It’s difficult to improve what you don’t measure. Metrics to optimize operational performance have traditionally been commonplace in most parts of a business, but less so in legal departments – although that trend has been changing as legal departments seek greater efficiency and budgetary restraints.
But what metrics should be used? Which are the most valuable for managing the department and demonstrating its value to stakeholders?
Here are some metrics to consider:
Spend-to-Budget
Tracking outside counsel budgets is the single most effective way to predict and control costs, period.
Budgets help control costs because law firms know their spend is being tracked and that they will need to provide explanations if budgets are exceeded. It’s particularly useful to track budgets and spend over time both at the matter level and the firm level. This provides a useful history for setting benchmarks as to what certain types of matters should cost, as well as tracking firms’ abilities to accurately estimate budgets.
Based on my experience consulting with hundreds of legal departments, this greatly improves budgeting and demonstrates to stakeholders that the department is making efforts to make spending more predictable and minimize surprises.
Legal Spend as a Percentage of Revenue
It’s natural to focus on legal spend as a single number. But it’s also useful to measure legal spend as a percentage of company revenue. Legal costs should be expected to increase as a company grows – with more locations, contracts, vendors, employees, etc. to manage. Legal spend can go up and still represent a reduction as a percentage of revenue. Reducing this metric can be a powerful selling point to stakeholders looking for proof of the value that the legal department provides.
Spend by Matter Type and Business Unit
Examining legal spend by practice area can help determine if there is a practice area that has an unusual level of legal spend, and if so, would it be more cost-effective to assign the work to a different attorney?
Similarly, legal spend by business unit can help red flag areas that need greater training or focus. New reporting tools can benchmark legal spend against comparative companies and identify if a legal department’s spending patterns differ from the norm in that industry.
Lessons Learned by Matter
Collecting and sharing knowledge learned about matters that are dealt with regularly allows a legal department to build a repository of information to handle those matters more efficiently when they occur (e.g., certain types of contracts that are routinely negotiated or common types of litigation encountered or regulations specific to an industry). This is also an invaluable resource when there is department turnover, so the hard-won knowledge is not lost when experienced attorneys leave.
Staff Workload
Tracking matters, average spend by matter type, outside spend, and spend-to-budget per in-house attorney can help determine the in-house workload and whether each attorney is effectively managing outside counsel costs.
In addition, measuring matter cycle time, or how long an average matter of each type is open, can help flag outliers early in the process. Cycle-time improvements can also help quantify a legal department’s increased efficiency.
Exposure from Litigation
Tracking exposure to litigation cases (at least for the larger cases) is an important first step in managing and reducing associated risks. Maximum and minimum exposures, along with likely outcomes, are numbers that boards of directors and other stakeholders often will ask for anyway, so it’s better to proactively keep them apprised rather then be caught unprepared when asked. Furthermore, it allows legal departments to demonstrate their value by showing how they have reduced the company’s exposure over time.
HR Violations & Ethics Complaints
Tracking ethic complaints and HR violations by business unit allows the legal department to target training to departments with the most complaints. Tracking trainings and complaints can demonstrate the effectiveness and cost savings of training by reducing claims and managing risk.
Outside Counsel Evaluations
Different firms provide different levels of value. Outside of bet-the-company litigation, where outcome is the only measure, criteria that can help measure value include cost, performance, knowledge of the company culture, and responsiveness.
Periodically evaluating counsel can build a repository of data so when a new matter comes up, the most efficient attorney or firm for that matter can be easily identified.
Billing Guideline Compliance
It is surprising how many legal departments fail to adequately review bills for billing guideline violations. Merely enforcing agreed-upon billing and expense guidelines often represents low-hanging fruit. Reviewing line items can be time-consuming but is necessary to catch mistakes and overbilling, and automated tools can streamline the process.
Rate Benchmarking
Timekeeper rates generally increase every year (and yes, sadly, there are almost never decreases). Tracking rate increases shows whether increases are in line with historical averages. Many legal departments will have rate freezes or caps for certain time periods or matters, so tracking actual rate increases is vital for enforcing these requirements.
New solutions provide real-time benchmarking. This knowledge is power when negotiating rate increases. For example, if the average increase for all Chicago labor attorneys is three percent this year, you may be less willing to accept a six percent increase from your Chicago labor attorney.
Published June 26, 2014.
