What Is Legal Spend Management? A Guide for Law Firms

Understanding legal spend management

To understand legal spend management, we must first touch on three main issues: (1) what this term means, (2) the key components of legal spend management, and (3) the role of technology in implementing spend management.

What is legal spend management?

The traditional meaning of legal spend management is managing the in-house and outside legal costs of a company. For law firms, the term refers to the management of business expenses.

The main components of legal spend management at law firms are as follows: 

• Expense management: Tracking and categorizing expenses, billing appropriate expenses to clients, and implementing spending process controls.
• Budget management: Instituting limits for expense categories.
• Invoicing: Generating and issuing invoices.
• Collections: Follow-ups and reminders on client invoices, along with other required client communications to facilitate collections.
• Financial reporting and forecasting: Generating financial reports, analysis of those reports, and forecasting future performance.

Automation and software enable your firm to make these processes more efficient. If your software solutions also integrate well with your practice management software, this will go a long way toward streamlining your practice.

Challenges in managing legal spend 

Law firms often run into a few key challenges when managing their legal spend, from accurate tracking, to company-wide visibility, to timely reporting. 

Manual tracking and spreadsheets

Manual tracking of legal spend items is inefficient and prone to inaccuracy. Even when a firm believes it is relatively tech savvy, the use of Excel spreadsheets will not be sufficient. Law firms need to shift toward more advanced technology for managing their spend.

Lack of centralized financial visibility

Another obstacle for legal practices is their inability to quickly get an overview of their legal spend. Without centralized financial visibility, the law firm’s financial situation will always be difficult to manage.

Limited reporting and analytics

Many firms engage in very limited financial reporting, making spend management even more difficult. Without reporting and analytics, it will be very difficult to find opportunities for better spend management.

Check out Clio Accounting’s financial reporting feature—giving firms instant financial insights.

Poor forecasting of future expenses

If you fail to have a window into the present, you will likely also fail to see the future. More than just a simple proverb, this is absolutely true for law firm expenses. If your practice cannot forecast future expenses, it also will not be able to forecast its future financial health.

Strategies for effective law firm financial management

Keeping your firm financially healthy takes more than knowing why legal spend management matters. It also takes putting the right strategies into practice. Here are some of the most effective strategies and tools firms can use to strengthen their legal spend management. 

Implementing technology solutions for streamlined processes

Today’s technology makes legal spend management simpler and more reliable, helping firms automate routine work and maintain compliance.

Software and automation

Manual data entry will wear down a firm’s staff and lead to inaccuracies. When manual processes can be automated with legal spend management software, speed and accuracy will both improve. This software can also provide real-time views of your firm’s financial data.

Legal spend reporting and analytics

Regular financial reporting is essential for maintaining the financial viability of a legal practice. Financial reports such as income statements, balance sheets, and cash flow statements will provide a window into your firm’s performance in comparison to its goals. Analytics will enable you to gain insights from these reports and generate useful financial forecasting.

Trust/IOLTA compliance

For law firms, compliance with regulations governing trust and IOLTA accounts is its own separate aspect of accounting. Legal practices often hold client funds and other third-party funds in trust accounts. Properly managing these accounts and avoiding commingling of funds are vital components of legal compliance, making the right accounting software also vital.

Clio Accounting makes it easy to conduct three-way trust accounting reconciliation.

Integrations with accounting systems

Since your law firm may use a variety of software, it will help immensely to have accounting software that integrates well. When your practice management software or other tech tools integrate with your accounting system, your whole firm will be streamlined.

For example, Clio Accounting pulls in data and insights from Clio Manage and Clio Payments, keeping everything in one place and reducing context switching.

Developing clear guidelines and policies

Any company that wants to manage its expenses will need to create and implement clear expense policies. Also important is setting approval workflows for expenses. Law firms are no different in this regard and will need guidelines and policies for effective spend management.

With AI built right into Clio Manage, you can route bills to the right approvers, set billing parameters, and configure end-of-month billing based on your preferences. Built-in checkpoints help you monitor progress and ensure everything stays on track.

Leveraging data analytics to optimize legal spend

Legal spend management software can provide data analytics to take your firm’s spend management efforts to the next level. Analytics can identify your firm’s spending trends in different expense categories. They can also help forecast your firm’s future legal spend.

Benefits of legal spend management software

Legal spend management software is an effective tool for your overall firm management. Here are just some of its many benefits.

Increased efficiency and productivity

Spend management software can automate numerous tasks that many firms may be performing manually, such as expense entries. The automation will also decrease the amount of errors that are inevitable with manual entries, thus requiring less staff time for double-checking. The software can also track expenses and streamline your firm’s accounting. 

Improving financial visibility, transparency and accountability

A firm needs immediate visibility into its financial health and the ability to detect discrepancies or fraud. Legal spend management software can provide this visibility with real-time insights. In addition to stopping any financial malfeasance at the firm, you will be better able to identify opportunities to minimize expenses.

Enhancing cost savings and budget control

Once your legal practice improves its financial visibility and transparency, it will be better able to impose control over expenses. Once you have established budgetary guidelines and controls, you can utilize your software to ensure those guidelines and controls are enforced. 

Data-driven decision making

One of the great overarching benefits of spend management software is the enhancement of your firm’s financial decision making. Instead of flying blind or going by “feel,” you can analyze the exact causes of profit leakage at your practice, allowing you to stop those leaks and find new opportunities for cost savings.

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Implementing legal spend management solutions

A firm implementing a legal spend management solution should be aware of several considerations.

Integrating software into existing workflows

Ensure that your spend management software integrates with any other financial software your practice uses. Just as importantly, check that it integrates with your legal tech software, including any practice management software. If your new software is incompatible with existing workflows and systems, you may fail to reap the benefits.

Training and support for legal teams

Your attorneys and staff will need adequate training to make sure they can use the legal spend management software correctly. Most software companies will provide this training or, at the very least, have assistance available for anyone at your firm who needs it.

At Clio you’ll have access to a dedicated team of onboarding specialists, and a 24/5 support team that is excited to help your firm get started and to ensure you’re getting the most out of the tool. Moving over to new tools does not need to be daunting, we’re here to help you every step of the way. 

Measuring success and ROI of legal spend management

Once you have implemented your legal spend management solution, be sure to get a before-and-after picture of your firm’s financial health. When you can see the impact on minimizing expenses and measure the ROI, the firm leaders will be motivated to keep the solution in place and maximize its beneficial effect.

Running a legal tech audit lets you see which tools are working well, which can be retired, and where a better solution might serve your firm.

Conclusion

Spend management is no longer just a concern for in-house legal teams trying to control outside legal expenses. Now law firms must employ these same strategies, along with the software to make it possible.