Continuing with the theme of goal setting for the in-house legal department and my sample goals (see January 8 post), this week I will focus on this goal: “Meet Budget Target for 2015.” No in-house department is immune to cost pressure. After taking care of your team, nothing is more important than being able to successfully manage your outside counsel spend. As I have said before, the legal department is a cost center and the business is always looking to cut costs. That’s why it is important for you to be on top of what you spend with outside counsel (or vendors). 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 (and the CEO) go much easier. In-house lawyers who run their matters, teams, or department like a business have more credibility at budget time –- and during those really tough times when the business is looking for more difficult cost cutting measures.
This edition of “Ten Things” will focus on some things you can do to reduce or better manage outside counsel spend. One thing you will want to do up front is establish some metrics so you can measure success, e.g., “reducing total outside counsel spend by a certain percentage” or having “all legal spend come in at an average hourly rate of $X.” You can either use your own data for whatever metrics you set. For fee-based metrics you can also pull it from court fee requests available on PACER or you can buy data about average hourly rates by city by type of work from several sources. With that background, here are some ideas:
- Use a monthly “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 in the most useful format (and require your outside firms to include new or different information), but doing so should not be a show stopper. If you don’t have an e-billing system (and we did not in my last job), 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 we would ask all of our outside counsel to tell us: a) what did we spend in April (the preceding month) and b) what do you forecast we’ll spend in May? The Excel spreadsheet captured all of this data over the course of a 12 month period (with a running total showing how we were doing against budget overall). Additionally, in the middle of the month we would go back out to our outside counsel and ask if anything changed in the forecasted spend. This gave us a very detailed (and accurate) look at spending. This is different than a “project” or “case” budget as those focus on the entire cost of that matter (which is important as well but not always useful in the short term). A monthly budget forecast gives you precision and allows you to exercise proactive reductions in spending if necessary. It also causes you to talk more with your outside counsel about what is driving costs. My experience has been that outside counsel are happy to discuss spend and ways to reduce it (they would rather have those proactive discussions vs. an unhappy client).
- Agree with senior management 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 on that deal. Likewise, you may want to charge trademark searches to the marketing department to help drive efficient behavior. You will still need to be on top of all legal spend (whether it hits your budget or not) but being clear on what hits your budget gives you better ability to actually manage the spend you will be measured against.
- Use alternative fee arrangements.There are a number of ways you can go with this angle. Some of the ones I used 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 (see above)
- Retainers (i.e., a set amount paid monthly for a negotiated set of services from the firm)
- Blended rates – one fixed rate that covers partners and associates
- Fixed fees for specific projects (contracts, litigation, patents, trademarks, etc.)
- A percentage contingency 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.
- 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, in some agreements we had 0% rate increase for first 18 months than the hourly rates could not go up by more than 3% thereafter in any given 12 month period)
- 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
- 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
- Limit use of first year lawyers – I was a first year lawyer once. One thing I remember pretty clearly: I didn’t know much. Basically, I don’t want/need first year lawyers on my matter. If the firm thinks they need first years then either substantially discount the rate or, better yet, let the first year tag along for free. A flip-side idea is to get free summer associate time for simple but time consuming projects
There are many more ideas here. You can mix and match the above or be more creative (and this will likely be a future “Ten Things” topic).
- 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 move work, be sure to get free hours from new firm to get up to speed on the matter.
- 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. We created a list of quality “niche” firms and made an effort to push a certain percentage of our yearly legal spend to those firms. We created the list from our own experience 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. One niche firm described themselves as 5-star lawyers for 3-star price.
- Use (and try to stick to) outside counsel guidelines.If you do not have an outside counsel billing policy, put one in place quickly. 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 policies I created stated we did not pay for online research (e.g., Lexis or Westlaw), and we did not pay for car services or food unless someone from the company was present or it was cleared in advance. Also, we reserved the right to reject any bills we did not receive within three months 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 online with a simple search.
- Get RFP/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 documents online. Sometimes you can a firm you prefer to match the rates offered by a competing firm. 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. Likewise, 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.
- Get to mediation fast. Ninety percent of litigation settles, why wait two years with your wallet hemorrhaging? Consider if it makes sense to see if you can get the other side to agree to mediate early. Another trick: Use the phone. I can recall several times where there was a dispute pending and I simply picked up the phone and spoke with either an in-house lawyer or outside counsel on the other side and worked out a quick resolution. If you go this route you can create some simple decision trees to help you analyze where you think a case may go if it goes to trial (including the cost of trying the case) and use that to help set your settlement authority for the mediation. Finance folks/business folks like decision trees because it gives them something concrete on which to make decisions (and it gives you a more reasoned basis for any recommendation you may make).
- 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 email 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.
- Create a monthly (or quarterly report) showing savings. At some point you will want to show the CFO or CEO (or the GC) 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 showing cost savings (monthly or quarterly is best). On this one 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 you plan to get back to budget). We did this in the spreadsheet I mention above;
- 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, or settled under settlement authority. Primary attorneys fees
- 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 depo prep, that is a huge cost savings
- “Money In” – this was always my favorite because I got to highlight legal as a “revenue generator” vs. a cost center, i.e., 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
You can also get your outside counsel to help quantify savings (they will be happy to show you ways they are cutting costs!). I know a small innovative firm that is already creating reports like these for its clients – exactly the type of information general counsel love to have. Also, get your team involved. If people get excited about the process of saving money the entire process starts to snowball in a good way. Ask your team for their ideas–both in terms of cost saving ideas and how to measure/report. Set up a big board or something to show costs saved (and if you hit a certain target there is a small reward for the team such as a lunch out, or an afternoon sneak away to the movies).
I am only scratching the surface here. There are dozens of other ways to save costs, but I need to stop writing or else my blog will turn into a slog. Also, nothing is in stone. Not every situation lends itself to cost savings or easy management of outside counsel. Some cases or deals are just too complex, too important and too risky. The circumstances will matter, so don’t feel bad if you just have one of those deals or cases that doesn’t fit. If you have any other ideas you’d like to share with me or readers of this blog, please feel free to post a comment.
(If you find this blog useful, please pass along to colleagues or friends. “Ten Things” is not legal advice or legal opinion. It is intended to provide practical tips and references to the busy in-house practitioner and other readers. You can find this blog and all past posts at http://www.TenThings.net or www.sterlingmiller2014.wordpress.com)
January 22, 2015