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Outside Counsel Cost Management: A View Around The Corner

Courage can’t see around corners but goes around them anyway.- Mignon McLaughlin[1]

It is 2017; time to manage outside counsel spend. Again. You are not alone.[2] Historical pricing practices and market dynamics offer opportunities for additional legal service delivery cost reductions. In this corner of legal department operations, outside counsel management offers a relatively easy target to realize savings.

You can, should, and no doubt will focus on continued outside counsel management initiatives. Before proceeding too far, look around the corner and consider who should be doing the work. Are your outside counsel management initiatives designed to address specific, albeit important, cost management targets? Alternatively, are your initiatives integral components of your broader legal service delivery strategy?

Below, I suggest a number of factors that legal departments might consider as they embark on or continue with outside counsel management initiatives. In particular, I focus on various operational issues associated with managing outside counsel in the light of all available legal sourcing options.

Although addressed primarily towards in-house practitioners and operations professionals, the following content is also relevant to law firm professionals. After all, effective law firm-department relationships are partnerships.[3] Ideally, the following suggests opportunities to grow in this regard.

Your Plan

You’ve got to be very careful if you don’t know where you are going, because you might not get there. – Yogi Berra[4]

Thankfully, your 2016-authored strategic plan identifies elements of you outside counsel management approach:

  • Update outside billing guidelines and automate their enforcement through an enhanced eBilling platform leveraging advanced analytics, coupled with more consistent internal payment processes.
  • Manage law firm pricing negotiations with RFPs/RFQs, focusing on increased use of value pricing and alternative-based fee arrangements (AFAs).
  • Create, manage and monitor budgets for your matters.
  • Identify, collect, and report on key performance indicators (KPIs) and industry benchmarks in light of current and future trends (and by organizational areas, practices, and geographies).
  • Use data analytics and modeling to extract meaningful and actionable information about outside counsel costs and pricing.
  • Implement systems and processes for evaluating and providing law firm feedback (e.g., QBRs – quarterly business reviews).

Depending on your team, their skills and your culture, legal operations professionals (existing or new roles) may conduct pricing negotiations consistently, objectively and strategically. These professionals will also likely architect a deliberate legal IT strategy to manage this vision.

Your approach may also include two additional elements worth highlighting.

Legal Project Management

Setting the right price is important, but absent project management you run the risk that you will not meet your budgets and plans. Project management helps you manage scope, quality, time, and cost, ensuring pathways to successful value delivery. Law firms are investing in legal project management.[5] In conjunction with your law firm cost management initiatives, you might collaborate with key law firms to develop and implement thoughtful project management partnerships.

Convergence

You better cut the pizza in four pieces because I’m not hungry enough to eat six. -Yogi Berra[6]

How many law firms do you use? Are there any other organizational areas that have direct relationships with law firms that are not part of the legal budget? You might examine the number and percentage of firms accounting for greater than $X (e.g., $100k) of spend. What are the amounts and percentages of invoice adjustments or rejections, and the accuracy of submitted accruals for each law firm? What are their percentages of matters with budgets or that are AFA- or value-based? These and other metrics[7] may suggest that your outside counsel management plan include an intentional reduction in the number of outside counsel used by your organization.

A convergence/preferred provider initiative[8] offers at least two benefits. First, the use of many outside firms translates to additional overhead. Someone must track and manage pricing negotiations, e-Billing and other system integrations, procurement and finance vendor approvals, invoice and time entry reviews, accruals, and rate increase and conflict waiver requests. More relationships to manage, more communications, and more distractions for the team.

Second, a convergence initiative offers you an opportunity to partner with select law firms to develop and implement thoughtful pricing structures within and across your practice teams.

Ideally, your outside counsel management initiatives will make you feel less bloated from a cost perspective. Will these initiatives really change your overall legal eating habits? Although you may benefit from different pricing structures, fewer firms, and focused department efficiency, you may not have altered the way you deliver legal services. Efforts to create more focused bites at the pie should not distract you from broader, systemic cost saving opportunities that await around the corner.

Your Portfolio

I never blame myself when I’m not hitting. I just blame the bat and if it keeps up, I change bats. After all, if I know it isn’t my fault that I’m not hitting, how can I get mad at myself? – Yogi Berra6

When managing financial investments, it is prudent to conduct regular checkups to maintain a current, balanced and diversified portfolio – stocks, bonds, funds, and cash equivalents.[9] In certain respects, the use of outside counsel is an “investment” in one asset type. You’ve chosen the resource. The harder part is remembering how, why and when to use it.

As you conduct your outside counsel checkup, consider if you can secure short- and long-term savings through thoughtfully managed outside counsel costs and a diversified legal service sourcing portfolio. Put another way, if your focus is on outside counsel cost reduction alone, you may be missing broader opportunities. Prioritize long-term cost-effectiveness over straight, short-term cost savings to secure durable value.[10] Start with your in-house team and explore your options to insource, outsource and otherwise value staff.[11]

Your Team

You can talk all you want about having a clear purpose and strategy … , but ultimately this means nothing if you are not investing the resources you have in a way that is consistent with your strategy. In the end, a strategy is nothing but good intentions unless it’s effectively implemented. -Clayton Christensen[12]

Look for intelligence and judgment and, most critically, a capacity to anticipate, to see around corners. Also look for loyalty, integrity, a high energy drive, a balanced ego and the drive to get things done. -Colin Powell[13]

Your in-house team is your core. It includes a broad talent mix: counsel, paralegals, legal operations,[14] and other legal professionals. You may now or in the near future integrate AI[15] to your legal service delivery model.

In addition to outside counsel, you may diversify your legal staffing portfolio with temporary or contract hires, consultants, and managed/outsourced service and talent providers (LPOs for short).[16] Where and how you invest will be driven by organizational and departmental strategies, adapted to meet episodic and continuous demands for legal service.

As you (re)explore your sourcing portfolio, you might consider the following team management issues:

  • Talent: What is the optimal mix of skills and experience for your team and organization, now and in the future? Your answers may suggest that you train, borrow, buy, or try and buy talent (i.e., insource, outsource, hire contractors and temporary employees, leverage secondees and interns, etc.) Also consider how staffing allocations impact team growth, training and cross-training opportunities.
  • Culture/Diversity: What type of culture are you fostering in your legal team? How will your sourcing decisions impact this? Consider your diversity goals. You can continue to promote diversity by pushing all your providers to expand and create opportunities at all levels.[17]
  • Process: Effective solutions involve an integrated mix of people, process and technology.[18] How will changes to the staffing (people) element change your legal service delivery processes? How should you disaggregate your work and where should it go? What work should be shifted from lawyers to paralegals or other legal professionals? What processes are best outsourced or insourced? Analyze the impacts on your legal project management strategies as you partner internally, and with law firms, LPOs, and your other legal service delivery partners.
  • Collaboration & Engagement: How can you enhance collaboration and engagement within your team and with your organization? [19] How do sourcing decisions impact your ability to learn and adapt to ongoing business needs or your ability to partner with internal clients? How do they impact your ability to measure internal client satisfaction?
  • Knowledge Management: How does the use of law firms, outsourced providers or temporary/contractors impact your KM strategy? How many internal resources will devote time to maintain your KM platform given your sourcing decisions? Can elements can be outsourced?

Your Costs

A nickel ain’t worth a dime anymore. – Yogi Berra6

Fully loaded apples

In addition to team management issues suggested above, optimal sourcing decisions are based on cost comparisons. Presumably, you have specific, negotiated rates with law firms, outsourced providers, contractors, and consultants. As you gather comparative internal numbers, remember that there are a costs beyond salary — benefits and other compensation elements, taxes, rent, perhaps travel or other unique costs relating to your team, geographies, and organizational structures. Consider how you calculate fully loaded costs for your comparisons.

There is no magic percentage to apply as the mix of inputs varies widely by organization, location, and industry. Where possible, you might try to derive a blended hourly rate for counsel and for other legal professionals internally and for each type of other provider that can serve as a basis for apples-to-apples analysis. Even assuming that you derive these data-driven costs, you might include an additional internal cost adjustment.

Productive Time

There are so many things that we wish we had done yesterday, so few that we feel like doing today. – Mignon McLaughlin

How many X (e-mails, invitations, meetings) do you have today, this week? How much time was correctly spent on training, hiring, reviews, and other team management activities? How do these numbers grow when you survey your entire team? As you calculate fully loaded costs, you might also revise your calculation to account for “productive time.”

Consider how in-house teams scrutinize outside counsel bills and individual time entries in particular. This painful process enables legal teams to evaluate productive outside counsel work, and to approve, reduce, or reject certain activities accordingly. Although there are some exceptions, many legal departments do not track their time and have little, direct visibility into the productivity of individual team members. Absent these details, it may be easier to assume 85-90% of your calculated fully loaded cost to develop a comparative “productive” hourly rate for your team.[20] Or not.

Your Data

Data is like garbage. You’d better know what you are going to do with it before you collect it. -Unknown author.[21]

Data supports strategic decision making.[22] Your outside counsel management initiatives no doubt include plans to track relevant data (e.g., fee types, rates, budgets, client satisfaction, ratio of inside counsel to outside counsel spend, etc.) In parallel, you may track your internal historical and current operational costs (by matter type, practice, geography and organizational unit). Finally, you may have identified benchmarks and KPIs to measure your success, and to create dashboards to monitor your progress.

Carefully identify the relevant data you capture and the business value you hope to derive from that data. In addition to helping you stay on track, your data that will help your team better understand the cost for each provider and resource, perhaps by phase, task, and matter/project. [23]

Under the light of value-based pricing,[24] what should you do about shadow billing? If your team has the luxury of understanding, defining and measuring value, shadow bills offer only additional overhead and may be misleading. Moreover, there are clearly benefits to keeping things simple. That said, for the moment this data may provide the context your team needs to have comfort with and develop the prices for your work. As your team develops a better pricing expertise and you (re)balance your sourcing portfolio over time, the data may be less relevant.

In-house and law firm project leads do not always understand how to price, scope, or determine the underlying value of a matter/project. Training on these issues is one area in particular where in-house and law firm lawyers have a shared need and interest. [25] Perhaps in-house teams can partner with select outside counsel to provide joint training in this regard? In the meantime, there is no perfect approach regarding the capture and use of shadow billing. Legal teams need to weigh the costs and benefits in light of their data and outside counsel management strategy.

Importantly, time-based billing is still embedded in many e-Billing systems. There is rich data to help with matter value estimation and correlate historical costs with understood results. Even though legal departments and law firms continue to explore beyond hourly billing and appropriately rely on AFA’s and value pricing, hourly rates remain durable and relevant in pricing discussions and analysis.[26] Collectively, this data will help you understand the comparative costs of all providers and formulate your current, optimal legal sourcing strategy.

Your Future

Remember, the future ain’t what it used to be. – Yogi Berra

Legal service delivery requires agile assessment of staffing and sourcing options. Given the relative inefficiency in the way outside counsel services historically have been priced and managed, these services offer a logical target for in-house teams. As you continue to manage client expectations and your spend, view all corners of your legal department strategy to develop and manage a holistic staffing mix. You will realize savings, lock in long-term efficiencies, and deliver value.

This article originally appeared on LinkedIn on January 12, 2017. Interested readers are invited to (1) use a link below to share this article on LinkedIn, Facebook, Titter, etc. and/or (2) visit the article on LinkedIn to share the article or their comments.

©2017 Peter Krakaur

  1. See The Complete Neurotic’s Notebook
  2. Legal Departments Are Decreasing Outside Counsel Spend, Study Finds; Many CLOs Are Cutting Outside Counsel Spend, Survey Finds
  3. Cf. Why Big Law Can’t Escape Its Conflict of Interest
  4. Yogi Berra quotes
  5. Legal Project Managers: The New Rainmakers?
  6. See More Yogi Berra quotes.
  7. You may also be interested in cycle time, responsiveness, and accuracy and frequency of project management reports (e.g., open, closed matters; status reports).
  8. See 7-Eleven’s Law Firm Convergence Program; How ADM Cut Its Outside Counsel Rosters By 680 Law Firms
  9. See e.g., The pro’s guide to diversification
  10. See Leading Practices in Law Department Metrics: Company Best Practices (describing strategy of outside counsel performance tracking of University Secretary and General Counsel at York University p. 32. (ACC 2013)).
  11. See ACC Guide to Value-Based Staffing (although the nuances of value-based staffing are beyond the scope of this article, these important concepts may help you allocate work across your portfolio).
  12. How Will You Measure Your Life?
  13. Lesson Thirteen — Rules for Picking People.
  14. See CLOC; ACC Legal Operations
  15. Artificial Intelligence (AI) in Law Departments: Opportunities
  16. E.g., Axiom, Elevate Services, QuisLex, Integreon
  17. See ABA Resolution 113
  18. Artificial Intelligence (AI) in Law Departments: Staffing
  19. How Do I Drive Effective Collaboration to Drive Real Business Impact The New Science of Building Great Teams; Harnessing the power of informal employee networks; Making Virtual Teams Work: Ten Basic Principles.
  20. See Rethinking Activity-Based Costing (simply assume that practical full capacity is X percent of theoretical full capacity, allowing time for breaks; training; communications; travel; interviewing; outside counsel and other staffing management issues; etc.).
  21. Attributed to Mark Twain but I am unable to locate a primary source. See e.g., Mark Twain Project.
  22. See The age of analytics: Competing in a data-driven world; Big Data, Artificial Intelligence and Analytics in the Workplace. See also Littler Earns Top Rankings in Financial Times 2016 North America Innovative Lawyers Report (referencing data analytics services that guide human resources decisions and reduce the risk of future legal disputes).
  23. See Getting Away from the Hourly Rate: Ready, Set Go” (Of Counsel, Vol. 35, No. 3, Mar. 2016)(ACC Subscription may be required)( “Data-rich matter-management and e-billing systems should contain a wealth of detail regarding prior work that, to one degree or another, may be comparable to that being contemplated. Parsing and analyzing those data will enable the parties to frame and hone their thinking about the effort that will be necessary.”)
  24. A discussion of value-based pricing is beyond the scope of this article. For more information see Value-based Billing Principles and Structures (ACC); Leveraging Value-based Pricing for Financial Success (CLOC, membership required); Value-based pricing options and why discounts don’t work (ABA May 2015); How to Assess Value-Based Fees without Shadow Billing (ACC); Implementing Value-Based Fees: Practical Advice and a Chance to Practice.
  25. See Tailoring Alternative Fee Arrangements to Clients’ Needs
  26. Shell Legal – Reverse Rate Auctions and the Durable Billable Hour.

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