Dive Brief:
- Law departments expecting to keep outside counsel costs in check amid strained budgets are likely to face an uphill battle as inflationary pressures remain an issue, analysts said at a virtual roundtable organized by the Blickstein Group last week. But there’s another trend these analysts see as well: pent-up litigation demand from the pandemic.
- A December 2022 law department survey from the Blickstein Group, in collaboration with Deloitte, found that 81.5% of firms said they expected outside law firm rates to go up this year, with 40.9% forecasting increases of greater than 5%.
- Meanwhile, 61.4% said they expected annual legal spend to increase, aligned with 2021. However, 22% said they expected annual legal spend to increase 10% to 25%.
Dive Insight:
One factor in addition to inflationary pressures that could be influencing expected increases in outside counsel spending is rising demand to undertake casework that got delayed, analysts said.
“A lot of litigation was put on hold for … almost two years,” said Jerry Levine, chief evangelist and general counsel at contract management software firm ContractPodAi. “It’s possible that some of the external spend is all those prior cases that are now moving forward.”
If litigation demand is on the rise, it runs counter to some surveys that show transaction work on the decline as sales dip, lowering the need for contract work, and M&A slows, lowering the need for that work, among other things.
Strategic shift
Coming out of the pandemic, law firms are also more likely to be revising their rates, said Ashley Smith, managing director of legal business services at Deloitte Transactions and Business Analytics.
“There is inflation across the board. There is a pendulum swing after COVID ... people are coming back to work and they're refreshing their rates,” she said. “For those companies that haven't done rate adjustments for five years, you're going to see a big jump.”
Another factor influencing outside counsel spending is what Smith called a “strategic shift in the sourcing of legal work,” in which departments may be more comfortable spending more with certain partners that deliver high-level work while looking to bring costs in line for others.
While law departments may attempt to pull more work in-house during strained economic times, a look back at downturns in 1991, 2002 and 2009 shows that work typically does not come in-house during tough economic times because legal departments aren’t in a position to increase headcounts, the study said.
As outside counsel spend increases, return on investment is increasingly coming into focus. In particular, law departments aren’t sure whether outside law firms are effectively using technology to streamline operations, the survey suggested.
Among firms polled, 71.7% said outside law firms aren’t effectively leveraging technology to deliver legal services more effectively and cost efficiently.
“[During the pandemic] I think the legal operations community stepped up and did a lot of work in-house to enable technology and then they looked at their outside counsel and [said] ‘you’re not stepping up,’” said Smith. “There’s a disconnect in terms of how quickly in-house teams pivoted and shifted … they’re reflecting back on their providers.”
A key lesson from the pandemic law departments have taken to heart is the necessity to pursue technology strategies that improve work flow and efficiency. The percentage of law departments saying they have a technology strategy in place that addresses how they will integrate, evolve and replace systems went up 8% between 2021 and 2022, to 48% of respondents.
The emphasis on technology is in part due to new skills being brought into legal operations departments, said Levine.
“They're coming in with MBAs. They're coming in with practicing lawyers who have done this, they're coming in with all this additional knowledge and all of a sudden they're saying ‘Let me build the plan. Let's make this work correctly.’”
