In 1992, the Chairman of a leading US multinational, DuPont challenged the business to find cost reductions across the company of US$1bn. Their in-house corporate legal department formed a project team to see how they could play their part in expense reduction. What was proposed by the project team, based on established business practices, to reduce cost and increase productivity, became famous as the DuPont legal model.
This model is business focussed, founded on strategic partnering, based on the principal of constant process improvement, uses the best technology, and emphasizes efficiency and cost control. Many companies and legal departments have instituted the process over the years.
In-house legal counsel are under increasing pressure to demonstrate value by ensuring the appropriate allocation of resources and close management of costs. Pressure is greatest on external spend, with a large number of businesses under pressure to reduce or minimise legal costs.
The current economic climate is putting pressure on all companies to reduce expenses, not just legal costs. In large corporates, banks and insurers, legal costs are a significant spend as law firms are integral to their operations. Even if you are a small, one-off user of legal services, legal costs can still be significant when faced with paying the bills.
So the question is how can you achieve a demonstrable reduction in legal costs without leading a well-resourced and expensive project team through a complete reengineering of your business process and adding extra people?
4 ways to reduce legal costs
Agreeing upfront how much you be charged and for what
Most businesses small or large, have some form of procurement process, whether a procurement team who manage the end-to-end function, or preferred suppliers, agreed quality and pricing, purchase orders and an IT system that channels your firm’s procurement through a process. In many companies this procurement process is sacrosanct and may under no circumstances be circumvented. Yet when it comes to procuring professional services (like legal, accounting, consulting) this is often done on a very informal basis based more on senior managements’ personal network, than on a procurement process.
One of the lessons from the DuPont legal model is the use of established business practices like procurement. Matching your company’s legal requirements with the correct legal service providers – if for example the directors of your company are facing charges by regulators for financial irregularities, then the lawyers that should be engaged are those that have experience in dealing with regulators and have a practice specialising in this type of work. With the exception of the top tier international and national legal practices, most other firms of lawyers do not offer a one-stop service to clients. Most have 1 or 2 areas of specialisation.
How do you go about using procurement methodology and process to establish legal services? There are essential 2 ways; either through a formalised legal panel, or direct negotiations with a firm or several firms to provide specialist services.
Large users of legal services often have panels of law firms in place. Examples of these will be insurers or banks. The panel arrangements normally come about through a tender process that can either be open to all, or closed by invitation. In some circumstances the tender process can call firstly for expressions of interest from legal firms, then after a culling process where the unsuitable are excluded, then call for a closed tender from the surviving legal firms.
Preparation is key to a successful tender. Tender committees should have a full and transparent view of the business’s requirements. In large corporates the range of legal work can vary from merger & acquisition advice, contract law, management liability, litigation, legal collections, employment law, product liability, conveyancing and so on. These needs are often across various national and international jurisdictions. In these situations, the tender committee should have consulted widely with internal stakeholders to determine needs.
The next step is to determine what legal services are value-added and what should be excluded from the charges. An example would be whether you are prepared to pay for photocopying, or administration/secretarial services. Some businesses are not prepared to pay for legal research in some cases, as they feel the legal panel members should be experts in that field of the law.
This should be disclosed in the tender document to the prospective legal firms together with the estimation of the volume of legal work emanating from your business. Here volume will impact price, so to achieve the best outcome, it makes sense to be transparent up-front.
Another consideration that is normally released in the tender document, is the expected service legal agreements such as response times, billing arrangements and expected free value-adds such as training, or use of law library.
Panels are normally established after tenders have been rigorously reviewed to ensure the right firms with the skills and experience have been chosen. Once the panel is in place there is clarity for both parties. It is important to bring in some competitive tension between the firms on the panel to drive further value.
But what if you don’t want a panel or think that the volume of work requires one? You may just be a once a year, or once-off user. How do you go about procuring a similar arrangement?
Some of the steps under which panels are arranged are still important. Consultation with internal stakeholders to find out what type of legal services are required, what service levels are expected and also what services are considered value added. Then sit down with your lawyer or prospective lawyer and ask to see a copy of the law firm's standard engagement letter. Discuss the rates and services with your lawyer and come to an agreement to what you consider to be fair. Have it documented in the letter of engagement so it becomes binding between you and your lawyer(s).
What are the expected benefits for your business?
• A volume discount on list rates, or at least agreed rates
• Free value added services that you would have normally paid for, or additional services like training that your business needs.
• Agreed service levels
• Clarity of expectations between your business and the legal service providers
Ensure that only those law firms on the panel are instructed
Once you have established approved legal service providers (either through a panel or by negotiation), the business needs to exert some control over legal instructions and make sure that legal work is sent only to those approved legal firms where arrangements are in place.
Whoever it is that manages the legal procurement process in your business, establishing a legal panel is only the beginning and not the end of the process. It is of little use that unapproved lawyers still get work at rates that are outside of the agreed rates, or deliver service that is outside the agreed norms. Resist the pleas of those staff who just simply have to deal with certain lawyers not on the panel. "They understand me and how I work" "They know our business and I don't have to take time to explain it to a new law firm". We have all come across these people before who resist change even if it is to the detriment of the company.
There are several ways to achieve this:
Install legal vendor management software
that automates the end-to-end process, from assigning the matters to panel members, notes and controls the budget and checks the submitted invoices. LSG’s Advocator System®
is a great example.
• Centralise legal instructions through the corporate legal counsel’s office so control is exerted to ensure flow of work to approved vendors.
• Through an education process, make staff aware of the benefits and the process. At the same time communicate to staff that making use of legal services, which are outside of the arrangements will not be paid for by the business. Then instruct Accounts Payable only to pay those invoices submitted by the approved legal firms. By making use of the Unique Matter ID within Advocator System® to ensure that if the law firms invoice does not have this number, it will not get paid.
The benefits to your business through such a business discipline will be a decrease in legal spend
Articulate your instructions clearly and restrict them to what is essential
Despite having agreed arrangements in place and controlling the flow of work to approved providers, the most immediate effect you can have on reducing legal costs is to ensure your legal service providers are given clear and articulate instructions.
The most basic point to keep in mind is the hourly rate arbitrage between what your lawyer is charging you per hour and what staff in your business are being paid per hour. Only the most senior business executives are earning hourly rates equal to what solicitor’s charge.
Don't simply appoint the lawyer and ask them to take carriage of the matter at hand. Take time to detail exactly what you want them to do for you.
Instruct the law firm to refer back to you for further instructions should they not be able to carry out your instructions or want to go in a different direction with their investigations. Remain in control of the relationship and the situation. If you are not sure, ask questions of your colleagues, management and your solicitors. Decisions are best made as an informed purchase.
Having a strategy will always help. The best way to determine what the best strategy to resolve the matter will be, then establish the facts. Don't ask your lawyers to do work that you can easily do. Collate evidence, photographs, work procedures, pre-incident information, names of potential witnesses, site maps, books of account and anything else your attorney will need. If the information is at the business’s other branch, it will be better for you to request the information from them, than have your lawyer do the work. If you are not getting internal co-operation, rather get your senior management involved. It will be way more beneficial when the legal invoice arrives in the post.
It often helps discussing the matter with colleagues and if required, a discussion with your lawyer. It may be necessary for the lawyer to provide an initial legal advice (sometimes referred to as the preliminary legal advice). Be very clear with your instructions as to what advice you are requiring. If it is only to determine liability for instance, then ask for liability advice. No need to obtain and pay for quantum advice if your business is not liable.
Respond promptly to requests for information and ensure it is quickly supplied and answered. Each unanswered letter or email from the lawyer is costing you money, as they will be charging for following you up.
Remember, you are the instructing party in the relationship. Stay in control and demand that your instructions are carried out. Listen to the advice of the law firm but make your own informed decisions.
There is a high price to thoroughness. By ensuring that your attorney carries out the appropriate level of work relative to the matter at hand, will result in more reasonable legal costs being incurred. If the strategy and legal advice is to settle the matter, then work performed by your lawyer should only be what is appropriate for the matter to settle. Should the matter not settle as intended, then you can instruct your lawyer to prepare for a trial. Most instances the attorney will be thorough and prepare the matter for a trial even if the strategy is to settle. Only do what is absolutely necessary. Most matters settle before a trial.
The benefits to your business will be lower legal costs only work that is appropriate to the strategy will be carried out.
Check your invoices
Never pay an invoice without checking for errors and mistakes. All humans make errors and solicitors are no different. You owe it to your company, management, clients and shareholders to obtain value for services rendered.
Law firms are businesses which sell expertise by the hour. This means that the average lawyer has to work extremely long days in servicing their clients to be able to bill 8 hours’ worth of time a day. Each minute that is spent in a day having a coffee, a toilet break, a sandwich, is a minute that cannot be billed. This adds a lot of pressure to any lawyer’s day. The work they do for us, it challenging and stressful. As described in the report by the Melbourne Law School and Thompson Reuters into the state of the Australian legal market in 2015, partnerships within legal firms are reducing and law firms are shedding staff which means the remaining work is being shared out to the remaining staff. Good for productivity statistics, but not good for the remaining staff. Under these circumstances it is very easy to make errors.
There are some commonly held beliefs that it takes too long to manually check legal invoices either monthly, or at the end of the matter. And why bother when the majority of legal firm’s charge by the hour and as long as that agreed hourly fee is right on the invoice, then the invoice will be accurate and can be paid. Manually checking each individual invoice, which is then processed manually by accounts payable – time and money and effort, especially when large number of invoices involved.
Another belief is that expertise is required to understand to confidently check invoices. This is not true as the entries on an invoice should have sufficient detail and be logical to the untrained eye. If you are not sure about an item on the bill, pick up the phone and ask questions. If an entry on the invoice lacks enough detail for you to make a decision on it, ask for clarification.
Some of the finer detail to consider:
• Check that the rates by partner, senior associates, lawyer and paralegals are correct per the panel arrangements or letters of engagement
• Check that the time billed on each matter is appropriate for the type of matter. This means that a non-complex legal matter involving simple instructions should not have a lot of time billed against it. Check that time billed per lawyer on individual days is appropriate. E.g John Smith senior associate, billed 20 hours work on 13 August 2015
• Consider your instructions to the legal firm and check that you have not been billed for work that you did not instruct the lawyers to do. For example, you may see an entry regarding advice on quantum, or experts reports in support of a quantum advice, when your instructions did not authorise the lawyer to provide quantum advice
• Check for back billing where you may have already been billed and paid for the same work
• Look for entries where you have been billed multiple times for the same task such as where you have received a single email with one other person copied in. There should only be a single entry for email to client on the invoice
• Any entries on the invoice for work that was agreed to be excluded such as photocopying, should deducted
• Reports such as cost variations, invoices and monthly reports should not be charged for
• Look for internal conferences between lawyers within the firm, research into the law where the legal firm in considered an expert, and deduct these as well
• Check the invoices for large time blocks with vague descriptions, or descriptions of multiple actions lumped together in a single entry. Ask for this to be broken down into the individual actions and full detail disclosed
Just as you wouldn’t automatically pay a restaurant bill, or a private expense without checking to see that you have been charged correctly, you need to look into the legal invoices. We are certainly not advocating a position that law firms are devious and untrustworthy when it comes to charging, but mistakes can creep in and be costly.