Today, more than ever, in-house: Enables Legal in-sourcing. How Technology. Moving Matters

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1 White Paper Moving Matters in-house: How Technology Enables Legal in-sourcing Today, more than ever, corporate legal departments are bringing a greater volume of legal work back to their in-house counsel. While moving some legal work in-house as a cost reduction measure is not a new practice, the type of shift we have observed over the last few years points to a fundamental shift in the role of corporate legal departments rather than a short-term cost savings initiative in reaction to the ebbs and flows of corporate earnings. Ben W. Heineman Jr., senior fellow at Harvard s Law and Kennedy Schools and former General Counsel at GE, notes two critical trends for major companies in the U.S. in a recent Harvard Business Review blog post (The Rise of the General Counsel, rise_of_the_general_counsel.html, September 27, 2012): 1. The general counsel, not the senior partner in the law firm, is now often the go-to counselor for the CEO and the board on law, ethics, public policy, corporate citizenship, and country and geopolitical risk. 2. There has thus been a related, dramatic shift in power from outside private firms to inside law departments. In a recent survey by the consulting agency of Altman Weil, it was revealed that 38 percent of Chief Legal Officers (CLO) plan to increase internal budgets, while only 7 percent plan to make a decrease. At the same time, 29 percent plan to decrease the use of outside counsel and only 14 percent plan to increase it. Clearly, the desire to allocate more funds to internal staff combined with the fact that more CLOs prefer to decrease reliance on outside counsel shows that this change is real and happening today. Mitratech Holdings, Inc Mitratech Holdings, Inc. All rights reserved. 1

2 This has been witnessed in depth in our own client base. One Fortune 500 insurance client has been able to increase their internal case load to 25,000 open matters in-house and reduce their outside counsel spend by 27 percent in 2 years. The question is why now? What has driven or enabled these fundamental shifts? We examine four underlying forces driving the need for this change, and ultimately show how the rise of advanced Enterprise Legal Management (ELM) solutions is enabling these changes. Forces behind Corporate In-Sourcing Budget Cuts While the economy recovers from the latest recession, corporations are still looking for ways to reduce spending, especially in those areas not traditionally viewed as profit centers. Cutting legal costs continues to be an easy target for cash strapped organizations. In the same Altman Weil survey cited earlier, cost control and reduction was cited as the number one management priority of the legal department, ahead of even efficiency and quality and value of legal services. To anyone who has viewed or analyzed a large number of market research studies, that is absolutely astounding. Almost invariably, any statement involving value and quality rises to the top of a list of relative importance. However, what we are observing here is that GCs an increasingly strategic and business-minded role are stating that it is more important to simply reduce costs than to increase the value of their department to the organization in which they serve. Putting pure cost reduction ahead of value in any business context is very rare, but that is what is being observed here, underscoring the immense cost pressures organizations are putting on legal departments. Increased Regulations There are more new laws and regulations facing a GC or chief compliance officer than ever before. Anne Scheuerman, a legal coordinator in Genworth s Retirement & Protection business in Lynchburg, Virginia states, Legislation comes in from all 50 states and the federal government too. Last year, we had roughly 1,500 changes corporate-wide. I average 12 to 15 new laws per day. This incredible influx of legislation has shifted the emphasis of the legal department from the ability to react quickly to fires to being able to see the smoke before they happen and prevent them. In the former model, calling outside counsel to handle litigation was a luxury and helped corporate legal react to the business, often at a premium cost. In the new world of the GC, it s more important to understand the environment, risk profile, and experience working with the business, as well as have the historical data to proactively prevent future litigation and mitigate exposure to risk. In order to create effective policies, organizations must have detailed data on the time spent, dollars spent and outcome of matters related to different parts or books of regulation a practice that is impossible or, at minimum, incredibly difficult if most of that legal work is leaving the building. Increased Litigation Rising litigation is not exactly a new trend in the United States, however, due to such factors as the rise of NPEs (non-practicing entities or patent trolls ) and increased regulation, overall litigation is spiking rapidly. Again, this makes simply farming out all litigation increasingly expensive and untenable from a business perspective. In Fulbright s 9th Annual Litigation Trends Survey, 26 percent of respondents indicated that they expect the number of legal disputes their company faces to increase in the next year whereas only 6 percent expect it to decrease. Perceived Value of Law Firms Law firms rates and associated billings have always been the target of some skepticism from their clients, however that skepticism has turned into outright frustration and increased scrutiny in recent years as corporate clients have faced increased cost pressures from their business. In another astounding statistic, only 14 percent of U.S. respondents stated they were completely satisfied or very satisfied with their outside counsel on overall cost management (Fulbright s 8th Annual Litigation Trends Survey Report. Note: this data was not included in Fulbright s most recent 9th Annual Litigation Survey). It is difficult to imagine another product or service that would be in business if 86 percent of customers didn t feel like the supplier respected or managed their investment well. Technology as the Driver of Change Due to increased regulation, litigation and financial constraints, this is by far the most challenging environment for a GC in the history of corporate legal departments. However, these challenges alone do not enable the Mitratech Holdings, Inc Mitratech Holdings, Inc. All rights reserved. 2

3 corporate legal department to take on more work more efficiently and cost effectively. The emergence and rapid development of ELM technology solutions has enabled the shift we have seen in reaction to these challenges. When asked what they have done in the last 12 months to increase department efficiency, 64.1 percent of Chief Legal Officers selected greater use of technology tools, and 34.5 percent stated that greater use of technology tools yielded the greatest improvement in efficiency more than any other response. Moreover, our internal estimates indicate that around 70 percent of publicly traded U.S. organizations have a matter management system, the cornerstone of any Enterprise Legal Management system. Historically, in-sourcing had reached a glass ceiling of around 50 percent of total budget, meaning that most corporate legal departments still must spend at least half of their budget on outside counsel fees if not much more. In a recent Mitratech survey of clients and prospects, corporate legal departments indicated they were spending 48 percent of their total budget on internal expenses versus 52 percent on outside counsel fees. The rapid development of ELM solutions, however, has created new tools to tackle these challenges like never before, shifting the balance of power, and of work, in-house for the foreseeable future and likely pushing the in-sourcing threshold well through the 50 percent mark. Three Technology Pillars to Effectively Handle More Matters In-House If your organization is looking to bring more work in-house, take a look at your existing technology solution (or any new technology solutions you are evaluating) and see how they stack up on the pillars below. Based on research and interviews with a number of clients and industry leaders, we have identified the core capabilities and benefits necessary to optimize the balance of in-sourcing and out-sourcing, ultimately driving efficiencies, cost savings and better business insight in your legal department. Decision Analytics The first question that usually comes to mind from legal department management is what should we in-source? This inevitably leads to a flurry of other questions that, in the past, have been hard or impossible to answer, often making the risk of in-sourcing too great and perpetuating the when in doubt, farm it out mindset. Decision Analytics Check List : Are you able to quantify the number of matters associated with various departments or groups within your organization? Can you calculate current utilization of in-house counsel to understand current bandwidth and capacity by practice group? Do you have documented the areas of expertise for all attorneys employed? Are you able to report the following metrics by certain matter criteria? - External attorney fees - Outcome - Internal Time and Costs - Cycle Time Can you compare similar matter types when handled internally versus externally? Can you track historical caseload by matter type, category or line of business? Can you track historical workload by task type? However, ELM solutions have aggregated key legal department data and allowed for the powerful analysis of it to answer the following questions, which we have found to be consistent for clients who are looking to move more matters in-house. All of these questions are necessary to answer when a business decision maker decides to move a book of matters or tasks in-house, and ELM solutions are uniquely capable of aggregating and reporting on such questions when deployed correctly. What departments currently have legal needs? Can you quantify the number of matters associated with various departments or groups within your organization? What are your current resources? Can you quickly calculate your current utilization of in-house counsel to understand current bandwidth and capacity by practice group? What is the knowledge base and expertise of your attorneys? Do you have a repository of areas of expertise for each in-house attorney employed? When a new matter comes in, can you quickly gain insight on previous matters that had a similar profile? Mitratech Holdings, Inc Mitratech Holdings, Inc. All rights reserved. 3

4 Can you search all historical matters to identify other common matters and report on the following metrics? External Attorney Fees Outcome Internal Time/Costs Cycle Time How much does it cost to handle a matter of any type internally versus externally? How consistent are matters of each type in terms of frequency? Are they extremely volatile, or is workload relatively constant? How consistent are tasks of each type in terms of frequency? Are they extremely volatile, or is workload relatively constant? In a recent interview with an operations director for a Fortune 100 Financial Services Organization who has yet to finish implementation of their ELM solution, he stated the conversation [of outsourcing] is happening within our organization right now, but the biggest challenge we face is understanding the volatility of different matter types or activities so we understand what will be a consistent enough type of work to make hiring more in-house counsel a viable strategy. Without the analytics associated with ELM, it is difficult or impossible to make the decision to bring matters in-house versus outsource. Knowledge Management Related but different than the analytics capabilities you currently have or are evaluating is the area of Knowledge Management. Can your practicing in-house counsel effectively find, understand and utilize intelligence gathered on similar matters that have been handled in the past? Effective knowledge management capabilities can tip the scale of expertise in favor of the corporate legal department. An advanced ELM solution can house all previous memos, documents, matter information, financial information, attorney information and more, so you don t end up reinventing the wheel again and again. Strong knowledge management capabilities also create a virtuous cycle which reinforces itself. Bringing more work in-house offers your attorneys an increase in intelligence related to a greater breadth of matters, making it more likely that they will handle the next matter more efficiently and more effectively than outside counsel. Knowledge Management Check List : Do you have a strategy for storing and searching historical legal data? Is all of your legal information stored in one place, including documents? Can your attorneys and paralegals easily located matter files, or is too much time wasted searching? Is it easy to locate historical matter which may be similar to a current matter, or do you find yourself reinventing the wheel over and over? Can you easily find subject matter experts within your legal department? Perhaps the most important benefit of creating a knowledge management solution via ELM is the ability to identify and proactively manage risks or threats to your organization before they happen. Related to some of the NPEs litigious activity and the influx of new regulation, corporate legal and compliance groups need access to all data in order to analyze and act swiftly and decisively to enact new policy or provide good counsel to the executives of the business. Process and Workflow Optimization The final pillar is around optimizing workflows and efficiencies. As one industry analyst recently noted in an internal interview, Historically, the legal department has avoided the corporate efficiency microscope other departments have always been under. This last bastion of the old way of doing business is falling, and the fall is giving way to leaner, more optimized legal departments. This is enabling attorneys and other staff to take on more workload with the same or fewer resources, creating another value driver for bringing matters in-house versus outsourcing. Often, standardizing processes and workflows can be a very daunting task and potentially a barrier to technology adoptions. Many clients, when first evaluating an ELM solution, were unsure whether their operational model could be handled via a technology solution. However, a good ELM platform will provide the functionality and flexibility to match these workflows and maximize efficiency. Mitratech Holdings, Inc Mitratech Holdings, Inc. All rights reserved. 4

5 As Steve Harmon, Legal Operations Director at Cisco, notes, the appropriate workflow engine and technology environment can maximize the effectiveness of best practices in legal operations. I use the analogy of a golf club. If your swing is flawed, the best clubs in the world aren t going to make you better. However, a good golf club can maximize the effectiveness of a fundamentally sound swing. That s what our technology backbone has done for us here; maximize the effectiveness of the best practices we have identified. Conclusion In-sourcing is a powerful tool to drive efficiencies, gain insight, gain control and reduce costs within the challenging environment of today s corporate legal department. Although in-sourcing can provide significant benefits to an organization, it is but one tool to use to meet the ongoing pressures of increased caseload and decreased resources. Other practices to consider include the unbundling of legal services, better utilization of non-law firm LPOs, development of best practices in your operating model and using intelligence from an ELM solution to identify mutually beneficial rate agreements or AFAs with outside counsel partners. Only when used as one club in your bag of strategies can in-sourcing provide maximum value. Moreover, for some matters, lines of business or even entire departments, an outsourcing strategy may be the optimal choice. This is especially the case on matters that require deep expertise in a niche area or on matters which are extremely volatile or unpredictable. In this regard, it is important to understand the role of the decision analytics enabled from an ELM solution and use this data to inform the choices you make. Process and Workflow Check List : Do you have clearly defined matter lifecycles which are adhered to? How is that process overseen and automated? How are legal services requests submitted and routed? Is it automated? Do you have auditable, automated approval processes, or are they overly reliant on manual exchanges or ? Are budgets created, approved and tracked in a formal process? Do you have an automated bill review and approval process, or is it mostly manual? Do you have a process in place to funnel outside counsel requests? Can your outside counsel gain access to key matter and payment status, or are they too often asking your attorneys and staff directly? We expect that technological advancements combined with the external forces of increased litigation, increased regulation, budget cuts and the suboptimal value proposition of many law firms will continue to force corporate legal departments to increase their in-house resources and caseload. However, we also see law firms reacting to these changes and revamping their operating models, rate arrangements and overall value propositions to help their clients meet these challenges. We expect the law firm to continue to be a center of excellence and trusted partner, and we expect a new equilibrium to arise, albeit in a reality where more work is being handled in-house than ever before. About Mitratech CONTACT Mitratech Mitratech is the leading provider of Enterprise Legal Management solutions. Law departments from Fortune 500 companies and large enterprise organizations around the world rely on Mitratech to help them manage their core legal processes, as well as governance risk and compliance. Using Mitratech s TeamConnect platform, legal departments can automate and streamline their matter management, e-billing, legal hold, e-discovery and compliance activities, resulting in reduced costs, improved performance and increased client satisfaction. Available as an on-premise, hosted, or SaaS-based solution, TeamConnect can adapt to any organization s business and IT infrastructure requirements. Mitratech Holdings Inc Plaza on the Lake Suite 111 Austin, TX info@mitratech.com Mitratech Holdings, Inc Mitratech Holdings, Inc. All rights reserved. 5