How legal departments are managing costs

Increased workloads for law firms, partly due to the recent boom in M&A activity, are threatening to push up billing rates. This is a concern among corporate legal departments that understandably want to manage the costs of external legal advice.

The annual Thomson Reuters Legal Department Operations report, based on responses from 1,500 corporate legal departments worldwide, showed that controlling outside legal costs was a top priority for 87% of respondents (the highest-ranked issue). This was followed by ‘using technology to simplify workflow and manual process’ (74%) and a ‘focus on internal data security’ (73%). Legal departments are becoming increasingly sophisticated in managing costs, with 82% saying they were proactive, optimised and predictive in how they managed spend on external legal costs.

One of the key ways in which legal departments are keeping costs in check is by bringing a greater proportion of legal work in-house. Some 43% of companies surveyed reported that more legal work that would otherwise have been outsourced to external counsel was now being dealt with in-house.

To cater to this higher demand on internal counsel, over a third of corporate legal departments have stepped up recruitment of in-house counsel.

Firms under pressure to prove value

One reason why corporate legal departments are bringing more work in-house is the increase in billing rates by external law firms, most notably at the associate level. Among firms with an annual revenue of $500m or lower (defined in the report as being ‘small’), associate billing rates rose by 11.6% in the past year. The average rise in associate rates across corporates of all sizes was 3.2%. As corporates focus on bringing costs under control, law firms will be under pressure to demonstrate their value-add to justify these higher rates.

In response to the recent boom in M&A, capital markets and other work, law firms have been forced to raise salaries to attract newly qualified associates to meet this growing demand. The concern is that these increased costs will be passed on to corporate clients.  

In the study, 86% of legal departments claimed that ‘general enforcement of billing guidelines’ to reduce invoice fees and expenses was standard best practice for cost control. Other methods include: regularly reviewing high-cost matters; securing discounts on timekeeper rates; and reducing rate agreements and law firm matter budgets.

Alternative fee arrangements

Alternative fee arrangements (AFAs), which enable clients of a law firm to pay for a specific deliverable rather than pay by the hour, have become increasingly popular among corporates in recent years. However, this has mainly been among larger businesses, with 27% of large businesses surveyed saying that increasing their usage of AFAs rather than hourly billing rates was a priority. This is just 19% among smaller businesses.

Despite the trend of corporate legal departments keeping more work in-house, more than half of legal work (54%) continues to be handled by external law firms. If law firms want to remain competitive and keep winning lucrative work from large corporates, they may wish to introduce flexibility in fee structures, such as AFAs.

Legal tech can boost efficiencies

Another key method employed by corporate legal departments to keep costs under control is increasing usage of legal technology. Indeed, over half (52%) of all legal departments surveyed mentioned they had stepped up use of such technology in the past year.

The technology most used by corporates is e-billing/spend and matter management, which helps legal departments keep on top of spend. This is used by 97% of corporate legal departments. The second most utilised technology is e-signatures, which facilitates the digital signing of documents and is used by 80% of corporates. In third place, used by two-thirds (65%) of corporates surveyed, is legal hold/litigation hold, which helps departments track information relevant to pending litigation in a secure manner.

Respondents in the study were asked about the legal tech solutions they would be most interested in procuring in the next two years, with legal workflow automation coming out on top, among 27% of legal departments.

Corporate legal departments have faced considerable upheaval since Covid struck in 2020. The switch towards remote working has highlighted the need for investment in technology to help cater for hybrid models of working. Given the uptick in spending in this area within the past year, corporates have certainly recognised the importance of technology investment to boost efficiencies, streamline processes and help keep costs under control.

Jasprit Sandhu Dade is head of corporates Europe at Thomson Reuters