Corporate legal costs have risen steadily for the last 40 years (including 2020 — and excluding the Great Recession of 2008 to 2009). Meanwhile, the legal system’s demands on business increase relentlessly.
So, CFOs, or other business executives, need to step in and impose spending discipline on the corporate law function. Because lawyers in-house and in firms have not.
Every dollar spent on Legal is a dollar not spent on something more constructive. And waste tolerated today renders the law function that much less resilient in the face of surprise demands on Legal.
1. Lawyers are good at lawyering, but they’re bad at cost control and other management tasks.
Lawyers in-house and in firms accept the legal profession’s business model and the waste it produces (hourly billing, overstaffing, and assignment of inexperienced law grads (see here, here, and here).
And innovations that save time mean fewer hours to bill. So, Legal has been slow to adopt technology and process efficiencies that have long since been adopted in finance, IT, and other corporate functions (see here, here, and here).
2. Much of Legal’s spending goes to outside counsel, but too many in-house lawyers say they can’t negotiate on price with law firms.
The average corporate law function spends 61% of its budget on external counsel (Thompson Reuters, “2020 State of Corporate Law Departments”). But too many in-house counsel are afraid to challenge law firms on price.
Altman Weil’s 2019 Chief Legal Officer Survey asked this question:
“What obstacles, if any, do you face in getting greater discounts from outside counsel (Check all that apply).” The top 3 answers:
- “Not enough buying power to negotiate more effectively” — 52%
- “Law firms resist – 49%
- “Don’t want to damage good relationships” – 34%
3. When lawyers in-house talk about price with lawyers in firms, they don’t leverage what should be their greatest strength: their company’s purchasing power.
An exemplary outlier: Jeff Carr, former general counsel of FMC Technologies, then a Fortune 500 company, cut total legal spending by one third over 11 years, while the company’s revenues grew four-fold. At the start, 80% of law firm bills were based on hours worked. At the end, “almost 100% of our billing was based on performance.”
In contrast to in-house lawyers afraid to challenge law firms on price, Carr leveraged FMC Technologies’ purchasing power:
“I got a lot of grief at the time … but here’s my face not caring. In a world of thousands upon thousands of alternatives, the customer should be the king. While I respect firms and how they do business, we have absolutely no problems finding lawyers and firms that will work with us in the way we want to work.”
4. Lawyers in-house and in firms react to problems; they should focus on problem prevention.
When I moved to the business side of the lawyer / client table, I found that legal problems don’t “just happen”. They originate in a management failure inside the company’s operations. Usually before any attorney is on the scene.
For every lawsuit, regulatory violation, or other legal mishap, management and Legal should conduct an after-action review: debrief with all involved to identify what went wrong, to agree action steps to make it right in the future, and to make participants accountable for follow-up on needed corrections.
Separately, collaborate among attorneys, managers, and line employees to identify legal risks inherent in operations, to agree preemptive action steps against those risks in advance of any problem, and to assign duties to implement those steps.
Getting excellent work from your lawyers is imperative. So is getting that work done with the cost efficiencies and preventive disciplines you demand of any other corporate function. That’s my focus, and it’s why I write this blog.