Thomson Reuters in partnership with Acritas has recently released its first annual report for corporate legal departments, with the Corporate Legal Operations Consortium (CLOC) as an association contributor. In today’s dynamic and complex legal landscape, the report concludes that organizations need modern departments that embrace innovation, are data-driven and work collaboratively with other parties in the legal ecosystem to create an optimal result.
This report includes data from Acritas, Thomson Reuters and CLOC. Acritas conducts an ongoing global research study of senior in-house counsel, called Sharplegal, which began in 2007. The Corporate Legal Department report draws on 600 interviews conducted with US-based respondents in 2017. Thomson Reuters data is derived from the “2017 LDO Index Benchmarking and Trends Reports,” which are based on qualitative survey responses from Thomson Reuters customers as well as quantitative data from Legal Tracker including over $73 billion in legal spend and matter data. Data from the CLOC survey (published in November 2017), with responses from 156 companies – including 11% of the Fortune 500 – across 32 industries, is also part of the report.
The modern legal department takes a far more proactive stance than the traditional department. It works to add value to the organization rather than be perceived as a cost center operating reactively to legal requests.
The modern legal department aligns itself with three key goals:
- To ensure the long-term sustainability of the organization by identifying, monitoring and mitigating risk;
- To maximize shareholder value by driving up the effectiveness and efficiency of legal input to maximum return; and
- To be socially responsible in considering ethical behaviors surrounding ethical sourcing, the diversity agenda and pro bono efforts.
To be fit for purpose, the modern legal department is more corporate in its approach. It utilizes formal legal operations management disciplines. It is no surprise that half of legal departments now have dedicated legal operations roles.
Modern departments leverage efficiency gains and information management through systems and technology. These systems enable them to gain control of legal activity through understanding both demand and spend in much more detail. Measurement enables more effective management, and metrics are a critical resource for the modern legal department as they, like other departments, become more data-driven.
To learn more about the legal trends today and the state of the modern legal department, please see the “State of the Corporate Legal Department Report”
Key to staying modern will be constant innovation. While few departments will be early adopters by definition, modern departments can learn from their more adventurous peers and emulate their successes. They can also look to disrupters on the supply side in the form of the alternative legal services providers and how different approaches are creating new and significant industry players. Only 41% of departments have implemented some form of innovation into the way they work in the last year, and only 22% of legal departments are increasing their technology spend.
Figures reveal that spend is increasingly moving in-house, now up to an average of 43% of total budget, and that overall spend aligns with low revenue growth. Analysis of legal spend patterns against different ratios of internal and external allocation has identified an optimal range where legal spend was most efficient – between 40% and 70% allocated internally. So perhaps the average of 43% should continue to increase until the supply-side can offer a more cost-effective approach.
Controlling external counsel costs emerged as the No. 1 priority for legal departments, and legal departments would benefit from implementing some of the highly effective cost-control strategies. The strategies most often rated “highly effective” as a proportion of those who had implemented them were:
- Alternative fee arrangement (AFA) – fixed/flat fee – set amount at group level (matters of a similar type);
- Strict enforcement of billing guidelines; and
- Reduction of invoice expenses.
Law firm realized rates have seen very little growth over the last five years, just 1% per year. This rate of increase, however, varies for different levels and different practice areas. Partner rates have grown at the lowest rate, an average of just 0.4% per year, compared to paralegal rates, which have grown at an average of 6% per year. A paralegal used to be charged at 30% of a partner rate and is now charged at 36% of a partner rate.
Modern legal departments are allocating work to firms that are proactive in showing their value, and this allocation was identified as a top priority for legal departments surveyed. The average legal department satisfaction rating of outside counsel based on value has increased nine percent over the last five years with improvements across all areas of service delivery.
Departments could consider allocating more spend with a fewer number of firms to try to drive down cost in a meaningful way. Also, 53% of legal departments have reduced their roster of outside firms over the last four years, working with a median of 16 fewer firms. At the same time, however, 43% have grown their outside counsel ranks, with a median of 17 additional firms.
Feedback from outside counsel suggests that a more business-partnering approach with a smaller number of “preferred provider” firms will result in more effective and efficient service. Through taking a more holistic view of their legal work, external lawyers should be better placed to help with the broader risk agenda.
The modern legal department prioritizes social responsibility in areas of diversity and pro bono. A study of more than 1,000 reviews of law firm performance revealed that male and female lead partners perform equally well. A mixed-gender legal team, however, performs significantly better than a single-gender legal team. Implementing a practice where one in three matters is allocated to a female lead could encourage law firm diversity at the senior levels and accelerate the growth of female equity partners. And 47% of US legal departments devoted time to pro bono work in the last 12 months.
This article was co-authored by Carly Toward, director of Support & Business Operations at Thomson Reuters.