For businesses, understanding your legal spend is key to maintaining good business practices and profitable relationships with your law firms. Too often, however, organisations lose oversight over their legal spend because of outdated practices, leaving them reliant on a combination of email and spreadsheets as their only form of work-in-progress (WIP) oversight.
A lack of regular updates and billing delays is a toxic combination that causes nasty surprises which can blow up in the faces of those trying to maintain good business practices. In our research and in conversations with our banking clients, we have heard the phrase "WIP bomb". The WIP bomb is difficult to defuse, and when it explodes, the consequences can be far-reaching.
Law Society figures show the banking and financial services industry accounted for more than 40% of the total value of deals on which the top 50 law firms advised between 2013 and 2017. Given that in the years to 2015, global legal spending by banks topped £200bn, the scale of the WIP management problem is significant and it is understandable why banks and other organisations are seeking a tighter grip on the fees being charged. A 2018 report from EY Global found that 85% of the banks interviewed had digital transformation as a priority, with innovation-led investment efficiency projects the main recipient. In such an environment, how can failure to upgrade technology and implement lean practices be justified?
Increasingly banks require their panel law firms to improve their management information (MI) function. Better MI gives banks oversight on all matters they have engaged law firms on, and WIP is a crucial element in this. Banks want better visibility of their legal spend because the last thing they need is to receive a nasty surprise bill which can affect their financial planning and budgeting. The pressure for change comes from the CFO, as they naturally expect departments throughout the bank to be better at managing cost. GCs require their teams to clamp down to ensure banks are billed issues as close as possible to when the cost of the matter was incurred, or face the consequences of the WIP bomb detonating.
In our conversations with legal operations managers in banks, we uncovered a series of issues around the deadly combination of unknown WIP and unbilled WIP, which are only emphasised as banks seek tighter control of costs across the business.
For banks, legal work tends to fall into two areas, litigation and transactions.
Litigation can see significant costs build up quickly, and it is, therefore, essential they are monitored and bills are received regularly. Hefty bills are also not uncommon for transactions, and in many cases for banks, there can be legal costs ascribed to deals that don’t go ahead. This means clients have no revenue to book costs against and so require their law firms to work with them closely and ensure costs are kept to a minimum.
While firms are usually receptive to reducing the bill, being close to your WIP numbers means you can facilitate the conversation better and with greater accuracy – and then ask for a discount as closely as possible to the date when the cost was incurred. The last thing banks want is for a matter to drag on for months, discover a £100,000 bill and have forgotten what the cost relates to.
We have discovered the current approach to managing these costs is ad hoc at best, with each lawyer having their own approach to billing. Banking litigation lawyers are often excellent at managing costs, keeping law firms on a very tight leash to ensure bills are raised appropriately. For transactional issues, there can be less discipline and this can be a fundamental cause of the WIP bomb. Having less structure, standardisation and formal reporting in place can lay a trap for banks, which can be easy to fall into. Standardised, transparent MI reporting is essential across the business as it allows GCs and the c-suite to become familiar with it, and gain demonstrable value.
Avoid the spreadsheet flood
We agree that standardisation is essential, but if banks are relying on email and Excel to do their work for them, they are still reliant on humans to complete them correctly and to deadline. Sure, banks can try to put the weight of the work onto law firms but a whole process needs to be built to monitor the spreadsheets as they arrive, and then try to work out where the problem areas are.
The problem is magnified when working with multiple law firms in a panel. Suddenly a flood of spreadsheets is submitted in 12 monthly waves. Our research found that consolidation of spreadsheets accounts for 25% of an individual’s time each month. In an age where technology is employed to increase the value of skilled staff, this is a significant waste and one that should be easily avoidable.
Why expect the unexpected?
The end-of-year accrual can be where the WIP bomb is most deadly. Banks don’t want surprise legal bills related to 2019 matters to hit the 2020 budget without provision being made. A lack of transparency means banks are forced to do the heavy lifting of working out what needs to be provided in the accounts for legal bills so they hit the right accounts.
Bank legal operations managers say they have experienced times where their CFOs have told them that, due to an unexpected bill they have lost budget, hampering their efforts to transform their business. Having better and transparent MI avoids this issue entirely.
New processes, new success
For smart businesses, it’s pretty basic stuff. Having a tool that tells you about the accumulated WIP is a huge advantage. Managing costs accurately and in a timely fashion using emails and spreadsheets is not sustainable. Being able to see spend, across all matters across all law firms integrated into one place can put banks significantly further ahead.
Continuing to plug away at the same old broken processes and expecting change is inefficient and detracts from the good work that in-house departments do every day. It is time to start thinking about what is possible, and stop waiting for the WIP bomb to go off.
So, what steps can you take with your law firms to ensure you have WIP awareness and take the action to stop the bomb going off? Look out for our guide on how to maximise your law firm relationship and manage your WIP.