Managing Outside Counsel Cost and Workflow: The Eightfold Path for Smaller Legal Departments

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In his thought-provoking book “The End of Lawyers?”, Richard Susskind highlighted the wave of change overtaking the legal industry and the drivers of the transformation. Professor Susskind distilled the challenges confronting in-house legal departments into three core components: (i) dealing with internal headcount reductions; (ii) controlling outside counsel fees; and (iii) bearing an increasingly heavy workload where compliance requirements and legal risks are rising in tandem.

The challenges confronting in-house legal departments are universally felt from the single lawyer “department” to corporate legal divisions with hundreds of legal professionals. Nowhere are Professor Susskind’s challenges felt more poignantly than in smaller legal departments. Fewer products and services are geared specifically towards helping smaller legal departments operations so the challenges are intensified.

The remainder of article analyzes how Susskind’s challenges more acutely affect smaller legal departments and offers practical, near term solutions to help smaller legal departments effectively navigate towards the right results on an obstacle-ridden path.

Internal Headcount Reductions for Smaller Legal Departments

Headcount reductions in a legal department are operationally challenging and emotionally taxing for everyone involved regardless of a department’s size. In smaller legal departments, however, operational challenges and emotionality tend to be intensified.

With fewer legal professionals and resources, headcount reductions in smaller legal departments are felt to the bone as the remaining legal and administrative work is redistributed amongst fewer remaining people. Any headcount reduction in a smaller legal department almost certainly means an irretrievable loss of substantive expertise and institutional knowledge whereas in a larger legal department, remaining legal personnel may possess sufficient institutional knowledge and similar substantive expertise to substitute for departed colleagues.

Finally, in a larger department, headcount reductions are often undertaken in a mechanical and formulaic manner. With hundreds of legal professional located in multiple, geographically dispersed offices, it is possible to escape direct emotional fallout resulting from headcount reductions, especially where the survivors had no interaction with the departed. In small legal departments where people work in close proximity and everyone knows everyone, the termination of each individual is felt at a very personal level by everyone without escape.

Reducing Excessive Outside Counsel Fees

Large enterprises and small enterprises in the same industry sector often confront the same set of legal issues. The volume and risk levels certainly vary, but the substantive issues tend to look the same. It logically follows that smaller enterprises require essentially the same quality, experience and expertise in outside counsel needed and demanded by larger enterprises.

For a variety of reasons, smaller legal departments operate at a disadvantage to their larger counterparts when it comes to managing outside counsel cost during the entire life cycle of an engagement.

Because of the volume of legal work generated by the titans of the business world, their legal departments can exert, at the outset of an engagement, significant purchasing power to successfully negotiate rate discounts, favorable payment terms, AFAs and outcome based fee arrangements with outside counsel. Smaller companies, however, find themselves agreeing to pay higher rates for outside counsel for essentially the same legal services due to a lack of purchasing power.

At later stages of an engagement, smaller companies continue to be disadvantaged when it comes to managing and monitoring outside counsel expense. Unlike their more sizable counterparts, smaller legal departments often cannot afford outside counsel cost control technologies, like eBilling platforms and e-Discovery tools, because they require an upfront capital investment which is more easily absorbed and spread across the budget of a larger legal department. Larger legal departments also now employ specialized law department managers or legal operation directors who are tasked with managing outside counsel cost, among other things. Smaller legal departments again do not enjoy the benefit or have the budget to assign a full time person to managing outside counsel cost.

At a matter’s conclusion (or even episodically) when outside counsel’s invoices must be reviewed and approved, the administrative burden on a smaller legal department is considerable as compared to their larger counterparts who often have personnel and processes in place to efficiently handle that task.

At bottom, controlling outside counsel expense challenges every legal department. Larger department simply tend to be better equipped and positioned to face the challenge than their smaller counterparts.

Increasing the Workload of a Scant Few

Steadily increasing government regulation and rampant litigation are giving rise to new compliance requirements and legal risks which burden legal personnel in even the most efficiently run legal departments.

Even when equally applied to large and small organizations, new compliance requirements and legal risk schemas can have vastly different outcomes and often a more burdensome effect on the personnel in smaller legal departments. For instance, a change in ERISA regulations or a new development in patent law probably would not confound the army of employee benefits attorneys at General Electric or the throngs of patent litigators at Google, respectively. However, those changes could immeasurably increase the workload of a smaller legal department comprised of a General Counsel with a specialty in securities law, a Deputy General Counsel with a specialty in environmental law and an Associate General Counsel with a specialty in general commercial litigation. There is an unavoidable learning curve associated with becoming conversant with a new area of law. In a large law department context, new compliance requirements and legal risk schemas can be diverted or re-diverted to a multitude of attorneys with closely related specialties. This may not be possible in a smaller legal department thereby causing a significant increase in the workload of the already overburdened.

Trailblazing an Unpaved Path

Professor Susskind mapped two paths for in-house legal departments to explore when confronting the challenges of today’s legal environment, characterizing these two paths as the only “sustainable strategies” for inside counsel.

First, he reasoned that in-house legal departments can attempt to cut costs by using in-house and external resources in radically different, more technologically driven ways. This first path envisioned streamlining communication between inside and outside counsel through instant messaging tools and social networking, using technologies to automate recurring tasks like drafting form documents and adopting workflow and project management tools and processes to drive efficiency. Second, he posited that legal expenses could be shared with other in-house counsel or with law firms. This second path envisions that parties encountering common legal issues or risks would collaborate and share the cost of addressing and resolving the commonly borne legal risks or issues.

Professor Susskind astutely observed that the two paths for long term sustainability were fraught with numerous systemic, industry wide obstacles all originating from the focal point of most law firms’ economic model – the billable hour. Indeed, neither path lends itself to immediate or unilateral implementation by in-house counsel, but instead require an industry-wide shift in mindset with gradual adoption over time as the billable hour model becomes less prevalent.

The Noble Eightfold Path for Smaller Legal Departments

In light of the challenges facing smaller legal department and Professor Susskind’s skeptical outlook for favorable near-term change, a little hope and optimism for smaller legal departments seems merited. It does not seem too far afield to invoke then guiding principles and enlightened tenets of Buddhism when offering practical near term solutions for smaller legal departments.

In Buddhism, the Noble Eightfold Path teaches followers of eight interrelated principles that focus on living or behaving in the “right” manner in order to realize the cessation of suffering and the achievement of self-awakening and enlightenment. These principles educate followers how to live with the “right” intentions, act with the “right” concentration and effort, and engage the “right” action and speech. For smaller legal departments, focusing on the “right” things should go a long way towards ending the challenges of smaller legal departments and creating a productive, efficient, engaged and “enlightened” department

1. Focus on the right tasks.

Headcount reductions often leave the post-layoff “survivors” with an overwhelming, self-preservationist inclination to handle every task that comes near their desk. The leaders of smaller law departments should keep the minds, energies and efforts of their in-house lawyers focused on legal, not administrative, matters. Routine administrative tasks, such as invoice review and analysis and outside counsel process management, are best outsourced to third party service providers who can effectively and efficiently handle administrative tasks thereby allowing lawyers to focus on purely legal matters.

2. Pay at right hourly rate.

Just because smaller legal departments lack the market clout and purchasing power of larger counterparts does not mean that smaller legal departments should automatically pay a higher rate. Using legal industry analytic tools and domain experts in the field of outside counsel cost control, both at engagement and throughout a matter’s life cycle, can help a smaller legal department recalibrate published rates to a more favorable level paid by larger enterprises.


3. Demand the right staffing mix.

Smaller legal departments with reduced headcount will likely find themselves having to rely on outside counsel more frequently with less money to spend. Employing the right staffing mix is critical to make this seemingly upside down proposition work. Most times in-house legal department defer to outside counsel to staff matters on a task appropriate basis with the lowest cost competent legal professional. Cost-ineffective staffing usually first comes to the attention of an in-house legal department when an invoice is received. If an invoice is not carefully and thoughtfully reviewed by someone with a legal background and domain expertise, a smaller legal department runs the risk of overpaying outside counsel for the wrong staffing mix.

4. Require outside counsel to charge for the right thing.

Outside counsel billing guidelines published by in-house legal departments establish market accepted and fair rules of engagement. Meaningful savings can be realized by making sure that outside counsel charges within published guidelines. The problem is that shortly after billing guidelines are written, they are ignored – both by inside counsel and outside counsel. For any legal department, “market testing” billing guidelines to ensure they measure up to current industry standards is challenging and regular monitoring for compliance is uncommon. For the over-burdened smaller legal department, outsourcing these tasks to third party industry experts can be an effective cost savings measure.

5. Use the right data and metrics.

Cost effective and efficient dealings with outside counsel are driven by knowledgeable use of the most up-to-date legal spend data. When in-house counsel uses self-generated data to benchmark and predict future outside counsel cost, the results are often suboptimal because in-house counsel is left only with legacy data generated by an outdated economic model. Smaller legal departments typically lack the time to undertake a comprehensive analysis of outside counsel spend data and often cannot absorb the cost of data procurement. Fortunately, third party vendors have emerged that can help a smaller legal department cost-effectively procure, interpret and use timely and meaningful legal spend data.

6. Align economic interest the right way.

Outside counsel’s primary role to be a staunch advocate and trusted and loyal advisor can become blurred when balancing the economic interests of inside counsel and outside counsel. It is important for the relationship between the parties to focus primarily on legal strategy, risk mitigation and matter outcome, not their respective economics. Both parties deserve to be treated fairly and may be best served by involving a knowledgeable and objective third party with domain expertise in outside counsel cost management to ensure a proper alignment of interests of smaller legal departments with the economics of outside counsel.

7. Rely on the right domain expertise.

Effectively managing outside counsel spend requires a working knowledge of substantive legal issues and how they are best addressed, access to current market rates for outside counsel and, most importantly, a deep understanding of the opaque economics and operations of outside counsel. By thoughtfully allocating legal department tasks between in-house personnel and external advisors with the right domain expertise, smaller legal department can find themselves as well or better positioned than their larger counterparts.

8. Pursue the right results.

For smaller legal departments, the challenges of the transforming legal industry are considerable and the path to getting the right results from outside counsel can seem obstacle ridden. Employing and arming the right personnel and advisors with the right tools, objectives and motivations can drive the right results for smaller legal departments.


Achieving “Enlightenment” in Today’s Legal Industry

It is a safe bet to conclude that few smaller legal department leaders who are experiencing the evolution of the legal industry and materialization of Professor Susskind’s forward-thinking observations would have ever drawn professional comfort and operational enlightenment from the Eight Noblefold Path. By focusing on the “right” things, smaller legal departments may find that the industry challenges are not so daunting and the path to the right results may be clearer and more easily attained than ever expected.

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