CCBJ: Can you start off by just telling us about your background and current role with WK ELM, and then what brought WK to bring it into fruition?
Nathan Cemenska: I’m Director of Legal Operations and Industry Insights at Wolters Kluwer ELM Solutions, a legal software company. My role mainly has to do with e-billing, although I’m also somewhat involved with a contract lifecycle management product, a legal hold product and various other products. But mostly my job has to do with e-billing matter management, spend management—the financial aspect of corporate law, you might say.
I’ve been doing this for approximately four years. My job, as I see it, is to educate myself, my clients and potential clients about legal operations, trends and best practices. And the backbone of all that, in my view, is mining data out of WK’s LegalVIEW Analytics’ data warehouse, which is the largest body of legal performance data in the world, with over $150 billion in legal invoices and associated data. Previously, I spent a couple years at Elevate Services, a legal consulting firm, where I was a data analyst embedded in a large corporate law department. I also worked for Stephanie Corey, one of the CLOC co-founders, for a couple years, doing legal technology procurement, where I demoed over 100 pieces of legal technology. Before that I was a practicing attorney—I still have a valid law license, but no longer practice—and I also have an MBA.
So obviously you know the ins and outs of law firm finances and operations. From that perspective, can you talk about how you all decided to originate this report and how you feel it’s going to impact other industries that have been doing this for a lot longer and at a larger scale than other companies or legal departments.
We’re one of the biggest e-billing providers, and while we have all sorts of clients, banking, finance and insurance companies comprise a large part of our client base. So part of the impetus for specifically examining that was demand from those clients. They’re very hungry for data out of LegalVIEW and I do special presentations for them all the time, but we had never done one that was specific to finance.
Previous research I performed featured an industry breakdown showing that banking and financial companies have reduced their outside spend over the past six years by about 15.6 percent. No other industry that we looked at had any sort of consistent reduction like that.
Keep in mind that this is happening during a time period where the AmLaw 100, I believe, increased their revenue by 30 percent and AmLaw Second Hundred firms increased their revenue by about 10 percent. So we see this strange pattern where law firms are becoming quite wealthy, but it doesn’t appear to be due to banking and financial institutions, who are some of the largest purchasers of legal services in the world.
Why do you believe that financial services companies or banks are generally more effective than other areas or industries at containing or capping rate increases?
I think that they have more negotiating power because they’re buying more hours, and the more hours you’re buying, the cheaper you can go, because if you walk away from a deal, that’s a huge amount of business lost. I think that they’re also more sophisticated on average. They’ve invested more in people, process and technology to control costs.
They also have better data. Because they’re so big, they’re talking with all sorts of law firms across the globe and they have a pretty good idea of the kind of deals they can get for different types of work from different types of firms, and that enhances their bargaining position as well. And for some that are big names, law firms love to work for them, especially if the client allows them to be public about the fact that they’re a client.
The last thing that I would say about the report is it shows that banks and finance companies’ rates only went up by 2.8 percent, which was pretty good compared to other industries. That said, the really high rate increases that you see in some of the other industries may look real, but many of those companies put a great deal of pressure on their law firms and actually slashed rates during the pandemic and they had to make up for that in 2021. So it appears to be a huge rate increase, but if you smooth that out over two or three years, it might go away. I haven’t done the analysis, but I suspect that’s the case.
Why do you think banks are paying a premium for legal services?
It’s not totally clear that they are, because the comparisons aren’t apples to apples. Yes, they’re paying higher rates than any other industry, but that’s not apples to apples in terms of the type of legal work that’s being done. I do think some of the work that they’re doing is extremely niche, and we know from economics that when a particular good or service is scarce, the price goes up. So I think in many cases, the reason banks are paying the highest rates is because they’re forced to buy that scarce expertise.
There are some other reasons as well. I think that their use of alternative legal service providers is probably lower than average. My analysis showed that their use of ALSPs is something like half of what you see in the industry at large. So that probably doesn’t help the average rate they’re paying for people.
And the historical relationships that clients have with law firms also keep rates higher than they might be otherwise – for example a tendency to use the law firm that’s physically located near you, with attorneys that you know, or that you went to law school with. The geographic correlation and the type of timekeepers you tend to use probably doesn’t help banks. If your company is based out of South Dakota and your in-house attorneys are using South Dakota firms, that’s probably cheaper than if you’re based out of Manhattan and your in-house attorneys are using Manhattan attorneys.
Can you talk about what financial services firms can do to save on legal services going forward? And this is outside the scope of the report, I know, but is there anything you’d like to impart to readers in other industries that they might take away as they try to mature their organizations?
To answer your last question first: Don’t underestimate your bargaining power. There’s data from Altman Weil showing that a large percentage of law firm revenue still comes from undiscounted rates. While some of that might be smaller companies that lack bargaining power, there are also bigger organizations out there buying legal that underestimate their bargaining power. What I’ve heard is that if you just ask for 10 percent off, you’re going to get 10 percent off just for asking.
In terms of what financial companies can do to save more—and I think this doesn’t just apply to them, but to everybody—the most potent thing in my opinion is probably methods that scale. If you look at a lot of the things that people talk about, like AFAs and budgets, those things are powerful but they’re largely bespoke. You must do them on a matter-by-matter basis, and they’re relatively high maintenance. When you establish the budget, you must monitor it and it has to be revised. An AFA has to be renegotiated many times. That’s a lot of work. While I would not discourage people from doing these things, there may be other strategies that you can deploy that are lower maintenance, that pay dividends in the long run and scale, applying equally to the largest legal matters and the smallest.
I would include quick-pay arrangements and late penalties on invoices sent outside deadlines specified in billing guidelines. For example, if a law firm submits an invoice three months late. Engaging the services of a trusted partner to perform outsourced invoice review can also help companies drive savings. There’s a lot of movement on outsourced invoice review right now. Companies like ours are starting to do artificial intelligence-assisted legal invoice review, and we’re saving our clients a lot of money.
So probably the number one thing companies could do is those turnkey, scalable ways to save money. The second thing, which I don’t think many are doing but I’ve spoken to some who are, is what I would call a “minimum viable vendor” policy. When a case comes in, don’t automatically hire a top 50 law firm. Instead, train your people to have the discernment to ask themselves, “How much risk is really here? How much is really at stake? Do I really need to hire an AmLaw 10, AmLaw 20, Am Law 50 firm? Or can I achieve the desired results with an AmLaw 195 firm?”
I think that more companies should break vendors up into different tiers and train in-house attorneys to hire from the appropriate tier, maybe even have some sort of decision tree that helps them hire a firm that’s most appropriate based on the organization’s risk tolerance. I think you can save a lot of money by doing that.
I also think that external-rate benchmarking is important. I’ve done some internal polls. They were not a huge sample size, but they were enough to be valid and they showed that something like 60 to 70 percent of our clients were benchmarking rates with new law firms that they’re dealing with against their own internal historical data from other law firms, but only like 20 or 30 percent of them were doing any sort of external rate benchmarking. And the info is out there, like our company’s Real Rate Report, which is probably the leading source of data on that subject. Even if you think you’re getting a good deal based on your own historical data, how do you know that you’re not out in left field, at least some of the time? Using the Real Rate Report or other sources of external rate benchmarking provides a dependable point of reference.
Published June 6, 2022.