3 Tactics for Handling Your Biggest Expense: External Resources

Given that outside expenditures comprise 51.2% of the average Legal Department budget, now is a critical time to address external resource management: even small improvements in this facet of legal operations can generate significant ROI for your team and organization.

Xakia’s Legal Operations Health Check surveyed nearly 350 in-house lawyers around the world to assess the health of their Legal Departments and their adoption of 100 best practices in legal operations. By examining this data, we can see what Legal Departments are doing now to manage their external resources – and where they have room to improve.

What's happening now?

As a whole, in-house Legal Departments that participated in the Legal Operations Health Check achieved maturity in five tactics for external resource management:

1. Have clearly understood, organization-wide rules about who has authority to engage external legal service providers.
2. Choose external legal service providers for each engagement based on expertise, demonstrated outcomes and value.
3. Foster collaborative relationships with external legal service providers, facilitating regular and proactive sharing of information and ideas.
4. Frequently use “value-adds” from external legal service providers, such as training, secondments, library services and precedents.
5. Use an established panel of firms or other formal relationships with external legal service providers.

If you are amongst those who have not yet achieved legal operations maturity in these areas, they warrant your focus. Some of them are small but foundational and can deliver an instant improvement to your in-house legal resource optimization.

The last on this list merits further discussion. As we will note below, while most Legal Departments have established panels, they fail to monitor and maintain them effectively.

All told, these activities are the proverbial “low-hanging fruit” of legal spend and external counsel management. These uncomplicated tasks provide an important foundation for substantive legal operations improvements.

What's next?

With a majority of Legal Departments taking a scalpel – or a chainsaw – to their spending plans, it’s fine timing to take legal spend and external counsel management to the next level. Indeed, by adopting some of the activities below, in-house lawyers can ensure a consistent (or maybe higher) level of quality from law firms and external service providers, even while cutting costs.

First, recall that most Legal Departments are using panels of firms or external legal service providers. While panels certainly can foster critical institutional knowledge and efficiencies, they must be measured and periodically refreshed. What to do:

• Use quality and cost/value metrics to regularly review the performance of external legal service providers. Presently, 64.2% of Legal Departments do not do this.
• Refresh the legal panel and external legal service providers every two to three years. More than half (58.3%) of Legal Departments do not do this.

Tips to managing external resources

Beyond panel maintenance, other smart steps in external resource management include:

1. Explore and use solutions for high-volume, low-value legal work 

High-volume and low-value work is well suited to finding alternative solutions to the traditional, single-matter solution law firm. This repeatable work, may deploy the use of a 'playbook' or a repeatable process but does not require specialist knowledge or specific commercial context to deliver a suitable legal solution.

Three solutions are worth exploring for this type of work:

• Alternative legal service providers: a.k.a. ALSPs - operate in the realm of document review, contract management, intellectual property management and the like – and can be a cost-effective solution, sometimes leveraging offshore resources and/or a process driven approach that has been well honed to deliver efficiencies to customers at a reasonable margin.
• Automation of documents: This is now commonplace across corporate legal departments as a means of resourcing repetitive document creation. Automated assembly of documents can form part of the resourcing model offered by your law firms, or it could be a solution you bring in-house to avoid large costs with your external counsel. Either way, be sure to explore how these tools can be deployed to save you costs.
• Artificial intelligence and large language models: These are promising enormous time and cost savings in the resourcing of legal work. Whilst use cases for this tool are still being explored, you can expect your law firms are hoping to save costs through their adoption. Just be sure to ask how those cost savings are being shared with their clients (and how your information is being protected!)

Less than half of Legal Departments are currently taking advantage of alternative resources, but 12.4% reported plans to do so.

The most important first step with finding the optimal resource solution for this work is to understand your work profile - make sure you are tracking your work in a way that helps you to identify risk, work category and strategic importance. This can be easily done in your matter management software.

2. Maintain templates for 'request for quote' that provide uniformity, minimize assumptions and enable proposal comparisons

This legal operations activity requires little time investment and zero dollars, but it will ensure true apples-to-apples vetting of external resources if you are seeking more than one estimate for your legal work – and then once you have selected a firm, help avoid surprises when you receive invoices.

Just over 40% of Legal Departments currently use RFP templates; another 9.8% are working toward this goal.

A standard Legal Department 'request for quote' template should include five key items to be completed by your external counsel when submitting their quote:

• Scope of work: Ask your law firms to clearly set out the work that will be delivered (using your well articulated instructions of course!).
• Assumptions: Any limitations on the work, or assumptions made around the scope of work should be outlined to ensure 'scope creep' is addressed without friction. 
• Expertise or experience: Your law firms should articulate the experience and expertise that they bring to the specific work in question. When comparing across multiple quotes, this allows you to understand the relative value and also ensures that you are not making assumptions about the experience of a 'relationship' firm. 
• Timeline: Delivery on time is critical to extracting the highest value from your external resources. This may not be a single date, but comprise of multiple dates throughout a longer transaction or litigation process. Ensure that these are structured to allow comparison across fee earners, stages of the matter or contingencies.

3. Frequently use alternative fee arrangements

Incentivize your firms to prioritize results over time spent. Consider the scenario where a well-researched and detailed advice is delivered, accompanied by a bill for 10 hours of work and a result didn't quite answer your initial question. It may leave you scratching your head and wondering if it was you or them, and whether it is worth asking for clarification (and more billable hours) or just doing it yourself.

In the same scenario, where the fee has been fixed to an outcome, you can be confident that the legal service provider will be crystal clear about the question they are required to answer, and that they will deliver it - or you will be back with that clarifying question!

Mature legal departments will use alternative fee arrangements as often as possible to extract maximum value from their legal service providers. Those who are just starting on this path will look first to a simple, clearly scoped piece of legal work, such as a contract review, intellectual property filing or regulatory audit.

Half (50.2%) of in-house teams embrace AFAs; 11.1% plan to in the months ahead. 

Next steps for handling your biggest legal expense

Get a handle on your biggest budget line item by tackling this list. (The good news: None of these best practices require any additional monetary spend.)

You can find benchmarks for your team size, industry or region in our new e-book, Legal Operations Health Check: Benchmarking Survey and Practical Tips.

For extra help with your budget, download Ten Steps to a Smarter Legal Budget, a white paper that comes with a Legal Budget template – so you don’t need to start with a blank spreadsheet.

If you would like to learn how Xakia's in house Legal Department software can help manage external resource spend, get in touch with the friendly team today for a demo.