Controlling Law Firm Spending With Business-Oriented Solutions is Top Priority For Corporate Clients
10th Annual ACC/Serengeti Managing Outside Counsel Survey Reveals In-house Counsel Requiring More Process-Oriented Management Techniques to Obtain Value From Firms; Overall Law Department Spending Remains Flat
Posted: Oct 25, 2010
OCTOBER 25, 2010 (San Antonio, TX/Washington, D.C.) — Controlling spending on outside counsel remains the top priority for in-house counsel, topping compliance and other concerns, according to the results of the tenth anniversary 2010 ACC/Serengeti Managing Outside Counsel Survey Report, a collaboration between the Association of Corporate Counsel (ACC) and Serengeti Law, released at ACC’s 2010 Annual Meeting, October 25 in San Antonio, TX. In addition, the survey found that overall law department spending remained flat, with a 0% median increase in the past year. This year marks the 10th anniversary of the report, and summarizes findings from the last ten years of the survey on the evolving relationships between company law departments and the law firms who represent them.
By collecting objective data from in-house counsel related to their relationships with outside counsel, this year’s survey finds in-house counsel - now more than ever - are focusing on the need to drive efficiency in legal costs, leading to more value-based policies to reduce overall legal spend, especially with their outside firms. To accomplish such efficiencies, the majority of in-house counsel are embracing business-oriented techniques from the ACC Value Challenge, an initiative to reconnect the cost of legal services with value. This industry-wide movement has resulted in corporate clients adopting specific retention policies for both current and new firms. Retention terms for firms now being employed by the majority of in-house counsel include:
Ten years ago, the first ACC/Serengeti survey of ACC members was designed to assess the specific techniques in-house counsel were using to manage legal work being handled by their law firms. When the survey began in 2001, ACC had 12,800 members and Serengeti’s matter management and e-billing technology had not yet been released.
On this, the 10th anniversary of the survey, ACC’s membership has doubled to more than 26,000 globally and Serengeti’s matter management and e-billing system has more than 120,000 users. At the same time, the corporate legal world has been struggling to comply with Sarbanes-Oxley and many other related requirements put in place since 2000 as well as the “dot-com bubble,” followed by a period of recession, and since December 2007, a second recession triggered by the subprime mortgage crisis which continues to the present. “Compared to a decade ago when this survey first started, in-house counsel are now more intent on requiring an array of measurable data, metrics, targets, project management tools and rigorous cost-controls to implement their focus on getting maximum value from their outside firms,” says ACC Deputy General Counsel and Vice President – Legal Resources James A. Merklinger. He adds, “These findings are consistent with what we have been hearing from members throughout the year. The successful firms will be the ones that track and present results-oriented data to clients so as to continuously improve accountability, efficiency and transparency.”
A business-solution trend worth highlighting this year is the continued movement to Internet-based matter management and e-billing systems to help clients connect directly with outside counsel to manage spending, project plans and budgets, documents and results more efficiently. This year, web-based systems jumped to nearly 42% of in-house counsel compared to last year’s 24%. The use of these systems, which are hosted by vendors and run by law departments, is poised for continued rapid growth, as the survey shows that 23% of in-house counsel plan to use such systems, compared with 18.5% who plan to adopt internal management systems. “In today’s results-oriented environment, a firm must understand a client’s legal and business objectives from the start of the engagement in order to provide superior project management,” says Serengeti’s Rob Thomas, the author of the survey report.
To get better results, in-house counsel must have access to better information by leveraging the process-oriented legal project management systems available in the marketplace today. Thomas adds, “An all-encompassing, web-based system where clients can manage all of their legal matters, connected with all of their outside counsel, is ideal for managing to a plan and for dealing with any issues as they arise. The latest online matter management/e-billing systems give in-house counsel a practical way not only to monitor and analyze their spending and results, but also to evaluate the relative value provided by their outside counsel. With this new information, in-house counsel are able to create alternative fee arrangements that align the interests of both in-house and outside counsel by rewarding more efficient, more effective performance.”
HIGHLIGHTS FROM KEY FINDINGS:
The legal landscape for managing outside counsel in the past decade has clearly changed, as indicated by movement in this survey’s ten-year comparisons. Key takeaways from these survey benchmarks are:
The following key findings provide a retrospective look at major developments over the past decade, comparing specific data from the first report in 2001 (covering activities in the year 2000) with similar data from this year’s report (covering the year 2009):
KEY FINDING I: Top priorities of in-house counsel have remained constant over past decade.
SIGNIFICANCE: Although compliance is still a key focus, controlling outside legal spending has returned to the top spot during the past two years similar to the start of the decade.
During the first several years of the survey, the top concern cited most frequently by in-house counsel was controlling outside legal expense. The increasing complexity of regulatory requirements driven by the introduction of Sarbanes-Oxley and related laws, along with high profile trials involving executives and in-house counsel, moved legal compliance issues to the forefront of in-house counsel priorities. Although such issues continue to remain important, controlling outside legal spending has returned to the top spot during the past two years, driven by the growing financial pressures on law departments to help their companies address a changing economy.
KEY FINDING II: In-house counsel are setting rules of engagement for their outside counsel.
SIGNIFICANCE: The need to drive efficiency is leading to more value-based policies to reduce overall legal spend. Policies requiring project budgets, client consent for firm staffing, early case assessments, the use of alternative dispute resolution, client ownership of work productand technology requirements have all increased significantly in the past decade.
Client-imposed retention terms now specify how outside counsel must handle their legal work. Many of these requirements stem from basic project management principles: conducting an early assessment of the project (usage is up 35% in past 10 years), creating a financial plan or budget (usage is up 29% in 10 years), and required approval of any changes to the project team (usage is up 47% in ten years). Law departments are requiring that law firms agree to client policies, such as preferences for alternative dispute resolution (usage is up 111%), client ownership of work product (up 55% in 10 years), and diversity among their service providers (up 106% in 10 years).
Across the board, the use of each retention term has increased over time as in-house counsel have taken greater control over the rules of engagement, requiring changes from the law firms they retain. This trend will likely continue, as many in-house counsel state each year that they are planning to require even more of their firms in the future.
KEY FINDING III: There has been a noticeable shift of work from outside to in-house counsel. Also, law department budgets are not increasing, as they had earlier in the decade, but are remaining flat for most, or even decreasing for more than a third of the respondents.
SIGNIFICANCE: Although legal spending is taking a growing bite out of company revenues, law firms are getting a smaller share relative to corporate law departments.
During the past ten years, we have seen the percentage of company revenues going to law departments increase at a much faster rate than spending on outside counsel. Similarly, there has been a significant decline in the ratio of outside to in-house spending (from 2.2 to 1.5).
These numbers indicate that over time corporate clients have recognized the relatively lower cost and greater value of work from in-house legal departments. In-house counsel are doing more legal work at a lower cost, leaving for outside counsel those areas of extraordinary specialization or unusual volume for which it does not make sense to employ permanent in-house staff.
For outside counsel, this means they are not just competing with other law firms, they are also competing with their own corporate clients’ law departments.
In addition, the study found that overall total law department expenditures on average remained flat in 2009. Only 26% of respondents reported an increase in law department spending in the past calendar year, a number significantly lower than prior years (49% in 2008, 61% in 2007, 62% in 2006 and 85% in 2005). And, 37% of respondents reported no change in budget allocated to their legal departments and the same percentage, 37%, responded that their budgets had actually decreased this past year.
Clearly, the times when law department budgets were grew exponentially have changed. CLOs are now under greater scrutiny and their margins for increasing legal spend for their department are restricted. Thus, law departments are being asked to do more internally with the same or lower budgets which is putting pressure on in-house staffs to be more efficient in their work.
KEY FINDING IV: In the past decade, hourly rate increases have fallen substantially. This year is no exception – rates have increased only 1.48%, the lowest ever and a decrease of 84% since 2000.
SIGNIFICANCE: Due to the greater willingness of in-house counsel to assert their bargaining power, along with the weak economy, we not only are witnessing the smallest increase in hourly rates in the past ten years, but in-house counsel are also anticipating similar record low increases for the coming year.
Over the last decade, the annual increase in law firm hourly rates has fallen dramatically, from over 9% in 2000 to this year’s increase of 1.48%, the lowest in the survey’s history. Furthermore, in-house counsel predict that this record low will hold at least for the coming year—projecting on average an annual increase of only 1.52%. These numbers clearly show the impact that in-house counsel and a challenging economy are having on their law firms’ power to increase revenues each year simply by raising their rates.
KEY FINDING V: When in-house legal departments do use firms, the use of alternative fees is becoming increasingly frequent, but is still not the norm.
SIGNIFICANCE: The study does show that the number of in-house counsel with little to no company resistance to alternative fees has increased by 16% in 10 years; firms with little to no resistance to alternative fees has increased 69%.
As indicated in the chart on use of alternative fees, over the past ten years, law firms are “getting it,” as they are offering alternative fees more often (up 6%). And, the percentage of in-house counsel who are seeing no firm resistance to AFAs has increased 69% over the past decade. It will be interesting to see if the move to alternative billing continues in the coming years, even if the economy strengthens.
KEY FINDING VI: With the focus on using business methods and technology to track and reduce outside counsel spending, approximately 92% of law departments are now required to provide periodic reports regarding legal spending, unbilled time accruals, exposure, status, and results.
SIGNIFICANCE: Due to these demands, in-house counsel are increasingly turning to more sophisticated tracking systems to carefully understand where their money is going.
Business Challenges for Law Departments to Monitor Law Firm Activities
A majority of law departments must report on certain categories of spending either monthly or quarterly: legal matter status (95.5%); legal matter results (87.1%); legal spending (77.5%); liability exposure (74.7%); and unbilled spending/accruals (74.2%). If there are material changes between periodic reports, the vast majority of law departments (82.0%) must also report upon such developments. Because much of such reporting information originates with outside counsel, in-house counsel must maintain systems to collect and track such information.
A greater number of law departments (42.1% in 2009 versus 30.3% in 2008) have to certify that the reporting systems have no deficiencies in internal controls. As a result, companies are adopting better systems for tracking legal projects and spending.
Business Solutions for Law Departments to Monitor Law Firm Activities
TECHNOLOGY: To track legal projects and budgets, home-grown systems such as internal spreadsheets and databases are still the most common technologies that law departments use to keep track of their work and spending with outside counsel—64.6% (compared with 40.0% in 2008, 38.3% in 2007, 39.5% in 2006, and 32.5% in 2005).
Less common is internal matter management software (not connected with outside counsel), licensed from vendors by a small number of in-house counsel—13.5% (compared with 16.7% in 2008, 13.4% in 2007, 12.2% in 2006, and 13.6% in 2005). Conversely, Web-based matter management and e-billing systems that connect with outside counsel have overtaken internal systems and continue to grow rapidly. In fact, in 2009, their use jumped to 41.6% of in-house counsel, compared to last year’s 23.9%. Web-based systems are also poised for strong growth, with 23.0% of in-house counsel planning to use such systems, compared to 18.5% who plan to adopt internal management systems. In-house counsel often find it inconvenient to have to go to multiple law firm extranets to find their information, compared with client-centric Web-based systems which manage all of their information in a single site. As a result, the use of law firm extranets remains at a low level, with only 13.5% of in-house counsel reporting that they use extranets provided by one or more of their firms (compared with 8.7% in 2008, 10.4% in 2007, 10.1% in 2006, 13% in 2005, 7.5% in 2004, and 30% in 2003 and 2002). An even smaller number of law departments (4.5%) provide their own extranets to work with their outside counsel.
Of note is that more than one-fourth of in-house counsel (28%) sought input from their law firms when evaluating technologies for collaboration. Of those who did seek law firm input, the most common technologies for which law firms provided input were matter management and e-billing systems (which law firms often have used with other business clients).
Survey Methodology & Respondent Demographics:
The survey was conducted online in two parts: one survey to collect hourly rate data, and another for the rest of the survey questions. The responses to the non-hourly rate survey were provided during May and June, and the responses to the hourly rate survey were provided in July and August.