Show me the outside counsel cost savings: The inside lawyers’ role in the business

How to create and foster a law department culture that excels in the business of practicing law for both long-term cost savings and for obtaining better legal results

The law department is no longer exempt from executive budget scrutiny and budget cuts. Incremental law firm rate increases, lack of transparency in spend data, and “I’m a legal practioner not a business manager” mentality is not acceptable in the “new normal” age. The chief legal officer and/or the general counsel must proactively demonstrate to executive leadership how the law department, like any other corporate department, is becoming more efficient in this post-recession economy.

This article will explore how to create and foster a law department culture that excels in the business of practicing law for both long-term cost savings and for obtaining better legal results. This article will provide some structure to the business of practicing law value and then illustrate how to apply this value to the hiring process. Subsequent articles will focus upon the outside counsel management stages of directing the staffing model, matter budget, invoice line entry review, and quantitate and quantitative performance analysis.

Short-term “savings” vs. long-term savings

60 percent or more of the law department’s budget is comprised of external or outside counsel spend. As a result, this budgetary line item is the most targeted area for obtaining cost savings. Unfortunately, purported cost savings do not automatically translate into realized cost savings. We have seen the after effects of impulsive, short-term initiatives, such as independent rate freezes or aggressive rate discounts without a formalized budget program. Besides irreparably damaging the law firm relationships, these “short-term savings initiatives” often backfire resulting in an increase in the total cost (rates x hours) of the matters.

What is the best way for a law department to obtain long-term cost savings? The most effective driver of long-term cost savings occurs when the general counsel formally integrates the business of practicing law value within the law department, especially in directing and managing the outside counsel relationship.

Business of practicing law defined

Perhaps the best way to define the business of practicing law value is by describing what it is not. Most of the law departments’ clients and business partners we encounter provide accolades on how their internal lawyers have mitigated key risks, accelerated business growth, and served as a trusted business advisor on a significant regulatory matter — all areas involving the practice of law. These same clients are silent when asked about their knowledge on legal matter budget, staffing roles, fee arrangement structures — all areas involving the business of practicing law.

Driving change

To drive any change effectively, the change must be defined, monitored, enforced and re-evaluated from the very top. The chief legal officer and/or general counsel must articulate the inside lawyers’ business role:

  • in hiring the outside counsel
  • in negotiating the fee structure arrangement
  • in codifying the staffing model
  • in complying with budget management
  • in reviewing invoices
  • in developing performance metrics and measurements

As Peter Drucker expressed, “What gets measured gets managed.” Thus, each inside lawyer managing outside counsel should be measured on compliance with outside counsel management programs involving AFA solicitation, staffing efficiencies, unbundling, budgeting, and invoice review. Many of these can be key performance indicators on the individual inside lawyers’ respective outside counsel management scorecard.

Which law firm and lawyer to hire

Hiring the “right” law firm and lawyer for the “right” work is the most important cost-savings decision. Most law departments have converged 80 percent of their U.S. external legal work to less than 15–25 law firms. Most law departments have created a matrix classifying their law firms by legal specialties, jurisdictions, negotiated rates, and key “go-to” lawyers. Utilizing a smaller number of law firms has created a closer alignment, better understanding of the business priorities and additional cost efficiencies.

At the same time, an unintended convergent result seems to be developing. Many law departments have panels that contain an overwhelming high percentage of the global megafirms (1000+ lawyer firms). Is every matter a “bet the company” matter? The larger the law firm, the greater the overhead, the higher the partner rates/increases and, arguably, the less receptive to altering the traditional financial and process model. Perhaps increased global regulation is fueling this trend. To break this pattern, consider hiring a former partner that transitioned to a smaller law firm. The quality of lawyering would be familiar and the lawyer may be more responsive to cost efficiencies like AFAs and unbundling.

How to hire a law firm and lawyer

Practically every law department’s hiring conversation starts with the internal hiring lawyer calling or emailing her outside counsel and stating: “I have this new matter that I would like you to handle.” Then the conversation discusses the facts, contacts, the corporate position — all practice of law elements. How would the entire relationship change by stating:

“I have a new matter and you and your law firm are one of three law firms we are considering. No doubt you would excel in representing us, but we do have a competitive hiring process. Let’s have a discussion first about how we can create more process efficiencies that impact the cost of handling the matter…staffing model…traditional financial arrangement.”

If the law firm comes back with a bare discount and nothing else, be concerned.

Conclusion

Integrating the business of practicing law value in the hiring process and, as future articles will show other outside counsel management processes, is the most effective driver of long-term cost savings. The chief legal officer and/or general counsel must drive the change effort and articulate and monitor the inside lawyer’s role and accountability in the business of practicing law. Determining which law firm to hire and how to hire the law firm is the first step in this process.

Contributing Author

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Colleen Scimeca

Colleen Scimeca is a consultant in the Law Department Practice Group at HBR Consulting. She has 14 years of experience working as a law department...

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