The unpredictability of legal activity has been the top reason in-house teams struggle to accurately predict legal spend. But, this is changing, especially with the rise of legal operations. Legal teams can no longer operate as a black box, spending with impunity. They must be more quantitative. They must take a disciplined and strategic approach to spend management so they are armed with the necessary data to enforce real change.
While every business is different and there are many strategies to manage external spend, I want to share three things every legal team should keep in mind to become an efficient, data-driven legal department.
Tracking external spend is the first (and most crucial) step to managing it. In the past, legal teams were able to get by using spreadsheets to track spend. But, the process was time-consuming and often entailed manually sifting through paper invoices, scrutinizing line items, and bucketing costs into appropriate categories. At month or quarter end, these spreadsheets had to be laboriously manipulated to identify trends or garner any type of valuable insights. Let’s be clear, this is not what we mean by tracking spend.
Modern legal departments are turning to legal operations platforms with e-Billing and spend management capabilities to eliminate the manual efforts of tracking spend – all while gaining the tools for budgeting and accruals, reporting, collaborating on matters, and managing legal vendors and knowledge across the organization. Technology allows legal teams to review and process invoices more efficiently which can lead to improved revenue management, law firm discounts for faster payment cycles, and cost reduction programs.
2. Billing Guidelines
Billing guidelines are another great resource for helping legal departments manage their external spend. Focused on transparency for both the legal department and its law firms, the primary purpose of billing guidelines is set clear and consistent expectations for how your law firms should work with you. They detail how you expect matters to be staffed, how invoices should be submitted, which fees and expenses the legal department will pay for, and much more.
Billing guidelines are not one-size-fits-all and shouldn’t only be reserved for larger legal departments. They can provide value at nearly any stage as they allow you to:
- Identify non-compliant charges
- Minimize errors and overpayment
- Create positive billing habits
- Enhance relationships with law firms and create strategic alignment
- Identify vendors who consistently have issues billing you the way you expect
With proper billing guidelines, general counsel will be happy with a more streamlined process, fewer billing errors, and greater transparency into their legal spend. Law firms will be happy to have clear direction from their customers. CFOs will be happy with a better ability to plan future expense. Everybody wins.
3. (The Right) Reports
Part of being a successful data-driven legal department is your ability to quantify your savings and demonstrate to your C-suite and board that your efforts to transform your department from a cost center to a profit center have paid off. Technology is crucial to this effort. Ideally, you will have a solution to track spend and produce the key metrics and reports you need to identify spending trends, as well as produce department, vendor, and matter-specific cost analyses. This provides concrete data to objectively evaluate law firms based on performance metrics and their ability to meet your expectations. You can identify bad partners and justify whether or not to move work to a firm better suited to meet your needs, long-term goals, and price.
A few KPIs legal departments want to track include:
- Overall spend by practice area and business unit
- Vendor activity by matter
- The average hourly rates charged (timekeeper rates)
- Discounts on outside counsel rates
- Accruals (unbilled estimates vs actuals)
- Actual spend compared to budget
Reporting provides a wealth of data that makes it easier to determine which matters would benefit the most from Alternative Fee Arrangements (AFAs) and gives legal departments with one more lever to effectively manage external spend.
Start Building the Foundation
While these are just a few of the items that can help jumpstart a legal team’s spend management efforts, they go a long way in building the foundation for financial responsibility within the organization, specifically finance, and creating greater alignment with business objectives.