Using metrics to unlock value in your legal department

How are metrics used in legal department management?

In recent years, in-house legal department budgets have not consistently grown in line with the increasing volume of legal work. Findings in the 2023 Legal Department Operations (LDO) Index from Thomson Reuters show that law departments have seen an increase in workloads over the last year, with 12 times as many law departments raising their volume of matters worked compared to those who saw a decrease in workload. Yet only a little more than a third of those who increased their output saw a budget increase.

According to the LDO Index report, the top five priorities for legal departments are:

1. Controlling outside counsel costs. The most effective cost-control measures include reducing invoice expenses, enforcing billing guidelines, and providing standard discounts to proposed timekeeper rates.
2. Using technology to simplify workflow and manual processes. Legal technology is constantly improving, becoming ever more intuitive, simplified, and flexible, meaning that legal departments are much more inclined to invest in these capabilities. Many focus on migrating to electronic storage, implementing document and knowledge management technology, utilizing generative artificial intelligence to streamline contract drafting, and educating internal business stakeholders on legal guidelines.
3. Focusing on internal data security. Information and data within your organization are valuable business assets. Because data breaches could have significant business and reputational costs, the legal department's role in protecting sensitive information is vital.
4. Focusing on legal operations. In organizations large and small, there has been an increase in the recruitment of dedicated legal operations staff. Having highly qualified lawyers set department budgets and strategies isn’t always the most cost-effective solution, and legal departments can realize more significant benefits from having specialized operations staff.
5. Bringing more work in-house. In addition to implementing cost control measures for work they send to outside law firms, GC also look at whether they can keep more work in-house . They may hire more specialists or implement resources that help their team get up to speed quickly on new types of matters.

Legal departments must now be able to precisely explain their impact on the overall business. Historically, in-house legal teams didn’t usually track their spend or use metrics to measure performance and benchmark against their peers. However, this is no longer the case. Such activities are now critical to communicating how the team is driving value and contributing to the organization's success, and many legal departments are looking at process improvements and technology, mainly metric tracking, to deliver this. But what metrics should a legal department measure?

According to the 2023 LDO Index, the top five metrics used are spend based:

Although spend metrics are vitally important, they alone do not measure the core value a law department contributes.

Findings in the 2023 LDO Index demonstrate that legal departments are also tracking the volume and quality of work they do.

Taken together, these metrics can be incredibly important in helping law departments demonstrate to the business how they create value and avoid losses. Ultimately, this enables law departments — now often seen as cost centers — to fend off attacks on their budget and grow their reputation as strategic advisors.

How technology and metrics can support your strategic goals

Many successful in-house legal departments have turned to automated matter management and e-billing solutions. These solutions can help you:

• Better track costs
• Control the number and type of matters handled by your legal department
• Improve communication within your legal department and with outside counsel
• Provide greater insights to your C-suite that leads to a better bottom line for your organization
• Ensure outside counsel rate increases are in line with market benchmarks
• Find matter-based pricing automatically, allowing for a more targeted request for proposal (RFP) process

To keep metrics at the forefront of its operations, have your law department establish a regular reporting mechanism that helps the internal team stay on track. This mechanism will help you communicate the value your organization brings to the business leaders who control the purse strings. The information and insights provided by these metrics can be vitally important to the success of your organization. Not only will you be able to measure the value that your department contributes, but you can provide strategic benefits to your department by making data-driven decisions.

What are these tools?

Matter management

Matter management refers to the organization and control of matters in a legal department. At a very basic level, matter management can be quite manual, with some organizations relying on spreadsheets to track activities.

The basic solution may meet the requirements of a smaller organization, which carries out lower levels of activity in a market where there is less exposure to risk. However, as activity increases within the department, in-house counsel often look for more advanced technology to help.

A legal matter management solution can provide instant access to every aspect of every matter, such as documents, emails, deadlines, and personnel — all in one place. Robust tools will connect with your law firms.

Utilizing a matter management tool also enables you to track and report on what your department is working on. Increasingly, legal departments are using matter management tools to regularly report on the number of legal matters opened and closed, the litigation exposure of each matter, and the quality of legal outcomes. Such metrics will go a long way to demonstrating how the law department creates value and avoids losses for the organization.

Spend management

The discipline known as spend management focuses on enabling businesses to gain complete control over their external spend. For corporate legal departments, this means concentrating on managing spend with external counsel and other legal costs. There are now software solutions on the market specifically developed to meet the needs of in-house legal teams.

A spend management tool for legal departments is not the same as an accounts payable tool. A standard solution supports the complexity of legal matters — considering the evolving nature of typical legal issues and pricing. While this is understood widely by the legal department, it can be a common misconception outside the legal team. Legal departments, particularly those with a high external spend or those interested in reducing costs, need a solution with spend management functionality for a critical reason: accounts payable software doesn’t accurately capture and report data vital to effective legal department management.

Due to the unique type and volume of invoices received by the legal team, invoice approval software costs the legal and accounts payable department an enormous amount of unnecessary time and money. Matter management and e-billing software provide essential functionality and capabilities to the legal department that accounts payable software simply cannot. The correct solution will sit alongside your wider business’s finance system, allowing integration into its accounts payable functionality.

The difference between spend management and e-billing

A best-in-class e-billing component is the cornerstone of a spend management solution. Most modern software includes additional features alongside the e-billing functions — such as reporting and analytics components — and functionality to help manage legal spend. Such features may include: 

• Automatic or manual enforcement of timekeeper rates, expense compliance, alternative fee arrangements (AFAs), and other billing guidelines 
• Over-budget spending alerts for month, fiscal year, life of matter, or phase
• Budgeting and unbilled time reporting to capture spending estimates directly from your firm 

Those are just a flavor of what is possible from a spend management perspective, but as you can see, the e-billing element is just the beginning. Spend management is where your department can gain the most value in terms of fully understanding and controlling legal spend.

Reporting and analytics

A quality reporting and analytics component can let you know exactly what is happening in the department. It can also help transform raw data into a readable format, enabling you to produce reports that break down budgets and spending, summarize key information, and identify developing trends, all of which will help to support better decision making.

Though often talked about synonymously, reporting and analytics play distinct roles in understanding how the legal department is performing. While reporting focuses on compiling data, analytics focuses on exploring and interpreting that data to garner valuable insight.

True analytics deliver customizable, interactive visual dashboards that provide real-time insights. These analytics can assist in comparing the impact of proposed rates before entering negotiations with your firms, as well as easily reviewing, adjusting, and approving the proposed billing rates on one page. Additionally, analytics can also enable peer benchmarking, revealing how client relationships have evolved and exposing areas that need attention. You can leverage current market rate trends based on real, up-to-date statistics and view markdowns by area of law or matter type compared to industry benchmarks.

When combined, these four technologies create synergies, particularly concerning transparency and the ability to analyze data.

While standalone solutions exist, integrating them can be incredibly complex as they require more supplier management. Plus, you will need to ensure that you can integrate any chosen solutions with each other.

How these tools can support a project-oriented approach to legal work

A project-oriented approach to legal work is about adapting project management techniques in a legal context. It is the process of: 

• Defining the parameters of a matter upfront 
• Planning the course of the matter at the outset with the facts you have at the time 
• Managing the matter 
• Evaluating how the firm handled the matter from the perspective of the legal department and the client

Many lawyers already use aspects of this to manage their work. However, client pressures on lawyers drive the need for a more proactive, disciplined, and systematic way of working.

At its core, legal project management is about better communication with the matter team internally and between the lawyers and their clients, whether the matter is handled by a law firm or done within a legal department.

Data-driven legal department management solutions provide in-house lawyers with the right tools to support the legal project management approach.

How these solutions work in practice

Amazon

“Amazon’s international legal billing processes are built on our e-billing and matter management solution — and it does a great job.”

The legal department at Amazon was confronted with several unique challenges when working with its overseas business units and law firms. For example, paper bills and tax information needed to be routed for approval around the world and then booked to the correct ledger — which became increasingly difficult as the company expanded.

Amazon's legal department now efficiently processes international invoices thanks to data-driven legal department management solutions that provide the necessary tools for streamlined operations. Now, for example, international tax and entry information for each invoice is automatically routed to local business units for review. The Amazon team has also configured their software solution to hold invoices until they’ve set up the vendor in both the U.S. and international accounts payable systems. According to Bernstein, “that feature alone made international billing easier.”

Today, Amazon uses e-billing and matter management software to collect invoices, budgets, and unbilled time from 100% of its firms, which operate in more than 90 countries. Amazon’s software solution includes built-in currency conversion, allowing Amazon to review all financials in both U.S. dollars and native currencies.

FMC Technologies

As a leading global provider, FMC Technologies offers advanced technology solutions for the energy industry and other industrial markets. FMC relies on its proprietary Alliance Counsel Engagement System (ACES), an innovative risk-reward fee structure, to compensate law firms based on actual performance. When considering legal management systems, FMC required enterprise-level features to support the company’s global reach and the flexibility to integrate seamlessly with its award-winning ACES system.

FMC’s legal management system dovetails perfectly with ACES because it allows them to implement and enforce policies to measure law firm performance and promote continuous improvement. With this system, FMC requires budgets and status reports from firms. The legal department also completes mandatory law firm evaluations and lessons learned when closing each matter.

After creating this essential knowledge base of firm performance data, their solution’s reporting features enable FMC to pinpoint the most efficient firms, compensate them accordingly, and retain them for similar matters. Plus, by using a legal management system, FMC can provide specific feedback to firms — driving efficiency up and costs down. FMC’s legal management system has helped the company reduce its ratio of legal spending to revenue by approximately 40% in six years.

Choosing the right solution: A buyer’s guide

Knowing the right time to invest in new technology can be a struggle. A helpful first step is to pinpoint your legal department’s level of sophistication in terms of legal spend and matter management. This process will help you determine the maturity of your legal department in this area and indicate the extent to which there is room for improvement. It will also help you decide on your next steps.

Perhaps you have already implemented e-billing guidelines with your law firm but lack a good tool to help enforce them, or maybe you are starting on your journey and need to begin reporting basic legal spend information to your business. Knowing where you currently stand will help facilitate a conversation with your supplier and help determine which features you wish to roll out right now.

Primary considerations

With technology now an intrinsic part of any efficient and forward-thinking legal practice, firms and in-house legal departments must strategically choose the right software solutions. However, with so many different options on the market, it can be difficult to evaluate one product against its competitors. The following are some critical things to consider when choosing the right solution for your legal department.

Budgeting capabilities

As the complexity of legal work increases, costs will rise, and you will need a robust budgeting capability. Choose a solution that offers targeted features for managing over-budget billings. Some solutions provide a handy pre-set invoice rejecter role, enabling you to pull back an invoice even if it’s in another reviewer’s queue, ensuring over-budget billings are tackled consistently. 

Timekeeper rate benchmarks

Outside counsel rates vary significantly by location, size of firm, level of expertise, and even length of relationship between client and firm. Choose a spend management solution that gives you benchmarks to compare law firm rates. You can use this information to negotiate a more favorable rate or shop for other law firms.

Invoice audit, review, and approval 

Choose a solution that can handle the standard invoice review process, which will save you considerable time. Even better, a solution that gives you visibility of billing guidelines violations will provide substantial cost savings. 

Currency conversion and tax

You may need a tool that can track foreign and domestic tax separately, or you may want the ability to restrict the currencies in which your firms submit invoices to reduce exchange rate exposure. 

Accurately transferring invoice data to accounts payable

Your solution should ensure your invoice data gets to your accounts payable team without introducing errors, delays, or work duplication. If your organization uses a dedicated accounts payable solution, such as SAP or Ariba, look for suppliers that offer either an existing integration or can develop a suitable one. 

Alternative fee arrangements 

Most e-billing solutions offer functionality to support alternative fee arrangements (AFAs). The key is finding a solution flexible enough to accommodate the broad range of AFAs you are using now or wish to use in the future. The solution should be able to: 

• Manage multiple fee arrangements for various firms on the same matter or exclude certain matters from an AFA 
• Select strict or flexible cost controls for AFA matters and automate early expenditure warning emails 
• Group multiple matters into a single firm profile with an overall spend limit and combine AFAs and volume discounts to help you achieve more significant savings 

The solution should also allow you to review AFA matters before you pay for them to be sure they match your agreement.

Matter pricing and RFPs

If you favor matter pricing or RFPs, select a tool that automatically helps you see a firm’s price for a specific matter. That way, you can run a targeted, competitive, and objective firm selection process. You can use this approach to save money and have proactive, informed firm negotiations while getting great performance from your outside counsel.

Matter and IP management

Your users will appreciate a solution that helps them visualize their data, making it easy to understand and take any necessary actions. A good dashboard will go a long way to achieving this. Additionally, you’ll want to ensure that the matter creation function provides configurable rules capable of automatically adding, filling in, or limiting user-selected fields within templates. This feature will streamline matter creation considerably. 

Choose a solution that gives you the ability to enforce billing requirements and guidelines. This functionality should ensure that firms are notified that a bill will not be processed and paid until the required information is provided. 

You’ll want to be able to track a matter as it progresses, so look for a solution that captures critical developments from outside counsel on a monthly or quarterly basis and allows you to track the duration and outcome of a matter. Combined with reporting and analytics features, your solution should give you predictive accuracy, lessons learned from each matter, and the ability to evaluate and compare the performance of outside counsel. 

Reporting

Ideally, you want a solution that can produce reports to help you analyze budgets and spending, summarize essential information, and identify developing trends. The ability to show changes in trends over time, schedule and automate reports, and give you a good level of customization means that your chosen solution will assist with strategic decisions. 

Integrations

Check to see what integrations are available. For example, integrating the solution with Outlook lets you quickly generate matters and instantly review, dispute, or approve invoices directly from the Outlook reading pane. You can also add documents and send emails directly to the solution from Outlook. 

A solution that integrates with your accounts payable (AP) system will enable you to feed improved invoice data accurately and automatically to your AP department. This integration means your solution can automatically detect new batch files, transform the data to meet application import requirements, and deliver it to AP. Further, with accounting code integration, you can upload lists of accounting codes to maintain a valid chart of accounts, giving you a quick, easily accessible drop-down menu and type-ahead search. 

API integrations

Some suppliers provide APIs facilitating integrations with the data sets and your existing systems and software. For example, you may use analytical tools, SharePoint sites, and portals within your technology stack. The optimum solution will enable integration with these platforms, enabling you to adopt a best-in-class approach when it comes to technology. By combining these data sets, API integrations can give you greater control of your data, enabling even better matter and spend management.

Other key features

When choosing any new technology for your organization, these next features are the fundamentals you should look for.

Ease of use

To get users on board with any new solution and realize a return on investment (ROI), you must choose an easy-to-use solution. Choose one that is unambiguous, learnable, and flexible, ensuring that it is more relevant and usable for your team. Software works well when it’s focused on the user’s priorities, goals, and challenges. When a product has been rigorously developed and road-tested with clients, it will likely be a usable and valuable tool.

Value 

The most expensive system isn’t necessarily the best if you don’t need all the bells and whistles. If the value of how your users work isn’t apparent and compelling, the discussion should probably stop there. 

Configuration and scalability

Ensure the solution can be configured to your organization’s specific needs, regardless of size or ambition. Whether you want to include all or just some of the features on offer, you need to know they will work for your needs now and in the future.

Transparency and simplicity

Is the experience, including the pricing model, overly complex? If it isn’t straightforward to you, ask whether there is a simpler approach. If the right solution has an enterprise-wide value, there is a benefit to pursuing a long-term arrangement.

Implementation and after-sales assistance

A good software vendor should happily offer as much — or as little — ongoing assistance as your team requires. Ensure that you agree on the level of implementation and on-site or after-hours support you need before you commit. This support could include things like staff training sessions, a dedicated helpline or support team, ongoing “bug” fixes, or the delivery of program updates and notifications.

Common myths that lead to decision-making delays and how to overcome them

Myth #1: The value of a legal department can’t be quantified

Busted. In the old days, a GC may not have necessarily known the outside legal spend, what matters their law firms were working on, and perhaps not even which internal attorneys were working on. Again, using e-billing and matter management software enables you to track and report on all this information.

With this tracking and reporting, you can easily quantify savings attributable to your legal department. Savings through invoice reductions, AFAs, billing guidelines, and more can be shown in a report, as can statistics like reductions in overall year-over-year spend and legal spend as a percentage of company revenue. Legal departments can identify where legal cases originate and where they need more training for employees, and then report on the results of that training through the reduction of money paid out. Potential liability for the company can be tracked, and reductions in liability shown.

Myth #2: AFAs are too difficult to use regularly

Busted. The arrival of the AFA revolution has been a long time coming. However, while the growth of AFAs has been slow, it has been steadily building over the years. The inherent conflict of interest created by the billable hour has fueled this growth. For example, outside counsel need to bill as many hours as possible, but clients want excellent work done efficiently and to prevent “bill churning.” There are many variations of AFA designed to align interests in different ways. A good starting point is to identify matters that your legal department works on regularly — certain types of contracts, for example — where it can track the average costs of those types of matters over time. Once you have a good idea of the average cost, you can negotiate a flat fee for all matters of each type. 

If a legal department can identify low-hanging AFA fruit like this and get experience with these types of arrangements, the team can move on to more complicated agreements for more significant, more complex matters.

The bottom line is that the legal department is a cost center, and like all cost centers, when the time to cut costs comes — and sooner or later it always does — you will need to justify headcount and demonstrate value.

Conclusion

Because of the mounting pressures your legal department and organization face, utilizing metrics to measure your in-house legal team’s value is more important than ever. Combined with automated matter and spend management, data analytics and reporting can help cement your legal department’s position within the business as one that works smarter and more effectively, provides best-in-class service to internal and external clients, and is a valued facilitator of achieving commercial and strategic goals. Get started by working with the corporate legal industry’s most widely used software for managing e-billing, matter management, and performance analytics. Learn more about spend management solutions from Thomson Reuters.

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