2023 in-house legal outlook: Value creation rises to the top

Faced with pressure to do more with less as economic uncertainty continues, in-house legal department leaders will likely find themselves under the gun this year. 

“Many legal chiefs are experiencing the most turbulent period of their entire careers,” Sophie Ross, the global CEO of FTI Technology, has said.  

The turbulence is driving what are likely to be the biggest in-house legal trends this year: More reliance on legal operations staff and on the use of technology, particularly technology powered by artificial intelligence, and a redoubled effort to seek accommodation from law firms on fees.  

“Corporate law departments continue to face the brunt of pressure points involving cost control and increasing workloads,” say analysts at the Thomson Reuters Institute and the Legal Value Network.

Against this backdrop is a stepped-up compliance picture, particularly in data privacy. Following California with its landmark consumer privacy law, which takes full effect this year, states across the country are enacting their own laws to regulate how companies operate online. And this could also be the year the federal government gets involved: last year Congress came close to enacting the American Data and Privacy Protection Act. 

Another compliance area that is expected to command a lot of in-house attention are wage transparency and other employment-related laws. Several states, including New York, have enacted laws requiring employers to give a pay range when soliciting applications for jobs. Cities are doing it, too. Expect more to follow suit. 

Meanwhile, the economic uncertainty is changing the mergers and acquisitions calculus, heightening the legal department’s role as more deals end in fights.

To help you get a picture of what the year holds, here’s Legal Dive’s take on some of the top in-house legal trends of 2023 that could shape your department’s operations. 

Legal fees

Law firms have said they want to raise fees 7% to 8% this year, a Wells Fargo report says, but that goal flies in the face of pressure in-house law departments are under to cut costs.

Outside legal work is the highest cost faced by law departments by far, and it’s also the most unpredictable. Almost every legal chief in a Coleman Parkes survey said their legal bills are regularly higher than they expect, and 40% said they’re higher every single time they come in.

To bring those costs down, more departments are seeking alternative fee arrangements, but finding mixed success.

About 60% of law departments in big companies have been able to negotiate some kind of arrangement other than hourly billing, but only about 30% of smaller departments have been able to do that, according to a survey by the Association of Corporate Counsel and Major, Lindsey & Africa. Retainers and the use of blended rates are the arrangements getting the highest increase in use. 

To help move the needle on these efforts and to more generally increase their department’s operational efficiency, legal leaders are expected to turn more to legal operations specialists. About 60% of legal departments have at least one legal ops specialist today, up from something closer to 45% a few years earlier, an ACC survey finds. 

One way the legal ops function helps lower outside counsel costs is by enforcing billing discipline. That means rejecting fees that don’t follow the department’s billing guidelines, pushing for voluntary invoice reductions and turning to a competitive bidding process to light a fire under outside firms’ feet. 

Legal operations

Most legal operations teams have between one and four individuals, but many have been growing in size and influence in recent years.

Given the current economic environment, legal ops teams in 2023 are likely to be even more closely consulted by legal department leaders seeking to achieve greater efficiency.

“The logical evolution of the legal ops function is that it becomes the general counsel’s right hand,” said Kevin Cohn, chief customer officer at Brightflag.

Mike Haven, president of the Corporate Legal Operations Consortium, recently told Legal Dive that one way legal operators can support law department leadership in tight economic times is by helping to implement process automation.

In a similar vein, experts predict legal operators will be increasingly called upon to lead legal departments technology adoption initiatives.

“The legal ops team needs to empower the staff with the best tools to make the right decisions and to streamline communication with the rest of the business,” said Terry Dohrmann, co-founder & chief revenue officer at Litify.

These efforts will help legal departments shift from being “a cost center to a revenue/business initiative driver,” he said.

The legal ops function has grown in tandem with specialized legal technology, and that is likely to continue. Almost 80% of legal teams said their use of technology accelerated over the last few years, mainly for contract management, matter management and e-signatures, a ContractsWorks survey found.  

“The solutions that were quickly adopted by so many organizations during the pandemic seem to be just the start for the in-house legal community,” the ContractWorks report said.

AI-powered technology

Meanwhile, the release of OpenAI’s ChatGPT tool late last year quickly demonstrated the power of generative artificial intelligence to millions of people across the globe, including lawyers.

Not long after, the contract management provider Lexion announced the launch of its AI Contract Assist that utilizes GPT-3 technology to help attorneys complete contracting work in a more efficient manner.

AI in general, and generative AI in particular, is expected to produce further innovations that will aid the in-house legal industry in 2023.

“Generative AI has changed the paradigm of creativity by turning deep learning AI models into collaborators working with humans to generate new content and ideas,” said Omar Haroun, Relativity’s head of AI strategy.

Haroun also said he expects “the looming recession will be a catalyst for AI adoption as general counsels look to contain costs and require in-house and outside counsel to maximize efficiency.”

Beyond contracts, e-discovery is another area where the use of AI-powered tools is likely to grow.

“AI has the cycles to mine insights from vast quantities of data and uncover patterns in the haystack,” the e-discovery provider Everlaw has predicted.

Data privacy

The California Privacy Rights Act, known as CPRA, became effective on January 1.

It is one of a growing number of data privacy laws that corporations, particularly those doing business in multiple jurisdictions, must work to comply with this year.

“We predict data privacy compliance will consume significant resources and a greater share of mind than ever before within the legal department,” said Ray Pathak, Exterro’s VP of data privacy.

As a result, ActiveNav CEO Peter Baumann said he expects corporate legal teams “will finally embrace the tools and processes necessary to understand what type of risky customer data they are holding on to and where that risky data is stored.”

Meanwhile, there is a possibility corporations will eventually have to contend as well with a federal data privacy law. 

In July, a U.S. House committee overwhelmingly approved the American Data Privacy and Protection Act with bipartisan support, though it hasn’t progressed further since then. The bill could preempt some of the efforts by states to regulate in the privacy domain.

“While the timing is still up in the air, I predict we will finally make progress on federal privacy legislation in the new year,” said Danielle Sheer, chief legal and compliance officer at Commvault.

Pay transparency

Several states and a number of cities have laws requiring employers to disclose pay when advertising to fill a position. New York City requires employers to advertise a pay range if they meet a size threshold and the job would be done at least in part in the city, for example. 

Letting job applicants know the pay upfront is simple on its face, but employers have pushed back because it can expose disparities in their pay practices, opening them up to liability risk. They also say it limits their flexibility to tailor pay to the candidate.

In response, companies have been advertising broad ranges, but this approach could be challenged this year. Lawmakers in New York City have said they might modify their law to limit how wide these ranges can be because companies have been advertising ranges that are so wide that it calls into question whether they’re making a good-faith effort to comply. 

If it passes as contemplated, the law change would limit ranges to double the lower amount – $60,000 on the low end to $120,000 on the high end, for example.

Employers shouldn’t have to worry about pay disparity complaints if they base differences on objective criteria, like years of experience and skill type, and write those criteria down in a formal policy. 

“At the end of the day, it is permissible to pay people differently as long as there are legitimate reasons,” said Liz Washko of Ogletree Deakins.

Look for more state and local jurisdictions to pass laws. By one estimate, 20% of workers in the United States will soon be affected.

”This change is happening at lightning speed in the U.S. and could have a broad effect nationally,” a TechTarget report says. 

M&A

Acquisitions reached a record setting $5 trillion in 2021 and although deals slowed last year, to roughly two-thirds that, the volume has been high enough that law firms that have specialists in the area have been charging a premium to work on the deals.

M&A work generated law firms’ highest billing rates of all activity types, a median $878 an hour, according to a LexisNexis CounselLink report. 

Given the uncertain economy this year, deals will likely slow but demand for expert legal work should stay high as valuation and other conflicts increase. 

“Performance of recent acquisitions may fall short of expectations, [producing] an upswing in M&A disputes over the coming year,” Kevin Hagon, a Berkeley Research Group (BRG) director, said in a company report last year.    

“Prices are more volatile,” Matthew Weiniger, a Linklaters partner in London, said in the BRG report. “So when you sign the deal today to close in three months’ time, there’s a greater chance that your economic assumptions will be completely wrong at closing.”

Companies are willing to pay top dollar for M&A work because the activity is often central to their growth plans

“M&A matters are typically highly strategic, mission-critical transactions,” Kris Satkunas, CounselLink’s director of strategic consulting, told Legal Dive last year.

Compliance risk is rising too. In the last two years, the federal government’s antitrust regulators have started looking beyond deals’ potential consumer impact and scrutinizing them for their impact on data concentration, corporate board conflicts and employee pay. 

That makes due diligence more complex separate from the economics of the deal. 

What’s more, the Federal Trade Commission last year passed a resolution subjecting mergers that fall below the $101 million Hart-Scott-Rodino (HSR) threshold to automatic antitrust review.

The FTC already had the authority to look at smaller deals, but now they’ll automatically be subject to review in the same way as larger deals. 

In short, economic uncertainty and stepped-up regulatory scrutiny means the cost of M&A legal work will likely stay high in 2023.

When Abhay Nadipuram wanted to reduce his outside spend, the legal chief kept more work in-house, sent other work to non-lawyers and created a panel of firms to replace the single law firm his company had traditionally relied on. Today, Care Initiatives, for which Nadipuram was chief legal officer until he moved to another organization at the end of last year, spends 60% less on its operations than it did two years ago. 

“My preference was to reduce legal spend by negotiating rates and bringing in-house a lot of functions that were outsourced and then, frankly, reducing a lot of the work that was being sent out to outside counsel unnecessarily,” Nadipuram told Legal Dive.

For many legal chiefs, that kind of hard-nosed change could be necessary as they try to steer their department through what’s likely to be a difficult 2023.

With inflation expected to persist at a minimum 5% and many companies laying off workers as they respond to lower business demand and possibly a recession, legal departments are under pressure to do more work internally without adding more lawyers to do it. 

“In-house lawyers have had to juggle a lot,” said Susanna McDonald, vice president and chief legal officer at the Association of Corporate Counsel (ACC). 

Increased complexity

Virtually all in-house attorneys in an Axiom survey late last year reported that both the volume and complexity of the legal matters they’re dealing with have increased, leading almost 80% of them to say they’re burned out and nearly 60% that they’re looking for a new job.

“Attrition will continue to worsen as lawyers who work for legal departments … consider getting out before it gets worse,” the Axiom report said.

Against this backdrop, expect legal chiefs to seek increased use of alternative fee arrangements this year to help lower their highest cost area – outside counsel spend – and make it more predictable.

They’re also likely to tap the expertise of a legal operations partner, if they don’t already have one, to implement process and technology initiatives to make the department more efficient and a value-add part of the organization.

Mike Haven, head of legal ops at Intel and president of the Corporate Legal Operations Consortium (CLOC), told Legal Dive today’s economic environment is a “sweet spot” for legal ops teams, because the downturn offers up an opportunity for them to take “smart risks” for the benefit of their organization.

Nor will change-averse legal leaders be in a good position to say no to legal ops initiatives, including those related to law firm fees, if the broader organization in which they work expects them to become more lean. 

“In-house counsel often push back but they will be less able to do so in tough economic times,” said Brad Blickstein, principal at consulting firm the Blickstein Group. “In terms of reducing costs from outside counsel, legal operations professionals have not been pulling the levers they have.”  

More with less

For legal chiefs who already have one to help them, a legal operations partner can do a lot to ramp up efficiency while lowering costs. 

“This role is highly strategic, and when done correctly will transform your legal department,” said Mary O’Carroll, former legal ops chief at Google and chief community officer at legal software company Ironclad.   

Legal ops can standardize the way law firms are onboarded, for example, making these costs more predictable and more disciplined on the billing side – and even helping on the legal quality side. 

Daniel Michalek, legal operations manager at Branch, a mobile app marketing company, said he’s seen a difference after he standardized onboarding at his company. “You … get better value and more collaboration, and therefore, the result is a much better work product,” he said.   

Alternative fees

A legal ops partner can also help the general counsel or CLO get more firms to accept an alternative fee structure like a retainer or blended rate, since one the biggest roadblocks to both sides agreeing to a change like that is settling on the pricing. 

Legal leaders are concerned that, if they get the pricing wrong and they end up paying more than they otherwise would have, it will reflect poorly on their judgment, according to Alan Guy, managing director for underwriting and value optimization at Kobre & Kim.

“They sort of revert back to what they’re familiar with,” Guy said.  

Legal ops can help solve that problem by connecting the GC or CLO to a specialist who can tailor pricing in a way both the in-house and outside counsel sides can accept. 

“What's increasingly happening is that those [fee-setting] discussions are happening directly between pricing professionals as opposed to between the general counsel and the partner,” Guy said. 

Although adoption of alternative fees remains slow, it’s happening. 

About a third of the work that law firms do now for in-house teams is paid using some kind of alternative fee arrangement, according to data from the Association of Corporate Counsel and Major, Lindsey & Africa. That’s up from about 29% in 2021. 

The biggest growth has been in the use of retainers, which jumped about 21% between 2021 and 2022, the ACC data showed. The use of blended hourly rates also increased. 

That trend could continue at an even faster pace this year as law firms try to position themselves more competitively.

Better tools

Technology is the other half of the efficiency equation. At Care Initiatives, it wasn’t just changes Nadipuram made to the company’s relationship with outside counsel that helped him hit that 60% reduction in costs; it was his introduction of automated tools as well.

His first action after taking the job was to adopt a contract lifecycle management (CLM) system with the help of a paralegal and later a newly hired legal operations manager. 

“I was starting from ground zero,” he said. 

Nadipuram said he looked at five products before deciding on one that was assisted by artificial intelligence to pull out data from scanned contracts to create a database. Now all of the substantive information in the contracts can be organized, searched, analyzed, used in other contracts and automatically pulled up as terms come due, saving time and money. 

GCs and CLOs say they’re well aware of the efficiencies of CLM and other tools, particularly after shifting operations to remote work during the pandemic, making it unlikely adoption of new tools will slow much, if at all, in 2023.

Even amid expectations of layoffs and hiring freezes, 44% of more than 450 recently surveyed legal professionals said they expect to add technology to increase efficiency, according to a report from contract management provider Lexion.

Survey respondents indicated that e-signature (31.3%), contract repository (29.4%) and contract reviewing (27.6%) are their priority acquisitions in the next six months.

“Respondents are bullish on leveraging technology as a resource to help reduce the workload when there’s growth in legal work but no increase in headcount or outside counsel spend,” Lexion’s report said. 

Legal ops and tech

But for adoption to happen smoothly and the technology to do what it’s intended, legal ops staff are crucial, because they’re the ones best positioned to help the GC or CLO pick the best solution for the team and implement it in such a way that it actually gets used in the way it’s intended. 

A survey late last year by the Thomson Reuters Institute and the Legal Value Network found that one of the legal ops professionals’ biggest complaints with technology is that in-house lawyers don’t take the time to use it in a way that maximizes its benefits.

There’s a “sense of frustration among legal department operations professionals concerning the pace of change around technology,” the report says. 

That means legal ops staff must add soft skills to the business-discipline side of their job description if they want to bring lawyers on board. 

Ashley Adams, legal ops chief at content management company Contentful, said it can be a delicate task getting tech buy-in from in-house lawyers but with patience and empathy, even hold-outs can be brought around.

“If I was meeting resistance from somebody, I tried to dig into the why,” she said in an Inside Voices podcast. “It’s not me vs. you; [instead, it’s] let’s figure out how we can work together and dig into the why.”

About 60% of legal departments have at least one legal ops specialist today, up from something closer to 45% a few years earlier, an ACC survey found. For 2023, look for this number to climb as tech adoption becomes a principal way legal departments transform into more efficient operations to meet the more difficult economic environment expected this year. 

As legal departments examine ways to tighten their belts amid an uncertain economy, outside counsel spending is one area where they are likely to seek savings.

But if in-house teams wait until they receive invoices from their external law firms to discuss potential billing reductions, it’s often too late in the game for any meaningful changes to be made.

As a result, a growing number of general counsel and legal operations professionals are embracing legal spend management technology in hopes of taking a more proactive approach to monitoring their law firm expenditures.

These tools enable legal teams to closely review outside counsel spend throughout the course of a project, and providers say they expect to make greater inroads in the market during a year in which many economists have predicted a recession.

“Legal spend is too big a line item not to have a pragmatic and proactive way to manage it, especially when the markets are turning,” said Nicholas d’Adhemar, founder and CEO of legal spend management tool Apperio.

Monitoring budgets

As recently as 2021, the average external legal spend by large corporations was $99 million, according to Wolters Kluwer’s LegalVIEW Insights.

Figures like that highlight that if legal teams can reduce their spending on outside counsel by just a few percentage points, they can save a lot of money. 

One of the primary ways legal spend management solutions could help in-house departments in that regard is by closely tracking outside counsel budgets for specific matters from beginning to end.

Apperio, for example, enables legal teams to see in real time and receive alerts when the budget for a particular legal matter hits certain thresholds.

This spending information, which law firms also can access, is designed to facilitate collaborative conversations between in-house clients and their outside counsel about any adjustments to a project that may need to be made, according to d’Adhemar.

He said Apperio has seen increased use of the threshold notifications functionality in recent months as legal teams review their outside counsel spend more carefully.

No surprises

Scott Wallingford, president of enterprise business at legal workflow solution provider Onit, said his company’s spend management tool also allows companies to closely track outside counsel budgets for specific matters. 

This functionality, he said, helps legal teams avoid unwelcome billing surprises near the completion of a project handled by external counsel.

“If you feel like you're 10% of the way through a matter and you’ve burned through 45% of your budget, you start to say, ‘Is something wrong here? Do I need to allocate more or should I rethink some things?’” Wallingford said.

Additionally, detailed spending information is useful for legal chiefs to have when they are called upon to provide budgetary updates to their chief financial officers, spend management leaders said. 

Analyzing rates

Another reason more legal departments are purchasing and implementing legal spend management tools is they provide data that can help in-house teams scrutinize the rates they are paying law firms and inform their rate review processes.

This information is particularly useful at a time when many law firms are seeking rate increases in the high single digits to low double digits, which conflicts with the desire of legal departments for cost minimization.

To bolster the law firm rates data available to its customers, Onit announced in 2021 that it had acquired Bodhala, a provider of AI-powered legal spend analytics, benchmarking and market intelligence.

Wallingford said users of Bodhala can view anonymized, aggregated data to compare the rates they are paying similar-sized firms to the typical rates other companies are paying those firms.

“I can in real time make sure that my rates are in line,” he said. “That's one step toward making sure that your spend is both efficient and effective.”

Additional data about firms

In a related vein, some legal teams are using technology that provides data about rates in tandem with other information about their outside law firms.

Priori, for example, offers legal teams a cloud-based software-as-a-service (SaaS) platform for outside counsel decision-making that pairs pricing data with experience, expertise and diversity data.

This type of information available in its Scout technology allows in-house teams to make smarter and more well-informed decisions about which outside firms to use, according to Priori CEO and co-founder Basha Rubin.

“Many in-house teams think that pricing data alone is insufficient but instead needs to be supercharged and contextualized with other kinds of data to be meaningful,” Rubin said.

As legal departments have faced spending pressures in recent months, Priori has seen in-house teams “moving low-to-medium risk and complexity work away from BigLaw firms to boutique and midsize firms,” according to Rubin.

She said legal teams can use Priori’s flagship Marketplace technology product to help reallocate legal work to smaller firms and “see immediate cost-savings” by doing so.

Tracking other spending

Meanwhile, other experts predict that legal departments will also increasingly use spend management tools to analyze their spending across categories beyond outside counsel.

Two areas ripe for such monitoring are information governance and ediscovery, according to Ariyah Mandel, vice president of discovery services at Gulfstream Legal Group.

He highlighted that spending information about these areas has traditionally been challenging to collect and analyze, even as costs have risen in recent years. 

But given the growing desire among legal departments to analyze how external legal services are priced and performed, Mandel said, he expects in-house teams to seek a closer accounting of ediscovery and information governance spending moving forward.

“We will see a shift in this oversight and quickly see how important control of a company’s legal spend will affect the decisions being made in these areas,” Mandel said.