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HBR survey says corporate counsel slashing law firm budgets

For the first time in ten years, law departments have reduced their total legal spending, according to the Hildebrandt Baker Robbins 2010 Law Department Survey. Much of that reduction involves use of outside counsel. More than 60% of survey participants decreased their spending on outside counsel; at the same time, internal legal spending and staffing increased slightly.  

“The survey results confirm what we are seeing every day in our consulting practice with law departments of all sizes, sectors, industries and locations,” said Jonathan Bellis, who chairs Hildebrandt Baker Robbins’ Law Department Consulting practice. “As shown in our survey last year, law departments began to adopt a wide range of management practices to reduce and control internal and external legal costs. These efforts have continued, resulting in an overall decrease in total legal spending for the first time in the past 10 years of the survey.  The decline in total legal spending was driven in particular by a reduction in outside legal costs.”

“We expect that efforts to reduce spending will continue, particularly with outside counsel spending, which makes up nearly 60% of total legal spending,” said Lauren Chung, survey editor. “The challenge for law departments will be to move beyond the low-hanging fruit and develop more comprehensive and innovative strategies for managing not just legal costs, but also legal risks and services.”

The 2010 survey achieved an all-time high in participation, reflecting a strong interest in benchmarking among general counsel and law department managers. The survey provides comprehensive data on legal spending, staffing, organization, compensation and management practices. The 2010 survey also reports information on management practices that law departments have adopted in response to the current economic environment.    

This year, the Law Department Survey included 252 participants representing 22 industries. Almost 30% of participants are companies with more than $20 billion in revenues. Over 65% of participants have revenues at or above the Fortune 500 level. This includes companies that are privately held or based outside the United States. The 2010 survey reports data for 2009 and 2008 and, therefore, captures legal staffing and spending data during the heart of the economic downturn that began in 2008.

• Law Department Spending
The 2010 survey showed a decrease in total legal spending – by 1% in the U.S. and by 2% worldwide – between 2008 and 2009. Over the previous nine survey years, total legal spending in the US. had increased by an average of 7%, with a range of 5-to-9%. The median total legal spending was $24 million in the US and $33 million worldwide. Total legal spending as a percent of revenues worldwide was 0.40%.  

Inside legal spending rose by 1% in the US and on a worldwide basis. Spending on compensation for inhouse legal staff, which is 86% of inside legal spending, increased by 2% worldwide. The most notable decreases in global legal spending were on contract and temporary staff (down 12%) and administrative expenses (down 13%). The median inside legal spending was $9 million in the US and $12 million worldwide.

Outside counsel spending decreased by 5% in the US and by 6% worldwide. Over 60% of the participants reported a decrease in spending on outside counsel worldwide. Global non-litigation spending, excluding intellectual property costs, decreased the most at 14 percent.  The median outside counsel spending was $14 million in the US and $17 million worldwide.

• Legal Staffing: The median company reported 21 lawyers in the US and 31 lawyers worldwide. Per billion dollars of revenues, the median company had 4.3 lawyers in the US and 3.7 lawyers worldwide. The median number of total law department staff (including lawyers and all non-lawyer staff) was 47 in the US and 56 worldwide. For most law departments (66%), the total number of lawyers worldwide increased or stayed the same between 2008 and 2009. Approximately one-third of participating companies experienced a decrease in their total number of lawyers worldwide.

In the US, 51% of the participants anticipate that the number of lawyers will stay the same in the coming year, 41% expect an increase, and 8% expect a decrease.  The expected median increase in the US is 6%.  Outside the US, 56% expect the number of lawyers to stay the same, 39% forecast an increase, 5% anticipate a decrease. The expected median increase outside the US is 9%.

“Most law departments do not appear to be reducing staff as a cost-savings measure,” said Chung.  “We have seen that, now more than ever, they are focused on optimizing the use of internal resources through organizational and operational effectiveness.  Many departments are seeking to enhance their internal capabilities to do even more.  As a result, significant decreases in inside legal staffing are unlikely.”

• Forecast for Legal Services: The participants were asked to forecast their demand for legal services across 28 different legal practice areas.  Among these, regulatory was the highest, with 44% of participants expecting an increase in demand in this area.  “This result is not surprising, considering the major financial reforms being instituted in the US and globally, health care reform, and the ever-increasing focus on myriad compliance requirements around the world,” commented Bellis. Other areas with significant forecasted increases in demand include employment and labor (39%), government relations (35%) and international (35%).