Corporate legal functions of energy corporations are looking for ways to better manage external counsel, incorporate greater use of alternative legal service providers and empower internal teams to retain more work.
Like so many industries, Legal is undergoing significant transformation. The ubiquitous billable-hour-business-model that once dominated the market is fast becoming a thing of the past as corporate legal departments and legal service providers focus on managing costs and driving efficiencies. More than $4 billion USD of external legal spend has been redirected in-house as a result of the 2008 financial crisis.
Given economic pressures and technological disruptions, corporate counsel are taking a closer look at their costs, namely the large budgets that were once the hallmarks of external counsel spend. For 50 percent of corporate counsel, the need to do more with less is a top challenge. And reducing costs is not far behind with 40 percent rating it a top challenge for the legal department. A paradigm shift is underway, where general counsel now work more closely with external firms to negotiate prices and maximize efficiency.
Another outcome of this shift is the advent of alternative legal service providers (ALSPs). Today, ALSPs account for $8.4 billion USD in legal spend annually and over 60 percent of corporate legal departments work directly with an ALSP. Companies in highly regulated industries, like energy, are shown to be more inclined to utilize ALSPs. While the category of providers is diverse, leading ALSPs use a combination of industry leading technology, legal and compliance experts, as well as innovative business processes, to deliver cost-effective solutions to corporate legal departments.
The reasons why in-house counsel partner directly with ALSPs is primarily due to the expertise they bring and their budgetary appeal. What’s also interesting is that the use isn’t confined to one specific service offering. Instead, corporate counsel use ALSPs for a variety of services, and that use is expected to grow over the next five years. Services related to technology, like artificial intelligence and contract management, are still in nascent stages but are anticipated to be game changers in the future, according to the 2017 Alternative Legal Service Study.
Corporate legal professionals want the right advice and expertise at a fair price and are willing to work with a combination of external providers to get it. Procurement has also entered the world of legal as the network of outside providers is now managed by professionals who work closely with their counterparts in legal to control spend. It is quite common to see Key Performance Indicators (KPIs) and metrics used to measure external counsel in the drive to ensure the in-house team is maximizing its return on investment.
Energy legal department trends
Established energy-sector providers are experiencing significant flux as they are forced to evolve and diversify their businesses. Organizations from emerging economies are becoming leading players on the global stage with the balance of power shifting around the world. It’s no surprise seeing the evolution of the legal sector amplified within Corporate Legal Departments. Energy companies have had to become increasingly cost conscious after the 2008 financial crisis and the crash in oil prices in 2015, both of which have led to the further tightening of purse strings. On average, 0.3 percent of an energy company’s annual revenue is spent on legal services, which is below the company average of 0.39 percent, as shown in Figure 1.
Figure 1: Total legal spend as a percent of revenue, by industry (2015)
Sixty-five percent of energy corporations’ legal spend is external, as shown in Figure 2, placing it ahead of all other sectors except Financial Services, Manufacturing and Chemicals. There are several factors that could contribute to this: the global nature of the industry, the amount of litigation these organizations face, the dispersed nature of the legal functions supporting energy companies and the breadth of external law firm advisers used by those operating in the sector -upwards of 800 in some cases.
The more sophisticated legal functions are starting to utilize procurement professionals, working alongside general counsel, to get the best value for their investment. For example, BP is holding a UK panel review in 2017 and has also informed its current external advisers that they will now be required to pitch for any instructions worth $1M USD in legal fees. Nevertheless, most energy companies struggle to accurately identify how much they spend on external counsel and few have benchmarking datapoints. This makes it difficult to actively manage spend and reduce costs by enforcing budgets.
Figure 2: Proportion of external spend compared to internal
Managing the in-house legal budget
All this points to the fact that corporate legal functions of energy corporations are looking for ways to better manage external counsel, incorporate greater use of alternative legal service providers and empower internal teams to retain more work.
Legal-spend analytic tools can help determine legal expenses and improve productivity by freeing up resources to focus on higher-value work and facilitate direct online collaboration between in-house and outside counsel. As a result, companies are increasing their technology spend on these tools. Thomson Reuters has seen clients save between 5 to 15 percent in legal-service expenditures in the first year of implementing a legal-spend analytics solution. Large energy companies are reaping savings of 4 percent in the first year of deployment and over 9 percent after the second. More information on legal spend analytics is available at Legal Tracker.
Thomson Reuters has also supported several organizations within the energy sector with its ALSP offering, Legal Managed Services, which helps corporate counsel and compliance professionals mitigate risk, improve efficiency and reduce costs by delivering technology-enabled services for document review and analysis, regulatory change management and contract management services.