REUTERS/Kacper Pempel (Photo)
European corporates now spend less of their legal budgets on external law firms than UK and US corporates and only a net two percent of European corporates plan to increase their spend on external law firms, shows research by Thomson Reuters Institute in their 2020 State of the Legal Market Europe Report.
The research found that corporates in Continental Europe allocate an average 47 percent of their legal spend on external legal advice and 53 percent on in-house legal teams. That is a far lower share of spend on external law firms than in the UK where 60 percent of budgets are spend on external law firms and 70 percent for the US.
The share of spend by European corporates on external law firms has fallen in 2018 and the number of European corporates saying they intend to increase legal spend only slightly outweighs those that intend to decrease spend. At the end of 2019, 29 percent of in-house legal departments expected to increase their spend on external law firms whilst 27 percent expect to decrease spend. This suggests that law firms who want to increase their turnover from Continental Europe will need to win market share from other law firms rather than rely on an overall expansion of demand.
Jim Leason, VP, Legal Professionals Europe, Thomson Reuters comments: “There are still plenty of growth opportunities for those firms ready to adapt and invest. Considering COVID-19, Brexit, GDPR, diversity, cross-border transactions, restructuring and even climate change—all these issues are creating new demand from businesses for legal services.”
“However, until the economy is back on track, law firms that want to grow are largely going to have to do that at the expense of other law firms. To help take market share law firms will want to offer better value through more attractive pricing or be able to offer an improved service. Both are often going to require a more effective use of technology.”
European corporates surveyed said that their cross border legal spend is less likely to be cut than local legal spend—creating an opportunity for law firms with an international footprint and encouraging law firms to further strengthen their international capabilities.
The research also looked at the increasing competitive threat to traditional law firms from alternative legal service providers (ALSPs), non-law firm providers of legal services including the Big 4 accountancy firms. The research found that seven percent of the legal spend of Continental European Corporates is now on ALSPs such as non-law firm providers of legal services or the Big 4 consulting firms. That is slightly above the global average of six percent of legal spend going to ALSPs. Whilst these figures may look low at present, previous research by Thomson Reuters showed that the ALSP market in the US and UK was growing fast at 12.9 percent per year (CAGR).
Much of the interest in ALSPs has been based on their use of innovative technology to deliver legal services or for their ability to offer clients a more integrated approach to delivering legal services alongside other professional services—particularly true of the Big 4.
Whilst the Big 4 enjoy high brand awareness in the business community which helps their marketing push into the legal sector previous research by Thomson Reuters has found that their actual brand reputation, for legal work, lags behind the leading law firms by quite a margin.
The research also found that:
- On average, five percent of the internal legal budget is spent on legal technology. This is expected to increase as corporate legal departments seek greater efficiency
- Initial research suggests that law firms in Europe might find it harder to turn billings into cash collected. Collection rates amongst US firms in Europe is over 84.1 percent, markedly lower than the 89.2 percent they achieve in the US.
Jim Leason, adds: “The trading environment for law firms is a lot rosier than it was six months ago but in the near term, growth is still going to harder to come by than it was in the past.”
“Law firms are going to have to put even more effort into attracting and retaining clients.”
“Steps law firms are taking to help them do this include collaborating with clients on technology solutions. Helping clients in identifying the strategic legal issues they face through scenario planning sessions and offer to conduct portfolio analysis and risk assessment to help prioritise matters and spend.”
“Law firms may also want to consider alliances and collaboration with other professional advisors to create a more multi-disciplinary proposition to clients.”
Download your copy of the 2020 State of the Legal Market in Europe report here.