The newest report in our LegalVIEW® Insights series has been released, and it reveals several key insights about the corporate legal market and how it continues to evolve in the wake of the challenging COVID-19 pandemic. The study’s author – ELM Solutions Director of Legal Operations and Industry Insights, Nathan Cemenska – delved into our extensive LegalVIEW database to understand how legal departments are working with outside vendors and choosing to invest their budgets.
Here are just a few of the findings in LegalVIEW Insights volume 5: Trends in vendor mix and total outside spend:
Average legal spend increased in 2021
From 2020 to 2021, the mean legal spend in large corporate legal departments (CLDs) went up 36%. The spend increase is particularly remarkable after a six-year period when spend among the largest CLDs remained nearly flat.
However, this was not a universal phenomenon; many CLDs experienced only moderate spend increases, and 41% even decreased spend. Only 6.8% of companies experienced a spike of 50% or more, but these companies drove the mean spend up significantly. In fact, almost half of that 6.8% experienced an extreme increase of 3x or more, and the largest spike at a single law department was a 750% increase from 2020 to 2021.
The reason why outliers like this are having such an impact on the overall spend statistics is that total spend in some of these legal departments exceeded the total spend of ten “ordinary” legal departments combined. When a few companies have spend that is this extreme, they can set the tone for the entire legal market irrespective of what goes on at other companies.
Legal spend as a percent of revenue is less volatile
Despite the increase in overall spend, median outside spend as a percentage of revenue decreased somewhat in 2021, reaching an average of 0.36%. Why is this measure important? Because it speaks to both how much potential savings a particular company might be able to realize and how much cost-cutting pressure the legal department is likely to face.
The typical large corporation in our dataset over the last several years spent around 0.4% of company revenue on outside counsel, a relatively low number that limits the total amount that they could conceivably eliminate. In many cases, proposals for spend reduction give rise to understandable objections about potentially impairing the quality of legal service. In addition, a company with low legal spend relative to revenue is less likely to face internal pressure to reduce costs. Although CLDs are frequently asked to control costs, there is likely greater pressure on departments that regularly have operational costs that take up a higher percentage of revenue.
These statistics are an indicator of the frustration some legal operations professionals feel about cost reduction. While cost control is consistently a top legal operations priority, in practice, a lot of compromises have to be made with in-house lawyers, business unit leaders, and other company stakeholders that want better, quicker solutions to their legal problems—even if it costs a bit more.
The spending of those companies that had relatively high legal costs as a percentage of revenue, many of which spent more than 1% of revenue on outside counsel alone, may draw increased scrutiny. As legal operations matures and leaders become more conscious of typical legal costs, some of these organizations may be deemed wasteful and pressured to show more discipline around legal spend.
Law departments are working with fewer vendors
We previously saw the number of vendors engaged by the median CLD decline by 16% from 2019 to 2020 (see volume 1 of this report series for details). At the time, there was speculation that this would be a temporary dip and that these numbers would rise again after the pandemic slowdown. However, in 2021, this number dropped by an additional 8.6%, with small and medium-sized law firms losing the most business.
The significant drop in vendor count over these two years may well have been accelerated by the pandemic and its resulting changes to business velocity, but it seems clear that there are additional forces at work. Overall, about 71% of CLDs cut the number of vendors they work with, indicating a strong trend of convergence in the legal market. While smaller firms have taken the biggest hit, we have seen that even Big Law firms are not immune to this trend, with some of the largest firms also losing client relationships.
These are only a few of the data points captured in the latest LegalVIEW Insights report. To read the full analysis and gain access to all of our current findings on how corporate legal departments are choosing to partner with law firms and other providers, download LegalVIEW Insights volume 5: Trends in vendor mix and total outside spend.
