The end of Free Rein (part 3) | Managing Legal Spend

I have given you a quick overview of how to rein in legal spend in two previous blog posts in my mini-series called ” The end of Free Rein.” I discussed narrowing down which legal spend goals you want to achieve in part 1 and what type of information top management needs in part 2. Consider it a primer on “reining in” spend and halting “freedom of movement.” Here is the third round of my thoughts on the topic:

More and more organizations perform gap analyses, comparing post-matter scoring of in-house counsel versus outside counsel. Do both your in-house counsel and outside counsel believe the matter was managed well overall?

You may also want to include AFA metrics in your analyses such as: trend data, data by matter type, business unit/division, practice area or geography. Metrics on AFA value could also be a useful part of the information sheet. If available, comparison with your organization’s historic costs by matter type might be useful.

Since the majority of legal spend is still on hourly rates, top management in your organization might want information on average hourly rates by years of service, firm type, matter risk/complexity and geography. Also, trend information on average hourly rate increases would be of interest. More and more organizations rely on benchmarking information (what is the market rate?) and conduct rate arbitrage analyses: How much would relocating work to less expensive firms/geographies save us? Some visualize their negotiated hourly rates of different firms by region/ geography as well as by matter risk/complexity to make comparisons easier.  The things you really want to watch are rate creep, misbillings, block billings, and other rogue practices.

In addition to your organization’s leadership, you will probably work with managing attorneys, business unit managers, or others who can benefit from actionable information on cost drivers. These metrics let them know –preferably also in a brief format, no longer than one to two pages– what is going on, what area(s) need their (immediate) attention, etc. The view can focus on top matters or on matters that reached 50, 80 or 90 percent of their budget, as well as those matters that exceeded their budget. The focus could also be on the top billing firms or the top billing timekeepers.

Once cost drivers are identified, it makes sense to identify why this is happening. An in-depth report helps stakeholders understand what is driving the changes. This in-depth report would look into matter duration and matter age (by practice area, business unit, type of matter, firms), and aging matters (older than xx days) by practice area, business unit, law firms and geography. It could also look at closed matters by matter manager, number
 of invoices reviewed within or beyond xx days of receipt. The report could also focus on the number of hours top firms (or billers) billed during a time period. What are their average hours per billing day? Their average hours per weekend/holiday? The frequency of 10-plus-hour days? Billing in large “blocks” of time or marginal input billing?  Watch for the first year associate with a proverbial lead foot of billings.

CONCLUSION…

Legal spend is a “fresh and ready” candidate for cost reduction. It has had a long term exemption from inquiry. Now the data is available to get best practices, best outcomes, and lower cost. The trick is to be clear about the goal of and path for your spend reduction exercise and establishing robust metrics that help drive decision-making. But beware, metrics are not static, they need to be monitored in an ongoing fashion. Some need to be looked at more often than others, in particular when the metrics were different from what was expected. Begin this journey knowing that “freedom of movement” does not translate into better spending. Rein in the spend with compassion, zeal, and a sense of urgency.

Do you want to learn more about legal procurement and network with other legal procurement professionals? Please browse the Buying Legal Council’s website: www.buyinglegal.com and join us!

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The end of Free Rein (part 1) | Managing Legal Spend

To give a horse free reign is to hold the reins loosely to allow the animal freedom of movement. That can be dangerous. A synonym for “free rein” is giving someone a blank check. That is dangerous as well. If you jump forward to spending, “free rein” translates into overspending, over budgeting, and inattention.

Fortune 500 CEOs and CFOs today often augment their legal teams with a legal procurement professional to help reduce their organization’s legal spend. This is an effort to end “free rein.” Double and triple digit spending increases are the instigator. After decades of exemption from standard corporate cost savings action, there is a lot of work to do for legal procurement.

But legal matters are often of complex nature, so getting your arms around legal spend may seem an uphill battle. What’s more, until recently, legal work was not only complex, it was also obscure. Measuring, setting up key performance indicators were largely unknown and there was little documentation on how to do it. There was little –if any– data procurement could analyze. With electronic billing and matter management spreading among large companies, this is no longer the case. Legal procurement today should have lots of information at its fingertips. This is the first part of two posts that offers a quick overview of narrowing down which legal spend goals you want to achieve, distinguishing who needs what type of information. Consider it a mini-primer on “reining in” spend and halting “freedom of movement.”

  • Start off with modest goals. You should manage requests for too much 
data and information carefully, as many pieces tell the same things or look backward instead of at the current state and future trending. Take these metrics as a lunch buffet from which you choose and make sure you don’t overeat. If you use too many at once you will overwhelm your audience, which will lead to abandonment.
  • Be clear about what you are trying to accomplish by measuring: If you are tasked with optimizing, consolidating and lowering your legal department’s overall spend, what’s the plan to do this? By consolidating your company’s legal supplier base? By demanding “fair and equitable” billing from your firm? By directing work to the least expensive firm with the highest net win rate or the lowest cost per matter? By identifying and eliminating or reducing spend leakage? By simplifying and standardizing the firm selection process? You choose the primary objective. Or are you tasked with improving fee arrangements, increasing spend predictability and transparency? Do you plan on requiring fixed fees, retainers or other AFAs? Do you demand forecasts and staying within budgets and hold firms accountable?
  • Most companies start with an overall objective. Let’s understand our spending, let’s categorize matters, let’s focus our spending on fewer firms, let’s get “commodity matters” to lower cost firms, let’s establish clear rules on billing practices, let’s migrate from “free rein” to “controlled rein.”
  • Another typical task for legal procurement is improving billing practices. This would require metrics that ensure and measure billing compliance; reduce invoice lags and manage terms; leverage all possible discounts or interest from invoice payment processes; eliminate missing billing codes; eliminate block billing; or determine terms and conditions, including handling of expenses/disbursements.
  • Your task could also be to improve efficiencies, such as demanding efficient matter management, identifying, and avoiding redundancies and overlaps, as well as identifying and avoiding irregular billing practices. Each of these tasks, and the cost drivers you identify, require different metrics you should monitor and manage.

Read more about reining in legal spend in my second post!

Do you want to learn more about legal procurement and network with other legal procurement professionals? Please browse the Buying Legal Council’s website: www.buyinglegal.com and join us!

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The end of Free Rein (part 2) | Managing Legal Spend

In my blog post The end of Free Rein (part 1), I offer a quick overview of narrowing down which legal spend goals you may want to achieve. In this blog post (part 2 of my mini-series), I distinguish who needs what type of information.

After being clear about your legal spend goals, what type of decisions do the stakeholders in your organization need to make? What does the individual need to know, what does she influence? This should give you some guidance as 
to what you need to include in her information sheet. A cascading approach allows you to dive deeper and deeper into legal spend data, providing more and more granular information depending on an individual’s type of decision-making. Think about this as a year two goal. Let’s have a legal spend strategy. Let’s be focused and directed in our approach. Let’s have a program to track and measure progress.

Your organization’s leadership, the CEO, CFO, or general counsel need to know how much the legal department spends; how legal spend has been changing over time and what is the legal department’s spend against budget? Leadership needs bottom-line information, best delivered in the briefest format. Spend data information should be no more than one to two pages long.  Think of it as the summary brief.

A useful info-sheet for top management should answer:

  • Are we doing everything to drive efficiency, effectiveness, and performance?
  • Are we getting good value from our firms?

You may want to begin with a limited, manageable number of metrics. These could include general legal spend metrics, such as the legal spend total, trending data, legal spend against budget, and legal spend year-over-year. Depending on what is important to the organization or the specific recipient of the document, this could be broken down by business unit/division, by practice area or group within the legal department as well as by geographic area. Also increasingly requested by top management is the ratio of legal spend to corporate revenues. Trending data is often useful, as well as benchmarking information on companies in the same industry and/or of the same size.

If you look at the matter level, you may focus on the top 10 matters in terms of spending or matters that generate a considerable amount of the organization’s legal spend, such as 25 percent or more of all legal spend. Average matter cost by type of matter, average matter duration, and the number of new matters opened in 
a certain period might be interesting to some top management. Trending data and year-over-year data could provide additional insight. The big picture is to shine a light on areas of opportunity. Lower rates on the least important matters. Faster and better outcomes. Firms competing for your business.

Rather than getting lost in the quest for more information and the desire to endlessly drill downward, concentrate on the metrics of your top 20 firms, those that bill you 25, 50 or 80 percent of your organization’s legal spend.

  • What is their win rate? How often do they achieve predetermined goals (win the case, help you settle early, save you money etc.)?
  • What are their expenses, including total, trend and year-over-year expense data?
  • What is the firm’s diversity level? How many diverse attorneys are staffed on your matters? And, did the firm keep the originally promised staff intact throughout the matter?
  • Other than outcome, how does the firm score in terms of satisfaction? What is the firm’s scorecard of post-matter performance metrics?
Read more about reining in legal spend in my third post.

Do you want to learn more about legal procurement and network with other legal procurement professionals? Please browse the Buying Legal Council’s website: www.buyinglegal.com and join us!

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