A resilient future: Managing risk in an interconnected world
In the May issue of The Actuary, we examine how our increasingly interconnected world makes it challenging to predict future outcomes.
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.
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.
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.
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 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.
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:
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:
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.
An in-house legal team might have to manage dozens of outside defense firms litigating across vastly diverse jurisdictions in hundreds of matters, each with their individual complexity and potential volatility. One monthly invoice may be 20 pages in length, preventing any analysis from being performed given the manual effort that would be involved. This hurdle has traditionally limited a legal team’s ability to manage its legal spend to an elusive feeling that one outside counsel’s performance was superior to another’s.
At the same time, double-digit, year-over-year increases in legal spend have spurred a need to better understand the drivers of these costs, which have largely gone beyond the capacity of legal e-billing tools to control. This is clear from the recent trends, which show increases in defense costs are outpacing those for indemnity. For some insurers, defense costs may be 2/3s or 3/4s of total settlement costs. Often unsustainable, defense cost increases have occurred at a time when organizations and their boards have demanded a higher level of accountability and efficiency from internal stakeholders. The opaqueness surrounding the legal spend process has become no longer viable in many organizations where decisions are expected to be based on data-driven information that will strategically support the organization’s mission.
Legal spend management with advanced analytic functions provides the tools that can meet these expectations.
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:
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.
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 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.