Legal Spend Management - How to Minimize a Company’s Legal Fees
While legal teams typically take the lead in managing third-party legal fees, procurement can provide invaluable guidance to the legal department. As the goal of procurement is to optimize the spend, legal and procurement should work closely together to minimize legal costs.
Procurement has visibility into the spend, the budget, and methods of cost reduction that legal may lack. This is why procurement would be a vital asset in legal fee management, as they will be able to track legal fees and demonstrate to the legal department why they should be involved in contracting and monitoring outside counsel.
Understanding the Unique Dimensions of Legal Fees
It is essential to understand the unique dimensions of legal fees and how they are generated. These will include the following:
Timekeeper Fees - Labor fees for lawyers, paralegals, support personnel, etc. These will be on an hourly basis with set per-hour charges.
Expense Fees - Cost items, such as charges for copying, priority mail, travel, and legal research.
“Matter” Designation - The legal case or matters that the law firm(s) work on for a company. Each matter or sub-matter will have a budget agreed upon with FP&A in finance. Also, there will likely be a task code for each activity within the matter.
Here is an example of what an illustrative legal invoice charge (one month) for a timekeeper would include:
Timekeeper: Jane Danson
Matter #: 1456
Timekeeper Type: Lawyer
Hours: 3.5
Activity Task Code: Fact Gathering
Description: one on one with all of the subject matter experts
There should be a rate sheet for all timekeepers with an established hourly rate alongside a clear timeframe of how long those rates will be in effect. Also, ensure to limit any subsequent increases to notice and an agreed-upon formula. All expenses and expense limits should be clearly defined, such as restricting airfare to coach class and prohibiting hotel rates greater than a certain amount. You will likely not see an expense of an online research legal database, as this will be a monthly flat fee the law firm pays for all research. Lastly, look over all invoices and question anything that doesn’t look right or is too generic. It is easy for law firms to lay on fees without companies questioning it, which is why it is essential to look over all monthly invoices.
Implementing a Customized Legal E-Billing Toolset
Generally, a company’s invoice process does not support legal invoices. Therefore it makes sense to implement a customized legal e-billing toolset. The recommended approach for e-billing should include the following:
Legal Monthly Invoice From Supplier is Received - There is a standard legal invoice data format called LEDES (Legal Electronic Data Exchange Standard) that the law firm should use to invoice. The law firm will submit their invoice to you and will either be accepted or rejected, resulting in the potential need for hard edits.
Hard Edits - Hard edits are conducted when the invoice does not comply with the agreed-upon terms or if there are other disputes. The company will then reject the invoice and return it to the law firm, which the law firm will need to revise the invoice. The most common hard edits that arise are timekeeper rates exceeding the rate sheet, total matter dollar amount exceeding budget, expenses not allowed or exceeding the amount to be charged, and certain task codes not being allowed.
Soft Edits - Soft edits will not require as much time as hard edits, and usually will consist of tweaking a few areas such as printing and mail expenses, timekeeper hours exceeding 160 hours, and expenses.
Review/Approval - Once all corrections are made (if there are any), the invoice will then be submitted for review/approval to the matter owner (s) and ultimately to Finance. If Finance signs off on it, then we are good to queue up for payment terms.
One of the key benefits of an e-billing tool is that there is visibility to not only one particular invoice, but on all invoices to date for matters. Including the “to-date” cumulative charges will be critical to managing matter costs to ensure that your team doesn’t solely focus on the current monthly invoice but understands how the current charge fits into the overall budget. Here is an example of what that report would look like:
Matter: 1456 Start: 3/01/22 Last Invoice: June ‘22
Expenses:
Travel - $ 42,000
Mail - $ 500
Printing - $ 1,200
TOTAL - $ 43,700
Timekeeper:
Paralegal - $ 130,000
Ellen Stern - $130,000
Lawyer - $1,320,500
Jane Lester - $600,000
Joe Smith - $500,000
Nancy Fores - $220,500
TOTAL - $1,450,500
TOTAL - $1,494,200 BUDGET $2,000,000
And you can click on an item for drill down:
Joe Smith - $500,000
Task Code 3/22 4/22 5/22 6/22
-Discovery $100,000 $120,000
-Briefs $280,000
-Total $100,000 $400,000
As mentioned previously, it is critical to have a process to review all invoices and costs to ensure that they are legitimate. Simply signing off on each monthly invoice may not be adequate to validate that all expenses are accurate and legitimate.
For example, let’s say that print costs for a matter averages $1500 a month, which is fairly low and may not be questioned on each monthly invoice. Now eight months have gone by and you see your total print costs at $12,000. This is where you may think the print costs are excessive and question the law firm.
Let’s take a look at one more concrete example of immigration legal support spend for obtaining legal cards for proposed immigrant employees. The “matter” for immigration would cover each employee being supported for permanent residency. You need to review legal spend at not only every month but over the lifecycle of all spend for each employee. Items to check for are compliance with agreed rates and challenging any duplicate charges for immigration process steps that apply to each employee.
Taking Control of Your Legal Invoices
The legal team usually lacks having an invoice-review process in place and automatically signs off every month. The absence of review may correlate to billing amounts that exceed the agreement and do not correspond with an optimized approach to spend management. A key metric for lawyers to determine their compensation is billable hours, so this may cause behavior by lawyers to pad their hours, especially as you aren’t there to oversee the individuals day in and day out.
Educating procurement on the intricacies of legal spend will help demonstrate the value to the Legal Department of involving Procurement in the process. Legal may resist involving Procurement by stating that third-party legal spend is more about building relationships with lawyers, but that response ignores the two important reasons to involve Procurement. First, a proper budget leads to a better understanding of how the law firm intends to proceed; its strategy and its tactics. Second, legal spend needs to be optimized just like all other spend. Managing legal spend takes time and experience - which is why having the right people in place is critical. This is especially true for organizations that are just starting to look at legal spend.
Therefore, to best optimize legal spend and to better construct a budget that reflects the most optimal legal strategy and tactics, the company may seek outside expert support to oversee the establishment of your legal spend process.
Mike Glass runs GPC (Glass Procurement Consulting), a procurement consulting firm focused on optimizing a company's spend. Mike has worked in senior procurement management positions at NVIDIA, Google, Meta, Fitbit, and Flextronics. Mike would enjoy getting your insight on any procurement topic, feel free to contact Mike at mike@glassprocurementconsulting.com.
