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An essential guide to legal spend management
Keen to get started in legal spend management but it seems overwhelming? Take a crash course in what, why and how with five quick steps to get you started.
No in-house corporate Legal Department has an open budget to spend on law firms. Whilst large, company-critical litigations, or major strategic transactions may attract a "win at all costs" approach, your business-as-usual legal spend requires a much more disciplined, but easily implemented approach.
More importantly, legal spend management should not overwhelm your corporate Legal Department. You are busy enough managing legal matters, that administrative overhead should be caked into your process rather than adding another layer. So how do you achieve that without a huge overhaul?
What is legal spend management?
Legal spend management is the system corporate Legal Departments use for receiving, approving and tracking invoices from their external law firms in real time. Even a simple legal spend management process will also include analysis of costs against budget to optimize legal resources and control spend.
8 benefits of legal spend management for in-house Legal Departments
Putting a legal spend management system in place - irrespective of how simple it might be - will take some time investment. We would argue that the time investment need not be more than a single day, but even 8 hours within an extremely busy legal team schedule, must yield a rapid benefit for your corporate legal team.
Within weeks of implementing a legal spend management software, you should see the following eight benefits:
1. Cost control
What gets measured gets managed. Real-time visibility over your costs will help your corporate legal team to rein in costs before they become a problem.
2. Time savings
A systemized way to receive, approve, circulate and forward invoices will yield immediate time savings for every person who touches (or who is cc'd to an email) an invoice.
3. Law firm relationships
Clear expectations of budget preserves this important relationship where it matters - focused on the legal advice you are paying for, rather than on invoice haggling.
4. Optimize legal resources
A clear understanding of your spend as distributed across divisions, categories of work and specific legal matters will help to identify where you get the greatest (and lowest) return on investment, setting the stage for resourcing adjustments to optimize your spend.
5. Better decision-making with legal analytics
A legal spend management solution provides in-house Legal Departments with data-driven insights and analytics, enabling more informed decision-making regarding budget allocation, external counsel selection, and resource optimization.
6. Increased efficiency
Track legal spend in real-time and streamline your legal operations. Legal spend management can help your in-house legal team make informed decisions regarding budget allocation and the performance of external resources.
7. Improved transparency
Ensure compliance with billing guidelines. To be clear, billing guidelines do not need to be draconian to be effective, to help you reduce invoice disputes and back-and-forth clarifications with outside counsel.
8. Increased productivity and reduce time spent on tedious admin tasks
Modernizing the legal spend management process can free up your team's time on simple admin tasks like reviewing invoices and whether the external resource has complied with billing guidelines. It will also reduce the back and forth with finance on invoices submitted.
Seven signs your Legal Department needs legal spend management urgently!
There are seven red flags to look out for that indicate you need a legal spend management software ASAP for your corporate Legal Department! Below are some reasons why your corporate in-house Legal Department might need a legal spend management solution today.
1. Regular cost over-run on individual legal matters
You are in the middle of a key, strategic legal matter, things are progressing well albeit a little intense, and your outside counsel or law firm is providing you with high quality advice. Without notice, your General Counsel asks you to report on costs to date. After you scramble to gather up all the invoices from your inbox and hastily put an Excel spreadsheet together, you are horrified to discover that you are 300% over budget. Again.
2. No real time visibility on costs
CFO to General Counsel: Can you please provide an estimate of year-to-date Legal Department costs? And how does that compare to this time last year?
General Counsel: Gulp. Blink. Blink. Gulp.
3. Budget over-run
Your in-house Legal Department has developed a bit of a reputation in recent years - it NEVER hits its budget. Your explanations are weak and amount to "legal costs are hard to estimate" but are not followed through with changes to process to minimize repetition. The C-Suite is getting impatient - or worse, dismissive.
4. Resourcing mismatches
You are aware that your team engage 'Large Law Firm' on a regular basis. They are good, reliable, and your relationship runs deep. If only they didn't cost (average) $900 per hour! And then you discover that a small, uncontroversial NDA was sent to them for a "quick review" and you see the invoice for $1800 come across your desk. Perhaps they don't need to do all your work and you could consider your other resourcing options?
5. Administrative hassle for the legal team
Your Legal team members are highly frustrated. They are wasting time on:
- Opening invoices in their inbox
- Comparing them against legal billing guidelines and cost estimates (stored somewhere else)
- Replying to the law firm requesting adjustments
- Opening again (repeat step)
- Checking the delegated authority limits
- Forwarding to the next person in the approval queue
- Chasing the next person in the approval queue
- And it goes on...
Not to mention all the times the law firm submits an invoice:
- 12 months after the end of a legal matter
- With an invoice date from 2 months ago (finance won't accept it!)
- Well over the agreed cost estimate without seeking prior approval!
6. Administrative hassle for the finance department
Loading legal invoices into your payment system, or even just making sure that they are sent to the right person in your Finance team, can be an administrative nightmare. The Finance team regularly chase you for information, the right invoice, the invoice with the right entity, copies of approvals and so on.
7. Administrative hassle for law firms
You field questions from your law firms on a regular basis - has this invoice been submitted for payment? Is there a problem? Can you find out when it will be paid? And really, you want me to work until 11pm tonight to finish that new thing when you haven't paid for the last thing? Hmm.
There is definitely a better way for you to manage your external counsel spend.
Five steps to external legal spend management
- Step 1: Set budgets for your Legal Department and legal matters
- Step 2: Set billing guidelines for your external resources and law firms
- Step 3: Implement a legal spend management software solution
- Step 4: Run legal spend management reports
- Step 5: Take action on your external legal spend
Step 1: Set budgets
Your Legal Department budget matters (no pun intended). Take the time to build it properly. If you need assistance (and a template) then Xakia's white paper - 10 Steps to a Smarter Legal Budget - can walk you through the process.
More importantly for external counsel management, develop a system for setting and monitoring matter budgets. Legal matters can be unpredictable but they should be tracked, discussed and adjusted as required throughout the life of the matter. Even if matter budgets are initially exceeded on a regular basis, setting budgets helps you to understand whether your spend expectations are realistic and you can refine the process as you move forward.
Step 2: Set billing guidelines
Setting billing guidelines for external resources works for everybody. If your external firms know what legal expenses they can - and can't - include in an invoice, it will make the process much cleaner and faster for all involved, provided that you have:
- Set out clear billing guidelines that cover:
- What can and cannot be invoiced
- What happens when an invoice exceeds the firm's cost estimate (e.g. requires new approval)
- What needs to be included on the invoice for administrative purposes (e.g. name of entity, purchase order, date of invoice)
- When an invoice can be submitted (within X days of end of month, no more than X days after end of matter etc)
- Clearly communicated billing guidelines to all external firms and all fee earners and billing administrators within the firm
- Set up a process to keep your firms accountable when they do not comply with the billing guidelines. If you let the non-compliant invoices slide, they will just keep coming. Your in-house matter management software can help automate this process
- Review your resources regularly to ensure that they are within budget and well aligned to the type of work suitable for their expertise and your needs
There are multiple ways to implement billing guidelines:
- A simple list provided to your law firms
- A set of agreed terms baked into your panel agreement
- A modern matter management software that sets out the expectations on each engagement
Side note: Billing guidelines are now very standard so your in house legal matter management software will likely have a set of defaults you can select from, avoiding the need to start with a blank sheet of paper. Best of all, billing guidelines can be enforced with a legal spend management software solution, so in-house Legal Departments don't waste time reviewing the invoices.
Step 3: Use a legal spend management software
Create a clean, clear system for receiving, reviewing, approving and sharing external counsel invoices with your Finance Department. A legal matter management or legal operations software solution will help you achieve full automation and maximize time savings, but even systemizing this process with agreed rules amongst your team can yield significant benefits.
With a clear legal spend management software solution, you will be able to track legal expenses against cost estimates in real time, noting immediately when invoices take you beyond your anticipated costs.
Step 4: Legal spend management reports
Running in-house legal spend reports is essential for enforcing accountability across individual matter budgets, and also at the Legal Department level. Legal spend management reports should be configured to consider audiences such as:
- Individual matter matter managers, to ensure costs are well contained
- Law firms, to ensure they are aware of and controlling costs in line with agreed rules and estimates
- Business units, to ensure they are aware of their contribution to legal costs
- CFO / CEO, to ensure they are aware of your cost control philosophies and practices
In-house legal spend reports should consider the micro and the macro of legal spend, to facilitate action where it can be taken, without losing sight of the big picture strategic goals. Legal Department spend reports should include (at a minimum) these six elements:
- Matter spend: a list of all outsourced legal matters and the corresponding spend-to-date.
- Matter spend vs. budget: a summary of matters that are nearing, at or over their matter budget including a reason of why cost estimates were inaccurate.
- Spend per firm: year-to-date and a comparison to the prior corresponding period.
- Spend per category of work: year-to-date and a comparison to the prior corresponding period.
- Spend per division: year-to-date and a comparison to the prior corresponding period.
Ideally this spend will also be tracked against the strategic importance of the work being done by each of these external firms, so that the average cost per matter resonates with the nature of the firm being engaged. This will underpin your final step below...
Step 5: Take action on your external spend
With useful, real-time data on hand, your legal department spend is clearly mapped out. Now it is up to you to optimize your resourcing to ensure you are getting the best return on your investment. Whether it be internal legal resources, or external legal resources, making sure that the legal work requirement matches the resource capability, capacity and cost will help to keep your total legal spend under control.
Avoid legal budget blowout with Xakia legal spend management software
Enjoy full transparency and understand where you spend money with Xakia's legal spend management software. Software that is so simple, you will be up and running in minutes, not months.