What is legal spend management and how can you take back control of expenses incurred by your internal legal team?
Keeping operating costs low at a company-wide level is pivotal for sustained growth and a healthy bottom line. This is why all departments, including the legal one, must have their spending carefully monitored.
In this post, we’re going to look at legal spend management, what it is, why it matters, the most common challenges facing it, and the steps you can take to manage it better.
What is Legal Spend Management?
Legal spend management (also known as the acronym LSM) is a systematic approach adopted by legal departments to control legal costs incurred by in-house teams; analyze spending trends, and manage their legal resources.
It is a strategic operation that involves careful planning and deliberation on how to handle outside counsel expenses.
Elements that must be addressed when discussing legal spend management include financial reporting, counsel fee negotiations, budgeting, invoice reviews, value assessments, and resource selection.
And now here is why it’s imperative to find strategic ways to handle legal spending.
Why Getting Your Legal Spend Management in Order Matters
In the U.S., individual corporates spend millions of dollars a year on outside legal counsel. In 2020, combined corporate spending reached US$68 billion up from $66 billion in 2019.
What makes these figures even more alarming is the fact that 75% of Chief Executive Officers say that their legal functions are not providing sufficient value to account for the time and money spent.
So coupling what senior executives are saying and these figures, it’s no wonder enterprises are looking for better ways to manage external counsel expenditure.
The Way Forward for Legal Spend Management
Internal legal teams must be run like business units. Yes, while they exist to address the enterprise’s legal problems, they, just as with any other department, must keep tabs on their spending.
With many legal departments being appraised not on their legal duties but rather on financial performance and scrutinized by CFOs, there is an increasing need for better legal spending models.
According to the Thomson Reuters’ 2018 State of Corporate Legal Departments report, research shows that the ideal “optimal range where legal spend was most efficient was between 40-70%”
Change begins by looking at your current legal spend management model and seeing whether it’s showing justified Return on Investment (ROI) or not. If it isn’t, then it’s time to revise billing guidelines, panel structures, and any proxy fee arrangements in place.
What you want is real transformation. Contrary to popular belief and widespread practice of jumping into a tech-based solution, companies need to take time to assess:
· Stakeholder expectations
· The skills needed to improve the existing legal spend management model
· Examine the best processes and technologies to adopt
· Review comparative risks and anticipated ROI from new models
· Identify areas legal can cut back on and possibly automate
Now let’s dive deeper to look at ways to practically improve your legal spend management.
Steps to Improve Your Legal Spend Management
There are five ways in which you can pragmatically improve overall legal spend management. In a nutshell:
· Consolidate spend tracking
· Clarify resourcing policies
· Establish fixed budgets
· Examine data insights
· Modernize invoice reviews
Here’s a more in-depth look at each point.
1. Consolidate spend tracking
There is no way to get a complete overview of legal spending from disparate sources without centralizing spend tracking.
In order to get a comprehensive overview of where the money is going, it is imperative to install reliable legal electronic billing software.
The data and analytics obtained from tracking legal spending will facilitate the making of data-driven decisions that can strengthen future operations.
2. Clarify resourcing policies
Companies whose legal departments outperform others do so because they are always refining, strategizing, and looking for new ways to innovate their resourcing.
No legal spend management model should be fixed. Instead, it should change and adapt to reflect the times.
Regardless of which area you wish to improve whether it’s working with different law firms or introducing various fee models, it’s all about clarity in your policies.
3. Establish fixed budgets
Every business unit must have a granular budget – including the legal department.
Using legal budgeting software, teams can easily forecast the expected external counsel fees, verify accrued expenses, and potentially track spending according to categories.
Budgets are paramount in legal spend management as they serve to hold the legal department accountable.
4. Examine data insights
Your invoice payment process and approval in the procurement cycle are critical in helping you make sense of how the legal department is spending money.
By studying the invoice line items presented in reports, you can draw insights about your external legal service pricing and performance.
5. Modernize invoicing software
Are you still relying on legacy manual legal invoicing software? It’s time to adopt AI, cloud-enabled solutions for faster billing of outside counsel.
Relying on modern invoice technology to complete this process can significantly reduce administrative work and cut back on resources used.
The Future of Legal Spend Management
There has been much talk about the future of legal spend management and the various new models that have been proposed as prospective solutions.
Buzz is mostly around the new technology-based systems and services. As an industry leader in procurement solutions, ProcurePort is here to help you cut through the ‘white noise’ and find the right software to meet your needs.
If you have any questions relating to supply chain risk management software or indeed any of our suites of procurement solutions, please contact us today.