Using Metrics to Control Costs.
A company, wherever situated, will eventually be subject to litigation, government investigations, fines, employee actions, class actions, commercial litigation, etc. In a sense, the cost of business is having to pay for resolution of legal matters and problems. However, that cost may be high. In order for a company to properly defend itself will require the use of law firms, especially in the United States. However, legal fees and costs can be onerous and excessive. The financial well-being of a company may depend upon how well it is able to manage outside legal fees and costs. A company may win a lawsuit but go bankrupt because of excessive legal fees.
As part of an overall Legal Risk Management ( LRM) Program, a company’s law department must implement processes to control, reduce, and manage outside legal fees and costs. By utilizing legal risk management tools (such as surveys, interviews, risk assessments, KPIs and other metrics) a law department or risk management department can proactively reduce its legal spend. Likewise, a law firm , to stay successful must also implement internal processes to contain costs or it runs the risk of becoming irrelevant as corporate law departments switch from famous brand name law firms that are very expensive to lesser known law firms that are just as capable but much more reasonable in fees. Some of the tools that a law department or law firm can use to contain costs are:
Tools for Reducing Legal Fees
Processes that can measure the performance of outside counsel
Processes that track legal costs and expenses
Use of KPIs that measure the Law Departments metrics
Creation of a contract management system, which standardizes contracts and forms
Negotiation of legal fee agreements with outside counsel
Use of outside billing guidelines, which prevent excessive billing by law firms
Use by law firms of metrics such as KPIs that measure the law firms’ performance
Conduct risk assessments to determine whether to settle early or not
Key performance indexes (KPIs) are an effective way to measure a Law Department’s metrics as well as use and effectiveness of outside counsel. It can also be used by a law firm to measure its performance such as turnaround time of matters, etc. I recommend a corporate law department to establish at least ten to twenty KPI metrics to get a good picture of the effectiveness of not only the law department but outside counsel. This can be reflected in the dashboard on your computer monitor. Typical examples would be:
Law Department’s total expense
Law Department’s total expense as a percentage of revenue
Number of active litigation matters
Number of new litigation matters
Number of closed litigation matters
Law Department’s fees for outside counsel
Total external spending on litigation matter
Cycle time to resolve claims
Estimated dollar savings through use of legal risk management tools
Percentage of legal matters that receive a management—specific post-mortem review
Law firms can use metrics too!
Law firms can also use KPIs to measure performance and help contain costs. Typical examples would be :
Law firm’s total expense as a percentage of revenue
Number of active matters in relation to revenue
Number of closed matters
Turnaround time for transactional matters
Number of attorneys per case
Number of hours billed per attorney
Number of hours spent marketing the firm per attorney
There are other KPIs to use, but the above metrics can be used to help quantify the number of litigation matters, average time to resolve matters, total legal costs, and savings through LRM processes. The more processes put in place to measure performance from a risk management point of view the better. KPIs not only measure and track the effectiveness and efficiency of a law department but can be used as a tool to improve the effectiveness of the law department as well as the typical law firm.
What law firms must realize is that law departments are being held to a strict standard by the CFO or CEO of a company. Companies are requiring in house counsel to be more efficient and cost conscious especially when picking outside counsel. Law firms that come up with innovative business oriented practices that help the company’s bottom line will become the preferred law firms. As businesses use more and more metrics to measure performance and cost so will law firms be required to do the same thing. Law is becoming less of a staid old boy profession and is becoming more of a dynamic business that is subject to all of the vagaries of business just as the law firm’s clients are subject to such vagaries.
What can law firms do to contain costs and stay relevant:
- Use the KPIs mentioned above
- Implement strategies to contain costs
- Focus on cost management
- Conduct early risk assessments
- Utilize plans for strict budgeting and staffing
- Do more with less
- Consider using alternative fee arrangements instead of hourly billing
- Use surveys to provide feedback from clients
- Work with in house counsel to contain costs
- Add value!
Times are changing. Not only are corporations taking more and more steps to contain costs but the law departments and ultimately the law firms themselves are being required to contain costs as well. Failure to contain costs will result in law firms becoming less relevant in a world that is flat and quite demanding.