Baseball fans likely recall the story behind the book and film “Moneyball,” in which Oakland A’s general manager Billy Beane puts together a baseball team based on data. Beane and his staff used a form of statistical analysis, known as sabermetrics, to identify undervalued players, who often could be acquired at lower costs, and who often performed better than their cost would suggest. The results were undeniable—the Oakland A’s had a great season in 2002, the year this methodology was used. The practice was adopted by other baseball franchises, who sought to reduce costs and build high performing teams.
While most attorneys aren’t going to be playing major league sports anytime soon, the principles behind the sabermetrics methodology can be applied to today’s legal climate. Corporate legal departments, especially those with significant outside counsel costs, would benefit from tools that help them make better decisions and get the most value from those who perform services for their organization.
Spend Analysis: What Exactly Is It?
Using data to make decisions isn’t a new concept, and nor is analyzing legal costs. It’s easy to simply say spend analysis is “a means of analyzing spending to reduce costs and obtain better value.” But this is a simplistic view, and the reality is the concept encompasses so much more. It includes understanding what detailed costs are associated with a matter, finding the sweet spot between handling matters in-house or using outside counsel, identifying providers who can deliver value-driven outcomes, and predicting additional costs that may affect the bottom line.
According to KPMG’s analysis of spend management, there are both multiple parties, as well as focus areas involved in legal spend management. In-house legal spend, on-demand resources, managed services, alternative legal avenues, legal transformation, legal operations, software as a service technology, tech support staff, and automation are just some of the areas in which decision-makers must decide how to spend company resources. Those responsible for making budgetary decisions usually include the general counsel, CFO, COO, CEO, CIO, and the procurement department.
Why Should GC Focus on Spend Management?
Legal resourcing in today’s world isn’t straightforward. C-suite executives want to know exactly what they are getting when budgeting for legal services. Many already do not believe they are getting value for their legal dollars spent. According to the General Counsel Roundtable and Plexus Thought Leaders research, approximately 75% of CEOs “believe their legal functions do not deliver sufficient value to justify the time and money spent.”
This may seem distressing to corporate legal departments, but a better way to look at it is as an opportunity. By focusing on spend management and analysis, implementing new technologies, and utilizing optimized processes, general counsel can provide the c-suite with hard evidence that legal is delivering value. Truth be told, the adoption of these concepts isn’t optional. According to Gartner, who surveys legal clients globally to understand their challenges, general counsel must “help the business take the right risks to grow by modernizing legal operations and supplying new-in-kind legal analysis in a rapidly changing business environment.”
Besides being able to show value to executives, implementing spend analysis and management principles can provide other benefits as well. Analytics can also provide insights as to who can provide the best value on a matter, whether there are regulations that must be complied with, and can help reduce risk exposure while using outside resources. There are many ways to be creative with data and obtain answers to a wide range of questions about how legal dollars can be maximized.
There is a plethora of information out there on spend analysis, as well as numerous technology solutions that could be implemented. It can be overwhelming, and individuals may rush to implement concepts and technologies in a way that mirrors a “whack-a-mole” game, meaning they want to start something to knock a problem down quickly. The problem here is when you whack one problem, another pops up somewhere else. A spend management implementation will work best when there is planning, a strategy, and a clear understanding of the goals an organization wishes to achieve.
A spend analysis and management plan should begin with an assessment of the current people, processes, and technology of the legal department. It should identify some of the more serious issues and pain points. Is outside counsel spending out of control? Are in house lawyers spending excessive amounts of time on tedious processes unrelated to lawyering? Is the company getting overbilled from outside counsel? Does the department have any current metrics? Are the current software systems robust enough to handle what the department needs to do?
Another task that may be worthwhile in this analysis is identifying all data sources. Many organizations are “data-rich, but information poor,” meaning they have plenty of data but do not know how to maximize it to obtain needed information.
Once you have this benchmark, establish what the future state would look like. Does it require implementing new technologies? Are additional staff needed to handle technology tasks? Can processes be automated? How is quality measured? An important note: the department’s business goals should be aligned with the corporation’s path. Input should not be limited to general counsel. C-suite executives must also participate in discussions. In addition, they must provide executive sponsorship for the program to be implemented and supported.
Technology will no doubt be a large component of any spend analysis and management plan. Understanding what applications will work best for the department requires in-depth discussions with those who will use the system. Be sure the process of implementing new technologies has been captured thoroughly, from the selection of the application all the way through to implementation.
Identifying metrics will also be an important component of the spend analysis plan. What does the organization need to track and what data is needed? What questions need an answer?
Some common metrics, sometimes called Key Performance Indicators, are as follows:
- Total legal spend
- External and internal split
- Spend by law firm
- Spend by matter type
- Value of settlements
- Number of regulations to comply with
This is a small sampling of potential metrics, and more can be found in the 2018 State of Corporate Law Departments report, which is found here.
Spend analysis isn’t something that is going to transform a legal department overnight. There will be processes that must be changed, and technology to be adopted and learned. It may be a bit of a culture shift for staff. The concepts are designed to be proactive, but initial results may lead to a reactive response. However, spend analysis is likely a permanent part of corporate legal. By understanding the concepts, planning properly, and implementing the right combination of technology and process improvements, corporate legal departments will be able to hit a home run on every matter.