Taking steps to cut outside counsel spending

By Pat Murphy
BridgeTower Media Newswires
PROVIDENCE — Attorneys should expect no relief in the great game of catchup being played with business clients intent on reducing their legal expenses. From every corner, corporations are only finding more innovative ways to rein in spending on outside counsel.

For example, a new legal technology tool from IBM already in use by companies in the financial services sector puts the billable hour under a microscope with the aim of reducing the cost of outside counsel, sometimes by more than 30 percent.

Meanwhile, a travel website company based in New England has freed in-house counsel to do work once set aside for outside counsel by developing an automated program that enables its non-legal employees to produce routine legal documents for the business.

And when the geographic proximity of outside counsel isn’t an issue, clients are increasingly seeing the sense in farming out work to law firms in secondary markets where hourly rates may be more palatable.

Michael J. Yelnosky sees business metrics as driving the current scrutiny of outside legal costs by corporate clients.

“Companies are taking some of the tools they use to determine how efficiently they’re producing their products or services and turning them to evaluating the legal spend,” says Yelnosky, dean of Roger Williams University School of Law.

Yelnosky says the traditional hourly billing structure is placing the risk on the company rather than the law firm. Yet he also sees market power shifting to corporate counsel because of increased competition in the legal marketplace.

According to Yelnosky, it only makes sense that companies that now think they have the market power would prefer to shift risk to their law firms under the structure of alternative billing arrangements. It’s too early to tell exactly how new technologies and innovation will play out in the end, says Andrew M. Perlman, dean of Suffolk University Law School.

“But I do think the end game here is increased use of alternative fee arrangements and a continued movement away from billable hours,” he adds.

Cost-reducing tool?

Homegrown talent is behind “Outside Counsel Insights,” one of the newest tools for corporate clients seeking to contain outside counsel costs.

Brian Kuhn is co-founder and leader of IBM Watson Legal. For the last year and a half, the Boston native and graduate of Suffolk University Law School has been involved in the development and rollout of OCI, which he says was created in response to the realization that outside counsel spend is the primary “pain point” for corporate law departments.

“In financial services, you have companies spending one-third to 50 percent of their annual law department budget on outside counsel, which can be as much as a billion dollars or more,” Kuhn says.

Kuhn describes OCI as an artificial intelligence application that is “unique from any other tool on the market” in that it uses IBM’s version of natural language processing and machine learning to “read” the raw task descriptions associated with outside counsel’s time entries.

That essentially allows for the full automation of determining at a “line-item level” a law firm’s compliance with the client’s billing guidelines, Kuhn says. Moreover, OCI reveals what is driving budget overages, be it certain types of motions in certain types of matters, or the deposition
of certain types of fact witnesses.

Not only does OCI expose the “padded bill,” but Kuhn says the program may also show where a lawyer may be “baking in” research time as part of time billed for tasks such as drafting and analysis. The basic idea is to give clients an understanding they’ve never had before of the reasonable scope of efforts that goes into certain legal tasks.

“We want to move toward a place where our clients have more data and evidence to stand behind fixed-fee legal engagements as opposed to billing by the hour,” he says.

Kuhn says IBM Watson Legal is taking an “industry approach” in offering OCI services, looking first to the industries that hire the most outside lawyers, such as financial services, insurance, banking and health care.

“What we’re aiming to offer is a savings of 22 to 33 percent of a company’s outside counsel spend,” Kuhn says.

Technological developments like those from IBM Watson should help drive more innovation in the legal services industry, Perlman says.

“When a law firm is rewarded for spending more time on a legal matter, it doesn’t create tremendous incentive to find ways to deliver that service in more efficient ways,” Perlman says. “But if clients expect and demand more services to be delivered on a fixed-fee basis, that will make law firms much more inclined to use technology and innovative methods to deliver their services in new ways.”

David E. Morris isn’t familiar with IBM’s new product, but says tools that allow companies to review outside counsel billings in a “granular” way can only be helpful in containing costs.

Morris, vice president and associate general counsel for TripAdvisor, a global travel website based in Needham, Massachusetts, says his company uses Serengeti Tracker (now Legal Tracker from Thomson Reuters), a web-based software used by corporate legal departments to manage outside counsel billing.

“I have used Serengeti for about 10 years and it has consistently improved over time,” Morris says. “That tool allows me great transparency to understand the details on what I’m spending on outside counsel. It lets me see every bill electronically. I can go line item by line item and accept or reject a particular item in a bill.”

Sarah Gates is co-managing partner at Lando & Anastasi in Cambridge, an IP boutique that was formed as an alternative for clients tired of the spiraling billing rates at downtown Boston firms.

Gates expects the use of technology that analyzes outside counsel costs to keep increasing over time as there’s a growing understanding among corporate clients of the leverage that information provides in negotiating favorable fee agreements.

“They’re going to use the tools that are available to them to come to the negotiating table with their strongest position,” she says.
In-house solutions

While TripAdvisor’s Morris sings the praises of Serengeti, he cites another technological innovation for being particularly effective in helping his company contain its outside legal costs: TripAdvisor uses software that allows employees to customize and generate standard legal documents frequently used in the company’s business operations.

“Obviously, it would be difficult to do this with extremely complex documents, but for certain run-of-the-mill, frequently used agreements, like nondisclosure and basic sales agreements, this is a great self-service tool,” he says.

The self-service document program frees up in-house counsel to concentrate on matters that have a higher value to the company, meaning there’s less work that needs to be shipped to outside counsel, Morris says.

Providence attorney Michael M. Goldberg, co-chair of the Rhode Island Bar Association’s Technology in the Practice Committee, sees the value in an in-house automated document program and what it means for outside counsel like himself.

“The days are gone when you could make a living filling out forms for people,” the business litigator says.

Goldberg says he deals with cost-conscious corporate clients all the time as a solo practitioner, forcing him to think outside the box in reducing his own costs.

For example, Goldberg says he realizes savings by using a “virtual paralegal” who lives in Indiana. In addition to saving on office expenses, he gets the marketing benefit of being able to remind his clients that he’s watching his costs to save them money.

“In my engagement letter, I specifically say that to keep costs lower, I may retain parties outside this firm to assist in certain administrative tasks,” Goldberg says. “No client’s going to object to that.”

Secondary markets

When the location of counsel is not important, corporate clients are finding that money can be saved by retaining outside counsel in secondary markets with lower billing rates.

Goldberg has first-hand experience with that. He started his legal career in New Jersey before relocating to Rhode Island. He says that he has retained clients from New Jersey who are more than happy to pay him at his Rhode Island rates rather than the New York City market rates they normally would pay.

“The cost of living is a lot less expensive in Rhode Island compared to New York City, so I can quote a lower price,’ he says.

Yelnosky for one isn’t surprised by that dynamic.

“Increasingly what we’re seeing is general counsel realizing that the quality of work, at least to some matters, is indistinguishable, but it costs a hell of a lot more if it’s a lawyer out of Boston as opposed to a lawyer out of Providence.”

One of the more noteworthy developments in recent years is the rise of “legal operations professionals,” according to Perlman. Large companies are increasingly looking to legal operations professionals to find new ways to deliver legal services to the company in an efficient manner.

“That includes looking with increased scrutiny at how outside counsel are doing their work,” he says. “The rise of legal operations professionals is very illustrative of the new way of thinking in in-house legal departments.”