Effects Of The Current Economic Downturn On U.S. Law Departments

Monday, June 1, 2009 - 01:00

At one time, in-house law departments were more insulated from the effects of economic cycles. Legal chiefs were expected to forecast expenses like other departments, but the role of responding to law suits and the importance of managing critical legal issues gave their budgets a certain degree of plasticity. Now that era has passed, according to in-house experts, who say they are pressed as never before to control legal costs and even to show a return on investment at times. The task is particularly daunting because regulatory compliance and litigation workloads are increasing while budgets are shrinking. The modern mantra of "Do more with less" has hit law departments hard.

A recent LexisNexis CounselLink study, conducted by Corporate Counsel (published by Incisive Media), surveyed 191 in-house legal managers based in the U.S. and interviewed a representative sampling of them by phone in order to develop a sharp picture of how they are dealing with the economic downturn. This article summarizes the findings from the study and provides an overview of the strategies, systems and management tools that law departments within U.S. organizations are using to cope with current economic challenges.

Overview

U.S. employers shed more than 5.1 million jobs from December 2007 through March 2009. Veteran law department leaders interviewed for the LexisNexis CounselLink study called the current economic environment the most challenging they have ever experienced. Respondents said that corporate law departments are responding to the crisis in many ways.


Budgetary Impacts

More than 67 percent said they feel pressured to cut spending, and 96.9 percent are adjusting their current practices. Most are bringing more work in-house and roughly half are obtaining reduced rates or alternative billing arrangements from outside counsel. Some are even sharing litigation work with outside counsel or tackling specialties they have not previously handled.


Focus On Total Spending

Nearly all respondents stated that total legal spending was their primary focus now. Most survey respondents are reducing in-house and outside expenses in multiple ways, but many said that outside counsel efficiency is more important to them than hourly rates.


Management Systems Vary

Respondents indicated that they use a variety of software or paper-based systems for tracking matters, tasks and expenses by matter. Many have employed more than one system, favoring manual systems, e-billing systems, homegrown software or commercial spreadsheets. A majority of the 36 percent who tried e-billing said that it provides tighter, more accurate controls. Only 26.2 percent have used web-based systems, but more are open to trying them.


A Few Favorite Metrics

Most respondents track spending by matter, but there is not much consensus on the use of other metrics. Many interviewed have a few favorite metrics, such as spending by company unit or region, which can reveal whether certain managers or jurisdictional regulations are driving up costs.

Some track their expenditures per matter based on the identity/quality of opposing counsel to determine the best advocate against a thorny opponent or to hire that opposing lawyer away.

Economic Impacts On U.S. Companies And Law Departments

The vast majority of respondents (77.5 percent) indicated that the recession has affected their business in the U.S. and more than a third (37.7 percent) have witnessed a significant effect on their business in foreign markets. Virtually all respondents (98.1 percent) agreed that the current economic environment has affected their law departments (a number much greater than the 77.5 percent who reported an economic impact on their companies). Respondents from companies that are still doing well confirmed in phone interviews that they too are pressured for constant efficiency improvements.

Most respondents (67.7 percent) also stated that they feel pressure to reduce the law department budget and outside counsel spending as well. A majority of respondents have already experienced actual reductions in total budgets (58.9 percent) and outside counsel spending (55.7 percent).

Those respondents who reported an increase in litigation matters most commonly experienced those increases in one of three areas:


Commercial litigation and dispute resolution (including IP matters and products liability);


Bankruptcy and collections matters (mostly involving customers and vendors); and


Employment matters.

The issues of greatest concern to legal managers relate predominantly to workload and staffing. A substantial majority (59.7 percent) expressed strongest concerns about handling increased workload with existing resources, and a similar number (57.1 percent) worried most about reductions in outside counsel spending. Concerns about compliance (29.3 percent) raised the next greatest concern.

Respondents also expressed concerns about risk-taking associated with leaner budgets, in addition to their concerns about workload and staffing.

Legal Management Strategies

Legal managers reported that they are coping with current economic challenges in a variety of ways, with many employing multiple strategies to reduce costs and improve efficiency. Nearly all respondents (96.9 percent) are making some type of adjustment to existing practices, but the three most commonly cited adjustments are: bringing legal work back in-house (66.5 percent); asking for more alternative billing arrangements (57.1 percent); and requiring law firms to renegotiate their billing rates (49.2 percent).

It's particularly illuminating that nearly six in ten in-house law department executives are now asking their law firms for alternative billing arrangements, something that has been quietly discussed for years but now appears to be taking hold.

Bringing work in-house and negotiating with outside counsel are not the only tactics for cutting costs. More than a third of respondents also reported closer scrutiny of invoices, more eyeballing of regular reports on spending, and use of other multi-pronged strategies for productivity gains. One effective way of managing this function is through the use of legal spend management and matter management software like LexisNexis CounselLink, which helps corporate legal departments manage legal spend and matters while optimizing collaboration with outside counsel. Furthermore, CounselLink's powerful reporting tool provides easy access to strategic information that enables more effective decision making.

Use Of Management Systems

Survey responses demonstrated that law departments are often employing more than one type of management system for planning, tracking and payment of matters assigned to outside counsel. Responses also demonstrated that lawyers are slow-adopters of management technologies, with the greatest number of respondents still employing manual systems and paper invoices (40.8 percent). But a healthy number have also used commercial e-billing systems (36.1 percent), spreadsheets (27.2 percent), or homegrown software solutions (35.1 percent).

Among those respondents who have used commercial billing management systems, nearly six in ten (59.7 percent) felt they were easier to use and provided more accurate reporting. Just over half also reported that they provided tighter spending controls (53.7 percent) and reduced the total amount of time spent on proper invoice processing (50.7 percent).

Roughly a quarter of the respondents (26.2 percent) have adopted Web-based management systems, but others might consider doing so. A majority of those who use Web-based systems indicated that their own technology departments maintain them.

Metrics Favored By Managers

The vast majority of those who use management systems employ them for more than just tracking matters and deadlines. Almost all respondents (92.7 percent) use their systems to track metrics related to spending, time or workload. By far the most popular metric used is "spending by matter" (73.3 percent of respondents).

A little more than half of all respondents (56 percent) indicated that they track hourly billing rates, and close to half (46.1 percent) track "spend vs. budget by matter." But few other single metrics garnered significant attention from respondents. A little more than one-fourth tracked "staffing by matter," "caseload by matter," and "department caseload." About one-fifth tracked "matter lifecycles" and "documents/transactions completed." Many more Large Entities tracked the caseloads for their departments (31.5 percent vs. 16.4 percent for Small Entities).

Respondents did not clearly favor the usefulness of any two metrics over others, but "spending by matter" did register most favorably with more than one-third (35.6 percent) or just under half of those who track that metric. More than one-fourth (26.6 percent) favored "spend vs. budget by matter," which is actually 56 percent of those who track that metric. Hourly billing rates registered most favorably with roughly one in seven (14.1 percent), which is barely one quarter of those who track hourly rates.

Outside Counsel Hiring

Almost all respondents (95.1 percent) indicated that their law departments supervise law firms located in the U.S. and nearly three-fourths (73.1 percent) supervise one or more foreign firms, demonstrating that even many Smaller Entities increasingly need foreign counsel (and for some those are the only lawyers they regularly engage). The average number of U.S. law firms supervised was 38.6 firms per law department, and the average number of foreign firms was 18.9 per department.

The clear majority of respondents (58.6 percent) indicated that their law departments spent less than $5 million on outside counsel last year, but the mean level of departmental spending was $17.4 million (still only 0.38 percent of the mean sales revenue of $4.5 billion for all respondents). Large Entities reported a mean annual spending level of $31.7 million for outside counsel while Small Entities reported a mean of just $3.3 million.

Conclusion

The responses to this survey demonstrated that the legal world is changing. Many law departments now must accurately forecast costs and stay within budgets. Some even feel pressured to demonstrate return on legal investment.

It's clear that the increased scrutiny on budgets and cost efficiency is placing unprecedented pressure on in-house law departments to spend less money and quantify the benefit of what they do spend. Given the limited financial and human resources at their disposal, corporate legal departments would do well to take advantage of software solutions that automate and streamline as much as possible the administrative burden associated with matter management, reviewing and processing invoices, and controlling costs.

Solutions such as LexisNexis CounselLink are designed to do precisely that while offering corporate counsel greater control and visibility into key performance and value metrics, helping them to evaluate the productivity of outside counsel, and enabling staff to focus on resolving legal issues rather than billing issues. In addition, CounselLink is uniquely able to handle alternative fee arrangements which are clearly emerging as a real means to align incentives between legal departments and law firms.

Marcus Linden is Vice President of corporate counsel solutions for LexisNexis and Chief Operating Officer of LexisNexis Examen. A free copy of the report from the LexisNexis/Corporate Counsel survey, "Effects of the Current Economic Downturn on U.S. Law Departments," is available by registering at www.lexisnexis.com/study.

Please email the author at marcus.linden@lexisnexis.com with questions about this article.