When the First Law Department Operations Surveys were tallied last year, the results could have been summed up as “incremental improvement, exponential results.” While it is still true that many legal departments can benefit from the type of manager who can handle the day-to-day details, the challenges and opportunities have changed dramatically in the last 12 months, according to those who have responded to this year’s survey.
“The current economic environment has really driven home that the law is a business,” says Brad Blickstein, principal of the Blickstein Group. “The operations manager who has always done a fine job keeping the trains running on time now is expected to do much, much more.”
As the Second Annual Law Department Operations Survey proves, legal department managers are juggling a number of different tasks in an effort to do much, much more.
Alternative Fee Arrangements Take Center Stage
With law department and business leaders shifting more and more attention to the astonishing increase in the cost of outside legal services, getting their arms around outside counsel spend has become the “must handle” issue for most law department operations managers. As the media heralds the end of the billable hour, many organizations are looking closely at alternative fee arrangements. “These are becoming increasingly important as we move away from the billable hour,” says D. Mark Poag, general counsel & senior vice president, marketing, for DataCert Inc. “AFAs offer not only cost savings, but better alignment between law departments and law firms.” Nearly 65 percent of survey respondents use AFAs on a matter-by-matter basis, while 29 percent use them according to matter type.
In refining this year’s survey, several queries were designed to elicit some solid information on how, and how fast, companies are using AFAs. It turns out that the vast majority of those who use AFAs—81.8 percent—utilize a discounted hourly rate.
Mary Clark, vice president law and deputy general counsel at LexisNexis, questions how truly “alternative” some of these alternative fee arrangements are. “Anything with the word ‘hourly’ in it is a little suspect, in my opinion,” she says. “It’s still an hourly rate. It’s not entirely new, and if it had been effective, people wouldn’t be considering other types of alternative fee arrangements.”
E-Discovery Settles Down
Three years after the revised Federal Rules of Civil Procedure went into effect, most respondents are starting to feel they are able to effectively manage the discovery process—when asked if they feel “in control” of that process, 70.7 percent answered yes. Yet, LDOs are not complacent. About two-thirds have specific plans to improve their processes.
The survey found that the vast majority handle their own preservation, identification and records management in-house—95.8 percent do their own preservation, 84.6 percent manage their own identification and 87.7 percent do their own records management.
However, a substantial number continue to outsource hosting (42.5 percent) and document review (37.5 percent).
Organizations are also more aggressively developing their own methods and systems for e-discovery in particular. Most large companies have taken take an “unbundled” approach and have established their own vendor relationships, expecting vendors and firms to work together. Some have their “own shop,” while the remaining companies leave it up to their law firms.
“Law departments are finding more cost-effective ways to manage e-discovery,” says Rich L. Seleznov, managing director of Huron Consulting Group. “They are telling their law firms that they can’t pay $200-$300 an hour for an associate to review documents and manage e-discovery vendors.”
Rather, Seleznov says, more and more organizations are unbundling document review and hiring contract attorneys, or more recently, hiring firms that specialize in providing the full discovery lifecycle of services—from collection through to review and finally production to the adversary. Outside counsel are being asked to work with the service providers and conduct second or third level reviews of potentially responsive or privileged documents. Such an approach can offer tremendous cost-savings—in fact, Selenov has seen legal departments save much more than 50 percent off the cost of document review by adopting this approach.
The trend to more effectively and efficiently manage e-discovery is not new, but the economy has helped to drive more legal departments to adopt such an approach, he says. This is an area where the law department manager can bring particular value. “That’s not to say it can’t be done without a business manager, but this is an area where, say, a litigation attorney may be too close to the law firm to insist on this type of approach or see the approach as risky,” says Seleznov.
“This is all part of the new normal,” Seleznov stresses. “Once a company has achieved cost-savings, it won’t go back.”
Best Practices for Using Reports and Metrics
It’s not enough to compile data—it needs to appropriately mined in order to offer real value, according to D. Mark Poag, general counsel & senior vice president, marketing, for DataCert Inc. Specifically, organizations should be using their data to consider an individual firm’s budget and compliance, he suggests. Poag offers a few best practices for effective reporting.
1) Identify your legal department’s strategies (cost containment, budget controls, firm management, risk analysis, efficient resource management, AFAs, etc.) 2) Engage your key stakeholders 3) Conduct a series of recurring internal “interviews” to track the effectiveness of your reports 4) Identify and document the key pain points and challenges from these interviews; 5) List and group your department’s key metrics by subject area 6) Determine the most effective method for tracking and distributing updates on these metrics 7) Utilize best practices by business unit and practice area 8) Assign roles within your department around reporting “Legal departments are becoming more sophisticated,” says Poag. “The early acquirors have a great deal of data they can utilize.”
Metrics and Reporting Coming into Their Own
Effectively tracking metrics and reporting is more important than ever before. Tracking the percent of legal spend, both inside and outside, as a percentage of revenue and total expense, is the most popular metric that LDO managers are using—26.8 percent are tracking this type of metric. Fifteen percent of respondents are tracking total expenses by law firms for particular groups of matters (respondents could choose more than one answer).
For nearly 75 percent of respondents, metrics and reporting represent one of the ways in which the success of the law department is measured. And most respondents seem to recognize room for improvement—64.3 percent reported plans to improve or change their metrics/reporting program in the next 12 months.
Organizations are generating reports in a variety of ways—a quarter use a matter management system, while 20 percent listed both a dedicated report-writing tool and business analysts within the legal department as ways they generate reports. However, while 94 percent of organizations reported having an e-billing system in place, only 5.6 percent use it for generating metrics and reporting.
But of those who are generating reports, not all organizations are getting the most value they can from them. “Anyone can generate reports,” says Poag. “Reports shouldn’t just look backward, though. They should be used to make more strategic decisions and determine what rate is reasonable.” (see pg 11, “Best Practices for Using Reports and Metrics”)
And at many companies, financial incentives are lacking; only a third of respondents report that there are compensation ramifications tied to the use of metrics and reporting.
Legal departments are looking at many other options to control their costs, both internally and externally. Nonetheless, many of the survey respondents do not seem to be implementing many innovative approaches. “Most law departments are fairly risk averse,” says Clark. “What most of them want is certainty.”
Limiting travel ranked as the single most highly effective way to control internal costs—almost 80 percent find this move the first place to start their cost controls. Slightly less than 16 percent listed headcount reductions as highly effective, and 35 percent ranked it as an effective method of cost control. Law departments seem less enthusiastic about the prospects of enlisting business units in this effort. Less than 20 percent ranked pushing back work to the business units as effective or highly effective.
Legal departments are trying numerous ways to rein in external costs as well. The measures with the most punch: telling law firms that they won’t continue paying their previous rates (aggressive rate negotiations) and only paying for certain items (limits on disbursement through billing guidelines). A full 71 percent continue to seek out less expensive attorneys.
Rate freezes are also popular with a majority of respondents, but that is at best a short-term cost savings, according to Clark. “They are effective, but only for so long. Eventually, law firms will have to raise their rates. It’s not a strategic approach.”
Preferred provider networks became a buzzed-about phenomenon with the advent of the DuPont Legal Model in the late 1990s. While those who operate PPNs laud their value as a management tool, it’s not universally perceived as effective for controlling costs. Only 40 percent ranked preferred provider networks as effective or highly effective when provided in a list of ways costs are controlled, 8.1 percent report developing such networks this year.
The highest ranking cost cutting measures also are among the easiest policies to implement. That doesn’t mean that all the easy controls also are effective. Among the other methods of controlling external costs that ranked as ineffective among respondents: quick pay discounts, invoice review training (something that more than half of respondents are not even doing), flat fee arrangements and discount rate with bonus for success.
Clark urges law departments to think more strategically about ways to control costs and to consider situations that have positive impacts for both the legal department and the law firm. She points to early case assessment as one area that can represent a win-win for law departments and their law firms.
“It’s obviously helpful to have a defined process and make sure both parties are on the same page,” she says. “It’s one way that law firms can provide value and advise clients based on their business strategies and needs.”
According to Seleznov, the current economy is providing a catalyst to take on bold initiatives to save costs, increase efficiencies, and better align the interests of legal departments, vendors and outside law firms. “Now is the time for legal department operations managers to step up and take on additional initiatives,” he says. “And law department leadership may be more receptive than ever.”
“Now is the time to get the mindshare of your bosses,” urges Blickstein. “And it’s important to remember that this is not the last crisis we will face. Codifying lessons learned is extremely important.”