Year-end Cost-Cutting Strategies for Legal Departments

Year-end planning with an eye on cost-cutting strategies for legal departments requires a look at historical data and a look ahead to forecast costs, anticipated matters, talent acquisition, technology procurement, and more.

One obvious place to explore cost-cutting strategies in the law department is with outside counsel billing and invoicing. Other areas to consider include law firm fees, RFPs, and the vendor selection process.

Manage a Higher Volume of Law Firm Invoices

Here’s what you can do now to help work through anticipated higher levels of work and generate some cost savings during the process:

• At year-end, prepare for increased volumes of invoices. Law firms recognize revenue on a cash basis. To maximize profits per partner at the end of the year in October and November, they will make sure to have billed their clients as much of the Work in Progress (WIP) as possible. This likely includes some older work.
• Be prepared in late November and December for calls from firms to check on where invoices are in the approval/payment process.
• Do all you can to train your invoice reviewers and approvers on your outside counsel guidelines. Customers that use a robust enterprise legal management solution can easily access a standard Rules Dashboard to see which invoice flags are more commonly overridden and by whom.
• Communicate expectations clearly. For example, if your guidelines state that you won’t pay for work billed more than 90 days later, train invoice reviewers to reject the charges or at minimum reduce the charges by 10%.
• Keep a close eye on invoice reductions during Q4 to make sure percentages don’t drop because reviewers don’t have as much time to question individual invoice charges.
• Monitor invoice aging more closely. Identify backlogs and ensure there are resources to clear them.

Cost-Cutting Strategies and Preparation for Rate Increases

Expect to see submissions for rate increase requests for the coming year from vendors during the last quarter of the year. Many law firms focus primarily on their year-end revenue push before turning their attention to submitting rate change requests.

Likely, there will be an increase in requests in January. Most larger firms with pricing professionals are hard at work to optimize next year’s revenue. That means legal departments looking at cost-cutting strategies need to expect rate increase requests at year-end and also in January.

To prepare, consider these suggestions:

• Centralize the rate review process. This helps gain greater consistency AND takes work off the plates of lawyers who are likely hit with a higher volume of invoices to review.
• There’s every reason to expect requests for very large rate increases. Legal demand in some practice areas has dropped, and Large Law share of wallet in the most active practice areas poses the highest rate increases.
• Whether the economy is in good shape or in fear of recession, the economic factor is a good indicator of what drives rate increases. To implement cost-cutting strategies in the legal department, keep an eye on the economy as a bellwether of what’s to come.
• Work with your finance team and general counsel to set criteria for acceptable increases that align with your budget, rather than the law firm’s budget.
• Use benchmarks. Again, legal departments utilizing an enterprise legal management platform can access hourly rate benchmarks via insight dashboards. Make sure you know how to narrow benchmark information so it’s as close to apples and apples as possible. Most importantly, try to find benchmarks for similar types of work and similarly sized law firms. Matter type and law firm size are the two variables most highly correlated to hourly rates.
• Don’t be afraid to push back and ask for creative pricing and staffing that will help your organization manage your budget goals.

Data Drives Cost-Cutting Strategies in the Legal Department

It’s critical not to wait until Q4 to analyze data in the legal department. Corporate legal teams that are mature use data to drive decisions, develop cost-cutting strategies, negotiate matter rates, set metrics, use technology to analyze financials, and much more.

Here are several areas of focus where data can help in cost-cutting strategies:

• Look at the performance of the legal department in all areas including vendor performance, litigation wins and losses, the make-up of the legal team, budgeting, and outside counsel retained. Analyze these metrics against a year prior to determine successes and areas for improvement.
• Use data to drive cost-cutting strategies in all areas and do so with confidence as numbers don’t lie. They can be twisted, but numbers tell the truth.
• Target legal spend because it is the biggest price tag in the law department. It is critical to know how much is being spent by practice area and by business unit on outside counsel spend.
• Besides legal spend with outside counsel, analyze the budget for in-house matters. Take a look at areas for cost-cutting within matters being managed by the in-house legal team. The analysis includes looking at the volume of expected matters versus available talent. Decisions to stabilize the legal department are made with these criteria in mind.

One of the most important aspects of legal department management and operations is the type of foundational software selected to optimize and automate functionality.
Law departments that select advanced enterprise legal management software have feature-rich tools that align apps and functions in a unified legal workspace. These tools enable the use of dashboards, scorecards and analytical reporting that produce data to drive cost-cutting strategies in the legal department. Reach us to learn more.