Apperio, the legal spend tracking and analytics platform, has analysed £100 million of 2018 UK legal spend to isolate the three major, structural problems that are damaging the commercial reputations of in-house legal departments. The report, “Exposed: the three financial failings of the legal profession”, highlights:
Lack of visibility and transparency
Even in 2019, legal teams rely on out-dated, time-consuming and manual tools to track budgets, resulting in inconsistent, incomplete and inaccessible legal spend data. Based on data analysis and conversations with hundreds of UK legal teams, Apperio has found that 9 out of 10 legal departments simply don’t know what they spent on legal fees in the previous year.
There is also a lack of financial transparency between in-house legal teams and external counsel, caused by the lag between work completion and invoicing. Apperio’s data suggests that, on average, it takes 137 days between law firms completing work and invoicing their clients for it.
“Given the delay between work completion and invoicing, disputes between in-house legal teams and external counsel are common,” said Nicholas d’Adhemar, CEO, Apperio. “But the more damaging impact is unplanned overspend and difficulty for CFOs in tracking accruals. Legal spend tracking for most organisations will often be more than four months out of date.”
Confusing fee arrangements, inconsistently applied
Beyond traditional ‘billable hours’, there are dozens of alternative fee arrangements in use today. If the array of alternative fee arrangements weren’t confusing enough, Apperio’s data suggests that in-house legal teams don’t always get what they think they’ve agreed to. A significant number of fixed fee matters – one in five – are billed over the agreed budget.
Capped fee engagements, for example, are blunt instruments that often have counterintuitive consequences. Once the cap is reached, anecdotal evidence suggests that firms will often deprioritise the matter – putting up lower grades of lawyer, or off-shoring the engagement.
“During our analysis, it’s become clear that alternative fee arrangements provide in-house legal teams with a false sense of control and security,” said d’Adhemar. “If our data shows that 21% of supposedly ‘fixed fees’ are being regularly re-negotiated, there is clearly a false economy at work here.”
Recurring billing errors and questionable time recording behaviours
Analysis of billing records suggests that inadvertent errors caused by aging financial management technologies are rarely identified and addressed. For one client, Apperio discovered a £36,000 photocopying charge incorrectly allocated. Dozens of similar errors have been caught and rectified – incorrect charge out rates had been applied to one client resulting in a £42,000 over-charge, £20,000 of duplicate time entries was found for another client.
Apperio’s analysis has found evidence of timesheet rounding and time recording behaviours that seem to conflict with what clients have contractually agreed to. Very often clients will agree to not pay for travel time, scanning/printing time, handover time, internal meetings, bible time and bill time. Overall, 2.38% of billings analysed would seem to be for items that clients do not believe they have agreed to pay for. That’s £2,380,000 in fees in the sample analysed and, if applied to the UK legal services market as a whole, £835,000,000[1].
“Our analysis points to significant failings in the financial management of the UK legal services market, and one that is costing in-house legal teams many hundreds of millions of pounds a year”, said d’Adhemar.
An unacceptable impact that must be reversed
Apperio’s analysis has found that in-house legal teams are not on top of their legal spend in real-time, face a confusing array of alternative fee arrangements that are not always what they seem and are exposed to costly, inadvertent errors exacerbated by aging technology infrastructure.
“The UK’s £35.1 billion legal services market[2] is critical to the success of our economy. But, worryingly, the commercial reputations of many of the UK’s in-house legal departments are in the doldrums,” said d’Adhemar. “Our analysis reveals unnecessary conflict, uncomfortable confusion and unacceptable costs due to historic, systemic financial management failings. This creates friction between legal teams and external counsel, tense relationships between in-house legal teams and their CFOs and stunts the ability of legal departments to operate strategically.”
By integrating with law firms’ existing time recording systems and applying tracking and analytics, Legal Tech start-ups like Apperio are reversing these problems.
“Advances in cloud computing and analytics capabilities make it possible to extract valuable insights that give in-house legal teams real-time spend visibility and transparency, manage the complexities of alternative fee arrangements and reveal the recurring unintentional errors and behaviours that can lead to overcharging,” said d’Adhemar. “We’re helping to bring clarity, control and confidence to legal spend management, enabling in-house legal teams to reclaim their rightful position as a strategic organisational function.”
For further analysis, please read Exposed: the three financial failings of the legal profession, which can be downloaded for free via Apperio’s website.
[1] 2.38% of the UK legal services market, estimated to be worth £35.1 billion in 2018
[2] UK Legal Services Market Trends Report 2019