As noted in Corporate Counsel earlier this month, despite intensifying budgetary pressure to ‘do more with less,’ leaders of law departments remain skittish about negotiating outside counsel rates. That, combined with many law firms’ recent post-COVID rate hikes, makes it seem nearly impossible to hold the line on (to say nothing of reducing) outside counsel spend. Yet, hard evidence demonstrates that several simple steps can help significantly reduce spending on law firms—and even provide data to leverage in pushing back against law firms’ rates.
Recent reports substantiate that most law departments face the triple whammy of more work, flat budgets, and higher outside counsel expenses. As of this fall, two-thirds of law departments are handling higher workloads, and 60% face a budget freeze or cuts. Meanwhile, last year, outside counsel rate increases reached as high as 10.8%. With law departments spending roughly half their budget on outside counsel, that means a hefty financial impact.
The good news is that a holistic approach to outside counsel spend can save substantial money. In the case of a global coffee retailer, savings totaled over US$1M in two years. For one international technology company, the figure was US$900K in one year. With annual corporate spending on outside counsel averaging US$42M, those numbers are hard to ignore.
The savings come from myriad sources. Among them is improving billing practices to ensure compliance with Outside Counsel Guidelines, spot and remedy incorrect, inaccurate, and non-compliant billing entries, and detect trends in legal spend early on, before the budgetary consequences become acute. (As we have previously noted on this blog, improving billing practices helps to strengthen relationships between law departments and their outside counsel.)
Other impactful actions include:
- Eliminating inconsistencies in billing rates. For various reasons, some law departments pay different rates for the same (or nearly identical) work. Identifying such instances creates opportunities for savings.
- Ensuring a single rate per timekeeper. Savings also result when a law department makes sure a firm only charges one rate for a given timekeeper.
- Enforcing volume discounts. Especially in law departments with decentralised activities and no easy way to aggregate billing information, volume discounts can go unrealised. Obtaining a bird’s-eye view of legal spend means a law department does not pay more than it should.
- Reducing rate structures to achieve greater operational efficiency and time savings. Not all savings come directly from a law firm’s rate itself. By paring down rate structures (in the case of one company, from more than 200 to just six!), a law department’s eBilling operations become more efficient and take less time. This allows attorneys to spend more time on higher-value work.
- Initiating a Rate Management Programme with outside counsel. Such a program includes centralising rate negotiations, establishing a rate benchmarking methodology with metrics, and creating a standardized framework for assessing future rate increases. Armed with a consistent approach to evaluating firms’ attempts to raise rates, a law department can respond in a uniform manner and have confidence in standing its ground on rates.
- Matching matters with legal service providers based on cost-effectiveness. Law departments should routinely examine their roster of matters for work to reassign to a more cost-effective provider (i.e., one that has similar expertise, comparable work product, and lower rates than the incumbent provider). Scoping (and re-scoping) matters and staffing (and re-staffing) them appropriately will help control costs and increase productivity over the long term. Whenever a law department has large sets of similar, routine matters (e.g., subpoena responses, routine contract renewals, executing standard NDAs, etc.), the savings can be considerable.
There is no magic bullet to address the 'perfect storm' law departments face around workload, spending, and outside counsel rates. But a multifaceted approach pays sizeable dividends, with immediate savings that persist over time and across a wide variety of outside counsel activities. Especially in today’s environment, getting a handle on outside counsel rates should not wait.
Despite the 'perfect storm' of higher workloads, flat budgets, and law firm rate hikes, law departments can significantly reduce spending on outside counsel with several simple steps.