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As noted in Part 1 of this two-part series on strategies for leaner legal departments, when it comes to thriving under limited budgets and high expectations, it’s imperative for in-house legal departments to maximize their internal efficiency and resourcefulness. But streamlining inside operations is just one area that law departments must focus on to flourish while doing more with less. In this second part of our series, experts highlight the external aspect of the equation. 

On the following pages, consultants and in-house legal leaders discuss how law departments can best manage outside counsel relationships in the wake of the recession, leverage technology and relationships to trim external costs, and work with alternative service providers. Experts also discuss how law firms must adjust their traditional offerings to strengthen and grow their corporate client relationships.

Newfound Power

It’s no secret that working with law firms is expensive. According to the Fifth Annual Law Department Operations Survey, which InsideCounsel and Blickstein Group recently published in cooperation with Huron Legal, 70 percent of law department operations managers say their companies spend more than $10 million annually on outside counsel costs in the U.S.

Whereas in the past legal departments may have had the financial means to pay ever-increasing, steep outside counsel bills, albeit begrudgingly, many departments simply can’t afford to do so any longer. Luckily, legal technology developers have been launching targeted solutions—including integrated suites of matter management, e-billing, benchmarking and research tools—that empower law departments in new ways.

These tools have a twofold effect. First, they expand in-house departments’ knowledge, thereby leveling the playing field with law firms when it comes to legal expertise. 

“Law departments are using technology themselves to access knowledge that they once otherwise would’ve had to pay a lawyer at a law firm to provide to them,” says Michael Trotter, a Taylor English partner who has written extensively on inside-outside counsel relationships. 

Second, many technology tools allow legal departments to obtain meaningful metrics that they can then leverage to get better prices from their law firms.

“You need your technology to make you more efficient and generate data so you can make better decisions,” says Eric Laughlin, general manager of the corporate counsel segment at Thomson Reuters. “It’s really hard for a legal department to get to a value discussion with a law firm unless they have really good metrics in front of them.” 

Kris Satkunas, director of analytic consulting at LexisNexis, says technology tools enable inside counsel to have much more strength in negotiating with their outside counsel. “More and more legal departments are recognizing that they have a wealth of data at their fingertips,” she says. “In the past, they might not have had the resources or a great interest in trying to mine that data and make some decisions by using it. Now, we’re seeing much more maturity in terms of wanting to use the right information, surfacing it at the right time and making it available to the decision makers within the organization for purposes of pricing decisions, vendor consolidation and the sorts of things that help lead to greater efficiency and managing outside counsel expense.”

Legal department leaders at Waste Management Inc. and eBay Inc. say technology tools are making an impact on their outside counsel spend. 

Mike Haysley, director of legal operations at Waste Management, says some of the tools his department uses help it more closely examine firm staffing. “We have reports that give information on how many lawyers [a firm] is using and what level of lawyers are working on a matter,” ensuring that Waste Management is getting the best bang for its buck, he says. “It lets you see if you’re paying to train a first-year associate.” 

The legal department at eBay has a legal operations manager and an e-billing coordinator who analyze all outside counsel work that goes through the e-billing system. This helps the department identify spending trends and high-cost areas that need to be pared down, says Brian Levey, eBay’s deputy general counsel. Levey says eBay also uses its data to formulate annual budgets that it communicates to its law firms early on in the year so there’s a clear expectation of rates going forward. 

Michael Trotter, a Taylor English partner who has written extensively on inside-outside counsel relationships, says the latest legal technology tools help law departments keep their law firms in check.

Choosing Wisely

Legal departments can leverage technology to holistically re-evaluate their relationships with their outside counsel and make decisions about whether to continue retaining them. 

“In-house counsel should be tracking objective and subjective performance metrics for their law firms,” says Laughlin. “They should be rating a law firm on how it performs for them and how it performs versus other law firms.” 

Some important criteria to consider, according to Laughlin, include understanding of client goals, legal expertise, efficiency, responsiveness, predictive accuracy and effectiveness. “We see progressive GCs tracking along those criteria in a systematic way and even sharing their tracking with the law firms that they’re working with because they know that it will impact the way the law firms perform,” he says. 

Kim Townsan, senior manager of legal administration at United Technologies Corp., says that in addition to regularly analyzing law firm performance metrics, her legal department conducts outside counsel reviews every other year. “We send our internal lawyers surveys about the firms we work with the most,” she says. “The questions are designed to provide firms with actionable feedback. Each firm receives a PDF of their results. The format provides overall ratings and comments.”

Conducting performance reviews and analyzing metrics might lead some legal departments to reconsider the firms with which they work. Some departments are reducing the number of firms in their stables, assembling preferred provider networks and working with smaller firms outside of expensive areas such as New York, Los Angeles and Chicago to save money. Experts say these actions can lead to more efficient, personalized and cost-effective service.

“If you concentrate all of your work with half a dozen firms instead of 60 firms, then outside counsel are going to know you that much better because they’re going to be working with you that much more frequently,” says Craig Mills, a shareholder at Buchanan Ingersoll & Rooney. Mills frequently writes about the changing relationship between legal departments and law firms. “There’s trust. They know your business. There’s a deeper commitment. The relationship means more to both sides,” he adds.

Such relationships have cost-reducing benefits, too. “The law firms you have deep relationships with will be a lot more willing to suggest some of the more creative risk-sharing arrangements,” such as flat fees, Mills says. “Whenever you’re able to put more work with a single firm, you’re going to leverage the volume for greater discounts.” 

Chuck Jarrett, Progressive Corp.’s general counsel, says his legal department has saved between 10 percent and 15 percent on outside counsel costs by reducing its stable of firms and working with firms that are part of a network vetted by other in-house counsel. Many of these firms are open to alternative fee arrangements. 

“We’re trying to build long-term relationships with a much smaller number of key law firms that really look at it as long-term opportunity and are willing to share risk and work as true partners,” he says. 

Nonetheless, experts say legal departments are still giving their most high-profile, high-risk cases to the most expensive names in Big Law, and that trend likely will continue. “That’s partly because of the impression that if they’re the most expensive, they must be the most competent, and to some degree, it is a self-preservation step by in-house counsel,” Mills says.

Alternative Options

Legal departments can also trim external costs—and possibly get higher-quality results—by shifting certain work from law firms to alternative service providers, such as legal process outsourcers (LPOs). These providers can complete a variety of legal tasks, including document review and contract management. 

“These service providers are building a place for themselves in the industry by reducing costs and applying technology in ways that many law firms have not done,” Trotter says. He adds that the key to taking advantage of these providers is to disaggregate or unbundle legal services. “In general terms, it means taking a particular project, breaking it into parts and determining where each part can most cost-effectively be handled.”

Townsan says document review is a great starting point for legal departments that want to begin unbundling their legal services. “I really believe document review has, for years, been used as a training ground for young law firm lawyers,” she says. “It was OK for them to cut their teeth on that when entry-level salaries and hourly rates were lower. But now, it’s incredibly expensive to have firms conduct document reviews, given the volumes of data. So corporate clients have an opportunity to unbundle in that area and enter into arrangements directly  with service providers to leverage volumes to obtain better pricing.” 

Other alternative service providers that some legal departments are using include new-model law firms and legal staffing companies. 

Gregory Richter, global practice leader at the legal staffing company Inside Edge Legal, a Major, Lindsey  & Africa affiliate, says such providers aim to “help law departments understand how they can insource certain work and not necessarily supplant the use of their outside counsel, but rather build a bridge to work with outside counsel to create efficiencies that will ultimately lower costs and still maintain a high level of quality control.”

Mark Harris, the founder of the new-model law firm Axiom, says such alternative service providers have an added benefit of “freeing up members of the in-house team to focus on more strategic and higher-value matters.”