Cost pressure is accelerating in many industries, fueled by a variety of factors, such as persistent inflation and high interest rates, and legal is no exception. At the same time, corporate legal departments are grappling with new and very demanding legal issues such as the emergence and use of AI, environmental and social governance (ESG), deglobalization, and political unrest. These challenges demand attention during a time when corporate legal departments are left with limited resources and tighter internal and external budgets, limiting their capacity to act as holistic managers of legal risks and deal with these and other emerging challenges.

When faced with difficult environments, corporate legal departments have historically turned to traditional outside counsel management levers to reduce costs. These are primarily tactical efforts. involving:

• Renegotiating hourly rates and or "freezing" rates
• Conducting RFPs to select vendors based on cost, shape, and expertise "right sizing"
• Facilitating reverse e-auctions
• Developing alternative fee arrangements
• Creating panels of preferred law firms and third-party legal service providers
• Enforcing billing guidelines

However, as pressures invariably increase on corporate legal departments to deliver greater business value, a pure cost-reduction focus for outside counsel management is insufficient to meet these demands. Instead, legal departments should turn to a strategic approach to outside counsel management that focuses less on tactical cost reductions and more on driving overall value and efficiency.

Moving toward a new paradigm

Strategic outside counsel management moves beyond cost structure to determine the value created by decisions related to engaging outside counsel. It is based on three broader paradigms or best practices:

Determining whether to make or buy

Strategic outside counsel management challenges whether specific services need to be sourced externally or could be established internally and provided in-house. This opens various opportunities for insourcing with substantial implications on costs, speed and quality of services, and client proximity.

Disaggregating legal services

Instead of a one-stop shopping approach with a top-tier or otherwise familiar law firm, strategic outside counsel management requires a detailed understanding of which specific services can be effectively separated and procured on the market. Corporate legal departments use data to split complex workstreams into distinct clusters of work and then assign each cluster to the most suitable vendor by leveraging the full legal ecosystem. For example, certain firms or vendors will be more effective at completing repeatable tasks with speed and precision by leveraging technology, while preferred law firms may be better placed to conduct complex legal analysis relating to the same matter.

Going beyond the awarding phase (of a single matter)

Strategic outside counsel management involves managing, tracking, and controlling the full engagement lifecycle, from selecting a legal vendor to executing the work and closing a specific matter. This comprehensive approach includes regular performance reviews at both the matter level and firm level, considering both quantitative and qualitative measures, alongside the vendor’s performance in the aggregate over the course of an individual matter and the long-term business relationship

Getting from tactical to strategic

Transitioning from tactical to strategic outside counsel management takes time and effort. Yet in an industry rooted in tradition, many corporate legal departments have not yet established a legal operations function and continue to rely on traditional outside counsel management practices, making it incredibly difficult to meet expectations as enterprises look for legal to drive greater business value.

Three critical success factors are particularly important in developing a strategic outside counsel management function:

Understanding client value

Received and perceived value in their many forms, including the quality of service, time-to-market, risk mitigation capabilities, costs, revenue opportunities, and creation of value, needs to be assessed from the perspective of the business clients of a corporate legal department. This is also true for the value provided by law firms. The potential to create and improve value becomes a key consideration in assessing the performance of vendors.

Building a new target operating model
through disaggregation

The ability to deconstruct and disaggregate a specific legal service enables the assessment of insourcing potential and helps select the best vendors from the legal ecosystem, even if a service needs to be sourced and aggregated from various vendors. The degree of insourcing has a substantial impact on the target operating model of a corporate legal department. In that sense, outside counsel management and the ideal balance of insourcing and outsourcing become key drivers impacting the configuration of the target operating model of a corporate legal department.

Leveraging data and technology

Driving the disaggregation of legal services, measuring value creation, executing holistic vendor performance reviews, and leveraging the full legal ecosystem requires access to strategic data. Therefore, leading corporate legal departments are systematically exploring ways to get access to wider data pools (often in cooperation with other functions like finance or procurement) and establish specific data pools with corresponding analytics capabilities beyond current matter management, reverse e-auctions, and e-billing platforms.