WHICH TYPE OF SOFTWARE IS BEST FOR MANAGING LEGAL COSTS?
Many legal departments considering legal spend management software face a common objection internally; that legal expenses can be managed with existing enterprise software solutions. Doing this usually involves implementing the company’s standardised purchasing processes into legal, requiring a “purchase order” number (PO Nr.) for example. However, standard accounting procedures and software do not account for the unique features of legal procurement and legal e-billing and are therefore no substitute for dedicated legal department software. Even generic procurement software cannot meet today’s requirements for responsible legal spend management. In this article, we look at the reasons for this.
AP, ERP and Procurement Systems
Accounts Payable (“AP”) or Enterprise Resource Planning (“ERP”) systems collect and manage accounting data for a company’s suppliers. They are an integral part of the purchasing system, in which orders and invoices are managed according to suppliers. The system automatically makes bookings in response to operational transactions and stores a booking number for each transaction. General invoice information, such as invoice issuer and recipient, amount invoiced, date and invoice number are automatically entered in the system.
Classic procurement systems usually contain features that enable electronic supplier selection, ordering and order tracking by the procurement department as well as procurement logistics. The introduction of appropriate tools aims to reduce the effort and costs per order, since the ordering process is automated and uniform supplier lists with pre-approved terms are stored in the system. In addition, most tools offer eInvoicing solutions that allow suppliers to issue invoices electronically.
THE UNIQUE NATURE OF BUYING AND BILLING LEGAL SERVICES
In contrast to most other services, legal advice is usually instructed by the legal department or directly by a business unit, rather than the procurement department. As a result, the standard procurement processes are not applied and orders are regularly placed that do not comply with the usual corporate standards (e.g. “no order without PO number”). As a result, the unit that instructs external legal advice is quickly suspected of “Maverick Buying”, ie: purchasing services outside the pre-defined procurement guidelines. In this respect, the impulse to treat legal advice in the same way as the services of other suppliers can be understood. The challenge here is that legal services are often “ordered” ad hoc, as they usually relate to urgent matters. In addition, law firms are often engaged on an informal basis, for example by telephone.
The classic PO no. process is unsuitable for this purpose, as it takes time and also requires the specification of an order value, which is often unknown at the time of the engagement as lawyers’ fees are generally invoiced on an hourly rate basis and the actual scope of a project only becomes apparent during the course of the matter. Many legal departments try to follow the procurement guidelines by issuing a PO no. at the beginning of the year showing a certain budget with the definition “general legal advice”. Such a catch-all term has exactly the opposite effect to what is intended to be achieved by good legal spend management; allocating invoiced costs to specific matters and activities. What may seem like an understandable and rational idea at a first glance “to engage law firms based on the standard procurement processes”, proves to be ineffective upon closer examination, as it promotes a lack of transparency and plausibility of legal costs.
In addition, invoices for legal services are usually much more complex than invoices from other suppliers. The accompanying line item descriptions can sometimes fill walls of folders and it is difficult to compare and check invoice amounts due to the high complexity of legal services. Progressive legal departments therefore use “billing guidelines” and engagement letters that define clear requirements for billable activities, expenses and timekeepers. However, classic procurement software does not support automated checking of these legal-specific billing rules, so they ultimately come to nothing. A manual check by staff of the in-house legal departments, be it lawyers or legal operations managers, is not economically viable. These professionals should be spending time on high-value legal work, not tiresome, error-prone admin tasks. There is a strong case for automating billing guidelines compliance through software that has been especially designed for this purpose, while at the same time relieving the legal department of administrative work.
ADVANTAGES OF LEGAL SPEND MANAGEMENT SOFTWARE
- Clear budgeting and cost allocation
Legal spend management software ensures that all uploaded legal bills are automatically assigned to a specific matter. Legal departments can create matters themselves or have the law firms create them. For example, in a complex transaction, several matter-phases can be created as separate sub-matters with their own budgets and different cost centres. If multiple law firms are working on a single matter, different budgets can be assigned respectively. Furthermore, legal project costs can be assigned to individual subsidiaries within the group. These details allow costs to be clearly allocated and effectively managed.
- Automated billing guideline compliance.
Legal departments can enter their billing rules into a legal spend management tool at a law firm or matter level. The system automatically checks the invoiced activities, scope of activities and expensed amounts against the billing rules, flagging any inconsistencies or automatically rejecting the invoice, depending on the preferred settings for that specific rule, matter and/or firm. Since the alternative to this requires error-prone and time-consuming manual review, the automated process results in significant cost savings. In addition, invoices are paid faster and many legal departments have been able to negotiate better rates with their external legal providers on the basis of reduced payment time.
- Matter Management
In addition to these fundamental features, modern legal spend management systems also record detailed matter information, such as the legal area, jurisdiction, and timekeeper seniority level, i.e. legal staff, associate or partner, . Since the data is available in a structured format, a full report can be created at the click of a button. Such a report can, for example, provide quarterly information on the current costs by matter, broken down according to the aforementioned matter fields. Modern spend management solutions can also be integrated with any number of third party matter, document or IP management systems. The legal spend management software is suited to act as the legal department’s leading reporting tool; it’s “single source of truth”.
- Enabling data-driven legal management
The successful implementation of a legal spend management system provides the legal department with centralised and secure access to invoice data. The spend data is available at a high level of granularity, as the legal coding standards ensure that sufficient information is recorded about the timekeeper and the invoiced activities. It is therefore possible to create reports on activities, types of activity or expenses at any time. Data-driven decisions can be made based on the high level of transparency gained regarding legal spend. This applies both to short-term decisions, such as limiting the scope of research during a matter, to long-term strategies, such as insourcing re-occurring legal work and the respective creation of new in-house roles. The reporting and analytics modules are tailored to the requirements of the legal department and can be configured on an account or user basis. Analytics can be used to evaluate all matters and firms on any combination of fields within the system. The reporting and analytics tools provide helpful information that legal departments can use to make data-based decisions around, for example, which firms to engage for certain types of legal work, matters, or to negotiate better hourly rates and alternative fee agreements.
- Recording and communicating work in progress (WIP)
Law firms can enter unbilled activity into the legal spend management system at regular time intervals, for example on a weekly or monthly basis. The legal department can access the current cost status of their matters at any time through the WIP functionality to keep an eye on budgets and ensure budget compliance before the costs are invoiced. This enables the legal department to forecast and budget more accurately, reducing surprises when the invoices are submitted. Legal departments can predict outstanding costs for financial year-end and quarter-end audits and create automated reports to communicate any outstanding fees to their financial department or auditors.
Furthermore, tracking WIP gives a level of visibility that prevents undesirable developments; out-of-scope services can be quickly identified and discussed early on. Overall, law firms tend to record their times more accurately, which is also in the client’s interest.
- Sourcing and survey modules
Legal departments can use BusyLamp’s sourcing module to quickly and easily obtain fee quotes from law firms using a standard process that enables a fair comparison among the different offers from the law firms. The competitive nature of an invitation to tender ultimately leads to more favourable prices. The pricing data gained through the sourcing process can be used by the legal department to improve their budgeting process.
After a matter has been completed, there is also the possibility to evaluate the firm’s performance. For example, the quality of the legal advice provided, whether or not deadlines/timelines were met, responsiveness, and compliance to the agreed terms, especially regarding budget compliance, is evaluated. This feedback can be shared with the law firms with the aim of improving the relationship. It is also possible to request feedback from the law firms to get their perspective on the quality of the collaboration. If these functions are used consistently, the decision as to which law firm to engage for a particular matter or legal area is no longer based on a “gut feeling”, but on sound data.
IMPACT ON FINANCE AND PROCUREMENT
Legal spend management software offers significant benefits that generic systems cannot provide. However, it should not be seen as an alternative solution to AP or procurement systems, but as a complement. Modern legal spend management systems are designed to integrate with any open interfaced software. Our experience shows that the best results can be achieved by combining these two solutions. This enables the legal department to operate effective legal spend management, and finance receives the relevant information promptly into the AP system. A legal spend management tool therefore acts like a funnel that precedes the central AP system, gathering valuable legal-specific information, and therefore having a positive effect on the quality of important information for procurement and finance.