Legal Spend Cost Saving Strategies for the Law Department
by Kris Satkunas and Stephanie Beck
Virtually every legal department is under pressure to reduce and tightly manage costs. And for most legal departments, legal spend cost saving with outside counsel represents a very large portion of that cost. In addition to enforcing the billing of approved timekeeper hourly rates or alternative fee arrangements, LexisNexis® CounselLink® has features to manage discount arrangements with law firms. We were curious about the sorts of discounts used most by CounselLink customers today and whether any best practices could be gleaned from these arrangements.
Information in this article draws on the extensive CounselLink 2024 benchmark database of more than $59 billion in legal spending across more than 460,000 timekeepers and more than 1.6 million matters. We reference the benchmark database frequently to uncover an array of analytical data, including legal spend cost saving strategies.
To start, we looked at customers leveraging prompt pay discounts and found that 20% of CounselLink customers take a discount on some law firm invoices if they pay the firm within a relatively small number of days after receiving the invoice.
On average, these customers receive a 5.8% rate of savings on prompt pay invoices, and the overall savings these customers take to their bottom line is 0.5% of their total gross invoices (those with and without prompt pay discounts). While that percentage may be small, looking more closely at how prompt pay is utilized by customers points to multiple ideas for optimizing the savings potential of this discount arrangement.
Customers in three industries have above-average adoption of prompt fee discounts: Insurance, Entertainment and Pharma. While they seem like strange bedfellows, there isn’t a correlation between these verticals using prompt pay more than others. We understand why the insurance sector is in the group because it tightens the belt around cost management more than any other industry. Beyond that, we have no reasoning behind why entertainment and pharmaceuticals use prompt pay discounts more than other vertical industries.
3 Tips to Maximize Prompt Pay Discounts
-
Arrange for prompt pay discounts with as many law firms as possible
- Of legal departments utilizing prompt pay discounts, 73% have discount arrangements with fewer than 10 firms. These discounts result in a 6.9% rate of savings on prompt-pay invoices. The overall savings these customers take to their bottom line is 0.10% of their total gross invoices (those with and without prompt pay discounts).
-
In contrast, the legal departments leveraging prompt pay with 10 or more of their firms have a lower rate of savings on prompt pay invoices, 2.7% (they take lower average discount percentages), but the overall savings these customers take to their bottom line is 1.1 % of their total gross invoices, 11 times greater than customers only employing prompt pay for a handful of firms.
On the extreme, for example, a legal department with annual outside counsel spend of $10M that discounts all law firm invoices by 5% would save $500,000.
-
Negotiate as large a discount rate as you can.
- The majority of prompt pay discount rates are between 1% and 3%, with discounts between 5% and 10% being the next most popular rates.
- Do not assume that firms only accept prompt pay discount rates up to 3%. Those 53% of clients using prompt pay discounts include a discount greater than 3% in at least one tier of their discount arrangements. These arrangements have resulted in 20% of prompt pay invoices processed with discounts greater than 3%.
-
Employ multiple tiers of discounts.
- The most common terms for a prompt pay discount are 30 days, 10 days, and 15 days. About half of the legal departments taking prompt pay discounts use a 30-day threshold as part of their discount structure.
Most common number of days
to approve an invoice
30
10
15 - Prompt pay discounts can be tiered where each tier corresponds to a period of time and a discount percentage. For example, the legal department can approve an invoice within 10 days and receive a 5% discount with the firm but if they miss that cutoff and approve within 30 days, they can still receive a 3% discount. In fact, if desired, a third tier can be added based on a 15-day cutoff.
Most customers don’t take advantage of this configuration option, missing out on an opportunity to increase their prompt pay savings.
- 90% of legal departments with prompt pay arrangements have a single-tier discount structure
- 8% have two tiers – Knowing that one-and-done is not always the best option, legal departments should consider a two-tier (or three) prompt pay structure. Consider this: if the law firm agrees to a 10-day prompt pay discount, then why not ask for a 15- or 30-day discount, as well?
- 2% have three tiers
- The most common terms for a prompt pay discount are 30 days, 10 days, and 15 days. About half of the legal departments taking prompt pay discounts use a 30-day threshold as part of their discount structure.
Whether you’ve been considering adding prompt pay to your savings toolkit, or already employ the feature, these tips should help you get the most value from this discount arrangement.
Kristina Satkunas is Director of Strategic Consulting with LexisNexis CounselLink advising corporate legal department managers on improving operations with data-driven decisions. Follow Kris on LinkedIn.
Stephanie Beck manages the technical consulting group within the CounselLink Professional Services organization, overseeing the delivery of reports, data conversions, and integrations. Follow Stephanie on LinkedIn.
About CounselLink
LexisNexis CounselLink is a cloud-based enterprise legal management solution integrated into one platform with contract lifecycle management. Its vendor and financial management tools enable legal departments to utilize dashboards showing billing arrangements, fee arrangements, partner rates by law firms, and much more. CounselLink elevates legal department value with in-depth visibility into alternative fee arrangements, prompt-pay discounts, and legal spend management. Other tools, including matter and work management and analytical reporting, make CounselLink an invaluable solution for the corporate legal department.