For a long time, legal technology providers led with a value proposition of cost savings. That idea claims an important legacy in the history of the business of law, but it’s untenable today and perhaps, even, counterproductive. Collectively, we need to focus on control—getting more value from the budget the legal department spends—rather than cutting it.
Allow me to explain.
Historically, corporate counsel did not have a reputation for having command of their organization’s legal budgets. Risk is notoriously hard to quantify but its management was deemed essential. The necessity of legal work wasn’t questioned, and businesses weren’t especially price-sensitive to the cost of legal services. Pricing power, including the annual rate increase, rested with service providers.
That all changed after the financial crisis beginning in 2008. CFOs demanded cost-cutting from every department including legal. It was no longer acceptable to wave the red flag of risk in exchange for a blank check. Outside counsel spend was increasingly scrutinized, legal operations flourished, and corporate counsel increasingly took more legal work in-house.
The learnings from the financial crisis had a lasting effect: It proved legal departments can in fact do a much better job of predicting legal budgets and meeting spending targets—without putting the business at greater risk.
The Rise of Billing Guidelines and E-Billing Software
The financial crisis did to legal spending what the pandemic did to digital transformation over the last couple of years: It accelerated the adoption of policies and technology tools aimed at reducing legal spending. It was around this time that the notions of billing guidelines and e-billing really began to take off.
These tools were a way to fight a vexing problem facing in-house lawyers: managing a legal budget obscured by the asymmetry around law firm billing. This problem is best illustrated by the fact in-house lawyers were rarely certain what had been ‘spent’ until they received an invoice. Invoices were often delayed for months.
A corporation with several law firms on a panel—and large corporations might have several dozen—truly struggled to get a handle on their legal spend. E-billing offered a partial solution by automating legal bill review and rejecting those invoices that violated the agreed guidelines.
This slowed payments to law firms and conserved cash. It also reduced overall legal costs as law firms were inclined to write off such objections and keep a client happy. Certainly, partners could seek to redress flags they thought were unfair. Some even invested in teams dedicated to this process. Even so, it was still a contentious, at times even adversarial, and time-consuming distraction.
Battling asymmetry with asymmetry
Pricing power traditionally rested with law firms since they were the only side of the table with data to know what services actually cost. E-billing flipped this on its head since it collected and analyzed invoice data across the business. In some cases, vendors aggregated and anonymized data to produce industry benchmarks reflecting legal pricing across the market.
Law firms could name a price for services, but now so too could corporate counsel. For the first time, in-house teams had pricing data and many used it to squeeze their firms for discounts. Indeed, the inside joke among law firm pricing professionals was, ‘When the general counsel inquires about alternative fees, what they really are asking for is a discount.’
What’s happened is that data is effectively being weaponized for negotiation. In-house legal teams are battling asymmetry with asymmetry, which in turn, has created a zero-sum environment. The result is a unique oddity of the legal industry where a client hires a law firm for help, but in some ways they treat each other as adversaries.
Economic Growth and Innovation Breed Complexity
The focus on cost-cutting is unsustainable for several reasons. First, it’s damaging to relationships, which both inside and outside counsel are inclined to say matter in a collaborative profession like law. That matters because the market ebbs and flows. A buyer’s market one day is a seller’s market the next.
There are law firms in my old stomping grounds of private equity that are so busy right now they are turning business away. That may last for a while, or it might not, but that’s why relationships are important. Strong business relationships last across economic cycles. That’s desirable among clients who want to retain law firms that truly understand their business.
Second, the predominant metrics in use today to measure the value of the legal departments were created decades ago. When those metrics were implemented, the vast majority of legal work was sent to outside law firms.
That’s no longer true. Corporate legal departments have been bringing work in-house for a decade. Today, about half the workload is completed in-house, yet few legal departments have a method or means of tracking both internal spend—as well as outside spend.
Finally, as legal professor Daniel Katz has observed, economic growth and innovation continuously add complexity. Governments at all levels—municipal, state, federal and international—respond to economic complexity with new regulations.
“These rules don’t just accrete—they intersect, they overlap, and in many cases, they conflict,” said D. Casey Flaherty, the co-founder and chief strategy officer at LexFusion, in a recent podcast. “That’s even when they’re well-written. Some of them are painfully ambiguous.”
He points to a social media company grappling with new privacy regulations as an example. Such a company can strive to get more value out of every dollar they invest in legally. However, aiming for an overall reduction is simply not feasible and might even introduce greater risk.
Refocus on Controlling Costs, Not Cutting Spending
If not cost-cutting, then what is the value proposition of legal tech to the business of law? Casey suggests it’s about delivering legal expertise at scale—through process and technology.
“Instead of more with less, the idea that legal budget should be reduced, we need to reorient the conversation of more for less —that is we need a higher yield from every dollar we spend,” he said. “We are going to need more money because there are so many net new complexities that have a material impact on the business.”
I couldn’t agree with him more. The key is to refocus legal tech, and indeed the entire legal community, on controlling costs rather than cutting overall spending.
Nicholas d’Adhemar is a lawyer turned entrepreneur and the founder and CEO of Apperio, a legal spend analytics and matter tracking platform for in-house counsel.
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