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LegalJanuary 18, 2022

How megamatters are costing your legal department millions—and what to do about it

This article was originally published by ILTA.

In corporate legal departments (CLDs), matters with more than $1M in lifetime spend—which I refer to as “megamatters”—account for about 61 percent of total legal spend and are also bellwethers for the direction where total spend is headed. In fact, according to a recent report released by Wolters Kluwer's ELM Solutions, if annual spend on these matters goes up or down by even $1, there is an 89 percent chance that total outside counsel spend will go up or down in the same direction. Megamatter spend is also highly volatile, with 51 percent of CLDs spending double or almost double on them in a ”bad” year than in a ”good” one. Nine percent of CLDs will see a six-time variance between a good and bad year.

Megamatters present huge opportunities for savings. At the same time, these are the highest risk, most sensitive legal problems the organization has, and a short-sighted, heavy-handed approach to cost savings creates risks of not only failing to solve the organization’s legal problems but also exacerbating them. It makes no sense to push hard for 10 percent savings on outside counsel fees on major litigation if the cost of that is going to be a 100 percent increase in the eventual settlement check that has to be paid! This trade-off makes the mere suggestion of trying to save money politically unpopular in some organizations. This leaves legal ops to focus on finding savings on garden variety matters that, in reality, have minimal impact.

That is why legal ops needs to find a “light touch” or “passive” ways of managing the largest matters and to educate their in-house attorney colleagues that some key tactics, judiciously deployed, will not risk impairing legal outcomes and might even enhance them.

Use the lowest-tier firm that is good enough for the job. As one might expect, the largest law firms dominate the largest, most important legal matters with the most spend. However, regional law firms and even unranked law firms (outside the Am Law 200) continue to play a surprisingly significant role, with the Am Law second hundred achieving 6.2 percent market share on the largest matters and unranked firms accounting for more than a quarter of spend on megamatters, and especially litigation.

These smaller firms are often hired because the legal matter in question is in a smaller market where BigLaw has a diminished presence or none at all. However, the fact that some of the biggest CLDs in the world continue to entrust megamatters to these firms year after year suggests they might be able to perform satisfactorily in larger markets as well. That decision needs to be made on a case-by-case basis, but CLDs that reflexively dismiss regional and smaller firms are almost certainly missing significant savings in the form of reduced rates.

Try ALSPs. Alternative legal service providers (ALSPs) represent only 2.2 percent of megamatter spend, but that is twice as much as in garden variety matters. The increased utilization of ALSPs in megamatters suggests it is easier to see their value proposition in large, multiyear matters with huge potential for cost savings, as opposed to small matters where there isn’t much money to be saved and splitting the work between more than one vendor might not be worth the administrative effort. Ninety-five percent of CLDs that move work to ALSPs say it results in a significant improvement in cost control, yet many CLDs underutilize them or eschew them entirely.

Use phase-based AFAs. Another good tactic for saving money on megamatters is to use fixed fee arrangements. But because it’s difficult to decide on a flat fee for such a large matter with lots of moving parts, the fixed fees should be broken out by matter stage. Furthermore, the fees don’t all have to be negotiated upfront but can be negotiated a phase or two at a time, relieving CLDs and law firms of the risks associated with changing circumstances. However, I believe most CLDs are not using alternative fee arrangements (AFAs) on megamatters at all and are instead using them only on small, low-risk matters, like single-plaintiff labor and employment litigation. According to our research, only about 15 percent of legal spend is subject to AFAs, though, and the most common types of AFAs are fixed-fee per matter or for a portfolio of like matters—not AFAs associated with megamatters. There is nothing wrong with that, but the reality is there is only so much money to be saved on small matters. To achieve serious savings, CLDs are going to have to take AFAs out of the kiddie pool and apply them to the largest matters.

The biggest opportunities for savings are in the largest matters, but those can also be the matters where the organization is most likely to choose a hands-off approach. That’s a mistake. As our report discovered, in 56 percent of law departments, the top 10 legal matters represent between 20 and 40 percent of spend. These three steps represent relatively low-hanging fruit that can ensure CLDs aren’t leaving large sums of money on the table.

Nathan Cemenska
Director of Legal Operations and Industry Insights

Nathan Cemenska, JD/MBA, is the Director of Legal Operations and Industry Insights at Wolters Kluwer's ELM Solutions.

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