Spend management is a complex puzzle

Fifty-nine percent of corporate legal departments saw their budgets stay flat or decline in 2022. Yet 8% anticipated a reduced workload, according to the most recent Thomson Reuters Legal Department Operations Index

These stats mean that legal departments need to do the same or greater work with the same or lesser budgets while outside counsel are raising rates and employment costs continue to grow. For most legal departments, that means there isn’t a simple solution to managing their budget. You can’t just leave empty seats unfilled or slash whole categories of activity with outside counsel. Instead, you get to take on the complex puzzle of spend management.

Spend management is a discipline that businesses use to gain complete control over their external spending. For corporate legal departments, spend management concentrates on understanding and influencing spending with external counsel and other legal costs. It can be an incredibly complex discipline, especially when done manually. Many legal departments use software solutions designed specifically for in-house legal spend management.

Why is this practice so complex?

The complexity comes from all directions, from big-picture strategy questions and day-to-day line item review. First off, every business is different, so there isn’t a one-size-fits-all formula for your legal spend. You must tailor your spending to the needs of the business. Second, the manual and confusing nature of invoice review can lead to significant overspending. Finally, it’s hard to keep track of market trends for terms, conditions, and rates, so you may not know if you’re getting favorable terms from your outside counsel.

So, how do you get the clear vision needed to ensure you’re fitting all the right pieces together? How do you know what your spend management puzzle looks like when it’s complete? 

  • Start with the border pieces. The framing that tells you what you’re working toward. These value-to-the-business pieces help you assess your priorities and to-do lists. They give you a clear vision of what the business cares about and guide your communication. 
  • Move to the efficiency pieces. These might be the large patches of blue sky or green grass in the puzzle — the ones that better define the spaces for more intricate elements of the scene.
  • Then, tackle the cost-control pieces. These are the intricate elements that bring the picture to life.

Value-to-the-business pieces of the spend management puzzle

Creating value for the business is the ultimate goal of all legal departments. Implementing a spend management strategy and system will be most valuable if you align it to the needs of the business. 

As part of your efforts to ensure you focus on the activities that create the most value, you are probably talking with your business partners about what they are trying to achieve and focusing your team on supporting those goals and initiatives. These conversations help you keep your team focused on the most critical activities — they can also help you shape your spend management efforts. 

By tying spend management to value creation, you can find ways to reduce friction with business partners while driving superior legal outcomes. This is because you’ll always be able to explain the decisions you make about outside counsel — whether that’s changing firms or moving to fixed-fee pricing — based on market rate trends and billing practices. You’ll also be able to confidently answer when a finance partner asks if you’re getting the best rate on a piece of legal work. Most importantly, you’ll know you didn’t compromise quality for price.

Finally, you can gain confidence that your metrics and reporting align with the organization’s priorities. By starting with a deep understanding of what the business is trying to accomplish and what your partners care about, you can infuse your spend management strategy with that insight. With those value-to-the-business pieces, you can orient your priorities, reporting, and communication to address their interests. According to a Thomson Reuters report, the top metrics for law departments to track and report include the following:

  • Spend to budget
  • Staff workload
  • Spend by matter type and business unit
  • Outside counsel evaluations
  • Outside and inside spending as a percentage of company revenue
  • Invoice savings
  • Fee earner rate increases
  • Litigation exposure over time
  • Internal training vs. ethics complaints
  • Lessons learned by matter

When the legal department at Target Corporation took on the spend management puzzle, they felt like they had been “living in the stone age before,” according to Brian Sisterman of the law operations team. With a modern spend management system, “We gained a really good, in-depth, focused view of what the law department was doing, and why.” 

Efficiency pieces save you time for more complex tasks

Your spend management strategy and system can also help your team work more efficiently on routine tasks so they can devote more time to complex challenges and projects. 

You or one of your teammates is likely spending significant time reviewing invoices from outside counsel to be sure they comply with billing guidelines. You may be tracking information in emails and spreadsheets, scrambling to find it again when the time comes to review the invoice. Or maybe you’re not comparing invoices to terms and conditions at all — you may be crossing your fingers, hoping your law firms are following the terms you agreed to. That’s a risky approach, given how much opportunity for error exists in the law firm invoicing process. 

A solid spend management system can help you and your teams efficiently and accurately process invoices without spending all day on the task. While you’re reviewing them, you’ll be able to see clearly where an invoice follows your billing guidelines and procurement policies and where it deviates. This transparency reduces your confusion and investigation time compared to looking at many indistinguishable line items on the invoice. It also opens straightforward conversations with law firms when you need them to correct an invoice.

Cost-control pieces help you shine

You've addressed the puzzle's framework — the business requirements — and the daily operations, which involve optimizing the efficiency of invoice review. You need to assemble another set of puzzle pieces. Some might call this the fun part; it’s the complex and intricate parts of the puzzle: the windmill or the dog’s muzzle. In a spend management puzzle, these are the cost-control pieces. These are the parts where you work strategically and thoughtfully to ensure you get a fair rate and make smart decisions about which matters to handle in-house and which to send to outside counsel.  

[Related: read how Volkswagen Group of America kept law firm rate increases to about half the original proposal by reviewing all rate increases together, comparing benchmarks, and adjusting high outliers.]

Your spend management approach likely includes comparison shopping for benchmarking data. Or maybe you consult with your counterparts at similar companies to see what they pay for matters like yours. The information exists, but it’s tough to get enough of it when you’re in a time crunch. Sorting through piles of pieces and data is time consuming — it’s also fraught with mistakes and shortcuts. It’s not enough to have the right pieces somewhere on the table. You need them at your fingertips when you’re ready for them. 

A modern spend management solution can give you benchmarking data to help you negotiate favorable rates and fee terms based on real market data. This method is much more effective than relying on your historical records or guesswork. The solution can also help you analyze your historical workload by matter type and cost to see where there’s sufficient volume to bring those matter types in house. 

A complete picture — and a clear vision

Your spend management puzzle is complete. You have a clear vision of what the business needs from your legal department and what value to the business looks like. You’ve implemented efficiency measures that ensure your team can quickly and accurately review invoices and confidently ask for adjustments. You’ve got reliable insights at your fingertips to take on the tricky intricacies of negotiating rates and terms. You have defined a crisp border, filled in the blue sky, and brought the heart of the image to life. 

Netflix took on this puzzle and now is reaping the benefits. “Now we have a single workflow, one process, one route to get timekeeper rates approved and data captured … With very little impact on people’s day-to-day lives,” says John Elliot , manager of Legal Operations. “We get amazing results!”

What does it take to get there? A commitment to improving your spend management practices and an investment in a system that can support you in this work. Only best-in-class spend management can give you the clear vision you need now and well into the future. It provides reporting, benchmarking, and workflow tools that you can use to show and create even more value for the business while staying within tightening budgets.

Learn more about best-in-class spend management from Thomson Reuters. 

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