The Finances of Britain’s Legal Firms Are Due for a Shake-Up
After decades of archaic financial management practices, the commercial reputation of the £35.1 billion UK legal services market is in a bit of a sorry state.
According to Nicholas d’Adhemar, Founder & CEO at Apperio, major structural problems, which have remained unaddressed for years, have led to concerns over the ability of in-house legal teams to effectively manage their legal spend to the levels expected by CFOs.
New data has shown that a staggering nine out of ten legal departments don’t know what they’ve spent on external legal counsel in the last year. One in five fixed fee arrangements are billed over agreed budgets. Ageing practice management systems have led to recurring errors that cost clients significant amounts of money. Across the UK legal services industry, 2.38% of billings would seem to be for items that clients do not believe they have agreed to pay for – that alone is more than £800,000,000.
A Bittersweet Relationship
There is no doubting the critical importance of the legal profession to the UK, the law is essential to the running of every business and shapes the environment in which businesses operate, it provides the certainty they need to function.
In the UK, the sheer scale of the legal profession is impressive. The Law Society estimates that there were more than 180,000 solicitors in the UK by mid-2017. The UK Legal Services Market Trends Report 2019 puts the value of the UK legal services sector at £35.1 billion in 2018 and predicted annual growth of more than 5% per year amid growing confidence. This growth is coming at the same time as in-house lawyer numbers are increasing – more than doubling over the last 15 years (Law Society). As of 2017, more than one fifth of the profession worked in-house – this number is expected to rise to 35% by 2025.
Although there is still a universal respect for the advice given by the legal professionals, the same cannot be said of the commercial reputation of growing in-house legal teams. We’ve seen technology bring greater speed, ease and transparency across every sector – everything from banking to accounting has changed, yet legal is lagging. Spreadsheets and email are still the key tools in the legal sector. The existing software is old, ugly and complicated – while the data they create is hard to spot and impossible to act upon. Legal departments simply cannot stay on top of their legal spend in the way they need to.
If the concerns we’re seeing keep on, legal departments could become even more ‘isolated’ within their organisations. Their numbers are estimates, not grounded in fact, with in-house teams getting blind-sided by unexpected bills that are often over three months out of date. For in-house legal teams and their law firms, the result is unnecessary conflict, confusion, and cost.
Cause and Effect
In-house legal departments face many of these problems due to historic, systemic financial management failures across the legal industry. These issues build friction between in-house legal teams and external firms, reducing the ability of the legal department to operate effectively.
Apperio’s analysis of more than £100 million of UK legal spend suggests that errors are widespread and rarely caught and addressed. Apperio discovered dozens of issues – £36,000 charged in error for photocopying, a £42,000 over-charge and a £20,000 bill for duplicate time entries. These errors were not the result of nefarious practices – they are the product of ageing practice management systems – many of which are 25 years old.
The fact is, in-house legal teams have never had any real clarity over their spending. The industry is stuck with inconsistent legal spend data, and it’s always been this way. Even today, legal teams use outdated, time-consuming and manual tools to track spending – using data that is months out of date. Sadly, this isn’t even surprising – and perhaps linked to a global problem.
The 2018 Thomson Reuters Legal Tracker Legal Department Operations Index revealed that 93% of U.S. corporate legal departments put controlling outside legal spend as a crucial area of focus. Although, only 13% of departments surveyed categorised their spend management sophistication as ‘optimised’.
UK legal departments commission billions of pounds worth of external counsel every year. However, there are major concerns surrounding the management of this budget that have remained substantially unaddressed for decades. So, what’s the answer? It’s only now that firms are analysing large sums of legal spend data, and the broader financial aspects of running an in-house legal team, that the reality of the situation is becoming known.
The advances we see in cloud computing and analytics capabilities make it possible to find valuable insights that address the issues of visibility and transparency, manage the intricacies of alternative fee arrangements and reveal the ongoing unintentional errors and behaviours that can lead to overcharging. These new platforms go beyond the ageing E-Billing tools of years past – enabling in-house teams to understand their longstanding spend data, as well as what’s happening in real time.
In-house legal teams and their advisors sit on the solution – the very data that can help solve the industry’s financial management problems. By integrating with law firm practice management systems, new technology can reverse these issues and give legal teams real-time visibility and transparency of their spending. This will help to bring clarity, control and confidence to legal budgeting, meaning less time wasted, and more money saved – a win for businesses large and small.
As these new technologies become more embedded within the legal sector, we’ll start to see far greater transparency on legal spending, this in turn will mean next to no spending errors thanks to an accountable system that physically shows you what is being spent where. Real-time insight will protect legal teams from nasty surprises three months down the line. This is quite simply what in-house legal teams need to do to restore faith and modernise, or they risk falling further behind every other industry using digital technology to improve business functionality.