In-House Legal Spend and Budget Strategy In Ten Points

Transcription

1 Presented: 37 th Annual Corporate Counsel Institute May 7-8, 2015 Dallas, TX In-House Legal Spend and Budget Strategy In Ten Points Sterling L. Miller May 7, 2015 Author contact information: Sterling L. Miller Dallas, TX (Twitter) 1

2 No in-house legal department is immune to cost pressure. After taking care of your people, nothing is more important than being able to successfully manage your outside counsel/vendor spend, including being able to accurately forecast legal spend. The legal department is a cost center and the business is always looking to cut costs. That s why it is important for in-house counsel to be on top of what you spend with outside counsel (or other vendors), and deliver consistently accurate forecasts. Being able to demonstrate that you are paying close attention to costs and that you are thoughtful in what you are spending and why, will make conversations with Finance, the CEO, and the Board of Directors go much easier. If not already, gone are the days when general counsel could explain forecasting misses and budget overruns with Legal s different or It s impossible to accurately estimate legal fees with so many variables or I cannot tell you in August what we re going to spend next year. More and more your business counterparts will expect the legal function to run like other parts of the business, which must also accurately budget and forecast spending in the face of numerous variables. Those GCs who succeed will stick around. Those that don t may not make it. This paper will focus on ten things you can do to reduce or better manage outside counsel/vendor spend and make the budgeting process easier and more predictable. 1. Get the data/develop your metrics. The most important thing you will need is data. Unless you can consistently get data (and understand how to analyze the data) you cannot truly succeed in the budgeting process. First, you need to know what you are spending. Second, you will need to have some idea of what s market. For the first, you will use your own data (made much easier if you have an e-billing system). For the second, many e-billing systems (e.g., Serengeti) provide access to market rates. You can also pull rates from court fee requests available on PACER 1 or you can buy data about average hourly rates 2 by city by type of work from several sources. 3 With this data, you will create key metrics so you can measure and judge success. How much are you spending? With whom? How much per hour on average? What is partner/associate ratio? How long will it take to resolve this type of matter? What is the typical cost for something like this? The list of potential metrics is long, so you will need to draw the line at a reasonable number of key metrics that support what you are trying to accomplish. 4 Like See and for lists of potential key metrics. 2

3 it or not, data analytics is becoming table stakes for in-house departments. 5 If you can successfully develop useful analytics, you can increase confidence in the legal department and its ability to operate as part of the business in a strategic fashion. Below are the results of a recent study regarding how in-house legal departments are using data analytics Building a Budget. As you probably know, it is not acceptable at most companies for the legal department to simply say for next year s budget take what we spent last year and add 5% for outside counsel fee increases. The expectation now is either some percentage reduction of what you spent last year (the blunt instrument approach) or start at zero and build up a budget based on matters in play and past experience (having historical yearly spend data by category is extremely helpful here). You should expect that whatever number you present in the second scenario will get cut as the budget process plays out. This is exactly what happens in other parts of the business, so trying to argue that legal is a special case will not get you very far. Under either scenario you need to understand how much you re spending and with which firms. You need to understand what if any increase in fees the firm is anticipating (and whether you can agree to it). You need an understanding of what work can be pushed off or avoided, and which work will be absolutely necessary. All this is necessary because it is highly likely that you will need to pull some levers to tap the brakes or worse reduce spending at some point in the coming year. You need to be sure that your outside counsel understands the pressures you face and they our willing to help you manage the spend to meet your goals (and if they are not willing, it may be time to think about bringing new firms into the fold). One of the most important internal relationships you will have is with Finance. So, it s important to have a budget planning conversation or two with the 5 id= &page=/legalresources/resource.cfm&qstring=show= &title=improving%20va lue%20through%20analytics. 6 See Huron Data Analytics Survey, Data-Analytics-Survey 3

4 CFO and frequent conversations with the Finance person responsible for legal. You will want to understand the pressures and concerns they have, and they should understand the pressures and concerns you have. This does not have to be a combative process. Rather, it s a chance to work together to figure how best to meet the goals of the company. If Finance thinks you are approaching the budget process in a business-like manner they will be much more likely to support your plans. You will find that certainty of spend is often even more important than total spend in the eyes of Finance. There will likely need to be trade-offs in terms of what the business may want vs. what can be delivered under the agreed upon budget. Make sure the CFO and the CEO understand where you think the priorities lie and if they agree. Likewise, they should understand where you will not be spending in the upcoming year unless money is freed up under the budget. This is the time to pick your battles carefully. Ultimately, legal is a staff group and needs to support the strategic direction of the company. It is okay to advocate for money to do X or Y and not for Z, but lay out the facts and the tradeoffs clearly and honestly. If the CEO and CFO decide that Z is more important than X or Y all things considered, then you will have to do your best to make it happen. You should also reach agreement on what s included in the legal budget and what s not. For example, the business may decide that M&A spend is not part of the regular legal budget and will be part of the project cost center and ROI for that deal. Likewise, you may want to charge some legal fees back to the business unit involved to help drive efficient behavior (e.g., trademarks). You will still need to be on top of all legal spend (whether it hits your budget line or not) but being clear on what hits your budget gives you better ability to actually manage the spend you will be measured against. 3. Track and update forecast monthly. You cannot wait until the end of the year to track how the department is performing vs. forecast or budget. Forecasting needs to be a monthly event with an eye toward calendar year and beyond. Use some type of budget tool to forecast and predict (and control) spend. If you have an e-billing system, this can usually be handled via features in that tool. You may have to modify a few things to get the information and generate data in the most useful format (and it may require your outside firms to include new or different information). If you don t have an e-billing system (and you cannot otherwise justify the cost), you can create a simple spread sheet that shows what was just spent in a month and the forecast for the next month. For example, at the beginning of May you will ask all of your outside counsel to tell you: a) what did we spend in April (the preceding month) and b) what do you forecast we ll spend in May? The spreadsheet will capture this data over the course of a 12 month period (with a running total showing how you are were doing against budget overall). Additionally, in the middle of the 4

5 month you should go back out to your outside counsel and ask if anything changed in the forecasted spend. This gives you a more detailed (and accurate) look at spending as something may have changed. An example spreadsheet is set out below. You can use the data from your spread sheets to build historical year-by-year spending summaries. This will, over time, will give you a predictable gross spend average to use for yearly planning, i.e., total spend and then spend by category (e.g., litigation, corporate, IP, etc.). If you are forward thinking, you can even use the spread sheet to capture average hourly spend with any one law firm (i.e., fees divided by billable hours = average hourly rate). You can then use this information to see which firms are giving you the best hourly rate and/or measure against market rates. Example of a Simple Spread Sheet Forecast Tool Note that the monthly forecast process is different than a project or case budget. A project focuses on the entire cost of the matter (which may span years). A monthly forecast gives you precision and allows you to exercise (in-year) proactive reductions in spending if necessary. It also causes you to talk more with your outside counsel about what is driving costs. Typically, outside counsel are willing to discuss spend and ways to reduce it (as they would rather have those proactive discussions vs. an unhappy client). 5

6 4. Cut spending: As mentioned above, you will likely face pressure to find ways to reduce spend every year. This can be a daunting task but if you are willing to make some changes (and the bigger the cut the more radical the change) it can be done: A. Use alternative fee arrangements. There are a number of ways you can go with this angle. Remember, at the end of the day you will need to have an arrangement that feels fair to both sides if you want to keep using the firm. Some ideas include: Discounted rate cards from firms for the lawyers you use most frequently. Discounts tied to the average hourly rate for your city you ll need data for this one. 7 Retainers (i.e., a set amount paid monthly for a negotiated set of services from the firm). Blended rates one fixed hourly rate that covers partners and associates. Fixed fees for specific projects (contracts, litigation, patents, trademarks, etc.). A percentage contingency fee/success fee i.e., the firm is paid by receiving a percentage of whatever is collected by your company in the lawsuit. But consider building in safeguards to limit the windfall effect, e.g., have different percentages apply at different points in the case or have a cap of 2x or 3x of actual billed time. A success fee simply means the firm takes a lower rate but gets a bonus based on certain outcomes. If the desired outcome isn t reached, the firm does not get the bonus and you get a lower overall fee. Cost sharing with other companies involved in your matter (joint defense, share expert costs, local counsel costs, translations, etc.). Cap on rates rates cannot increase by more than X% in any year or over the course of engagement (for example, a 0% rate increase for first 18 months than the hourly rates may not go up by more than 3% thereafter in any given 12 month period). o Watch out for class promotions which will raise rates as the attorney moves in lock step up the experience ladder. Volume discounts discounts off the rate as you hit certain spend thresholds with the firm. If you can, get the discounts to apply back to the first dollar spent vs. just the incremental spend over the threshold. 7 There are several sources of benchmarking data available to in-house legal teams. See, e.g., 6

7 Get a number of free hours per attorney for them to get up to speed on your new matter, e.g., 15 to 20 hours of up to speed time on the firm s nickel. Develop a sliding scale there is a debate about whether having a partner do some work that could go to an associate is a good deal because the partner will do it faster and better. Overall, when fees are charged on an hourly basis, it s better to have work assigned at the right level and that the firm develop attorneys at the right level to work on your matters (otherwise your bills go up almost without question as your attorney moves up the experience ladder). If there is some question, one idea (related to the blended rate) is to get a sliding rate meaning if the partner is doing work an associate could do (or a senior associate is doing work a junior associate can do), you get a different (lower) rate for those hours vs. the partner s normal hourly rate. Such a scale should drive better behavior in terms of applying the right resource but if not, or if the partner or more senior associate wants to do the work, you do not get penalized. Implementing something like this would take a bit of work and plenty of communication with outside counsel. Utilize a 45-day net pay you are seeing more businesses move to a 45 day net pay cycle for accounts payable. Putting your law firms on such a schedule will save your company money over the long run. Vendors don t forget to include vendors (copy, e-discovery, depositions, etc.) in your thinking. They are also willing to wheel and deal on fees, especially if you can direct volume their way. Do not automatically defer to whatever vendor the firm wants to use as you may have or be able to get a better deal. Litigation financing this is brand new area around legal fees where essentially you can monetize your claim by having a third party pay the attorney s fees and costs and then sharing in the result, if any. This relieves cash flow issues for you and creates value in terms of revenue for other projects and potentially favorable tax treatment. 8 B. Don t be afraid to move work to save significant costs. Nothing gets you cost savings faster than being willing to move work. If you are unhappy with the firm or simply made a mistake in terms of sending a low value project to a high dollar firm, move the work to a firm better suited for what you need and offering costs savings that justify the move. You may wish to give the current firm a chance to retain the work if they can match the cost savings. And, if you do 8 See Litigation Finance 2.0: A Primer, Finance-20-A-Primer 7

8 move work, be sure to get free hours from new firm to get up to speed on the matter. C. Use less expensive firms for certain types of work. Sounds pretty basic but you d be surprised how often you or your team will send matters to certain firms without really thinking much about the match between cost and complexity or risk. Be sure you (and your team) are sensitive to which work goes where and why. There may be reasons other than cost as to why you want to use a certain firm or lawyer and that s fine. Just be sure to have a discussion with your team about which firm should get the work. Not only will you make a better decision, you will start to train the next generation of department leaders about how and why to make such decisions. Create a list of quality niche /boutique firms and make an effort to push a certain percentage of your yearly legal spend to those firms. You can create a list from your own experience 9 or from speaking with colleagues at different in-house departments. A niche firm is typically a smaller firm that specializes in a particular area of the law and is usually staffed with lawyers who moved away from the larger firms, meaning you will get the same quality lawyer but at a significantly lower price. Additionally, there are other alternatives to law firms (big or small). Companies like Axiom, RGP, Counsel on Call, etc. have developed new models 10 using experienced lawyers to take spot projects on demand at significant savings vs. law firms in that same market. Another model is one where niche firms partner with larger firms and the niche firm handles most of the day-to-day (at their low rates) while the larger firm provides one or two senior lawyers who participate in planning and strategic decisions and, if required, first chair the trial. D. Review bills closely. If you have an e-billing system, it will automatically check the bills to make sure they are in compliance with any agreement/policies you have in affect. If not, you can do it manually. Reviewing bills closely will give you a sense for how efficient the firm is, e.g., are four lawyers doing the same task? Are there numerous status meetings are they needed? Are lawyers putting in clear descriptions of what they are doing or just a generic attention to file? Reading the bills (even quickly) will give you a lot of insight into the firm and if they are working the way you want and need them too. If not, pick up the phone and have a discussion about 9 A great way to get to know niche firms is to invite them to give a CLE presentation to your department. Not only will you see them in action, you ll free CLE hours and they will typically pay for lunch (and free food will definitely boost attendance). 10 See,

9 it. You will find most outside counsel are more than willing to have the discussion and explain what they are doing and why (and if it s not what you want, make changes). E. Early Case Assessment. You can save significant legal fee dollars by implementing a systematic early case assessment process. 11 The purpose of the process is to identify as soon as possible those litigation cases that should be put on the settlement track (including early mediation) vs. those cases that may ultimately end up in trial. Since 90% of cases settle before trial, things you can do to speed up that event (within reason) will reduce costs, both in terms of time and money. 5. Get it in writing. Hard to believe you have to tell this to lawyers but be sure to have your fee arrangements and expectations set out in writing (and ensure the writing is clear enough that if a third party reads the document they understand the agreement): A. Use outside counsel guidelines. If you do not have an outside counsel billing policy, put one in place. And be sure that you send it to counsel with every new matter and to counsel you use most frequently on a yearly basis. This policy will set out clearly, among other things, what you do and do not pay for. For example, the policy may state that you do not pay for online research (e.g., Lexis or Westlaw), and you do not pay for car services or food unless someone from the company is present or it was cleared in advance. Also, reserve the right to reject any bills you do not receive within three months (or some reasonable amount of time) of the work be performed. Nothing kills budget planning like getting a bill in November for work performed back in January. A policy will also help you in the event you did not get an engagement letter for the project. You can find a number of sample policies 12 online with a simple search. B. Get RFP 13 /Engagement letters. If you have the time, run a Request for Proposal ( RFP ) process where firms bid on the project. You will probably get better rates, and you usually get some free analysis of your legal problem as firms like to set out how they would attack the problem. You can find sample RFP 14 documents online 15 or you can d=40433&title=sample+document+-+wal-mart+outside+counsel+guidelines 13 For a good discussion of RFPs and alternative fee structures see oopenews&_lid=

10 create a simple list of things you want to know from the firm. Sometimes you can get a firm you prefer to match the rates offered by a competing firm in the RFP process. There is not always time to go through an RFP process or you may have other reasons for not doing so. That is fine as everything depends on the circumstances at hand. Also, engagement letters are more important than you might think. Be sure to get one for every engagement (or at least have a master engagement letter with your preferred law firms). Your law firm will likely take the first cut at the engagement letter. Review it carefully and don t be afraid to mark it up. The letter should clearly spell out any discounts or alternative fee arrangements you bargained for and be sure that your outside counsel policy trumps anything contradictory in the engagement letter unless otherwise agreed in writing. 6. Set expectations up front with outside lawyers. Face it, if you tell outside counsel you want something, they will move heaven and earth for you to get the answer. Problem is, moving heaven and earth is pretty expensive. Sometimes you just need a little dirt shoveled. Set your expectations up front with your outside lawyers. It can be a cap on the amount of money you are willing to spend (e.g., cap it at $5,000) or on the number of hours you are willing to pay for (e.g., no more than 20), or just making it clear you do not want a formal memo with the answer (an or highlighted copy of the relevant case will suffice). Make it clear that you only want so many lawyers involved ( one riot, one Ranger as we say in Texas). Doing these things will provide clear guide posts for counsel. And, of course, encourage counsel to come back to you if they think you need to spend more or get more people involved but make sure they know you expect them to justify why it is needed. 7. Project management. Much of the discussion above dovetails nicely into formal legal department project management. Project management has been used for years and years in business but is only recently starting to take root in the legal world. At its core, project management means that before undertaking a significant project, management spends much time planning the effort, examining alternatives and looking for efficiencies, proceeding only with a detailed plan and budget in place. These same principles transfer to legal work 16 and can definitely help with ensuring large projects (corporate or litigation) come in on time and on budget. Legal project management can be broken into five phases: A. Planning in-house counsel and outside counsel break the matter into key phases, documents, and tasks. They then narrow the scope 16 The discussion in this section is borrowed heavily (with permission) from Bill Kleinman, a partner in the Haynes & Boone Dallas office. Bill has posted several very useful documents on legal project management on his firm home page at 10

11 of work appropriately and efficiently allocate tasks between in-house and outside counsel. Costs are estimated for each phase. B. Publication the plan/budget is circulated to all of the attorneys (internal and external) working on the matter. Everyone knows the scope of work and the budgetary expectations. C. Monitoring billing task codes are assigned for each phase and outside counsel tracks time by code. Importantly, time is entered by Friday of each week. 17 Every Monday the lead outside counsel and lead inside counsel discuss the progress of each phase and the budget. D. Managing with data in hand, the general counsel can report to management, can modify the scope of work if necessary, and make the case if the budget needs to be changed. Outside counsel can manage work and potential variances from the budget (with time to correct or raise a concern as applicable). E. Assess after the project is completed, in-house and outside counsel review their performance against the plan and identify lessons learned and make refinements for the next time. While nothing but a flat fee can get you a 100% guarantee on price, the use of well tested project management principles should get you within a predictable range of spend for each project. It will take commitment on your part (and your team s part), and a solid partnership with outside counsel, to make this work. 8. Legal Operations/Technology. Welcome to the future. You will be hearing a lot about legal operations management over the next few years as more and more legal departments hire a dedicated person to manage budget, forecasting, outside counsel negotiations, technology, knowledge management, project management, contract/document management, and data analytics, among other things 18. The Association of Corporate Counsel estimates that at least 33% of the Fortune 500 companies have added legal operations managers to their in-house legal departments. And it makes sense. Taking these tasks off of the plates of the lawyers means more time for lawyers to spend on legal work (increase value) and puts professionals in charge of managing and implementing new initiatives. You can find operations management teams in just about any company, e.g., in the sales organization. This is simply taking that same concept and moving it into legal. Consequently, if you approach the business with the need for such a 17 A recent study reveals that outside legal bills can be up to 30% lower when attorneys enter their within three days of undertaking the task vs. the 18 day average, i.e., entering time closer to when the work was done often leads to more accurate (i.e., lower) billing. See 18 See for a broader view of legal operations management; and 11

12 person, they should understand the value of what you are proposing. Regardless, you should be prepared to show the expected value of adding a resource. Similarly, and among the more radical ideas to driving cost savings, you may consider moving the negotiation of law firm and vendor fees to a procurement professional. This is becoming more wide spread in the in-house world 19 and can drive tremendous savings, along with giving you more credibility with the business when it comes to discussing your spend and choice of law firms and benchmarking against the market. 20 Engaging a procurement professional does not mean you give up control over which firms you use. Rather, it lets a professional, armed with data, negotiate the best deal on fees. You will work in partnership with them to ensure the best firm and the best price. Effective use of technology will reduce costs and increase efficiency, as well as provide a set of data to mine for analytics. With respect to contract management technology it can even increase revenue due to better management of contracts you already have in place. 21 The key, however, is that your team must actually use the technology and thus it is critical to get buy-in and consistency in terms of use of the tools, the process/expectations, and to show your team the results. For example, if you could eliminate one hour per week of time spent by each attorney on mundane administrative matters that can be automated, you will add somewhere north of 40 hours of time per year that attorney can spend on high value work. That is basically an increase of one work week of available time per attorney per year. If you have eight attorneys on your team, that is the full-time employee equivalent of two months of extra availability per year. If you are not already using (or at least thinking about) key technology in the legal department you need to catch up quickly. Here is what I consider the core technology you need to explore/implement: A. E-Billing System B. Matter Management System C. Contract Management System (creation and storage) D. Legal hold/e-discovery tool E. Key Data Analytics Dash Board F. Legal Research tool customized for in-house lawyers (e.g., Practical Law, Lexis Practice Advisor, Westlaw General Counsel, etc.) 9. Assemble your team. You cannot accomplish all of this by yourself. You will need help. If you are really going to attack legal spend at your company, 19 See for more insight into the use of professional procurement and outside counsel fees See for discussion of value of contract lifecycle management (CLM). 12

13 the best plan is a systematic review of the department, work flows, outside counsel spend, benchmarks, technology, etc. The whole nine yards. To do this properly and to establish credibility for any changes (especially if they involve spending money to save money) you will want to consider an outside consultant to conduct the process. While you may initially recoil at the thought of having some stranger come in and tell you how to run your legal department, think about the number of times the different parts of your business have engaged third parties to help them re-think business process or strategic direction. It should be no different for the company s in-house legal department. Sometimes it really helps to bring in a third party with a broad view and fresh perspective who can see things you and your team may otherwise not be seeing. If done correctly, your department can see significant cost savings and better operations. For example, an e-billing solution typically saves around 6% 22 of the annual legal spend through better visibility into bills and costs. Depending on your outside legal spend, this can be significant money. Likewise, as noted above, removing or eliminating administrative tasks or unnecessary work from your attorneys (or other in the department) frees them up for value-add projects (e.g., more contracts/faster contracting process). Additionally, putting in professional vendor management/or vendor management principles will save even more money. Finally, you will have reportable metrics to share with the business leaders, not only at budget time but monthly just like the business units. You will have lifted your department into the 21 st century. You will also need to partner with your outside firms. More and more you will find they understand the pressures you face and are willing to change practices, re-cut deals, and present other creative ways to save money. It is increasing rare that any firm can simply say no thanks to a client looking to reduce spend. The most important participants will be the members of the department. Bring them in early and get them to buy into the why is equally important to getting them to buy into the what. When they understand the reasons and are treated as partners in the process, you can reduce resistance and increase utilization/participation. A simple formula is that every dollar saved in legal expenses drops right to the bottom line of the company which means it s available for a better salary and bonus pool. You can also tie some portion of yearly bonuses to success with adapting the new technology and meeting spending targets. Aligning actions with incentives can go a long way to ensuring your team is fully bought in on the steps necessary to affect

14 change. Plus, sharing the work, asking for ideas, teaching them the numbers will give you a more energized team and a deeper bench. 10. Create a monthly (or quarterly report) showing savings/forward thinking. At some point you will want to show the CFO and CEO (and your team) that your efforts at saving money are paying off. It will also keep you focused on the task at hand. Two easy things to do: a) track on a monthly basis how you are doing against your budget or forecast (and if you are tracking over that tells you it s time to start cutting spend somewhere); and b) create a short summary PowerPoint or dash board showing cost savings or scores on key metrics (monthly or quarterly is best). You will need to be both creative and conservative. Meaning, turn over rocks to show you are saving money but don t go so far that you lose credibility with Finance. Keep things simple and make sure you can reasonably support any assumptions or assertions you make in the report. The report can show things like the following: Spend vs. forecast/budget (hopefully running under and if not set out your plan to get back to budget); Cost savings based on using lower-cost counsel, or based on deals you struck to shave costs off standard hourly rates or savings on vendor costs; Costs avoided (legal), e.g., cost savings because you won the case, settled a case quickly, settled under settlement authority, or were able to bring in some material matter in-house that would have previously gone to outside counsel; Costs avoided (business), e.g., cost savings when management does not have to prepare and give a deposition or attend a hearing/trial because of things the legal department did. If the CEO does not have to spend 20 hours in deposition preparation, that is a huge cost savings; Money In this is important because, if appropriate, you can show legal as a revenue generator vs. a cost center, e.g., if you win and the other side has to pay your company, or pay your attorneys fees, or you were able to avoid paying a tax. Important contracts, M&A, litigation results that show what the legal spend is returning back to the company. You can also get your outside counsel to help quantify savings on their work (they will generally be happy to show you ways they are cutting costs). ***** As you can see, there is a path to reducing, managing, and controlling legal spend. It takes effort and dedication and lots of team work and communication. But, you can change the story, especially if you re not wedded to doing things the same as you always have. Ultimately, the narrative you want to be able to tell your CEO/CFO goes like this: 14

15 Legal is on top of the spend and we know where every dollar goes and why We can reasonably predict and forecast the spend and are able to adjust spend if necessary no surprises We have key objective metrics that tell us how we are managing legal spend and tell us how we are doing vs. market. We are using technology to increase efficiency in the department and drive down costs (while providing better and improved service) The entire department is vested in this process and we are teaming with others in the company, and outside counsel, to ensure best practices We will report our progress (good or bad) to you regularly Surprise is inherent in legal budgeting and spending. You cannot eliminate it, but you can begin to minimize it. When you are operating and communicating off of metrics vs. instinct, pursuant to a plan that is regularly checked and updated, you will go far toward establishing your and the department s financial credibility and value to the company. 15