In Search of Predictable Legal Budgets:

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1 LexisNexis CounselLink WHITE PAPER SERIES In Search of Predictable Legal Budgets: GCs Seeking Useful Analytics to Make Best Possible Decisions by Kris Satkunas Consider this hypothetical exchange between a General Counsel and the CFO of his company and see if it sounds familiar: CFO: GC: When I ask you for a forecast of what you think you re going to spend, you always exceed what you tell me. Every other cost center in our organization is able to predict their expenses within a reasonable degree of accuracy. Can t you manage what you spend? Matters are unique. It s not possible for me to know how much a matter will cost this year when we ve not had a case like this before. I need to manage our exposure and though you don t see it, our department is actually saving you money by managing risk.

2 According to the research we ve conducted, this is a fairly common exchange between General Counsels (GCs) and members of their organization s management team. Discussions of this nature are illustrative of the increased pressure GCs are facing to prove their value to the other executives in the company. In fact, a recent LexisNexis survey conducted by ALM Legal Intelligence found that a whopping 94% of U.S. in-house law departments feel pressure to demonstrate value within their organization. The survey found that the most common pressure points are with demands to reduce spending on outside counsel (78%), followed by reduction of risks (65%), reduction of law department budget (64%) and forecasts of future costs (60%). Interestingly, the survey found that this pressure to demonstrate value cuts across companies in every industry and in organizations of all sizes. The message to today s GC is clear: it s no longer sufficient to be a great corporate lawyer, it s now a job requirement to be an effective business manager who can also communicate the value of his/her legal department to the company. Unfortunately, many GCs feel ill-equipped for this challenge. They know they should manage by facts rather than gut instincts but they don t know if they have the right facts, nor the ability to mine and aggregate those facts, at their fingertips. In this paper, we ll provide examples of how data should be mined to create powerful analytic tools and relevant metrics, how analytic output can be used to improve decision making and departmental results, and how analytics can strengthen the relationships between inside counsel and outside counsel and GCs and his/her peers. Please read on to understand how a GC empowered by analytics could have been better equipped to respond to the question from his CFO. 94% of U.S. in-house law departments feel pressure to demonstrate value within their organization. Importance of Analytics for GCs In speaking to GCs from coast to coast about the importance of analytics, we ve learned that a recurring theme is their desire to categorize similar legal matters together for purposes of tracking outcomes and costs. What it boils down to is that GCs are looking for specific analytics that can offer quick answers to a few basic questions. These questions include: How long should this kind of matter (e.g., lawsuit, joint venture, etc.) take to resolve? How much should this kind of matter cost us to resolve? What are the signals that a specific matter is going beyond the predictable norms of time and expense? We have found these conversations fascinating because what they suggest to us is that GCs are not seeking analytics in order to slash their legal department costs or to find new ways for grinding their outside counsel into taking budget reductions. The search for better analytics is not about costs per se, but more about the predictability of costs. To be sure, today s GCs want to manage costs and contain expenses as much as possible most industry observers are all too familiar with the spiraling costs of litigation, including the spike in electronic discovery expenses, and are definitely trying to keep the lid on budgets as best they can. But while they want to achieve cost containment to the extent that it s practical, the key consideration for most GCs is to minimize surprises and better predict budgets. Page 2

3 Mining Existing Data to Produce Powerful Analytics For many GCs with whom we ve spoken over the past year, all of this discussion about their need for better analytics has often led to a show-stopping question: How would I even get this kind of information? Fortunately, the answer to that question isn t as difficult as you might think. It starts with the aggregation of data from many sources (e.g., e-billing, matter management, A/P, etc.) that is easily mined from existing software systems. The trick is in the organization of the data to index matters with similar characteristics though their lifecycle. For example, the lawyer or operations manager in need of the information requires the flexibility to get to information about matters like this, where this might be as straightforward as all Employment matters handled by counsel John Doe or as complex as Employment Law cases involving counsel from at least two law firms, in the state of Arizona, of significant reputational risk and multi-jurisdictional complexity. With the proper data mining of experience across e-billing, matter management and accounts payable, an analytics tool could quickly inform in-house counsel about: What each of those matters typically cost through each point of their lifecycle and how long they last, by comparing each matter to others of similar substance; Where each matter is within its lifecycle and whether key phases have begun, by examining data for each matter charge and what those charges covered; Whether the matter has shown any early indications that it is going to deviate from a normal matter of that nature, by examining key influencers on matter lifetime costs and outcomes (e.g., does having more lawyers involved early in a matter usually result in higher costs?); and What the expected total cost for handling a matter may be and what the expected costs through the current fiscal year may be, by factoring in data about where the matter is in its lifecycle and what its risk profile looks like. For instance, imagine one particular matter that has been active for 16 months perhaps a complex employment litigation case. The employment law counsel can see from looking at the information of other employment litigation cases that they typically last 27 months. He/she compares this matter to 75 other employment litigation cases over the last four years and sees that in its sixth month, its costs spiked well above the average cost for this type of work, and costs have continued to be above average. Armed with this kind of business intelligence, the in-house attorney wants to know what drove up those costs. With a simple click and navigation to another view from this summary, he/she can see that the number of depositions for this matter was more than twice that of other similar matters, and that this matter has had 25 percent more partner involvement than other typical matters. This type of knowledge would be powerful in at least four ways. First, the forecast for the rest of the year is now informed by the fact that this matter is an outlier. With six months left in the year and 16 months already into this matter, the empirical data suggests that by month 22 of a typical matter like this, the total expense would be around $30,000. But given that this matter has been running at about twice the cost of similar matters, without deliberate management intervention a more reasonable forecast would be between $50 and $60k. Page 3

4 This brings us to the second way analytics are practically put to use: empirical data provides information with which to better manage how the matter is handled going forward. The in-house attorney may want to investigate why this matter has 25 percent more partner work than in similar matters. Can the lawyer who has responsibility for this matter go back to the law firm and ask them to better leverage lower costing resources? Perhaps the matter s lifetime cost can be managed back to a normal $30,000. Third, access to this sort of analytics provides information that opens a dialogue with the law firm handling the matter. Imagine how powerful it would be for the lawyer who owns this matter to bring the similar matter averages to the law firm and ask them to explain why so many more depositions were really needed and why a partner was doing so much more work. Using facts to underpin this conversation changes the dynamic entirely. Fourth, the aggregation of data for similar matters provides a baseline to use for early case assessment when new legal matters arise. An analytics tool enables the lawyer assessing the new matter to narrow down to matters of like complexity, jurisdiction, exposure, etc. This assists with pricing decisions, including making lawyers more comfortable with what fixed fee amounts might be appropriate and empowering lawyers to push outside counsel on establishing good budgets. As most GCs know, outside counsel are prone to suggesting that every matter is unique, and they can t tell exactly what something should cost. Analytics that inform early case assessment would become pretty powerful tools for communicating that you ve had experience with matters like this in the past, and the range of costs is consistently between X and Y. Conclusion Now, think back to the conversation between the CFO and GC. What if that GC had the power instead to give a response that was backed by information about what matters of this nature will most likely cost, both within his organization and at other organizations? Imagine how this changes the relationship between executives, and builds credibility for decisions made by the GC. Instead of a frustrating dead-end exchange, that conversation might go something like this: CFO: GC: When I ask you for a forecast of what you think you re going to spend, you always exceed what you tell me. Every other cost center in our organization is able to predict their expenses within a reasonable degree of accuracy. Can t you manage what you spend? Going forward I am confident that our forecast is going to be reliable. We ve found that 76% of our active matters have predictable costs within a tight band. The remaining matters are outliers toward which we are redirecting significant management time to keep under control. There aren t going to be any surprises in costs coming from the legal department. The GC making this statement has shifted his mindset from reviewing reports about costs that have been incurred to now predicting, managing, and balancing costs and risk for the organization. Page 4

5 The good news is that the alarm has been sounded and legal technology companies are moving quickly to address this emerging need with the development of helpful software offerings. At LexisNexis, we ve developed a product offering called CounselLink Insight that provides statistics to customers based on a huge volume of benchmarking data. In addition, we ve launched an analytic consulting service that will help corporate legal departments obtain key data, and then convert it into meaningful and actionable information. The offering draws on LexisNexis vast expertise in turning data into analytics. These dynamic market offerings represent a giant step forward in helping GCs make sounder business decisions based on objective data and, in so doing, to ultimately demonstrate greater value to their corporate management team. About the Author As Director of Strategic Consulting, Kris Satkunas leads the LexisNexis CounselLink team s efforts to advise corporate legal department managers on improving operations with data driven decisions. Kris is an expert in managing the business of law and in data mining. Areas of expertise include matter pricing and staffing, partner compensation, practice area metrics and scorecards. Prior to joining LexisNexis CounselLink team, Kris honed her legal industry knowledge by advising and consulting with leaders in large law firms for over 10 years. Most recently she led unbiased data-based research efforts as Director of LexisNexis Redwood Think Tank. From 2000 to 2005, Kris managed Redwood s consulting efforts as director of its Analytic Services group. She has authored numerous articles and speaks regularly at legal industry conferences and events. Page 5

6 About LexisNexis CounselLink A robust, online solution for in-house counsel and their outside law firms, CounselLink integrates powerful matter and legal spend management, legal hold, reporting and analytics functions to fully leverage your legal investments. You can rely on the CounselLink solution to help you more effectively track matters, manage legal spend, protect the company from risk and more closely align your activities with those of the business. Learn More > LNCounselLink@lexisnexis.com LexisNexis, Lexis, Nexis and the Knowledge Burst logo are registered trademarks of Reed Elsevier Properties Inc., used under license. Other products or services may be trademarks or registered trademarks of their respective companies LexisNexis, a division of Reed Elsevier Inc. All rights reserved Successful Strategies for Increasing the Value of Law Departments, ALM Legal Intelligence, 2011