State of Legal 2012: Cost Control 2.0

Today a look at a key agenda item in this new year: cost control. I know it sometimes sounds like a bromide, but I really think it is only at the start of the beginning. I promise to try to do this without using the phrase with the initials “BH.”

When I defined the scope of this State of Legal yesterday, I clearly focused on delivering law to the enterprise. If one thing was clear in 2011, it was the ongoing need to control costs. Even the most intransigent players in the corporate law industry saw the cost control imperative written on the wall.

See, here it is, from the “Occupy Law Street” crowd, right outside your office:

True, many talked about “value.” That’s fine although it is not some magic pixie dust that puts a GC in a trance and causes her to suspend fiscal prudence. Certain law firms see it as a tactic to stay upmarket where they think the higher margins will continue to reside. Maybe. More on that later in this series.

The base case for 2012 is this: costs really matter to clients. This is a safe premise for anyone serious about understanding the logic of corporate legal going forward.

We have to acknowledge a big part of the debate in the last few years: unending discussions on tactics like Alternate Fee Arrangements in their many varieties. This is fine, and it was needed. I submit, however, it’s not enough anymore. AFAs involve law firms, and often incumbent law firms. That focus leaves a lot of tools unused in the GC toolbox.

It also does something else: it makes the invoice the key target in cost control.

This is appropriate if a company is in its early stages of the cost control journey. And it will always be part of the process. General Counsel will need a consistent way to know whether what they are spending on outside lawyers is “in the market.” Both in the aggregate, and with individual firms. Maybe someday even with individual lawyers.

However, it’s just a start. Experts will tell you that an invoice is a lagging indicator: that many things happened to get to that point, and if you are looking mostly at how outside counsel get paid, you are missing an opportunity for more structural improvement.

So what is Cost Control 2.0? Going forward, it is a move backward. Backward, that is, in time. It means taking an earlier look at what the enterprise really needs legal-wise. Here are some of the questions I hear in-house bar asking:

1. Do we really need to do this?

2. Could it be done by a client?

3. How about by using a computer or software?

4. Can it be done in-house rather than by a law firm?

5. Can it be done by non-lawyers instead of me?

6. Could it be outsourced entirely?

7. Or maybe by a less expensive firm?

Note that it we didn’t get to law firms until number 7. And we know from experience that an AFA with a law firm that is too expensive for the task will typically be much more expensive than choosing a firm with a better cost structure and delivery model in the first place.

There is a lot more to this, and it will be covered here later this quarter.

And to be perfectly clear: while the reality of Cost Control 2.0 involves the entire corporate legal industry, the responsibility for it resides at the doorstep of general counsel. As Ron Friedmann pointed out yesterday (with a great five-point checklist to boot), if a GC doesn’t do this, others can. And will.

Tomorrow, a closer look at #3 in the list above. Will technology be the answer this year? Stay tuned…