As noted in Part 1 of this two-part series on strategies for leaner legal departments, when it comes to thriving under limited budgets and high expectations, it's imperative for in-house legal departments to maximize their internal efficiency and resourcefulness. But streamlining inside operations is just one area that law departments must focus on to flourish while doing more with less. In this second part of our series, experts highlight the external aspect of the equation.

On the following pages, consultants and in-house legal leaders discuss how law departments can best manage outside counsel relationships in the wake of the recession, leverage technology and relationships to trim external costs, and work with alternative service providers. Experts also discuss how law firms must adjust their traditional offerings to strengthen and grow their corporate client relationships.

Newfound Power

It's no secret that working with law firms is expensive. According to the Fifth Annual Law Department Operations Survey, which InsideCounsel and Blickstein Group recently published in cooperation with Huron Legal, 70 percent of law department operations managers say their companies spend more than $10 million annually on outside counsel costs in the U.S.

Whereas in the past legal departments may have had the financial means to pay ever-increasing, steep outside counsel bills, albeit begrudgingly, many departments simply can't afford to do so any longer. Luckily, legal technology developers have been launching targeted solutions—including integrated suites of matter management, e-billing, benchmarking and research tools—that empower law departments in new ways.

These tools have a twofold effect. First, they expand in-house departments' knowledge, thereby leveling the playing field with law firms when it comes to legal expertise.

“Law departments are using technology themselves to access knowledge that they once otherwise would've had to pay a lawyer at a law firm to provide to them,” says Michael Trotter, a Taylor English partner who has written extensively on inside-outside counsel relationships.

Second, many technology tools allow legal departments to obtain meaningful metrics that they can then leverage to get better prices from their law firms.

“You need your technology to make you more efficient and generate data so you can make better decisions,” says Eric Laughlin, general manager of the corporate counsel segment at Thomson Reuters. “It's really hard for a legal department to get to a value discussion with a law firm unless they have really good metrics in front of them.”

Kris Satkunas, director of analytic consulting at LexisNexis, says technology tools enable inside counsel to have much more strength in negotiating with their outside counsel. “More and more legal departments are recognizing that they have a wealth of data at their fingertips,” she says. “In the past, they might not have had the resources or a great interest in trying to mine that data and make some decisions by using it. Now, we're seeing much more maturity in terms of wanting to use the right information, surfacing it at the right time and making it available to the decision makers within the organization for purposes of pricing decisions, vendor consolidation and the sorts of things that help lead to greater efficiency and managing outside counsel expense.”

Legal department leaders at Waste Management Inc. and eBay Inc. say technology tools are making an impact on their outside counsel spend.

Mike Haysley, director of legal operations at Waste Management, says some of the tools his department uses help it more closely examine firm staffing. “We have reports that give information on how many lawyers [a firm] is using and what level of lawyers are working on a matter,” ensuring that Waste Management is getting the best bang for its buck, he says. “It lets you see if you're paying to train a first-year associate.”

The legal department at eBay has a legal operations manager and an e-billing coordinator who analyze all outside counsel work that goes through the e-billing system. This helps the department identify spending trends and high-cost areas that need to be pared down, says Brian Levey, eBay's deputy general counsel. Levey says eBay also uses its data to formulate annual budgets that it communicates to its law firms early on in the year so there's a clear expectation of rates going forward.

Michael Trotter, a Taylor English partner who has written extensively on inside-outside counsel relationships, says the latest legal technology tools help law departments keep their law firms in check.

Aiming for Accountability