By Timo Tscherig, Head of Customer Success at BusyLamp, a legal operations software provider.
CFOs are always under pressure to reduce costs, increase revenue and forecast accurately for the future. They can be forgiven for treating legal as a cost centre: a recent survey of chief legal officers by the Association of Corporate Counsel (ACC) found that one-third anticipate outsourcing more work to law firms next year. Outsourcing legal work is unavoidable and therefore one of the biggest potential expenses of any legal team.
There are three main ways legal can reduce costs when it comes to outsourcing: catching erroneous billing from law firms; improving efficiency and therefore reducing how much work is outsourced; and making data-driven decisions on which work to outsource to whom.
The same survey also found that CLOs are implementing new technologies to improve efficiency, and that more than half either plan to adopt a new technological solution or have done so recently. As outsourcing legal work is a necessity, a legal spend management technology solution that provides the ability to use granular spend data to drive more value from firms could be just one way in which legal and finance can reduce costs together. So what is it that holds finance and legal departments back from working together?
The case for a legal-specific solution
Many finance departments do not understand why legal can’t use the enterprise accounts payable (AP) system, but legal invoices are more detailed than other departments’ invoices and the way legal work is procured often differs too. In order to fully understand expenditure and therefore reduce costs in a strategic manner, corporate legal departments need to capture granular information – including detailed breakdowns of timelines, timekeepers and expenses coded against tasks, activities and expenses – than an AP system can manage.
A typical legal team will receive thousands of invoices a year. Because of their granularity, reviewing these invoices manually is time-consuming and prone to error. Different billing guidelines – what firms can and cannot invoice for – exist for different firms. Trying to remember and accurately apply these rules when manually reviewing invoices is a daunting task and mistakes, and therefore over-spend, will slip through the net. AP systems cannot manage these billing guidelines either and there are many other limitations. The answer, then, is to implement a technology that bridges the gap between legal and finance and enables each to work together.
The benefits of legal spend management technology
With the increased pressure on legal departments to improve efficiency and control costs, modern legal spend management solutions are a sensible option as they quickly generate savings that exceed the initial investment.
Legal spend management is the practice of controlling outside counsel spend such as the costs of using external law firms. Management of outside counsel spend involves having visibility of spend, identifying and actioning cost-reduction opportunities, and budgeting future spend. The level of detail provided by a legal spend management solution adds value to legal and finance, allowing legal departments to identify cost-saving measures both in the immediate term and by making use of data-driven strategies for the future. Most legal spend management systems integrate with the enterprise AP system, giving both finance and legal teams the information they need so they can work together smoothly and transparently.
This visibility of spend is especially useful in those situations where it’s not the legal team mandating the law firm. In some companies, business units can mandate firms directly, which is where a centralised legal spend management system can help provide company-wide reporting on total legal spend. This centralisation can also help the company negotiate volume discounts with the firm.
Using legal spend management to reduce costs
Legal spend management software can reduce costs for legal departments by automating invoice review and enforcing legal billing guidelines (rules such as caps on hours, total spend, expenses, overtime or staffing) through e-billing: the core feature of legal spend management solutions. By automating invoice review and guideline compliance with e-billing software, an in-house legal department can save 5% of external legal spend in year one, and 2.5% in subsequent years. It also offers real-time cost transparency, visibility and consistency of how legal bills, matter information and budgets are input, processed and centrally stored. This increased transparency makes budgeting easier and reduces unexpected costs.
As with many software tools, legal spend management dramatically improves efficiency and accuracy. With e-billing, information is automatically processed digitally and centrally with no need for manual sorting and organising. This saves a huge amount of administration time spent doing tasks which carry the risk of significant manual errors, and even makes some tasks, such as data entry, scanning and filing, redundant. With counsel no longer doing these admin tasks, they have more time to do legal work, which can reduce the volume of work being done by firms.
Having real-time, secure, accurate and consistent centralised data saves a lot of time accessing and reporting on documents, legal matters and financials. Custom reports required by the business can be scheduled for automatic creation and delivered to stakeholders in legal, finance, or elsewhere by email.
Over time, the use of legal spend management creates a database of all historic matters and their associated spend, broken down into UTBMS and LEDES codes – an industry standard for coding legal work to a fine level of detail. There will always be a need for expert legal advice from specialist firms and it’s worth paying for it on business critical matters. However, analytics can be used to gain insights into legal spend and inform data-driven decision making by using UTBMS-level codes to compare costs, savings, spending trends and budget-to-actuals across law firms, matter types, practice areas, task codes, jurisdictions, timekeeper seniority, and more. This allows the department to decide where savings can be made, but also where investment is necessary. The goal is to get more value and efficiency, rather than reducing costs for the sake of it.
Modern legal spend management solutions also include tools beyond e-billing and reporting that enable the entire lifecycle of legal work to be completed in a single system. One such feature enables counsel to submit request for proposals (RFPs) and cost estimates to law firms. Pre-structuring the requests in a consistent format ensures a fair and easily comparable response. Proposals are more likely to be competitively priced, as firms know they are competing for the work. Unlike enterprise procurement systems, these estimates also comply with the legal-standard coding that enables a more detailed evaluation of the proposal. Using data from responses and estimates can empower a legal department to make more informed resourcing and budgeting decisions faster. Throughout the course of the matter, law firms can submit Work in Progress (WIP), work completed that has not yet been billed. Unlike accruals, in a legal spend management system this is submitted with the same line item coding as the invoice itself. This gives both legal and finance visibility of upcoming invoices at a granular level and also allows invoices to be pre-approved. At the end of the legal matter, counsel can score the firm within the system and other lawyers can reference this qualitative data when mandating or negotiating with firms in the future.
Providing data to the finance department
Presenting legal spend data in a clear, concise way that gets the message across is a challenge, as different stakeholders will often want the same data presented in different formats. A legal spend management system automates invoice review so data is inputted consistently and has robust reporting tools for all stakeholder needs.
Legal spend management software empowers the legal department to make their own decisions around cost control, without blindly cutting budget in a way that may be detrimental to the business. At the same time, finance has access to the higher-level figures and KPIs that they need either through the legal spend management solution or a seamless integration between that and the AP system.
In order to deliver greater financial benefits to the business, finance and legal departments can put in place Key Performance Indicators (KPIs). These KPIs can be presented in a dashboard within the system, or sent by email to stakeholders on a regular basis.
KPIs worth considering include:
- Total cost of services (inside and outside)
- Legal spend as percentage of revenue
- Budget-to-actual total spend comparison (e.g., percent handled within budget)
- Outside expense versus in-house
- In-house lawyers versus revenue
- Cost per matter
- Cost per lawyer
- Spend after implementing e-billing compared to spend without.
Having one source of truth ensures all relevant data is held in one place. It means higher data quality, with more data available for better analysis and more reliable reports. There is greater transparency and all the information is readily available for the finance department.
Finance and legal: working together
With the increased pressure on legal departments to improve efficiency and control costs, legal spend management software quickly generates savings that pay for the investment so is a popular software purchase for legal operations managers. The benefits of legal spend management software are directly related to reducing costs so it’s easy to prove return on investment quickly.
The best way to improve legal operations to benefit the wider business is by eliminating cost surprises, wherever possible. Given the open-ended, unpredictable and sometimes urgent nature of many legal matters, it’s unrealistic to expect that everything can be accurately forecast. But steps can be taken to minimise the variables, improve the value, and help control overall spend, including some measures available through legal e-billing.
With a legal spend management software solution in place, legal departments and finance departments no longer need to be at loggerheads. In fact, the transparency between the two can only be of benefit to the business. Legal spend management improves reporting and forecasting, helps teams make smarter and more cost-effective outsourcing decisions, provides greater spend visibility as well as facilitating the negotiation of volume discounts, highlights and reduces errors such as overcharging by outside law firms and minimises risk such as exposure or gaps in legal counsel. By working more closely together, both departments not only support each other but also bring greater financial benefits to the business. In anyone’s book, but especially in that of the CFO looking to deliver cost savings across the business, that’s a win-win.