Law departments are no longer immune to corporate cost cuts, but there are multiple ways to contribute to the bottom line. In a six-part series, HBR Consulting will offer perspectives on ways that law departments can drive cost savings through the effective engagement of outside counsel. This first article of the series looks at how law departments can leverage benchmarking data to effectively understand its outside counsel spending levels and position itself to be the drivers in the relationship.
Benchmarking is a point of comparison, a framework for contemplating and probing a law department’s performance or characteristics. It is a tool that allows companies to compare themselves to practices and operations of various groups. Benchmarking serves as an important starting point for law departments looking to understand their current position and identify cost-savings opportunities.
Measure the spending
A key first step in evaluating the law department’s outside counsel management efforts is to measure its spending levels. A law department’s spend includes not only outside counsel spending, but also inside and total legal spending. On an annual basis, the law department should measure the following metrics:
- Outside counsel spending as a percent of revenues
- Inside legal spending as a percent of revenues
- Total legal spending as a percent of revenues
- Mix of inside/outside counsel spending
- Fully loaded inside hourly rate per lawyer
These metrics are interrelated and must be understood in relationship with each other. Collectively, they provide insight into how effectively the department is managing its total costs and help to identify areas that require deeper exploration and analysis.
With cost management as a focus, law departments must track the legal spending metrics on an annual basis. In particular, if outside counsel represents the majority of total legal spending, which is the case for most law departments, and if outside counsel spending levels are rising year over year or are high compared to peers, the department needs to focus on understanding the drivers.
Analyze the drivers
Benchmarking data provides the baseline understanding of outside counsel spending. Based on the resulting data, the law department must identify the drivers of its outside counsel spending. Drivers signify elements that increase or decrease outside counsel spending. To understand the drivers, a law department must conduct a deep-dive analysis of its current outside counsel policies and arrangements.
High outside counsel spending as a percent of revenues compared to peers and/or increasing spending levels over time indicates the need to more effectively manage outside counsel. This may involve the need for convergence initiatives, alternative billing arrangements, improved outside counsel guidelines, budgeting, unbundling of work, and/or use of lower cost providers.
To better evaluate outside spending, the law department needs to consider outside counsel management metrics such as the number of law firms paid, number of firms that accounted for 75 percent of total outside counsel costs, percent of total outside counsel costs accounted for by top-billing law firms, and the types of fee arrangements used.
For example, high outside counsel spending may be attributed to a large number of law firms paid and a low percent of total outside costs accounted for by the top-billing law firms. In other words, the company may have work spread among too many firms without maximizing relationships with key firms. A review of outside counsel retention and fee arrangement metrics can also support outside counsel management plans focused on cost-savings.
Apply the results
To have impact, benchmarking results must translate to performance objectives and action plans for the organization. After measuring and understanding the spending, the law department should formulate a strategic cost management plan that addresses the key drivers of spending. This may involve a number of initiatives including the following:
- Setting budgets on major matters
- Utilizing alternative fee arrangements such as fixed fees
- Tracking spending data with a e-billing and matter management system
- Competitively bidding large matters
- Increasing the concentration of spending to fewer law firms
- Focusing on selecting the right law firms for the right legal work
- Directing the outside counsel relationship throughout the lifecycle of the matter
- Utilizing evaluations of outside counsel to track performance and promote continuous improvement
In developing the strategic cost management plan, the law department should actively engage with its key outside counsel to gain their perspectives, insights, and support.
The key to utilizing benchmarking data to manage outside counsel cost is to 1) measure key spending metrics on an annual basis 2) analyze the drivers that impact spending, and 3) apply to results to take measurable action steps for the desired outcome. When properly applied, benchmarking data serves as the key initial step for companies who want to understand and strengthen its outside counsel cost management initiatives.