Thomson Reuters Legal Tracker recently released its inaugural legal department operations (LDO) Index report. This unique report combines responses to an online survey conducted among Legal Tracker participants with quantitative analysis of results from Legal Tracker, compiled from matter data from more than 1,000 participating legal departments, monitoring more than $71 billion in annual legal spend.
Overall, the survey results, combined with Legal Tracker metrics, provide an intriguing picture of how legal departments are structuring themselves in a shifting legal marketplace where corporations are increasingly viewed as being in the driver’s seat when it comes to determining how the market will continue to evolve.
A few of the report’s highlights:
- LDO improvement initiatives are becoming ubiquitous.
- Volume of legal work has increased for almost two-thirds of corporate legal departments.
- Continued focus by legal departments on cost control pays off, with average spend per matter down 8% year-over-year (YOY).
- Cost control is not driven by one method alone, e.g., alternative fee arrangements (AFAs), but rather with a combination of methods.
- Spend by law ﬁrm, matter type and practice group remain the most highly utilized reporting metrics.
The key areas of focus from this report merit further examination.
Legal department operations
The employment of LDO professionals is becoming much more commonplace, particularly among larger legal departments, regardless of whether the size of a department is judged by the number of in-house attorneys or by the amount of external legal spend. Legal departments are also taking a much more proactive stance with regard to how they use these professionals.
Slightly more than half of legal departments surveyed have dedicated LDO staff. Among large legal departments – those with external legal spend greater than $50M or 51+ in-house attorneys – better than 90% have staff dedicated to legal operations. These large departments were also more likely to see additional staff being dedicated to LDO, with 28% of legal departments with 51 or more in-house attorneys reporting an increasing number of internal staff devoted to legal operations.
Legal departments also view themselves as relatively proactive and sophisticated in managing external spend, with 58% of respondents using some combination of billing guidelines, invoice audits and legal bill reviews, and processes for management of timekeepers and matters.
Volume of legal work
The volume of legal work handled by the average company has not appeared to diminish to any appreciable degree. In fact, the majority of survey respondents reported upticks in their overall matter volume. Among respondents, 62% report the volume of legal work has increased in the past six months. Small and large legal departments reported the largest percentages of increased volume with 68% of small departments and 73% of large departments reporting increases. But a majority of respondents across all segments reported an increased number of legal matters.
However, increasing workloads are not necessarily translating to increased human resources. While on average 53% of responding legal departments reported an increase in the percentage of work handled in-house, only 28% reported an increase in the number of in-house staff in the last six months.
Some of this new work is being sent to outside counsel. While 45% of respondents reported increased outside counsel spending, 31% have actually decreased spending on outside ﬁrms.
Technology and attempts at process improvement are also being leveraged to help legal departments “do more with less.” Some 18% of legal departments have increased the legal department budget for technology, while another 13% of legal departments have increased LDO staff.
Outside firm relationships
As a result of cost-control measures and a focus on better predictability in legal spend, legal departments have been able to rein in their average external spend, both in terms of average dollars spent per ﬁrm as well as average spend by matter. Average spend per ﬁrm was essentially ﬂat YOY, with a slight decline of 0.6%. Average spend per matter shrank considerably, down 8.1% compared to the previous year.
Legal departments are also increasing the scope of certain factors of their domestic law ﬁrm relationships to include more of their global law ﬁrms. Use of e-billing outside the US is increasing – with 25% of legal departments reporting an increase in the last six months. Medium-size legal departments with spend between $15M-$50M reported the largest growth in international e-billing with over 52% of respondents reporting an increase.
And while legal departments on average did a good job of holding outside counsel rates in check, with only modest growth, rate growth among certain segments of law ﬁrm clients grew much more dramatically than among others. Overall, 65% of legal departments report outside counsel hourly rates increased over the last six months with only 4% of legal departments reporting rates have decreased.
Legal Tracker data shows that Am Law 50 ﬁrms enjoyed the highest average modest growth in rates across timekeeper index averages, with the largest YOY rate increases among Am Law 50 law ﬁrms.
Cost-control strategies and their efficacy
Survey respondents also highlighted a number of cost-control strategies they’ve employed, most with varying degrees of success. Cost-control measures most commonly utilized include moderate enforcement of billing guidelines, ﬁxed/ﬂat fee set at matter level, volume discount, blended hourly rates, required law ﬁrm matter budgets, and auto-reduction of invoice expenses.
The cost-control measures identiﬁed as most effective include auto-reduction of invoice expenses, required law ﬁrm matter budgeting, ﬁxed/ﬂat fees set at the matter level and volume discounting.
The least effective cost-control measures – those with high utilization but low effectiveness rankings – include use of procurement policies and blended hourly rates.
Legal departments with staff dedicated to LDO also tend to be those that view themselves as more sophisticated in management of legal spending. Among those legal departments who viewed themselves as sophisticated, 50% of relevant respondents identiﬁed strict enforcement of billing guidelines as the most effective cost-control measure, with ﬁxed/ﬂat fee at matter level and competitive bidding, including request for proposals, also earning high marks.
Metrics and reporting
Legal departments continue to explore how to best evaluate and report on their performance. Determining which metrics to utilize can pose a challenge.
Among respondents, metrics with highest utilization include:
- Total spend by law ﬁrm
- Total spend by matter type
- Total spend by practice group
- Number of legal matters opened/closed
- Savings from invoice review/reduction
- Total spend by business unit
Less commonly utilized metrics include:
- Savings from alternative fee arrangements
- Cycle time – average period from opening to closing of a matter
- Costs avoided by winning or settling a case quickly
- Law ﬁrm diversity
On the whole, the results of the report provide fascinating insight into how legal departments are attempting to change their internal structures as well as their external relationships to streamline their operations and maximize value.