looking strategies.
There’s no getting around cost control. In-house leaders are focusing tightly on metrics that benchmark legal spend relative to corporate revenue, even in a year when 43% of global law department leaders are expecting an increase in total legal spend — the highest upturn in legal expenditure in a decade. Legal teams feel the pinch of corporate cost pressure, but the answer isn’t to cut people or say “no” to the business. A spend management strategy can help the legal department better protect the business and ultimately protect its budget during expense challenges.