legal spending

Three Key Trends in Legal Spending

Few industries have experienced the pressure to “do more with less” as acutely as the legal industry. Both in-house and at firms, the Great Recession forced attorneys and their clients to find ways to stretch their dollars—and that mentality has largely persisted for the past decade.

But recent research suggests that the landscape for legal professionals is finally shifting. The 2nd Annual Study of Effective Legal Spend Management has revealed that legal department budgets are finally growing again—and that’s only one of several trends that could have major implications for legal departments, law firms, and legal service providers.

But what do the experts see in the data? What are the reasons underlying the trends, and more importantly, what do these trends today tell us about where the legal industry is heading tomorrow?

Trend No. 1: After years of cuts, legal budgets are finally rising again.

Brad Blickstein, Principal at the Blickstein Group, explains, “Legal budgets are expanding, but almost all of that expansion is in-house spend. Folks are starting to build up their teams; they’re starting to bring work in-house. Spend outside the law department is relatively flat.” Departments are increasing headcount, but they’re also increasing their capabilities.

Robert Taylor, Vice President and Senior Corporate Counsel at Liberty Mutual Insurance sees such spending as an investment in the future. “I believe we’re seeing a lot more investment in legal R&D taking place—investing in new technology and processes to lower the overall cost of delivery in the long term.

There are several reasons behind this trend, but the primary imperative is efficiency. Blickstein continues, “Bringing work in-house is not only cost efficient, but it also provides visibility and accuracy in budgeting as well.”

Part of this increase may be related to overall improvements in the economy. Chris Ende, Vice President, Enterprise Legal Services at UnitedLex, sees times changing. “As the markets change, if we’re seeing an uptick in transactional activity or M&A activity, it may just be the case that legal departments see the need for more spend to keep up with the volume of work that’s coming in.”

Trend No. 2: Outside legal spend is decreasing.

While legal departments are bringing work in-house to improve efficiency, they’re also looking at ways to stretch their external legal spend dollar as well. Taylor notes that in particular, “In-house departments are looking very carefully at those high-volume, low-risk activities.”

These sorts of commoditized or near-commoditized legal transactions are prime territory for new players in the legal industry. Ende observes, “There’s just an incredible opportunity as we think about all the different legal needs that in-house departments face. New providers come into the market and bring that combination of people, process, and technology to get that work done effectively.”

Trend No. 3: In-house departments are managing external spend more actively.

Even with legal departments looking at ALSPs as a serious alternative to law firms, they are still spending most of their external budget with the firms. But how much of that revenue stays in the firms themselves? Ende observes, “While the majority of spend is in the law firm bucket, you don’t know what’s underneath that? It could be that there are significant pass-through expenses that are actually other providers.” Law firms may also be taking advantage of the benefits of working with ALSPs.

Wherever they spend, though, legal departments are scrutinizing their external budgets closely. Taylor highlights the importance of communicating with law firms, “It’s incredibly important that you provide consistent feedback to your law firms and what KPIs are import to you—what you are measuring them on, so that they can manage their lawyers to your expectations. It’s critical to have a level of transparency between how you’re measuring them and influencing their behavior.”

Movement at law firms can be slow, but in-house departments hold the key to making transparency take root. “People are not going to change unless they’re incentivized to change,” Blickstein explains. “It’s the in-house counsel’s job to incentivize folks to change.”

What do these trends say about the future?

Prediction No. 1: Expect legal departments to measure efficiency in-house more precisely.

Blickstein notes, “Most law departments do not have their in-house lawyers track time. But if you’re trying to get good metrics on what your people are doing, you need to figure out some mechanism for that. If we’re going to bring more work in-house, we really do need to find better ways to measure what’s getting done and how effectively.”

In-house departments may be able to leverage existing and emerging technologies to do just that. “If you can use your matter management system similar to how you’re doing it with outside counsel,” Ende offers, “it gives you a pretty good start into what your in-house team is doing.” Perhaps artificial intelligence (AI) could fill the gap, Blickstein muses. “You can build an AI tool that can basically understand what you’re doing without you having to fill out any forms.”

Prediction No. 2: In-house teams will increase their focus on high-value work.

In-house legal departments have a better understanding of the business units than outside counsel do. They can add value earlier in the business cycle than law firms can. Taylor explains, “We get involved in new ventures or new products very early in the process. That allows us to head off legal risk and help steer the business in the right direction. The in-house counsel is kind of your general practitioner, the one that’s looking to keep you healthy, whereas outside counsel might be the orthopedist or the surgeon, where things go wrong, and you need something a little bit more serious.”

Prediction No. 3: Alternative legal service providers will continue to grow.

While the experts agree ALSPs are pulling some work from law firms, is that where their growth will end? Brad Blickstein doesn’t think so. “They’re often less expensive than in-house counsel as well. To really reduce legal costs, I think a lot of it is going to have to be by taking both work that is currently done outside and work that is currently done inside and moving it to ALSPs.”

While it’s a good sign for the legal industry that budgets are finally growing again, that doesn’t mean that the imperatives that arose during the Great Recession have gone away. In-house and external teams must continue to find efficiencies and invest in their futures to ensure they remain viable in the face of competition from ALSPs and even technology.

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