The key is to identify the strengths and weaknesses of each approach and deploy it selectively where it offers the greatest opportunity — finding the most effective balance across all strategies.
More worryingly, half of business development leaders reported that these inefficiencies have resulted in lost business. In the current economic environment, any lost revenue is a major cause for concern.
General Counsel are aware of these challenges with only 52% reporting that their department’s day-to-day work is aligned with the broader business strategy. The same percentage report their department is effective at adding value to the business.
“Enabling growth will be a crucial priority over the next twelve months,” notes John Knox. “To maximize growth opportunities, law, procurement and commercial contracting departments will need to ensure they are focused on the key risks and that their processes are optimized.”
How law department leaders are addressing CEOs’ priorities
To respond to CEOs’ priorities for 2021, law department leaders and business leaders from across the organization will need to embrace new ways of working. Indeed, a majority of law departments (92%) report they are already changing the way they operate using a range of approaches.
Slightly more than half of departments (51%) are implementing tactical solutions designed to target specific problems. The same percentage have programs in place to re-engineer their legal function. Thirty percent are considering creating a co-sourcing or outsourcing relationship with a third-party provider to manage parts of the legal function.
This alone demonstrates that there is no one-size-fits-all route to transformation. Indeed, many organizations choose to run multiple strategies in parallel — combining outside counsel management, insourcing, process and technology optimization, and co-sourcing/outsourcing. Yet there is often little coordination among them or systematic analysis of which strategy to use when.
Optimizing use of outside counsel
Many law departments see the benefits of external lawyers — including that they bring significant legal expertise. However, they typically come at considerable cost and consume a large part of a law department’s budget. Given the current cost-reduction environment, it’s unsurprising that law departments turn to outside counsel management programs. The key to these initiatives is supporting them appropriately and using them as part of an overall balanced approach.
While outside counsel management programs can involve a wide range of strategies, the most widely used relate to controlling fees, such as hourly rate freezes, greater use of alternative fee arrangements and an increased focus on securing better rates from provider negotiations. Fifty-nine percent of General Counsel believe that a focus on negotiating better rates creates some opportunity for costs savings.
Other approaches include managing outside counsel more closely, through outside counsel guidelines, or consolidating spend into fewer providers. Seventy-two percent of General Counsel believe reducing the number of providers can achieve cost savings.
At the same time, only a minority of General Counsel believe these strategies offer significant savings. Law departments’ challenges with outside counsel management programs shed light on why that is the case. Eighty-three percent say they have too many providers to manage and eight-one percent don’t have the resources to effectively manage their existing providers. Seventy-nine percent of General Counsel say their guidelines are not detailed enough and eighty-five percent report providers don’t follow their guidelines.
Reducing the number of providers can also simplify operations.
Furthermore, while the above strategies promise some cost savings, they are unlikely to help accomplish law departments’ other priorities related to rethinking risk management, promoting digitization and increasing business enablement efforts.
As Stenberg observes, “Optimizing use of outside counsel provides law departments with the opportunity to shift cost savings to other areas. Reducing the number of providers can also simplify operations. Both outcomes are positive steps forward for law departments and can help ensure the success of other transformation initiatives.”
The challenge of effective insourcing
Insourcing is among the most visible, discussed trends in the legal market in the past decade. Shifting work internally can reduce spend on outside counsel. It also offers the potential for greater control and more integration with the business. For many law departments, however, insourcing has also produced challenges.
Rising workloads is the most obvious outcome of shifting work in-house. General Counsel expect workloads to increase by 25% over the next 3 years, yet headcounts are only expected to increase by 3% over the same period. This mismatch helps explain why 76% of departments say they find it challenging to manage current workloads.
A second challenge is an increase in low-complexity work. Law department leaders report that one out of every five in-house counsel hours is currently spent on low-complexity, repetitive or routine tasks, with 87% confirming that their department spends too much time on these tasks.
As a result, 47% report that increasing volumes of this work have adversely impacted employee morale. Given the importance of retaining and developing talent for law departments, such figures should be a major cause for concern.
Also, as law departments have brought tasks in-house and added more headcount, they have increased the complexity of their department. This complicates efforts to address the priorities of CEOs not directly related to cost control. While insourcing offers some benefits for addressing CEOs’ priorities for rethinking risk management and business enablement, greater complexity may work against these goals.
Law department leaders are split on whether insourcing has, overall, been a good strategy. While 78% believe insourcing offers opportunities for savings, few intend to increase headcount significantly over the next 3 years. To manage this, they will need to turn to technology and process improvement to help optimize the legal department’s operating model.
Managing workloads
76%of law departments find it challenging to manage current workloads.
Rising workloads
75%say growth in workloads will outpace budgets.
Digitization and optimizing internal processes
The role that technology has to play in transforming law departments cannot be understated. “Technology cannot only deliver cost savings, enhance compliance and de-risk the legal function,” says Cornelius Grossmann, EY Global Law Leader, “but it can also help deliver on CEOs’ priorities around data-driven risk management and improving business enablement.”
Most law department leaders are deploying a wide range of strategies in this area including implementing new technologies, automating and standardizing processes, providing training on best practices, and redesigning workflows. However, most of these strategies aren't being used extensively or as part of broader transformation initiatives.
Similar trends can be seen in the actual technologies that are being used. In the contracting space, for example, leaders report using a wide range of technologies (see figure below). Only a minority, however, use these technologies extensively.
One reason for law and contracting departments’ hesitation to implement process improvement strategies more broadly is that they face a wide range of challenges. Ninety percent, for example, report difficulty identifying a process that supports all users, while seventy-seven percent report they struggle with the adoption of new processes.
Law departments also report that too much time is spent selecting technology, implementation is too time consuming, and their lawyers don’t fully utilize implemented technologies.
Underlying the law department’s digitization and process optimization difficulties is a broader challenge — a lack of skills. Eighty-three percent of law departments report they lack the skills needed to automate processes, while forty-one percent report they lack the data or expertise to develop a case for investment into legal technology.
It is widely recognized that digitization and process improvement have the power to transform law departments' operations, but there are clear obstacles to implementation — including general under-investment, lack of skills or difficulty in identifying the most effective solution. As such, law departments will need to look at how best to accomplish their technology and process improvement goals, be that in-house or through an external provider.
Selecting the most effective sourcing strategy
It is evident from the above that there are benefits and downsides to be found when it comes to using outside counsel, insourcing and implementing technology. For many law departments, it makes sense to play to their strengths — and if any weaknesses cannot be addressed to look to broader solutions to do so.
These solutions may well include self-service automated options, using alternative providers, co-sourcing relationships, or the use of an on- or offshore center of excellence.
Each of these delivery methods presents opportunities and challenges for General Counsel looking to optimize their legal function and maximize the value they provide their organization.
Rethinking sourcing strategies offers benefits that go beyond cost control. Using new delivery methods can improve business enablement and enhance risk management.
Self-service strategies, which allows individuals to use standardized resources and automated processes to complete the required work themselves, can be managed internally or via partnerships with external providers. This approach can reduce department workloads and create on-demand services for internal stakeholders to leverage when they need them. At present, few legal services are self-serviced within large organizations — they are widely used in contracting areas, yet only 16% of contracts are currently self-serviced.
Centers of excellence (or shared service centers) also appear to be underused. While 73% of companies use them to support the legal function, only 9% use them extensively. There are many benefits to using a center of excellence. When optimized they can deliver services at lower costs than traditional law firms or in-house counsel. This is particularly true when centers are in low-cost on- or offshore markets.
While some organizations will receive operational support from other business functions and teams, legal departments thinking of establishing an effective center of excellence should not underestimate the significant time investment required in the short-term to derive high levels of effective service delivery. As centers of excellence can be cumbersome to manage, some departments have turned to third-party providers to help manage personnel, training and ensure continuous improvements in efficiency.
Alternative service providers offer process management and technology capabilities. They also utilize sophisticated talent models leveraging traditional lawyers, technologists, other legal professionals and on- and offshore talent.
There is a real appetite for the use of alternative providers, with 85% of General Counsel saying that their law department uses their services — an increase from 72% in 2019. The level of use, however, varies widely by law department and by service type. In some areas, like regulatory research or document support, their use is mainstream. In other areas like legal entity management, their use is less common.
Interviews with General Counsel suggest law departments appear interested in expanding their use of alternative providers. Significantly, the law departments that currently use alternative providers most extensively are most likely to say they want to expand their use.
“Rethinking sourcing strategies offers benefits that go beyond cost control,” says Dinning. “Using new delivery methods can improve business enablement and enhance risk management. Self-service techniques, for example, can help speed up service delivery.
“Alternative providers’ extensive use of process management and technology allows risk to be managed at a more granular level. It also provides greater access to data and transparency into processes. This allows companies to identify, measure and manage risk in new ways.”
Conclusion
CEOs’ priorities for 2021 suggest that law departments will be under significant pressure to think and act differently for the foreseeable future. While cost control is certainly on the agenda, maximizing the legal function’s value to the organization appears most important to CEOs.
Enabling growth and the business more broadly will be hugely important in the next 18 to 24 months as the global economy rebounds. Helping transform risk management so that companies can adjust to new realities and protect from future difficulties will also be crucial.
Interviews with leaders from law, procurement, commercial contracting and other departments suggest change is already underway in most legal functions. Many are already using advanced strategies to optimize parts of their department. Expanding these initiatives and maximizing their effectiveness will be the primary challenge for law department leaders in 2021 and beyond.
Law departments’ success in this area will ultimately be judged by their alignment with overall business strategy, their success at transforming risk management and in how they help their organization grow.
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Summary
The General Counsel continues the journey to optimize parts of the law department. Finding innovative approaches and maximizing their effectiveness will be the primary challenge for years to come.
