On May 3, 1883, the famous physicist Lord Kevin, in a lecture to the Institution of Civil Engineers, uttered the phrase “When you can measure what you are speaking about and express it in numbers, you know something about it”. More than a century later, the Stanford University professors Trevor Hastie, Robert Tibshirani, and Jerome Friedman, co-authors of The Elements of Statistical Learning, stated “In God we trust, all others bring data”.
World-class corporations know that enduring principles such as these apply to every facet of a business. The law department is no exception. The best managed law departments realize that having a system in place to control its finances involves more than just tracking law firm invoices and budgets. This article will describe how best-of-breed law departments use financial management processes as the third step in a four step continuous improvement program.
It is my experience that the majority of the money spent by law departments, excluding internal salaries, relate to:
- Outside counsel expenses
- Settlement expenses related to litigation and claims
I will discuss how having systems in place to control these two areas are required components of a continuous improvement program. Two caveats worth mentioning are:
- The balance between outside counsel and settlement expenses can vary depending on the type and number of claims in a given year, and
- This step of a continuous improvement program is not as critical if the nature of your business is such that your company does not have a significant portion of litigation and claims.
This post will focus on outside counsel expenses. A future post will address Settlement expenses related to litigation and claims.
Outside Counsel Expenses
It should be no surprise that tracking legal expenses is a basic requirement of every law department. There are several ways to do this ranging from sophisticated to rudimentary. The method chosen by a law department is typically based on the volume of invoices processed each month.
Sophisticated does not mean “complicated”. In fact, just the opposite. In recent years, there has been a wide-spread movement of law departments to adopt automated e-billing systems that use industry standard formatting and coding (www.ledes.org) whereby the law firms submit their invoices electronically via the internet. It is my experience that virtually every large and mid-size firm has the ability to submit invoices according to this standard.
These e-billing systems have three primary benefits:
- They relieve the law department of the burden of entering the invoice;
- The e-billing software will “read” the invoice electronically and compare it to the law department’s billing guidelines. The billing errors and non-compliant charges identified in this process will easily justify the cost of the software;
- Invoices submitted via the industry-accepted coding standard enable the law department to analyze costs across matter types and tasks within those types.
One does not need, however, to implement an e-billing system for managing outside counsel expenses. On the other end of the spectrum, a law department could literally enter invoices into MS Excel or into a matter management system. The objective, however you choose to get there, is to know how much your department is spending on each matter, law firm and type of matter.
Alternative Fee Arrangements
Law departments are increasingly using alternative fee arrangements (AFA), as opposed to an hourly billing model, when retaining outside counsel. I have written two blog posts discussing the various alternative fee arrangements currently in use, with recommendations as to when one AFA may be suitable in a particular situation over another method.
This post address the first part of the financial management component of implementing a Continuous Improvement Program. A future post will address how establishing budgets and reserves will complete this portion of a sustainable method of ongoing improvement for your department.