Key Metric #4: Law Firm Mix: How to Track Your Law Firms and Allocate Your Legal Spend

As the market for legal services continues to change and law firms push to increase billings, savvy in-house counsel and legal operations professionals are increasingly turning to data analytics to control costs. As part of our series on key metrics that legal departments should be tracking, our final post in this series will focus on how to allocate work among your law firms.
Like with lead partners in our prior post, due to the immense and increasing variation in business models of firms, Bodhala has found that one of the most impactful ways to optimize legal spend is having a system and data to measure and act on the variation between law firms handling particular work. Indeed, Bodhala has found this to be true in client after client.  
Most clients have multiple firms that can handle similar matters, but fail to fully realize the benefits of competition inherent in having multiple providers. By properly tracking and utilizing data, clients can keep their firms honest by rewarding work to the more efficient firms and pulling work from the less efficient firms.
While law firm mix is one of the key metrics to monitor for any legal department, we find that in-house legal departments frequently lack the resources to adequately analyze how their work is being distributed. The data is not available in real-time for when hiring decisions are on hand because the data requires IT intervention or is stuck in static reports.
In order to properly manage law firm mix, legal departments should be able to, in a matter of minutes, measure each firm by key metrics such as average blended rate, number of attorneys and allocation of work between partners and associates, average cost per matter, and block billing. Further, legal departments should be able to compare firms in similar practice areas across these metrics to see who is delivering value and who needs to improve.

In addition to monitoring the amount of work you are sending to a particular law firm, it is important to monitor your individual law firms’ business models, particularly their leverage ratios, in order to better allocate your work. For example, a law firm with a 3-to-1 partner to associate ratio is incentivized to staff 3 associates for every partner on each of your matters. If such a firm is allocated legal work that can be accomplished by one partner and one associate, they will nevertheless be incentivized to staff additional associates, resulting in increased costs.  All things equal, a client has to apply more scrutiny where it assigns work that only requires small teams to firms with high leverage business models.

Allocating too much work to a single law firm can create “lock-in” and lead to increased costs, as your law firms feel too comfortable and no longer work efficiently. On the other hand, allocating your work to too many outside firms can result in increased costs, as you lose purchasing power and weaken relationships when firms receive only small amounts of work. A well-implemented analytics platform allows you to monitor and adjust this mix in real time and produce large savings.    

Overall, measuring law firm performance with an effective legal analytics platform allows legal departments to use hard data to determine whether their legal work is being allocated to the right law firm. If a law firm is delivering insufficient value the legal department can have a productive conversation with the firm (backed by data) or make real-time adjustments to the amount of work the firm is receiving or seek firms with a business model that matches the work..

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