Managing budgets is a task that few look forward to, and now even less so as pressures on law departments have been intensifying. Outside counsel costs are often a particular pain point. Outside counsel rates can be dizzying at times, and cases of greater complexity and duration have been known to produce severe cases of “sticker shock.” In addition, managing outside counsel takes up time, which invariably is already in short supply.
Thomson Reuters recently conducted a survey of nearly 600 in-house attorneys which found that law departments are moving to reduce their outside counsel spend by bringing more work in-house or outsourcing work to non-law firm legal service providers.
Law departments are reporting moderate growth in headcount and budget over the past two years. At the same time, they are trying to achieve a more cost-effective balance between work that is performed internally and externally.
Fifty percent of legal departments surveyed said they have increased the number of employees over the past two years. The number of law departments that have increased their budgets over the last two years exceeds those with decreasing budgets by better than a two-to-one ratio. While the budget increases have largely been modest — often in the low single digits — they nevertheless point to corporations directing greater resources to corporate counsel, increasing the amount of legal work that can be handled in-house.
While law departments continue to rely on outside firms for substantial parts of their legal workload, organizations appear to be meeting the challenge of reducing outside legal costs by bringing more work in-house or outsourcing to legal services providers, while consolidating their spend around fewer firms.
While there has been much discussion about the use of alternative fee arrangements to reduce outside counsel spend, only 26 percent of firm billings currently involve AFAs, according to our survey.
A smaller portion of outsourced legal work goes to legal process outsourcing providers (non-law firm service providers). Forty-eight percent of our survey respondents answered that they have used LPOs or other alternative service providers in the last year. Strategic use of legal process outsourcing can help reduce overall spend, as LPO is typically less expensive than utilizing a law firm.
As LPOs have expanded their services beyond document review, law departments should periodically re-evaluate where, when and how LPO can add value.
While law departments have already begun shifting more of their work in-house, there are potentially significant opportunities to move additional work by evaluating the types of work the department does.
There are certain types of legal work where law departments have traditionally looked to outside counsel to carry a substantial portion of the load. Fully 91 percent of law departments surveyed use outside counsel for general litigation. In fact, more than a third of law departments say they rely on law firms for all or almost all of their litigation needs.
Similarly, corporate counsel frequently engage outside counsel for M&A, IP, tax, securities, banking and finance, and regulatory affairs. While the specialized expertise of outside counsel is often needed for specific cases and jurisdictions, these types of legal work may also present opportunities for GCs to re-evaluate whether some of these areas may be more cost-effectively handled in-house. If particular types of matters tend to be recurring, it may be beneficial to develop more of that expertise internally.
As law departments increase their staffing and budgets to do more work in-house, automated software tools may provide an opportunity to further enhance efficiency and increase capacity for legal work.
Our survey found that more than half of department time is spent on just three activities: contracts/transactional work, litigation, and regulatory and compliance.
New tools and services, such as automated software, that can improve productivity could allow law departments to handle more work with the same amount of staffing. For example, 48 percent of departments surveyed are utilizing collaboration software, 44 percent use e-billing software, and 28 percent have legal hold software.
Each of the three options explored — in-house, outside counsel and LPO — offers unique advantages and disadvantages. Under different circumstances each can lay some claim to being a high-value option to pursue.
As technology has matured to allow collaboration between teams, legal departments can now more easily divide up the work between resources, even within a single matter. This concept of unbundling legal services will continue to evolve, allowing legal departments to make more informed decisions about getting maximum value for their dollar.
The key to this approach is taking a holistic view of department activities, utilizing all available data from department systems and benchmarks, and making an informed assessment of the critical needs by activity type. For example, is it more important that a given activity be staffed to take internal business realities into account, or that there be deep legal expertise? Or is efficiency most crucial? Answering those questions may lead to rethinking of current practices and provide a new path toward achieving the twin goals of protecting the company and staying on budget.
Eric Laughlin is Managing Director, Corporate Counsel Segment, Thomson Reuters.