If I were the head of strategic sourcing for a company, and I wanted to try to endear myself to the legal department, here are some tactics I would consider (See my post of March 1, 2008: procurement with 17 references.). These offers to help do not go to the core of expense reduction, but they may ingratiate you, will certainly educate you, and might advance your cause.

1. Offer to analyze some of their data about what the department has spent on outside counsel during the past 2-3 years.

2. Check the match between the department’s guidelines for outside counsel and how bill review is actually done in the department.

3. Suggest that you might be able to give some insights into their budgeting process between core spend and spike spend that is unusual and impossible to predict.

4. Shadow the department’s next competitive bid, and suggest some ways to improve the process for the next one.

5. Interview law firms that were most recently retained for significant projects and ask their lead partners how the legal department could improve the retention process.

6. Conduct a comparative study of effective billing rates and allocation of work among different levels of lawyers and paralegals.

7. Create profiles of the law firms used most by the law department.

My expectation that companies sue or are sued more during recessions found no support in a recent survey of 191 in-house senior legal attorneys. The LexisNexis CounselLink study, entitled “Effects of the Current Economic Downturn on U.S. Law Departments” 2009 at 8, shows the rank given 11 “effects of the current economic environment on law departments.” “An increase in litigation matters” came dead last.

The respondents chose reductions in budgets, accountability pressures, increases in transactional work, and other effects more commonly that more lawsuits. Three quarters of the respondents did not mark it at all. Litigation, therefore, appears not to be counter-cyclical, rising as revenues fall. The costs and risks of a lawsuit bulk larger as the cash register stills. Litigation being the largest component of outside counsel spend, general counsel would be fortunate if pressure to reduce costs finds a systemic solution.

Richard Susskind, a visionary of legal transformation, alerted me to his article in The Times. I quote his opening paragraphs:

“In a ground-breaking move, Rio Tinto is announcing today that it is outsourcing its legal work to India — triggering what is predicted to be an irreversible trend in the legal sector. The international mining group has concluded a deal with CPA Global, a leading outsourcing provider of legal services, and expects savings on its legal costs of up to 20 per cent.

It works like this: Rio Tinto is building a team of CPA lawyers in India who will operate, effectively, as an extension to its in-house legal department. That will free Rio Tinto lawyers to focus on more complex tasks. More ambitiously, on all assignments involving external law firms, Rio Tinto will ask these firms to pass tasks that can be done by lower cost lawyers to CPA people in India and elsewhere.

The approach has already been shown to work. A team of 50 CPA lawyers was assembled in under 48 hours to work with a US law firm on a document review for the Federal Trade Commission. This yielded savings of $1 million (£600,000).”

The press release of Rio Tinto adds more facts.

“Rio Tinto has hired a team of lawyers in India to try to reduce its annual £60 million legal bill by 20 per cent. … The Anglo-Australian miner, with CPA Global, a legal outsourcing group, has recruited 12 lawyers in Delhi to work for it on tasks such as reviewing documents and drafting contracts.

The unit is expected to double in size within a year and will save the company 20 per cent of its annual legal budget, believed to be about $100 million (£61 million). Rio has 100 lawyers worldwide and uses law firms such as Linklaters and Baker & McKenzie for external advice.”

The legal industry needs some prominent first movers to prod other legal departments to consider similar combinations of service providers and technology.

If the outside counsel budget is your responsibility, currency fluctuations can hurt or help you. If your budget is denominated in dollars, for example, when the greenback falls, your fees paid to Euro-based firms climb. At least US firms negate currency fluctuations.

Aside from the swings in budgets, foreign currency payments throw other wrenches into the gears (See my post of Sept. 5, 2005: currency conversion for invoices from international firms; July 17, 2005: currency complications and VAT; April 9, 2006: alliance of software vendor and first user to iron out the kinks; April 22, 2007: tangle of currency conversion; Nov. 5, 2007: current thinking on currency conversion; and May 11, 2008: conversion issues when you reconcile matter management system to accounts payable.).

A related idea is purchase power parity (See my post of July 25, 2007: PPP with three posts cited.) where a general counsel attempts to pay people equitably after allowing for costs of living in different countries.

“It’s a fact of life that more law departments are being subjected to audits by internal auditing functions, particularly reviews of law department spending and budgets.” This assertion, proclaimed with no quantitative support, comes from an excellent article on e-billing in the ACC Docket, Vol. 27, May 2009 at 58. The authors do state, however, that the Law Department of NSTAR Electric & Gas endured a “thorough internal audit,” but that single example does not support a statement that “more law departments” face audits.

During my consulting career of two decades, I have not taken part in such an audit, but the practice may well be common and increasing. Certainly, government legal departments face internal audits of their legal teams and processes (See my post of May 31, 2005: audit of Austin, Texas law department; Dec. 23, 2005: Pierce County (Washington) Prosecuting Attorney’s Office; March 26, 2007: Hernando County, Florida; May 19, 2006: LA’s Office of the City Attorney; Jan. 20, 2006: California Department of Transportation’s Legal Division; and Dec. 18, 2006: Amtrak.).

Other references to audits of law departments have appeared (See my post of Nov. 2, 2006: internal audits of tax departments; June 5, 2007: Kraton Polymers; June 10, 2007: internal audit of matter management system controls; June 26, 2008: internal reviews of matter management systems; March 11, 2009: internal audit leads to firing of general counsel; and June 4, 2009: expense audits.). There is even a book on internal legal audits: Fargason, Scott, Auditing the Legal Process: Improving the Efficiency and Effectiveness of Legal Counsel (Inst. Of Internal Auditors 2002)

Can readers offer other examples of what a legal department audit has tested?

A brief comment in the ACC Docket, Vol. 27, May 2009 at 18, set me to thinking about audits of disbursements. A long article on e-billing cites Idearc (formerly Verizon Information Services) for its adoption of an online system for processing bills from outside counsel. “They were able to show concrete savings by putting expense guidelines into place with their firms, which were enforced through the system, saving approximately $50,000 on expense audits during the first nine months” (emphasis added). The guidelines were enforced by rules in the Serengeti system.

I am not familiar with “expense audits,” but if internal or external staff pore over the disbursements charged by law firms and charge the legal group for that analysis, calculations of the ROI from e-billing should be able to count reductions in those charges. The rules set in the e-billing systems check on many aspects of law-firm compliance with disbursement guidelines (See my post of May 1, 2005: ebilling rules and savings there from; May 14, 2005: savings from e-billing rules; July 31, 2006: have to know how to set the rules and at what thresholds; Sept. 18, 2006: some of the rules; Jan. 23, 2009: a patent for an e-billing function with rules; and April 13, 2009: CAGR of e-billing implementations.).

Some metrics are available that tell us how frequently legal departments collect accrual data from their law firms. Not an accountant, my working definition of accruals are legal costs incurred but not paid by a fiscal-period cutoff date (See my post of Aug. 24, 2005: year-end accruals and their difficulties; Sept. 17, 2005 #4: accruals at one company at the end of the year only; Oct. 1, 2006: finance needs to learn known amounts due to be paid in the future; and Dec. 21, 2008: whether to submit accruals monthly.).

As reported in the 2008 ACC/Serengeti Survey (and published in the ACC Docket, Vol. 27, May 2009 at 52), 31 percent of the respondents to the survey accrue monthly, 31 percent accrue quarterly, and 16 percent accrue annually. Either the rest didn’t answer the question or they, the lucky few, don’t accrue legal fees.

From the 2008 ACC/Serengeti Managing Outside Counsel Survey, published in the ACC Docket, Vol. 27, May 2009 at 9, comes this finding: “[C]ounsel most frequently reduce bills for what they perceive as time not well spent for the following reasons (in decreasing order of priority): overstaffing at hearings/meetings, administrative work/filing/organization, time billed to the wrong matter, duplicate invoices and office conferences."

Two observations occurred to me from that sentence. First, a law department does not save money if time billed to the wrong matter is corrected to the right matter, although of course if the time billed were to some other client’s matter the reduction would be legitimate. Nor is there a saving from rejecting duplicate invoices, unless the law department commonly paid the same bills twice.

The second observation is that none of these reasons explicitly depend on an assessment that the value obtained by the client for work done was less than the amount billed by the firm. Over-staffing perhaps implies that one or more people at a hearing or meeting were superfluous, but the basis for the reduction feels more mathematical than substantive. “Office conferences” is too vague. Genuine reductions of bills ought to pivot on marking down legal work done poorly, inefficiently, or inappropriately.

Wired, June 2009 at 110, describes Google’s auction method, one which could apply to legal departments when they put work out to bid for a fixed fee. The winner of a competitive bid would be selected to do the work for one thousand dollars more (or some other pre-determined increment) than the bid of the firm with the next-lowest offer. So if firm A proposes to handle all your immigration work for two years for $300,000 and firm B proposes to handle it for $320,000, you pick firm A and award the work at $301,000. This method reduces the winner’s curse (See my post of Jan. 14, 2007: winner’s curse.) and is more likely to reach a fair price. This technique is often referred to as a “second-price auction.”

I have criticized auctions for legal work, yet I strongly back competitive bidding processes and the second-price variant. To reconcile my positions, I have to make clear that what I do not like are electronic, online, real-time auctions for legal services of any complexity (See my post of May 21, 2007: auctions with 7 references.). I favor market discipline and information for fixed fee arrangements.

Other kinds of auctions exist, such as Vickrey-Clark-Groves (See my post of Feb. 20, 2007 #1: expressive bidding algorithms for bundles of services; Feb. 1, 2006: “double auctions” that match seller and buyer rankings as well as “unique bid” auctions; and May 23, 2008 #1: combinatorial algorithm auctions.).

Since that metapost in mid-2007, this blog has dropped the gavel on several more auction items (See my post of Jan. 14, 2008: competitive bids and market cost; Feb. 16, 2008: few references to auctions proves their unpopularity; May 2, 2008: Esq.-harmony to match law firms and law departments; Dec. 9, 2008 #4: online auction by Intel for patents in 2006;and April 9, 2009: eLaw Forum and a massive competitive bid.).

For years people have told me that general counsel strongly value predictability of legal fees, even if that means higher fees. I have doubted that statement. I doubt it because the total amount spent during a year on outside firms is the measure, not whether the law department hit its budget number pretty closely or smoothed out its monthly payments.

But perhaps I underrate the adverse consequences to a general counsel of coming in either much higher or much lower than budget. It throws off the calculations of the financial department.

Predictability is good; budgets have a purpose and take on a life of their own; and management of amounts spent outside is a game worth playing well (See my post of Nov. 17, 2006: survey finds that predictability favors alternative fee arrangements; Nov. 13, 2006: claim by Eversheds that clients demand predictability; and May 2, 2007: e-billing may enable more predictability.).