Not surprisingly, the heavy pressure that corporate law departments were under on many fronts before the current pandemic has only been exacerbated by the current crisis.
What may be surprising is that the strategic priorities corporate law departments identified in late 2019 have not changed even with the uncertainty due to the COVID-19 outbreak. Indeed, in the recent report from Thomson Reuters Acritas and the Legal Executive Institute, 2020 State of Corporate Law Departments: Effectiveness, Efficiency & Expanding the Guardian Role, we see these priorities have even become more important during this crisis, according to the corporate law department officials surveyed.
One of the most telling takeaways from this report is that law departments cite driving efficiency as one of their top goals, and, as a primary component of that, controlling spending has become paramount. The report also offers a deeper dig into the methods corporate law departments consider most effective in reducing costs, including such tactics as enforcing billing guidelines, reviewing budgets, reducing invoice expenses, and more.
Cost reduction through efficiency
Nearly half of survey respondents cited increasing efficiency as a strategic priority, and cost control was the primary goal for 21% of respondents, interlinked with a drive for automating processes and innovation, which in turn helps lower costs overall.
Diving deeper into the report, 90% of Thomson Reuters Legal Tracker™ participants said that controlling outside counsel costs was a high priority, and 41% of this group said that, as a large component of that effort, bringing more work in-house was a specific goal. This compares to 29% who said it was not a priority.
Further, several respondents suggested other ways they were trying to reduce costs in their departments, ranging from limiting the number of outside law firms they work with to specifically requesting alternative pricing options for their legal matters.
The in-house solution stalls
After 2007, spend on external counsel fell. Now, however, it appears those cutbacks were not sustainable over the long term—and this has significant implications for the ways in which law departments can successfully cut costs. And it may mean there is a limited room for law departments to reduce their outside counsel costs further; perhaps, the most they can aim for is strict control at current levels while targeting other areas for cost-saving measures.
However, given that corporate management is not letting up on demands made on their law departments—similar to all other business units—to provide greater effectiveness and demonstrative value, pursue more collaboration, and offer more expansion of the legal role into other areas of business, this presents the leaders of law departments with a big challenge.
Alternative ways of reducing costs
That has left corporate law department leaders scouring their balance sheets for other methods to increase efficiency in an effort to reduce costs in a way that can be demonstrated to corporate management and increase the value proposition of the department.
Some of the ways department leaders have said they are pursuing cost savings include:
Enforcing strict billing guidelines
One of the single most effective cost control measures they have found, according to Legal Tracker participants, is general enforcement of billing guidelines that result in the reduction of invoice fees and expense costs. Increasingly, the most successful law departments are pushing for clear, consistently enforced billing guidelines to be issued to their outside law firms, legal service providers, and suppliers that will result in fewer non-compliant expenses being included in submitted billings.
This tactic also allows law departments to more pro-actively manage unanticipated costs and simplify their invoice process, which further supports efficiency and additional cost savings.
And this method is working. The collected rate realization, which is the percentage of agreed-upon billing rates that law firms actually collect as revenue, fell steadily between 2007 and 2010, from more than 94% to just below 90%, according to law firm data collected by Thomson Reuters Peer Monitor™. This downward trend in rate realization—the figure has hovered at just over 89% since 2013—coincides with the timeframe in which corporate law departments started implementing these stricter billing guideline enforcement procedures.
While this cost-control tactic remains crucial to ensure outside counsel costs do not escalate, the fact is, collected rate realization has not moved much over the past 7 years, which indicates reliance on this will likely offer limited opportunity to significantly reduce external expenditure further.
Bringing work in-house
Another effective way for corporate law departments to increase their efficiency and reduce costs—and perhaps the most obvious one in the eyes of corporate management—is to bring more work in-house. However, like essentially every other measure, bringing more work in-house has its own set of consequences.
Chiefly, there seems to be a mismatch between the workload that in-house teams are expected to take on and the resources they are given. In fact, almost two-thirds of departments surveyed (64%) cite their push to keep more legal work in-house as a way of curbing outside spend, yet a nearly equal percentage (63%) noted their departments were not hiring additional lawyers and are even looking at ways to reduce their own headcount, according to data from the Thomson Reuters 2019 Legal Tracker™ LDO Index. (Furthermore, an examination of law department budgets show that almost two-thirds are expected to remain flat or decrease.)
So, what does this mean? Clearly, these trends seem to bring to vivid life the old adage of “doing more with less” that seems to haunt much of the legal industry but is an especially powerful mantra among corporate law departments. It is also leading law department leaders to find other ways of reducing costs and furthering efficiency goals.
Adopting new technology
Beyond the previously mentioned ways for corporate law departments to reduce their costs, all of which involved varying degrees of negotiations with or examinations of the value and performance of their outside law firms, department leaders have identified one internal method that could result in significantly improved efficiency and resulting cost savings: adopting new technology within the department.
According to the report, corporate law departments are increasingly considering the efficiency side of the equation and, in many instances, are investing in technology to deliver on that adage of doing more with less in the longer term. Not surprisingly, department leaders have identified automation of routine tasks as the area with the best immediate opportunity for many law departments to increase efficiency and, ultimately, reduce costs. In fact, about 70% of Legal Tracker participants said using technology to simplify workflow and manual processes is a high priority.
In the report, law department leaders surveyed named the technology solutions they felt offered the most effective ways of reaching their efficiency and cost-savings goals. In order of importance, department leaders ranked:
- E-billing and spend, and matter management
- Document and data retention
- Document management
- Legal research
- Contract lifecycle management
However, the report data and the survey suggest there is more technology that law departments should be looking into, and that too much of what corporate law departments cite as “technological innovations” is limited to e-billing and spend, and matter management systems.
That may be changing in the near future. Digital transformation—cited as a priority for about 87% of business leaders, according to Gartner Research—is one area in which law departments could see a big role as corporations feverishly transition to a more digitized workplace. In fact, law departments could become ground zero for this digital transformation since it carries with it associated risks, especially around issues of data, privacy, and compliance.
Finally, great advances in the use of artificial intelligence and data analytics also have the potential to save time and costs, and law departments are likely to be ahead of their outside counsel firms in this area, which would allow departments to exert additional pressure and reduce costs further.
The cost-saving paradox
As the report notes, corporate law department leaders are acknowledging their drive to greater efficiency—which they cite as one of their most strategic goals—is, at its core, an effort to control spending and reduce overall costs.
The clearer line toward true cost effectiveness may take some initial investment—which could be anathema to management during these turbulent times. Yet, it will be through the investment in more innovative technology that corporate law departments will finally be able to fully analyze data, collaborate with other units, and deliver on the promise of value to their corporate managers.