Each year CEB draws from the strength of its network to analyze the budgets of over 180 in-house legal departments with the intention of understanding trends across industry, revenue band, and complexity. As we reflect back on this past year, it’s worth looking back on what CEB has learned in analyzing legal departments’ budgets from over 300 different companies this past year (we’ve been doing this for a decade, so we’re homing in on some long term trends.)
Benchmarking budgets can help provide a solid business case for Legal and can garner additional point-in-time resources, but statistical analysis of what drives lower costs in legal departments will shape longer term strategic priorities. As we analyze legal departments with lower expenses than peers (which we use as a proxy for efficiency), here were some insights if efficiency is on the priority list for 2013, as it was for many GCs:
1. Perform more legal work in-house – It’s no secret, it’s just simply more cost-effective to have in-house staff do the work that we often ask outside counsel to manage. We’ve been advising clients to do this for a decade, in part because the budget data consistently show this to be true. Unless there’s major litigation involved, we typically consider the ‘ideal’ spend to be 40 percent outside spend/60 percent inside spend – many departments have this ratio reversed. There are plenty of good reasons, of course, to rely predominantly on outside counsel for specialized matters, but if your CFO is questioning costs in the department, bringing work in house systematically is a good way to start. Contact us to learn more about benchmarking your department’s budget.
2. Use Non-Lawyer Professionals More Often – Departments that have two attorneys per paralegal or non-lawyer professional can delegate more routine/administrative tasks and focus attorneys on their highest value activities. While our inclination may be to have our next hire be an experienced attorney, revisit workloads to think about streamlining certain processes (like contracts) and consider whether a non-lawyer professional can provide greater leverage.
3. Invest in Legal Operations Capabilities – The legal operations manager is an ascendant function in legal – 80 percent of large legal departments have them. These individuals are tasked with budgeting, technology selection, vendor management, and career development – all vital activities to manage costs and drive to greater outcomes. It’s hard to do these activities “on nights and weekends” and we can help you decide what the tipping point may be for your department. Are you a Legal Operations Manager? Join our LinkedIn Group
4. Invest Selectively in Legal Technologies – Matter management and e-billing technologies are becoming more commonplace across large legal departments and members express relatively high levels of satisfaction with those solutions. Document management solutions, more prevalent across departments, have less satisfaction (that may be because we don’t want to change our habits, not because the technology is poor.) The moral of the story – push forward with technology initiatives, but demand more from providers and don’t underestimate the workflow and change management requirements.
5. Unbundle Legal Services – Leading departments continue to pick apart the law firm service bundle, taking administrative or information-intensive activities away from law firms. Legal departments are most likely to use non-law firms for litigation work, and the proportion of legal departments using these providers nearly doubles to over 50 percent once litigation grows past 15 percent of the total legal budget. Although litigation is the primary practice area in which non-law firms are used, cost and quality reviews for these vendors are actually highest for other activities that are less commonly outsourced , such as M&A due diligence, legal research, and patent filing.
6. Focus on Litigation Matter Budgeting and Oversight – Litigation is often the largest area of the in-house legal budget and it’s important to budget for these costs and give them close oversight. However, there is huge variation in even basic litigation management techniques. The average company does not budget for roughly a third of its matters; and while a quarter of legal departments budget for all or almost all matters, just as many almost never create budgets. Interestingly, the average legal department is more likely to conduct early case assessment than to set a budget.
7. Use Smaller Law Firms More Often – Law firm size is the primary driver of hourly rates; it has a greater role in setting the price of legal services than partner experience, practice area, or even location (the second largest). We see larger companies reducing their reliance on large law firms in favor of midsized law firms (more than 50 but less than 500 lawyers) that also provide the expertise and coverage that permits them to consolidate their legal spending, in addition to seeking out high quality counsel at smaller firms.
8. Reduce the Number of Law Firms – On average, legal departments that consolidate a higher percentage of their legal work with their top-ten firms have lower outside counsel costs than peers in similar departments, even holding industry and number of jurisdictions constant. We may not like what our procurement partners tell us, but even there, companies that concentrate 98% of their costs in their top ten suppliers are most effective in reducing costs. Use our Real Rate Report to inform those decisions.
9. Be Judicious with Alternative Fee Arrangements – Although our research suggests that alternative fee arrangements are useful in reducing costs, the way in which legal departments administer and monitor fee arrangements is far more important than simply having them. Read more about what we say on Managing Outside Counsel.