The relentless year-over-year increases in legal spend have made the management of defense costs a pressing priority for many companies. But differentiating among legal spend management platforms can be as muddy as actually managing outside defense costs. There are, in fact, distinct differences to the wide array of offerings that have been developed. Some are geared to the nuts and bolts of auditing invoices, while others take the next step and use analytics to develop actionable information. This guide sets out frequently asked questions about legal spend management and is intended to clarify some of the key distinctions among these platforms.

What is legal spend management?

A core component of an enterprise legal spend , legal spend management is a system that allows a legal team to understand, allocate and control the spend of its outside defense counsel. The goal is to enable legal teams to be more strategic in the allocation of claims to high performing outside defense firms by providing the teams actionable insights into defense firms’ legal spend.

What are the main components of a legal spend management platform?

Legal spend management is often discussed in the context of its most basic component, a legal e-billing tool. This tool is designed to bring efficiency to legal billing by automating the invoicing and approval process and ensuring compliance with billing guidelines. The focus is on identifying compliance discrepancies.

Next generation legal spend management platforms also incorporate the use of analytics as a way of increasing visibility into legal spend, but even with these more sophisticated platforms distinctions arise in the application of analytics. They are discussed below.

A legal spend management platform may also include a matter management tool, which centralizes documents and other communications of the different parties involved in a matter into a database. This repository provides the legal team with access to critical information for tracking the status of a claim and allocating the appropriate resource to it.

How do legal e-billing tools relate to legal spend management?

Legal e-billing tools serve a basic function in automating the invoice, approval and auditing process. By reducing the need for human review, legal e-billing tools eliminate much of the inefficiencies that go hand-in-hand with a manual process and ensure compliance with billing guidelines. Developed some 20 years, legal e-billing tools continue to be an improvement over manual processes, but are essentially an auditing function.

Adding an analytics component takes the simple auditing function to the next level. Based on a common set of codes known as Uniform Task Based Management System (UTBMS), legal e-billing tools also provide a trove of billing data, which can be used to inform decision making, if properly assessed. Some legal spend management platforms attempt to access this invoice data by effectively layering analytic techniques over the legal e-billing codes. The output from this approach tends to have limited use.

More sophisticated analytic approaches to legal spend management use artificial intelligence (AI) to access detailed text descriptions, the unstructured data, which support the codes, and are able to deliver highly granular information on key markers of a company’s legal spend.

How does legal spend management software work?

Legal spend management software functions in different ways depending on the technology that is used, and is important to understand in making a decision about the usefulness and quality of the output a legal spend platform produces.

The most basic software typically supports legal e-billing tools, which matches invoices against billing guidelines. Invoices are either approved or flagged for inquiry.

More sophisticated legal spend management platforms deploy analytics in basically one of two ways in order to access invoice data:

• First generation analytic platforms
  Analytics were initially, and in many cases still are, used to access invoice data from the code-based LEDES files. Easy to access and manipulate, this structured data tends to produce summary level output such as totals for the number of motions filed. While this information is an improvement over that of legal e-billing tools, its usefulness is typically confined to tracking purposes and its ability to provide actionable insights is limited.
  
  Moreover, the invoice codes used in the analytics is prone to inconsistencies. This is because the same code can be interpreted differently. For example, writing an email can be coded as communications or drafting. Each of these activities has different cost implications. Taken individually, these differences make little difference in the underlying data used in analysis, but if they are multiplied over the 1,000s of invoice a legal team may receive each year from dozens of defense firms, which may each may have different paralegals coding the invoices, these inconsistencies can call into the question the accuracy and quality of the platform’s output.
• Second generation analytic platforms
  In more advanced legal spend management platforms, natural language processing (NLP) is used. NLP is a subfield of artificial intelligence that focuses on enabling computers to understand, interpret, and generate human language. NLP can be used to analyze and extract meaning from text data, such as legal documents, contracts, and invoices, which can be helpful for insurers looking to address legal spend management.
  NLP can help insurers to automate many of the manual processes associated with legal spend management, such as extracting relevant information from legal documents and invoices and identifying patterns and trends in legal data. This can allow insurers to quickly and accurately analyze their legal spend data, identify areas of high legal spend, and make data-driven decisions about how to manage legal expenses.
  For example, insurers can use NLP to analyze legal invoices and identify discrepancies or billing errors. They can also use NLP to extract key terms and clauses from contracts and legal documents, allowing them to quickly identify potential legal risks or issues.
  In addition, NLP can help insurers to improve their communication and collaboration with outside counsel. By using NLP-powered tools to analyze and communicate legal data, insurers can facilitate more efficient and effective communication with their legal teams, resulting in faster and better-informed decision-making.

How can legal spend management be used to control costs?

The ability to control costs depends heavily on the capacity of the legal spend management platform to increase visibility into an organization’s outside defense costs. The more granularity in output delivered by the legal spend management platform, the greater visibility an organization has into its costs and the better equipped it is to make informed decisions.

At the low end of the spectrum are legal e-billing tools whose cost savings derive from their ability to identify billing oversights and irregularities. A decided improvement over manual processes, legal e-billing tools have typically been shown to save 1.5 FTE hours when implemented.

Legal spend management platforms with an analytic function that extracts data based on invoice codes provide somewhat better visibility into defense costs than that of legal e-billing tools. The output, which tends to be summary in nature, can be used for tracking purposes but is difficult to use for more in-depth analysis.

Legal spend management platforms with an analytic function that extracts information from unstructured text data produces the most granular information and therefore the greatest visibility into legal spend. For example, output can include:

• The number of motions taken by firm by lawyer by jurisdiction.
• Travel spending by firm.
• Depositions taken by lawyer segmented by type of witness.
• The success rate of motions filed by lawyer.
• The number of trial days by case among other information.

This level of granularity can give legal teams a clear understanding of the cost drivers of their legal spend and identify high and low performing law firms.

The most advanced platforms use this information to develop risk-adjusted predictive scores for performance that allow a legal team to compare actual indemnity and defense costs of a claim with its expected outcomes, which can help to increase the predictability of legal spend budgets.

An advanced platform may also identify defense firms whose cost structures are a mismatch with their performance and those whose performance provides good value. In this way, legal team can maximize the allocation of its legal spend, phasing out less effective firms and assigning more claims to high performing firms. The ability to access a granular level of data can also augment the auditing function of a legal spend management platform. For example, one of the more advanced legal spend management platforms can identify if an attorney billed for two trips to a courthouse in one day when he or she only made one, or if an attorney exceeded the reasonable limit of the six-minute chipping practice and billed for more than 24 hours in a day.

But the critical advantage of an advanced legal spend management platform is its ability to provide new intelligence undetectable by the human brain that enables the legal team to quantify the effectiveness of its outside defense counsel based on risk-adjusted information—resulting in more effective allocation of legal spend.

Why do legal teams need spend management?

Managing legal expenses can be a daunting task for in-house legal teams, especially when dealing with multiple defense firms operating in diverse jurisdictions across hundreds of cases, each with its unique complexities and potential volatility. The monthly invoices for these cases can run up to 20 or more pages, making it virtually impossible to analyze them manually.

Traditionally, this has limited the ability of legal teams to manage their legal spend, making it difficult to determine which outside counsel's performance was superior to another's. Furthermore, the double-digit year-over-year increases in legal spend have made it necessary to understand the cost drivers, which has gone beyond the capabilities of traditional legal e-billing tools.

This is evident from recent trends, which indicate that defense costs are increasing at a faster rate than indemnity costs. For some insurers, defense costs account for two-thirds or three-quarters of the total settlement costs, which can be unsustainable. Additionally, organizations and their boards expect higher accountability and efficiency from their internal stakeholders, making the opaqueness surrounding the legal spend process no longer viable.

To address these challenges, legal spend management platforms with advanced analytic functions provide the necessary tools to meet these expectations. With the ability to analyze legal spend data, legal teams can gain a better understanding of cost drivers, identify areas of high legal spend, and negotiate legal fees with outside counsel, resulting in reduced legal expenses and improved legal cost management processes.

What are the benefits of legal spend management software?

By reducing the need for human intervention in the invoicing and approval process, legal spend management software greatly increases efficiency and accuracy. Coupled with the latest analytic techniques, the platform gives legal teams the ability to:

• Analyze the performance of outside defense firms based on key metrics such as success rates, deposition costs by firm, and percentage of indemnity claims among other legal markers
• Increase predictability of legal spend budgets with the ability to compare actual performance with expected outcomes
• Increase confidence that legal spend decisions deliver the expected value
• Allocate legal spend budgets using sound data-driven intelligence
• Reduce legal spend and loss payments by strategically shifting case loads to high performing defense firms
• Improve the ability to align changes in legal spend with corporate mandates
• Provide senior management and boards with a data-based support for legal spend decisions
• Reduce much of the labor-intensive effort needed to manually approve invoices
• More effectively allocate in-house resources to high value projects
• Ensure compliance with billing guidelines

Who needs legal spend management?

Organizations such as insurers, captives, and third-party administrators that manage large legal spend have traditionally had a need to manage their outside defense counsel costs, but today any organization that has seen its legal spend steadily increase and questions the rationale for these increases can benefit from a legal spend management platform.

What is involved in the implementation of a legal spend management platform?

In the past, cumbersome interfaces that called for a heavy in-house IT commitment have often hindered implementation of new software. But cloud technology has made legal spend management software much more available to a variety of companies. While some in-house IT support is needed, many approaches to legal spend management software are SaaS solutions, which greatly reduce the demands on in-house IT. The use of a SaaS solutions also eliminates the need for in-house IT to update the software, since the service delivers the latest updates and features.

Milliman’s Datalytics-Defense®

Milliman’s legal spend management solution uses powerful, proprietary data-mining algorithms to build a clear understanding of the information that is buried in invoices. With the ability to consistently read the text of invoice line item descriptions, the platform delivers new intelligence about the cost drivers of legal spend.

Legal teams can compare the actual defense and indemnity costs of a case with its expected results to improve case outcomes, gain actionable insight into the performance of their outside defense firms using risk-adjusted benchmarks, and maximize the allocation of legal defense dollars to the most effective law firms – an approach that has saved some legal teams up to 15% of their defense costs. Coupled with our subject matter experts, Milliman’s analytics give legal teams the ability to not only manage legal spend but achieve better outcomes on cases.

This article was originally published on June 30, 2021