How to Reduce Outside Counsel Spend — in Just Two Steps

October 08, 2021

Contributor: Rob van der Meulen

It starts with assigning legal matters based on their risk and value rather than just defaulting to favored law firms.

Almost half of in-house lawyers use their usual outside counsel 70% or more of the time, regardless of cost. General counsel could save thousands — and, in the case of those who work for the largest organizations, millions — by using a methodical two-step approach that assigns legal matters to outside counsel based on what’s at stake.

“For an in-house lawyer, going with the usual outside counsel is the low- risk choice,” says Ron Friedmann, Senior Director, Research, Gartner. “It’s a familiar and well-trodden path that presents the least resistance, so long as you aren’t considering the cost.”

Download now: 5 Lessons From Cost-Effective Legal Departments

But, despite pandemic-constrained budgets, legal departments currently face more work than ever. In this environment, general counsel can save big on their outside counsel expenditure by matching the tier of the law firm to the value of the legal matter.

Let's assume 25% of matters are misclassified as high-value and are assigned to top-tier firms that charge hourly rates up to 150% higher than mid-tier firms. By correcting those misallocations, a general counsel can save as much as $150,000 per million dollars of outside counsel spend. 

If you apply this savings rate to the median outside counsel spend of $3.1 million in 2020, the savings amount to just over $460,000; for departments in the top quartile, who record an average outside spend of $11.5 million, the savings is $1.7 million.

Outside Counsel Savings From Correctly Classifying Matters as Low-Value

“There are big potential savings from making sure in-house lawyers allocate the appropriate work to the appropriate law firm,” says Friedmann. “Yet few legal departments have formal, repeatable and enforceable procedures to guide law firm selection according to the expected matter value.”

This lack of standardization leads to two common behaviors, according to Friedmann. First, in-house lawyers often “up-classify” risk by perceiving more risk than warranted. Second, in-house lawyers tend to make the safe choice by selecting top-tier firms for low-value matters. 

Read more: Legal Must Help the Business Take Smart Risks Grow

Use a systematic approach to classify legal matter values

When evaluating legal matter values, it’s helpful to distinguish between disputes and deals. For disputes, it’s not necessary to come up with a precise estimate: Use a scale from 1 to 5 to score the cost of a loss based on commonly tracked key financial indicators such as stock price, net income or asset values. Each legal department must decide its own scoring criteria, factoring in the potential effect of a financial loss, damage to reputation, operations and strategy. For example, a $10 million loss could be high value for a small business but low value for a large one.

Then score the likelihood of a loss. One-hundred-percent precision is not possible, so again, use a scale of 1 to 5 based on probability ranges. Then, map these two scores to a grid with low-value matters in the lower left and higher-value ones in the top right. This provides a systematic way for general counsel to guide in-house lawyers on when to refer matters to top-tier law firms and when to select lower-tier ones. The risk tolerance is adjustable based on organizational needs.

How the Risk Frontier Determines the Number of Low-Value Versus High-Value Matters

Evaluating deals requires a different approach, because the probability of that deal closing does not affect the deal size. Written, standardized criteria allow in-house lawyers to classify deal values so they can select the appropriate outside counsel.

This could include financial criteria such as a deal-value dollar threshold or percentage of a company’s market value. It could also use strategic or operational criteria such as whether a deal generates a significant new line of business or opens a new geographical market for the company.

“In an era of growing demand for legal advice and shrinking legal budgets, these suggestions are among the easiest and fastest ways to stretch resources,” says Friedmann. 

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