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Corporate clients innovate to slash spending on outside counsel

By: Bridgetower Media Newswires//August 28, 2017//

Corporate clients innovate to slash spending on outside counsel

By: Bridgetower Media Newswires//August 28, 2017//

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By Pat Murphy
BridgeTower Media Newswires

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 of the country, corporations are finding only more innovative ways to rein in spending on outside counsel.

For example, companies in the financial-services sector are already using a new legal system from IBM that puts the billable hour under a microscope in order to reduce the spending on outside counsel, sometimes by more than 30 percent.

Meanwhile, a travel-website company based in Needham, Mass., has freed up in-house counsel to do work that was once set aside for outside counsel. This has been accomplished largely through the development of an automated program that enables non-legal employees to produce routine legal documents for the business.

And when the geographic proximity of outside counsel isn’t a hindrance, clients are increasingly farming out work to law firms in secondary markets where hourly rates may be lower.

Michael J. Yelnosky sees business interests as driving corporate clients’ current scrutiny of outside legal costs.

“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 in Rhode Island.

Yelnosky says standard hourly billing structures place risks on companies rather than law firms. Yet he also sees increased competition in the legal marketplace shifting market power to corporate counsel.

According to Yelnosky, it only makes sense that companies that now think they have market power would prefer to shift risk to their law firms using alternative billing arrangements.

It’s too early to tell exactly what effects new technologies and innovation will have 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 added.

Cost containment?

One of the newest systems meant to help corporate clients contain these sorts of costs is called “Outside Counsel Insights,”

Brian Kuhn is a founder and leader at 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 release of Outside Counsel Insights, also known as OCI. He says the system was devised in response to the realization that spending on outside counsel 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 being “unique from any other tool on the market” in that it uses IBM’s version of natural-language processing and machine learning to “read” raw task descriptions associated with outside counsel’s time entries.

That essentially allows for the full automation of attempts to determine at a “line-item level” whether a law firm is complying with a client’s billing guidelines, Kuhn says. OCI can reveal what is driving budget overruns, whether it be certain types of motions, 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 how a lawyer may be “baking in” research time as part of billings 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 the work 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 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 systems that allow companies to review outside counsel billings in a “granular” way can only help contain costs.

Morris, vice president and associate general counsel for TripAdvisor, a global travel website based in Needham, Mass., says his company relies on 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.”

In-house solutions

Although Morris at TripAdvisor may sing the praises of Serengeti, he credits 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 the standard legal documents that are 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 sent to outside counsel, Morris says.

Michael M. Goldberg, co-chair of the Rhode Island Bar Association’s Technology in the Practice Committee, says he can see why some find so much value in having an in-house automated document program.

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

Goldberg says he, as a solo practitioner, finds himself dealing often with corporate clients who are intent on frugality. As a result, he is constantly having to come up with ways to lower costs.

Goldberg says one way he meets this goal is by using a “virtual paralegal” who lives in Indiana. In addition to reducing his office expenses, this service lets him remind his clients that he’s looking for ways 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 had first-hand experience of that. He started his legal career in New Jersey before moving 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, says he isn’t surprised by such stories.

“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 has been the rise of “legal operations professionals,” according to Perlman. Large companies are increasingly looking to legal operations professionals to find new ways to efficiently deliver services to companies.

“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.”

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