For the most recent episode of our Legal Leaders Exchange podcast series, two of our experts on legal spend and the legal market, Nathan Cemenska and Jeff Solomon, discussed the findings in our report LegalVIEW Insights volume 5, which focused on the changes since 2020 in how corporate legal departments partner with outside counsel firms.
Increasing total outside spend
After several years of average outside spend at large corporate legal departments (CLDs) remaining steady, from 2020 to 2021, there was a 21% increase in median outside spend and a 36% increase in mean outside spend. There are a few plausible explanations for this significant departure. For example, the changes brought about by the onset of the COVID-19 pandemic led to rate freezes for many outside counsel engagements. As businesses began to pick up again in 2021, many CLDs had more work to route to outside counsel while also recognizing that some rate increases were reasonable.
Nathan and Jeff agreed that there is an opportunity for CLDs to put additional focus on rate management in order to control their total legal spend. Despite extensive experience working with large legal departments that have well-established legal operations programs, both of our experts expressed concern at how few CLDs have a robust rate management approach.
Legal spend vs. company revenue
One metric that our experts don’t often hear legal departments utilize is legal spend as a percentage of overall company revenue. This metric is a tool that can help a legal department contextualize its spend when it reports to upper management. This is also an area where benchmarking against industry peers can help legal teams determine whether they are on track in terms of outside spend. If a legal department spends a higher percentage of its revenue than comparable companies, it’s a red flag indicating that it could be lagging behind its peers and probably has an opportunity to rein in spend if it takes the right steps.
When measured as a percentage of company revenue, legal spend went down slightly from a median of 0.43% of revenue in 2020 to 0.36% in 2021. While ELM Solutions data shows wide variation in the metric across our database, our most typical clients spend between 0.2% and 0.3% of revenue in legal spend or close to that range. Some even spend less than 0.1%. For those that are controlling spend well and staying in this relatively low range, however, there is no reason to take focus off of legal spend. Maintaining this level of performance takes a commitment to constantly measuring and closely managing legal spend.
Reducing vendor counts
The unusual circumstances of 2020 led to a fairly steep reduction in the number of outside vendors that the average legal department works with. After a steady but gradual decrease over several years, 2020 saw a steep 16% decline in the median number of active vendors serving the typical corporate law department. This number was largely expected to rise again in 2021 as corporate legal work picked up again. However, in 2021, we actually saw a further 8.6% decrease in median vendor count.
This new level of law firm convergence is hitting smaller firms hardest in terms of lost relationships. That raises a question: In their effort to reduce overhead with lower vendor counts, are legal departments now directing more work to bigger firms that typically charge more? With more clients looking to direct work to larger firms, clients may be inadvertently creating a seller’s market where firms are reluctant to lower rates.
In addition to these topics, Jeff and Nathan also discussed more about benchmarking data, additional factors affecting legal spend, and the use of alternative legal service providers. To hear the full conversation, listen to Legal Leaders Exchange: Trends in vendor mix and total outside spend. If you are a podcast app user, be sure to follow our Legal Leaders Exchange show on your favorite app (Apple Podcast, Spotify, Google Podcast, Amazon / Audible.com, iHeart Radio), to make sure that you don’t miss any of our informative episodes.
