- While the average external legal spend by large corporate legal departments rose 36% from 2020 to 2021, the spending by large financial services companies on such services remained essentially flat, according to a recent report.
- One explanation for the success of banks and similar companies in preventing a large spike in spending on law firms and other legal services providers is that they were more successful in containing rate increases, a new report from Wolters Kluwer found. Financial services companies saw law firm rates rise 2.8% on average last year, a figure that compares favorably to industries such as basic materials and industrials that saw average rate increases of 8.9% and 10.8%, respectively.
- Banks and other financial companies, which are often the target of litigation, also likely benefited from the pause in court cases during the height of the COVID-19 pandemic.
Banks consistently spend far more than the average corporate legal department on outside legal assistance, both in absolute terms and as a percentage of company revenue, the Wolters Kluwer report highlighted.
A key reason for this trend is that finance is one of the most highly regulated industries, noted the report authored by Nathan Cemenska, director of legal operations and industry insights at Wolters Kluwer’s ELM Solutions.
But several factors contributed to financial companies' success during the COVID-19 pandemic in containing their external legal spend, which rose from an average of $59 million in 2020 to $59.1 million in 2021.
“Banks tend to have invested more than the average (corporate legal department) in the people, process and technology around rate management, and some have dedicated legal pricing experts, access to rate benchmarking, centralized control over rates, or all of the above,” the Wolters Kluwer report said.
“This stands in stark contrast to other organizations, some of which do not even attempt to exercise any central control, but decentralize rate negotiations out to in-house counsel, many of whom lack the skills, gumption, desire and/or temperament to take an arms-length tone in rate negotiations—with results that are all too predictable,” the report continued.
Banks have also in recent years reduced the number of outside law firms and legal service providers they have used.
For example, the mean number of outside vendors used by financial legal departments declined from 199.1 in 2016 to 162.3 last year, an 18.4% decrease.
While the vendor reduction is in the same ballpark as what Wolters Kluwer has observed in the broader market, banks appear to have started the trend of reducing vendor count earlier than other large legal departments.
“One possible explanation is that financial companies, either because they possessed more legal ops sophistication or because they have greater spend and therefore receive more pressure from the C-suite to control costs, made a proactive choice to ‘trim the fat’ of excessive vendors prior to the pandemic,” the report said.
“Another possibility is that, to the extent financial companies merge or acquire other companies more frequently than average, they are more likely to terminate certain vendors with capabilities that have become redundant post-transaction,” the report continued.