Improving the Organization's Legal Cost Efficiency

Scott Ewart

Traditional reviews of legal departments and processes simply focused on ensuring legal invoices were documented appropriately. This is a typical control function, but it does not focus on the true issue of budget size and organizational risk.

The scope of review should be expanded to include both legal departments and processes because legal:

  • Dramatically affects the legal risk profile of an organization.
  • Controls large budgets for internal and external legal costs.
  • Often works with no defined mission, strategy, tactics, or accountabilities.
  • Process is not historically reviewed by audit committees or internal audit.
  • Is usually on the back foot to defend budgets, and it is virtually impossible for the person acquiring legal services to do self surgery or be self-critical.

It is generally accepted that risk assurance is now assuming a much-greater prominence with boards of directors. Audit committees are now asking for highly reliable business and controls assurance across the business. As a result, internal audit is beginning to review high-risk, big-ticket, strategic areas. With the size of legal budgets and the amount of risk legal manages, the legal process can be considered a “high-risk, big-ticket strategic area.” Audit committees and internal audit are uniquely positioned to provide an objective appraisal of this area of cost and risk.

As a result, audit committees should focus on legal departments and processes to ensure:

  • The retention of external counsel is both defensible and competitive.
  • A major area of organizational risk is reviewed independently.
  • There are appropriate controls surrounding significant legal budgets.
  • The legal department is the right size for the organization.

Moreover, internal audit departments should focus on legal departments and processes to:

  • Focus on major areas of organizational expenditure — external legal fees.
  • Drive internal and external legal costs down and improve legal cost efficiency.
  • Ensure the process for the retention of external counsel is defensible and competitive.
  • Ensure the appropriate legal cost controls are in place.
  • Assist in creating a legal functional business plan linked to the organization’s goals to improve efficiency.

By conducting a properly co-sourced legal process review, legal costs can be reduced through:

  • Improving the effectiveness (doing the right things) and efficiency (at the right cost) of the legal process.
  • Having external legal work done by the right firms, at the right cost, and at the right level.
  • Having a structured plan to mitigate the unique legal risk.
  • Understanding the current reality in the legal department — its strengths, challenges, and improvement opportunities.

Internal audit departments are subject to periodic review. With the increased focus on cost and risk, it is time to open the legal process up to periodic review.


Posted on Nov 3, 2011 by Tim

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