Bringing Down The Gavel On Corporates’ Excess Legal Spend

In the most litigious nation on the planet, corporations are spending big bucks on their legal departments. Over the last year, corporate legal spend has risen, driven by a variety of factors, from data privacy issues to pandemic-related business interruption matters.

A survey by AlixPartners revealed businesses in the U.S. and Europe expanded their legal budgets with more than one-third of surveyed firms reporting that legal budgets have increased over the last year.

Businesses are loosening the purse strings on legal spend to ensure their firms stay protected and compliant. But relaxed budgets have a downside, according to Onit CEO Eric M. Elfman. For decades, businesses have struggled to adequately assess the complex and voluminous invoices sent by outside counsel and other external legal vendors, leading to overspending and inefficiencies.

In a conversation with PYMNTS, Elfman dove into the biggest barriers to making sure that legal departments are adequately connected to accounts payable (AP) teams and that their legal B2B payments are going toward the correct services.

Slipping Under The Radar

Just as can happen with employee expenses, when outside counsel bill for various services, there can be plenty of opportunities for businesses to overspend or pay for noncompliant services. Corporations have outside counsel guidelines that dictate what internal legal departments can and cannot spend company money on, but according to Elfman, they’re rarely followed.

A look back at the history of corporate legal spend reveals several factors behind this lack of oversight.

One of the biggest points of friction is the legal invoice itself. When they were submitted by paper and later emailed as PDFs, these documents placed a high burden on legal departments that would receive tall stacks of complex bills. Junior attorneys were typically tasked with reviewing these invoices, noted Elfman, but little attention was paid to each line item to ensure it was compliant and accurate.

“A Fortune 500 legal department would get a stack of four or five feet of invoices every month from their law firms — literally,” said Elfman. “It was just a horribly inefficient system, and there was no way to check an invoice against all of those rules.”

A Coded Message

The history of legal B2B invoices also includes an effort to make it easier for parties to identify the services that were provided and presented on these bills. But this strategy, as Elfman explained, was wrought with problems.

The legal services space has traditionally used standardized codes to explain a service provided. In theory, this makes it easier for a corporation to determine that it spent, say, $12,000 on discovery, $9,000 on research and so on. The reality, however, is that these codes can be far too broad.

“It makes these really broad assumptions about the work that was being done,” Elfman said. “The codes had to be so generalized to serve everybody’s needs, but they actually served no individual law firm or corporate legal department’s needs.”

There have been cases of fraud, of course. Elfman presented the hypothetical scenario of a lawyer buying a pair of shoes and billing it as a travel expense. He also offered a real-world example of Onit identifying cases in customers’ legal invoices in which outside legal counsel were charging for travel expenses — despite those supposed charges occurring during a pandemic when travel was not happening.

“Our customers were paying hundreds of thousands of dollars on travel expenses, but they were coded differently, and so their system didn’t catch it,” he explained.

Bridging The Gap With Accounts Payable

What typically happens with legal invoices is that legal departments approve the invoices before being sent over to AP teams for processing and payment. Making the process of identifying potential overspend or errors even more challenging is the fact that terms for B2B payments in the legal arena can be as long as 150 days.

By more closely aligning legal spend and legal invoice review with broader AP practices, Elfman said there is a significant opportunity to not only optimize corporates’ legal spend but to support the cash flow of external legal service providers too.

Introducing dynamic discounting to entice companies to review and pay those invoices more quickly can support the working capital health of those external partners. Meanwhile, Onit has also introduced an artificial intelligence (AI)-powered solution, InvoiceAI, to review legal invoices. Already, the company has identified a massive pain point: 7 percent of invoices include charges that are in violation of outside counsel guidelines, while a whopping 90 percent of invoices are never actually edited if any discrepancies or errors are discovered.

There is a cultural element to that challenge, Elfman said, citing the personal relationship between lawyers of outside counsel and internal legal departments. But through automation technology, businesses have a chance to save significantly on one of their biggest spend categories. With corporate legal spend on the rise, the risk of overspend and erroneous spend will continue to climb, and businesses need an efficient means of litigating that threat.

“Legal costs keep getting greater,” Elfman said. “This is why the market for technology has evolved and matured over the last 20 years. Corporations just couldn’t afford to throw people at the increasing spend every year anymore.”