Article by Joe Calve
Thomson Reuters recently released the first edition of a new semiannual report focused on legal department operations. It’s called the Legal Tracker LDO Index Benchmarking & Trends Report, which puts it squarely under the company’s e-billing and matter management brand, Legal Tracker. (Tracker evolved out of Thomson’s 2010 acquisition of Serengeti and has become the most widely used e-billing platform in the world.)
The LDO Index, which uses matter data from 1,000 legal departments overseeing more than $71 billion in annual spending, is complemented by a survey to which 161 legal departments responded. Thomson says it launched the index and survey in response to customer demand for “deeper insight” into the evolution of legal department operations. While some of the report has a certain johnny-come-lately feel to it, there are some intriguing data points awaiting those who dig in.
Thomson first asked law departments to identify their level of sophistication on a spectrum ranging from “chaotic” to “predictive.” More than half the departments self-identified in the middle, with an overall tilt toward the still-have-a-long-way-to-go end of the spectrum: chaotic (2 percent), reactive (21), proactive (58), optimized (12), predictive (7). Size is a big factor in sophistication. Four in 10 large departments (more than $50 million in outside legal spending or 50 in-house lawyers) call themselves predictive or optimized, while only 9 percent of moderate-size departments do so (and an alarming 21 percent call themselves chaotic or reactive).
Of course, bigger law departments have big advantages. Almost all – now 90 percent – report having dedicated ops staff, and 28 percent are adding even more. It’s these groups that identify themselves as more sophisticated in managing their external legal spend, with well over half mixing and matching various techniques, including billing guidelines, invoice audits, bill reviews and process management.
According to the report, total legal spend was basically flat, while spending per matter fell sharply. Two out of three companies reported an increase in legal work, which has not translated into additional staff. More than half the respondents report doing a higher percentage of work in-house, while just 28 percent have managed to grow in-house staff. This has led to a predictable uptick in outside counsel spending.
The data gets more interesting deeper into the weeds concerning “cost-control strategies” and “metrics and reporting.” Overall, law departments have wielded their considerable clout to “rein in” the average dollars spent per outside firm (down 0.6 percent to $176,034) and the average dollars spent per matter (down 8.1 percent to $16,623). At the same time, rates continue their inexorable climb. Fully 65 percent of law departments report rate increases in the last six months while a mere 4 percent saw rates decline.
These numbers suggest the Am Law 50, which saw the highest average rate growth, will continue to pull away from the pack. Even more interesting, the results show that the billable hour continues to rule the legal roost (a mere 10-15 percent of work is being managed under alternative billing arrangements). I wonder, however, how long that will hold. While some believe AFAs have a “design problem,” a number of in-house ops professionals have stated publicly that once they better understand the data, they will move as much work as possible to fixed fees and other alternatives. We’ll see.
It’s clear that the cost-control strategies currently being employed are having what Thomson calls “varying degrees of success.” The most common, according to the report, are moderate enforcement of billing guidelines (emphasis added), use of fixed/flat fees at the matter level, volume discounts, blended hourly rates and auto-reduction of invoice expenses. The most effective measures are auto-reduction, requiring matter budgeting, fixed/flat fees at the matter level and volume discounts. The least effective measures are the use of procurement policies and blended hourly rates. Among law departments who called their approach to cost control “sophisticated,” half the respondents said their most effective measure is strict enforcement of billing guidelines (emphasis added). Also cited were fixed/flat fees at the matter level and competitive bidding (including RFPs).
Dig a little deeper and it gets still more interesting. The LDO Index includes a table matching up utilization of particular cost-control measures with law departments’ view of their effectiveness. Moderate enforcement of billing guidelines towers over the pack at 70 percent utilization, while less than half of the departments cite it as the most effective measure. Among the measures seen as least effective, with the widest gap between utilization and effectiveness, is the use of procurement policies, which is used by 35 percent of respondents but is seen as most effective by just 5 percent. Other measures with single digits on the effectiveness scale are contingency fees (3 percent), outcome-based fee variations (5 percent) and speedy pay discounts (5 percent). Only two measures had a higher effectiveness than utilization rating: preferred provider panels (10 percent utilization v. 18 percent effectiveness) and strict enforcement of billing guidelines (34 percent utilization v. 38 percent effectiveness).
It’s kind of a no-brainer that strict enforcement delivers more bang for the buck than moderate enforcement. Still, it’s noteworthy that strict enforcement topped the effectiveness list of those departments that view themselves as more sophisticated in their approach to managing outside counsel. One reason may be that more sophisticated departments tend to be bigger and have more senior ops staff, which Thomson says better equips them to use cost-management strategies that require more oversight.
Finally, the report shows that law departments tend to gravitate to a small set of metrics for gauging the effectiveness of what they’re doing. The top metrics and their overall utilization (regardless of whether the department employs legal ops professionals) are: total spend by law firms (86 percent); total spend by matter type (68 percent); total spend by practice group (57 percent); number of matters opened and closed (48 percent); and savings from invoice review/reduction (46 percent).
A number of metrics widely used by more sophisticated legal departments see much lower utilization across the broader survey of all law departments. These include: average matter spend by firm, litigation exposure, spend-to-budget ratio, and cost of handling work in-house v. sending it to outside counsel.
One measure that garners a high level of press coverage gets among the lowest utilization marks from in-house counsel. That’s law firm diversity. For sophisticated departments, utilization is around 25 percent. Across departments in the broader survey, that number shrinks to a mere 13 percent. Interestingly, that’s the same utilization rate as “quality of legal outcomes,” which is also at the bottom of the metrics barrel.
To access the full report, click here.