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Managing Legal Costs Amidst Increasing Expenses
Legal spend continues to rise for companies across all industries and sizes, primarily driven by large corporations in the US.
The median legal spend in 2023 was $3.1M, showing a 29% increase from the previous year. The lowest 10% of departments spent approximately $470K, while the top 10% spent $43.4M, as per the 2023 Law Department Management Benchmarking Report by the Association of Corporate Counsel and Major, Lindsey & Africa.
This surge in expenses puts considerable pressure on claims and legal executives tasked with managing budgets and reducing risks. The need for effective strategies to control and mitigate these escalating costs is more critical than ever, given how increasing social inflation is driving and impacting legal outcomes.
At Alan Gray, we advocate for an integrated approach—combining technology's analytical power with the nuanced understanding of experienced attorneys. This dual approach maximizes accuracy and ensures compliance with billing guidelines.
External Pressures and the Importance of Cost Control
Claims and legal executives face numerous external pressures, such as rising litigation risks and evolving regulatory requirements. One controllable factor is the implementation of robust legal bill auditing practices to manage the financial impact of social inflation. Effective cost control not only addresses current expenses but also prepares companies for future challenges, helping to safeguard the bottom line.
The Role of Technology in Legal Cost Management
To address these challenges, many leaders are turning to technology to gain insights through advanced data analytics. Modern tools and software offer detailed analyses of legal expenses, aiding informed decision-making on cost optimization.
However, technology alone is not a comprehensive solution. Overreliance on technology without thorough legal bill audits can result in overlooked errors and missed savings opportunities. A combined approach that integrates technological insights with manual reviews ensures the most accurate and effective cost management.
The Need for Legal Bill Audits
Legal audits are essential for verifying the accuracy and compliance of legal bills. A comprehensive audit process should focus on:
- Accuracy of Bills: Ensuring that the charges listed are correct and reflect the actual services provided.
- Compliance with Company Guidelines: Verifying that all billed items adhere to the company's internal policies and procedures.
- Identification of Improper Time or Expenses Billed: Detecting any instances of non-compliant items, duplication of effort, or charges for services not rendered.
By scrutinizing legal bills, companies can ensure that invoices are within guidelines and optimize their legal spend.
Balancing AI and Human Expertise in Legal Audits
While AI can efficiently process large data volumes and detect patterns, human expertise remains indispensable. Experienced attorney auditors bring a critical eye to the review process, spotting subtle inconsistencies and errors that automated systems might miss. Moreover, when challenging conversations need to take place with firms, the AI will not be available to assist. These conversations involve genuine individuals and authentic relationships and necessitate sensitivity and comprehension to uphold the relationship.
At Alan Gray, we advocate for an integrated approach—combining technology's analytical power with the nuanced understanding of experienced attorneys. This dual approach maximizes accuracy and ensures compliance with billing guidelines.
Insights from Alan Gray’s Experts
David Schrader, Director of Legal Audit, and Andrew Hamilton, Senior Manager of Legal, emphasize the importance of balancing AI with human oversight. They highlight specific areas where companies can improve their auditing processes to prevent payments for non-compliant items, thereby enhancing bottom-line savings.
- Staffing Efficiencies: Effective legal bill audits should scrutinize staffing to avoid inefficiencies, such as task duplication and improper task assignments. For instance, associates might perform paralegal tasks like preparing deposition notices, which should be handled by paralegals for cost efficiency. Similarly, partners drafting discovery documents instead of associates can inflate billing rates. By ensuring tasks are assigned to the appropriate personnel, companies can optimize efficiency and reduce unnecessary expenses. This transparency builds client trust in the fairness and accuracy of their legal bills.
- Travel Deductions: Travel expenses should be managed through clear guidelines differentiating between local and long-distance travel (e.g., trips over 100 miles round trip). Non-billable local travel should be enforced to prevent unjustifiable costs. Regular audits ensure compliance with these policies, promoting transparent and accurate billing for travel-related expenses.
- Legal Research: Legal research is another area that requires careful oversight. Ideally, research tasks should be conducted by associates, not partners, to avoid unnecessary cost increases. Moreover, firms should not bill for basic research that falls within their local expertise or when stock research materials are available. Engaging in dialogue about the necessity and appropriateness of research tasks ensures fair billing and aligns with client expectations. Legal research is a particular area that may go unnoticed during an AI audit. This can happen for two main reasons: one relates to staffing issues, and the other to the nature of the research conducted. Legal research should be carried out by individuals with a legal background, primarily associates. However, it is not uncommon to see partners billing for research activities, leading to higher costs. This practice is inefficient and drives up expenses unnecessarily. Another nuanced reason why legal research billing may violate guidelines is the nature of the research itself. Conducting a legal bill audit requires genuine legal expertise to understand and evaluate the necessity of the research claimed. Large firms often have substantial stock research and standardized materials, reducing the need for extensive new research. Therefore, it is unusual for large firms to bill for extensive legal research unless the matter is exceptionally complex. Additionally, firms hired for their local expertise should not bill for basic research on local rules and procedures. Despite these concerns, the work firms provide is invaluable and it is appropriate for the auditor and the company to open a dialogue with firms about the research conducted for each matter. This approach ensures a better understanding of the necessity and appropriateness of the research assignments.
Proven Solutions with Alan Gray
Alan Gray’s integrated approach combines advanced technology with seasoned auditing expertise to offer a robust legal billing solution. Our SIMS e-billing system integrates e-billing software with skilled auditor reviews, helping companies streamline legal invoicing, reduce errors, and ensure compliance.
Our team has helped clients achieve an average savings of 6-15% on aggregate legal spending. Contact Alan Gray today at info@alangray.com or (617) 426-6255 to optimize your legal expense management. Trust our expertise to secure your financial health.
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