ALM | Law.com
Global Leaders in Law Executive Briefing
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IDENTIFYING SOLUTIONS TO IMPROVE THE LAWYER-CLIENT RELATIONSHIP |
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The Global Leaders in Law Executive Briefing offers data and analysis along with challenges and opportunities our members have identified when it comes to issues encompassed by our quarterly theme. In this edition, we deliver our findings from Pacesetter Research and member-led discussions around Spend Management. |
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Spend Management: Maximizing Value, Minimizing Risk
In today's rapidly changing business landscape, legal departments face numerous challenges that demand their attention and resources. To effectively prioritize, legal department need to focus on robust spend management practices so they can not just have better control over their financial resources and allocate funds strategically to meet organizational goals, but also to help comply with regulatory requirements, provide accurate financial reporting, and uphold ethical standards.
Beyond cost considerations, effective spend management empowers legal departments to enhance operational efficiency. By streamlining and automating processes related to billing, invoicing, and payment management, legal teams can minimize administrative burdens and free up valuable time and resources. This allows legal professionals to focus more on their core responsibilities and providing value to the business.
Furthermore, spend management plays a crucial role in mitigating risk. By implementing frameworks, legal departments can establish transparent billing guidelines, enforce billing compliance, and prevent unauthorized spending. Such measures not only protect the organization's financial interests but also ensure accountability and predictability. Five Main Takeaways from the Pacesetter Research: 1. Most legal departments split their cost oversight strategy between the department’s own spend, and matters – which are considered a financial black hole
2. Departments position themselves not as cost centers but as value-creation partners by proactively reaching out to their organization’s CFO, the board, business unit leaders, etc., and helping them formulate better risk-informed strategies
3. The importance of creating opportunities for sharing both resources and costs, as well as more clearly defining the value the legal departments adds to the organization
4. The number of providers – legal tech, consulting, technology, and boutiques – focused on legal department needs is expanding exponentially, with an increasingly fragmented competitive landscape 5. In a growing number of organizations, procurement departments are seeking a greater voice in all outside vendor hiring decisions, including outside counsel
What Do Law Firms Need to Know? -
The disconnect with billing hygiene is that few law firms self-analyze their pre-bills or submitted invoices for these common issues. Law firms tend to closely monitor the metrics and analytics focused on law firm performance.
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Relationship partners should always ask their client contacts what metrics the legal department tracks to evaluate outside counsel performance.
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The most common involve billing hygiene, diversity and matter staffing, and various budget-to-actual metrics. The relationship partner's follow-up question should then ask their client contact what metrics the legal
department utilizes to evaluate its in-house professionals. -
While much of the focus on billing hygiene metrics and legal spend analytics is associated with outside counsel performance, many legal departments use a variety of metrics to measure & evaluate their in-house counsel.
- Finally, poor billing hygiene slows collection speed for law firms, which
impacts cash flow and often increases client-facilitated invoice adjustments, lowering collection realization. Billing hygiene is as much a financial issue for law firms as a client relations issue. Whether it is client service or billing hygiene, law firms should excel at the variables within their control that, if poorly managed, often become an annoyance for in-house counsel.
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General Counsel's Key Pain Points (and Opportunities for Law Firms) Some of the most cited challenges for spend management by legal departments are: -
While Innovators realize they must find the equilibrium point between client and outside provider interests, still, there is a basic conflict of interest at play between clients (who want to minimize costs) and law firms (who want to maximize profits)
- Law firms often still lag in their use of data analytics tools
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Many law firms still insist on using billable hours for technology or advisory services, adding unnecessary cost
- In 2023, most law firms are raising their rates significantly, making them less able/willing to work with clients over rates
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2023’s economic circumstances force law firms to seek to find profits in raised rates, adding more lawyers to matters, or increasing the amount of billable hours
- An important ingredient in long-term spend management strategy is horizon-scanning (“issue spotting”), a capability many law firms struggle with themselves
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In Your Own Words: How Members Are Tackling Spend Management
Part of this research included an off-the-record, candid roundtable discussion with legal department and law firm members on how they are navigating this issue. The discussion focused on the challenges, opportunities and how to best collaborate for success. Below are key comments from those roundtable discussions.
How many of you right now are utilizingmetrics to track your spend? "We don’t yet have a maturity level in terms of metrics on spend. Our biggest spend is external litigation, we don’t have a good way of tracking it." Are you requiring budgets on every matter? "Litigation no, occasionally on big matters we get budget from law firms. But, for the most part, no we don’t require budgets on every single matter. We do require budgets on things that don’t involve litigation." Are you tracking shadow billing? "More often than not we don’t." Can you talk about where you are in the maturity curve and the impact that it has had on how firms get involved and billing hygiene?
"We do track our spend closely by practice area and firm. Any way that you want to look at the data we can pull it up. We use exclusively flat fees and some blended arrangements, and the occasional hourly fee. But for the most part, this [flat fees] is what we have been doing. We have an electronic bidding room, where our law firms compete against each other on the fees. Then we track our statements, if people put in initial bids and then lower them in our bidding room then it is real money we have saved."
The thing I found interesting in the report is how critical it is to work alongside other business partners and units. Are you doing that? What particular areas does it work for you? "From my perspective, we are not doing it. We are at the infancy stage at the moment so I am looking at trying to develop this."
Law firms measure partnership-centric metrics, meanwhile the client looks at a variety of different metrics that relate to the spending side and matter-based metrics. There is a huge disconnect between law firms and clients. I think the law firms need to bend to the client. The law firm business model is the least client-centric model known to man. I am curious in terms of metrics, what are you tracking now? And of what you are tracking, what are you sharing with outside counsel?
"We have customized extensively, we track budgets and reports for monthly spend. ... We track budgets, rates, spend, year-over-year analysis, practice area, and matter type. We track everything!"
Has putting the programs in place reduced the average matter cost?
"I don’t know if it has reduced matter cost as much as it has put a bullseye and true focus on the accuracy of the work is represented properly. Billingpoint has guidelines - you have to conform to those guidelines for an invoice to go through. Things that it does in the first instance make it more valuable to us, for instance, invoices find matter manager easily. Rate curating approval is also great to have in a system where you can do a deep dive into year-over-year increases. Because we manage the rates and there are line item disputes you can do, it keeps spending in check but I don’t think it has reduced it overall."
You do work globally, are you doing more fixed fee arrangements internationally?
"No, we do as much on both sides of the pond. Our engagement is that we instantly require a 15-20% discount. We go ad-hoc matter by matter to see what is better - AFAs or phased for a big litigation."
Are you tracking shadow billing?
"Not at all."
When we talk to in-house counsel, they say that it is critical to understand what the other business units are focusingon. Speaking their language makes the legal team a value center rather than a cost center.
"This was a captive law firm that was moved in-house. How the business does genuinely reflects how well you do. You have to partner with the business and understand what risks and advisories you have to bring to the table and some are still having problems embracing that. Some are still struggling to understand how they can add value. It's important to show people what we are doing to bring more value." Do you ever use bill review management?
"We don’t at the moment but it is not outside the radar. The other thing I can guarantee is we have matter managers who are really good at what they do and others who just put it through. We run the gambit as then we have others whose invoices are all over the place. What I have found is there is a lot of fat that could be cut by having better eyes. Some of our pain points have to do with relationship management in the sense that it is decentralized in our organization. Some of them are good at it and some of them are not."
"We run into a number of factors which include building our processes, and people that don’t adapt well to new processes. Knowing and understanding people, and trying to convince people to do things can be challenging. It can be helpful to have people with different backgrounds, those with soft skills, legal backgrounds and those with operational backgrounds."
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Billing Hygiene as an Opportunity With some noted exceptions, law firms are missing the opportunity of increased legal department touchpoints that billing hygiene offers
With demand falling across the board and the world dancing on the precipice of recession, legal departments are facing tremendous pressure to cut costs. In conversations with general counsel the ALM Pacesetter Research team has held in recent months, many described receiving marching orders to reduce outside counsel spend by some arbitrary, often double-digit number. Of course, legal departments tended to split their view of spend management between their internal department cost management, and their external spend – or their matter management. For their internal spend, the answer was resource management. Their approach to matter management was a bit more complicated, however.
Among the responses we encountered in our conversations, we found a maturity curve on which we could plot legal departments. On the more reactive end, legal departments simply demanded rate freezes or cuts from their outside counsel, and also did things like delay payments to law firms for short-term accounting gains. To our pleasant surprise, however, we found a large number of legal departments who understood that the solution to their dilemma lies not in shell game-style budget tricks but in working more collaboratively with outside counsel.
These legal departments reached out to their outside counsel and asked for help with yes, rates and billing structures (i.e., AFAs), but also with data and technology management, research, capacity and resources, e-billing systems, and messaging. These departments were also more likely to review their relationships with outside counsel, whether individual law firms or through periodic panel reviews. Many were also beginning to retain data on important relationship metrics, though admittedly only a handful maintained and utilized this data for longer-term relationship management.
As legal departments pay more attention to their relationship with law firms, a lubricant in that relationship that is becoming increasingly prominent (though it’s been around for a long time in various guises) for general counsel is billing hygiene. Most law firms by 2023 have built or adopted some form of e-billing, but the software platform is only part of the solution. Billing hygiene requires consistency and a universally-standardized lexicon (such as Uniform Task-Based Management System or UTBMS codes), as well as transparency and regular communication. Legal departments are learning to use the information available through e-billing to both more closely manage matters, as well as keep their internal stakeholders informed about progress. This leads to fewer surprises in budget talks.
In some respects, enhanced billing hygiene has proven punitive for law firms as better-informed legal departments expect more from them. But in conversations the ALM Pacesetter Research team had with some law firms, there was a growing recognition that billing hygiene’s benefits flowed both ways. It helps law firms more clearly frame their value proposition – and their pitch is grounded in data. Perhaps more importantly, though, it gives law firms a stage for deeper and more frequent interactions with legal departments, and innovative law firms are using these additional touchpoints to hone their service delivery strategy while also providing information and tools that help legal departments appear to be heroes to their internal clients and stakeholders. By providing support around pricing and service delivery alignment, legal operations support, document and contract management, project and matter management, analytics and advanced technology support, and even outsourced/managed services, law firms are injecting greater transparency and predictability into their service delivery while gaining in return the same, plus shorter payment cycles, and a stronger institutional relationship with clients.
Innovators are doing all this, but admittedly, they are far ahead of the crowd (their peers). Far too many law firms still do not take billing hygiene seriously, and fail to see it as the client engagement opportunity it is. Indeed, ALM’s Pacesetter Research team also spoke with many boutique start-ups focused on some aspect of billing hygiene for a recent research effort, and each of those conversations inevitably began with a frustrated veteran lawyer describing the pointless and unnecessary friction they saw in legal department and law firm relationships.
On the whole, legal departments are further down the road of taking control of that relationship than law firms, which is odd for a service industry.
--Tomek Jankowski, Director - Pacesetter Research |
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Some Upcoming GLL and GLL Advisers Events - GLL An Evening with Friends, London- 9th March 2023. Register here
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GLL Members Forum, International- 23-25th March 2023. Register here
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GLL An Evening with Friends, US- 20th April 2023. Register here
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GLL Members Forum, Americas- 7-9th June 2023. Register here
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