Despite an improving economy in 2016, CLOs are still minding their outside counsel spend, using more alternative legal service providers and trying to get their legal departments in order. Altman Weil released its 2016 Chief Legal Officer Survey last month, and it’s clear that clients continue to experience significant internal budget pressures and wield their buying power to get the lowest prices from their legal service providers. I’ve outlined four continuing trends below. It is noteworthy that legal departments have in many instances taken matters into their own hands, often leaving their law firms behind.
Pricing and service continue to drive what might be a race to the bottom in legal services – clients demanding better service for the lowest possible prices. While technology and efficiency continue to play a large role in leveraging resources within legal departments, these factors seem to matter less when choosing outside counsel. For the most part, clients select their outside law firms based on price and transparency rather than innovation or efficiency within the law firm.
Legal Departments Continue To In-source Work Law Firms Used To Do While overall profits for the largest firms in Big Law might be up for the year, over 80% of CLOs who plan to reallocate spend on outside counsel in the next year said the work would move to in-house lawyer staff. Non-lawyers will also continue to absorb companies’ legal work, as has been the trend since the recession. Almost a third of CLOs indicated that non-law firm vendors and contract attorneys would be performing work formerly handled by their outside law firms.
While outsourcing might be a small share of total work being pulled from law firms (14.6%), it is noticeable that the breadth of work CLOs are now comfortable giving to non-law firm vendors has increased. E-discovery, document review and due diligence work has been going to vendors for years. However, an increasing amount of IP work, contract management and even legal research now is handled by outside vendors. These areas will continue to grow as technology and AI shows its capability to handle more complex work.
Operating budgets in law departments may be increasing, but law firm demand is falling. In short, legal departments have more choices than ever before, and they know it. They also have better analytics, which has made it easy to see exactly how much clients are spending with their outside law firms and vendors. If law firms continue to conduct business as usual (and many are), they cannot compete with low-cost providers who have built business models based on technology and operational efficiencies to complete legal work more economically. It’s simply a cost/benefit analysis for law departments, unfortunately lost on law firms who continue to think that the “right” answer at any cost is most highly valued by clients.
Legal Departments Continue Efforts to Lower Their Own Costs Lest we think that law departments have it all figured out, CLOs indicated that in-house legal departments are still very actively working on creating efficiencies and lowering costs. They are using technology and restructuring to try to leverage resources and decrease spend. While CLOs say they get high value from steps they’ve taken to increase efficiencies, there is no indication how that value is being measured, which can lead to a very subjective evaluation.
Law departments try to control costs through creating internal procedures, receiving price reductions from outside counsel, and using alternative fixed fees in addition to bringing more work in-house. CLOs indicate the highest value is coming from shifting law firm work to in-house attorney staff and from shifting in-house work to lower cost company locations. Somewhat surprisingly, while legal departments are bringing more work in-house, CLOs said reducing in-house lawyer staff ranked third for value realized to control costs. So it appears that some CLOs feel that fat can still be trimmed from their legal departments.
Finding efficiencies through hiring legal operations professionals has continued this year, but the survey data indicates the trend may have reached its height (only 8% of law departments plan to add an operations person in the next year). Not surprisingly, the largest legal departments are most likely to have a legal operations professional (over three-fourths do), and almost half of legal departments with 11-50 lawyers have someone managing legal department operations. Legal operations staff spend over 50% of their time on managing day-to-day operations, financial management, and outside counsel spend tracking and analysis.
It’s unclear from the survey whether value sought is value achieved according to Chief Legal Officers.
It only makes sense to bring work in-house if you can do it economically – the right people doing the right work in the right manner. Have legal departments really ascertained which work is best completed in-house versus what they should send to outside counsel? It’s easier said than done, and there is no set recipe. Determining metrics and KPIs for legal departments is just as important as taking steps to control outside legal spend. It’s no small chore to determine which work is best completed by whom, and arguably the only way to determine whether work should be moved in-house is to try it.
While Analytics Play An Increasingly Important Role In Managing Outside Legal Spend, Clients Change Law Firms For Traditional Reasons Less than 10% of CLOs think they are effectively using data they collect on outside counsel spend, while over 50% feel they are not particularly effective in using this data. Large law departments are more likely to have a strong process and tools to analyze their data. The survey doesn’t ask exactly how law departments are utilizing their data and there is no doubt variation among legal departments. While law departments continue to analyze their own data, only 1.7% of CLOs say they get some type of useful data from their outside law firms. Three-fourths of legal departments get no spending data at all from their largest law firms.
Despite moves toward efficiency and the use of analytics, the survey indicates legal departments change law firms for traditional reasons – client service, legal expertise and cost. These are the criteria attorneys are used to and things like cost are easy to measure. Managing matter efficiency comes in fourth, and somewhat surprisingly, technology sophistication of law firms ranks dead last as a factor affecting shifting work from one law firm to another. How law firms manage matters and the technology they use is too removed for clients to consider it important, which leads to the next conclusion.
CLOs Don’t Care How Law Firms Deliver Legal Services As Long As They Get Lower Pricing and Transparency When asked about law firm service improvements they’d most like to see, CLOs said that more than anything else they’d like to see greater cost reductions, improved budget forecasting, and non-hourly based structures. The focus is on what they consider the bottom line – cost and transparency. How law firms achieve those goals is not the concern of clients, and they don’t feel they should be the ones to figure it out.
CLOs named technology and cost pressures as the two factors that will most change the legal market in the next three to five years, reducing both the amount of legal work and the price of legal services. Lawyer demographics, regulatory burdens, in-sourcing legal work, alternative service providers, and the law firm model will also continue to affect the legal market. For legal departments, it continues to be all about price and predictability. When asked to evaluate current delivery models, some CLOs are satisfied (17%), or feel their law firms have complied with requested changes (13%), but the remaining 70% either feel it’s not their problem to solve or are not satisfied with what is happening.
The report confirms that law departments continue to favor alternative methods and personnel over outside law firms to achieve goals within the legal department. Outside law firms generally fail to deliver lower pricing, transparency and the certainty sought by most CLOs. While legal departments have more control when they in-source work, it’s an open question whether they can achieve the savings they want without measuring their own attorneys in a meaningful and substantive way. What they have concluded so far is that lowering outside law firm spend and using more non-traditional legal service providers is the way to go. As for changing business models, it is doubtful that clients will take the lead in this regard. It is much easier for them to change legal service providers or law firms when they’re not getting what they want. This leaves law firms to their own devices to figure out how to compete in a shrinking market that increasingly values efficiency and transparency, from wherever it comes.