This is the first in a series of articles examining legal cost and e-discovery metrics. In this series we will explain the benefit of tracking legal and e-discovery analytics–not only for purposes of legal cost management, but also to implement more efficient and effective e-discovery and document review processes.
In this article we begin with an overview of tracking legal costs and highlight why it is a good idea to do so. In other articles, we turn our focus to e-discovery metrics and offer suggestions about e-discovery data points to monitor.
Why Track Legal Metrics?
The most obvious reason to track legal spend is to get a grip on costs to lower legal bills. Tracking legal costs also helps prepare budget forecasts and measure law firm performance.
Tracking legal metrics is also important because without them, it is harder for legal departments to determine whether they are meeting budgetary and business goals. Additionally, reporting on legal metrics not only helps benchmark legal department performance, it may also help demonstrate the value legal operations bring to businesses.
Sterling Miller, a seasoned corporate counsel now with the law firm of Hilgers Graben, but formerly in-house with American Airlines, Travelocity and Sabre Corporation, says at first his company began tracking legal costs out of curiosity to better understand what the company was spending. Shortly thereafter, the CFO came knocking with an official request to lower the legal budget. “The CFO argued that the legal department’s budget should not be considered any differently from other departments,” Miller says. “I finally came to the realization that he was right–that [for budgeting purposes] legal really is not different from other parts of the business.”
Miller says, “once it got to the CEO and CFO, it was real.”
Where to Begin
As a starting point, set a high level goal to meet or choose a straightforward metric to track. This could be general adherence to legal budgets or achieving an average hourly rate for legal work.
For instance, to get a grip on legal budgets, requesting monthly or quarterly budgetary forecasts from outside law firms as a good starting point. At certain points in the year, corporate counsel should consider contacting outside law firms and ask them what they billed to date and what they expect to bill in the coming months. This permits tracking of both historical billing and also creates predictability in the amount of legal bills coming down the pike. These figures can be tracked by law firm, project or case.
What to Track
There are many metrics a legal department may track. Some to consider:
Spend vs. Budget
This metric is one of the easiest and most important to track. It permits legal departments to ensure they are staying within projected budgets, or help identify reasons budgets are exceeded. Tracking budgets also permits legal departments to monitor yearly budget trends and track budgets as a percentage of revenue.
Average Hourly Rate
This metric is straightforward and may be tracked in the aggregate or by law firm and then compared to what others are paying for their legal work.
Cost Per Matter, Case Type or Business Unit
Keeping tabs on the costs by individual case, subject matter or business unit helps identify problem areas so that preventative measures may be taken. For example, if trademark application costs rise, legal can talk to marketing to determine what is driving the increase. Tracking these types of metrics also helps prepare realistic budgets. For instance, if the average patent case costs $400,000, that amount may be used to budget for the next one.
Individual Legal Matter Metrics
Items to track here are somewhat obvious: How many matters are active? Historically, how many legal matters arise (or resolve) annually? What is the average time of matter open to close? Examining legal matter metrics can be even more granular–such as tracking the number of legal motions filed and their success rates, or the number of appeals filed and lost.
Keeping track of potential financial liability for legal disputes helps prevent surprises and assist with budget planning. These figures can be tracked by legal matter, matter type and in the aggregate.
Law Firm Metrics
To figure out if you are spending too much on lawyers, an obvious place to start is looking at legal bills. Items to analyze include the average rates charged by the firms, the number of attorneys working on any given matter, adherence to budgets, and outcomes. To assist with the analysis, billing codes may be used–even for e-discovery activities.
Internal vs. External Legal Spend
Information gleaned from tracking how much money is spent on inside counsel vs. outside counsel may be used to allocate resources and assign legal work.
How to Track Legal Metrics and Where to Find Data
To start, spreadsheet software such as Excel may be sufficient to capture legal cost data, but once legal departments become more sophisticated with metrics tracking, they may outgrow spreadsheets and may need specialized software. For instance, using electronic legal billing software (e-billing) often automates many of the metric tracking functions and allows users to examine data at a more granular level.
Data to track legal metrics may be found from several sources: e-billing systems, hard copy legal bills, matter and contract management systems, data from the finance department, and data collected from internal and external surveys.
Make Friends With the Finance Department
Hilgers Graben’s Miller points out that it helps to make friends with the finance department when implementing legal metric tracking processes. Miller says that he made it a point to sit down with members of the finance team to explain the workings of the legal industry and cost drivers. He also invited members of the finance team to participate in monthly legal budget meetings. As a result, “once [finance] understood how the legal world worked, they became advocates for the legal department” at budget time.
In the end, Miller found that by implementing legal cost tracking methods, his legal department developed a discipline and mindset about budgeting that focused on savings. For a more detailed look at controlling legal costs, check out this great article by Miller here.
If you are ready to begin tracking e-discovery metrics and costs, please let us know–we can help. In fact, we will track them for you.