A typical Fortune 1000 company is estimated to have spent an average of $19.4 million for outside counsel services during 2009. This represents an average annual growth of 5.8 percent over the last five years. The budget for the corporate legal department is growing at a rate faster than most other departments and, as a result, executives are paying more attention to their legal spend than ever before.
The Mystery behind Legal Spend
The analysis of legal spend has always been viewed as a complex problem because of the uncertainty in modeling the financial implications of results, and the variability caused by statutes and precedents outside the control of the organization. Traditionally, subjective and anecdotal methods have been used to estimate and manage the legal spend of an organization.
Legal spend cannot be analyzed using the standard spend management concepts that have been applied to most corporate functions and have resulted in significant savings across the other divisions of those organizations.
A guiding principle of the practice of law is that a lawyer should strive to provide the best-possible legal representation of the existing legal matters facing the client corporation and to minimize the occurrence of similar situations in the future. As a result, the focus is on legal representation to the exclusion of outcomes that may make more business sense (i.e., be more cost-effective) to the client.
At the same time, the modern practice of U.S. law is based on statutes and precedents that are hard to model for the purposes of predictive analysis.
Finally, the direction and progression of many matters is often influenced by plaintiffs, opposing counsel, legal research, logic and emotion. This combination will have a material financial impact in terms of the incurred legal spend if the corporation is reactive instead of proactive in how it processes its litigated matters.
The Analysis of Legal Spend
In my experience, analysis of legal spend can be performed by an organization if an analysis and reporting framework can be built for each legal department within the organization. This framework would be specific to the legal hurdles and challenges facing the organization, as well as the legal strategy and policies developed by the general counsel.
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The development of this framework involves an in-depth understanding of the costs incurred by corporate legal departments.
Corporate legal departments usually have internal and external costs associated with legal representation as well as litigation support & administration, as outlined in the chart below:
Experientially, external legal representation is the largest component of the legal departmental budget and could be as much as 60 percent of the total budget.
Building a Framework for Legal Spend Management
A simple analogy can provide an excellent starting-point for legal spend management. There are three critical aspects of legal representation that should always remain in balance, not unlike the legs of a three-legged stool.
These aspects of legal representation are:
- Qualitative Representation
- Responsive Representation
- Cost Effective Representation
Any change in one aspect needs to be balanced by a proportionate change in the other two aspects to ensure stability.
Elements of the Legal Spend Management Framework
An effective Legal Spend Management Framework should be able to monitor legal costs, provide multi-level reporting and analytics, develop benchmarks for outside counsel and matter management, and be able to recommend outside counsel best practices. The framework should also be able to provide financial reports, performance reports measured against budgets, and predictive statistics. The following list outlines some critical elements that should be considered while developing such a Legal Spend Management Framework:
- Extent of Decentralization of the Legal Department
- Policies regarding internal handling of matters versus representation using outside counsel
- Outside Counsel Selection, Monitoring, and Evaluation methods
- Role of in-house counsel in Matter Management and Staffing Strategy
- Evaluation, selection, and monitoring of Expert Witnesses
- Collection and quality of information from matter management systems, payment systems, and outside counsel invoices
An effective Spend Management Framework demystifies the legal spend and provides corporations with the ability to optimize their legal spend.
Nicky Mukerji is director of business intelligence at Legalbill, a global organization providing legal business intelligence and compliance services to Fortune 500 and Global 2000 corporations within North America and Western Europe.