Supposedly, General Counsel everywhere have gotten the memo: tough economic times demand better, more business-like management of legal departments and outside vendors. So, are you moving assertively toward becoming a sharper, better-informed manager, or do you run what respected consultant Rees Morrison calls a “passive pusillanimous law department?”

In our last post we talked about management tools and techniques that can drive more productivity and efficiency into internal law department operations. But since 60% of most legal department budgets goes to outside legal spend, let’s look at how well you are monitoring and managing all those law firms you hire.

 Take This Test

A fundamental axiom of effective management is “If it can’t be measured, it can’t be managed.”  So, how do you stack up on measuring and managing?

  • Can you tell how much the firms offering you discounted hourly rates now are increasing staffing or total hours worked to compensate for lost revenue? Does your spend look suspiciously similar to when outside counsel worked on matters at full rates?
  • As you review all your outside law firms, how do you tell which ones repeatedly spend more time on particular tasks than other firms?
  • Do your cost and billing metrics allow you to aggregate information so that you can compare firm to firm, task to task or timekeeper to timekeeper?
  • Do you have financial reports that break your total legal spend out by firm or business unit, matter type, geographical location or by specific activity?
  • Do you have metrics that allow you to know when it would be more cost effective to add in-house talent rather than buying services from firms?
  • Are you able to quickly, easily and efficiently generate financial reports for your C-level executives that provide insightful analysis into all aspects of your legal spend (not just totals)?

Tapping Technology to Look at Outside Legal Spend

If you answered yes to all these questions, you are among the very few General Counsel making effective use of today’s technology platforms – the ones that can slice, dice and compare voluminous data points to create a coherent view of how the law firms are spending the legal department’s money.

The reason you need a comprehensive perspective on bills, costs, staffing and efficiency is that by and large, your outside counsel can’t provide it to you.  Even in today’s cost-constrained environment, many law firms still do not know to figure out their costs of providing service, primarily because until recently you guys would pay any bill they tendered. So naturally, billings and rates were unconstrained, and they just passed their expenses through to you.

How can firms prepare and adhere to budgets if they don’t have baseline metrics? They can’t. Firms have, moreover, no way of comparing their costs, prices and efficiency with their competitors. So you have to do it.

Only you can fully assess all the costs and benefits.

Real Life Example: A GC at a multi-billion dollar manufacturer initiated in-depth analysis and discovered that a few firms were routinely spending 17 – 20% more hours than other firms performing the same tasks on similar matters.  Interestingly, all firms were producing about the same results.  So, those extra hours were not adding any value.  You can’t see that type of information simply by reviewing a 2-inch stack of bills every month.

The E-billing Example

Today’s rapidly-evolving software platforms take many forms – we will examine a particularly innovative one in our final post in this series – but to drive home the point about management and metrics, let’s consider one that has been widely and cost-effectively available for some time: e-billing, to date the most widely underutilized technology and metrics tool.

Sad to say, the General Counsel tribe has a long way to go to make the most of this affordable and efficient technology. Right now, only about 10% of US corporate legal departments use e-billing.  And of those 10%, many regard it simply as a high-speed electronic bookkeeper, performing highly-repetitive administrative scut work.  Using their platforms this way is akin to using a Ferrari to plow a potato field.

A Powerful Analytical Engine

Sure, e-billing platforms like Serengeti, TyMetrix and DataCert (and scores of others) can provide in-depth views into law firm bills. But they also can do a lot more: they can support astute financial analysis by generating incredibly comprehensive reports, both of current and historical outside counsel activity. Courtesy of the data-mining e-billing software allows, law departments now can track firm rates and billing trends over time and compare the costs of various firms providing similar services, and also link budgeting and billing to their internal forecasting cycles.

Real Life Example: One financial services GC has used such analytics to develop ranges of cost for different types of transactions.  “We are the experts on what our transactions should cost.  We have reviewed five years worth of billings (with the push of a button) and been able to establish cost ranges for the types of deals we do.  Now we are able to tell our firms what we will pay instead of asking them what they will charge.”

Real Life Example: Another GC in a global technology company was able to see that he was paying more for a 3rd year associate in San Francisco than for a very valuable partner from another firm based in Syracuse.  Drawing on e-billing derived analytics, he was able to use the Syracuse partner (with a little input from California local counsel) and still save 30% on the total bill – in addition to having partner-level judgment on the matter.  Without the analytics, he would not have had quick access to information that fostered thoughtful management.  He said,

we expect our outside firms to be careful stewards of our dollars, but we need to keep that commitment to our company as well by using information intelligently.”

Below are just a few of the metrics on outside counsel that well-run law departments keep up with:

  • Legal Spend Analyses, by analyzing fees and expenses for specific matters and aggregating classes of matters, law departments can rank firms according to total fees for similar matters, and scrutinize expense to fee ratios.
  • Firm Rate Analyses track and compare professional rates for various levels of timekeepers, depict percentage of matter staffing by level of timekeeper and allow detailed review of historical trends.
  • FTE Analyses by level of timekeeper show total hours on each matter, how those hours relate to FTE, and how total dollars expended relate to a single FTE salary.
  • Pooled Staffing Analyses aggregate information of all firms providing particular services, permitting in-house counsel to compare a single firm to a pool of firms and determine whether any particular firm is more or less productive and cost-effective than its competitors.
  • Budget to Actual Analyses show firms’ predictive accuracy and reasonableness of initial budgets, and helps to prevent relying on firms that lowball estimates and then ratchet up the costs.

Getting Brave in the Brave New World

Despite the availability of increasingly sophisticated software platforms, many General Counsel continue to tell us, in effect, that their department’s performance can’t be managed because it can’t be measured.

They’re wrong.  As the GCs described above demonstrate, the tools and techniques are there if they have the will to adopt and learn them. Numerous experts are tackling the task of driving greater efficiency into legal department operations, and there are excellent essays on how to do so, (see, for example, Patrick Lamb’s “10 Concrete Ways to Measure Law Performance.”) Performance metrics are not an area that should be delegated to the IT folks or bookkeepers; for GCs they are the doorway to vastly improved legal department management.

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