For the latest installment of our Legal Leaders Exchange podcast series, two of our experts on legal spending and the legal market, Nathan Cemenska and Jeff Solomon, discussed the findings in our LegalVIEW Insights report volume 5, focused on the changes from 2020 in how corporate law offices and external consulting firms work together.
Increase in external expenditure
After several years of outbound spending at large corporate law firms (CLD) remaining stable, from 2020 to 2021, outbound spending will increase by 21% and 36% increase in external expenditure. There are few explanations for this large divide. For example, the changes that have occurred since the start of the COVID-19 pandemic set the rate for many of the activities of external consultants. As businesses begin to ramp up again in 2021, CLDs are doing more to go to outside counsel and also know that some rate hikes are justified.
Nathan and Jeff agreed that there is an opportunity for CLDs to focus on rate management to manage their legal expenses. Despite extensive experience working with large law firms that have established regulatory programs, our two experts expressed concern that few CLDs have a robust rate management approach.
Legal expenses and company income
One metric that our legal experts don’t hear used is legal expenses as a percentage of company revenue. This metric is a tool that helps the legal department interpret its spending when reporting to upper management. This is another area where comparisons with industry peers can help legal teams determine whether they are eligible for outsourcing. If a law firm spends a higher percentage of its revenue than similar companies, that’s a red flag that indicates it may be lagging behind its peers and may have opportunities to hold back on spending if his actions are correct.
When measured as a percentage of the company’s revenue, legal expenses will decrease slightly from a median of 0.43% of revenue in 2020 to 0.36% in 2021. Although the data shows ELM Solutions measured variance across our database, and our clients spend between 0.2% and 0.3% of revenue in legal expenses, or close to that range. Some spend less than 0.1%. For those who manage their spending well and live within this relatively modest range, however, there is no need to worry about legal expenses. Maintaining this level of performance requires an effort to measure and closely control legal expenses.
Reducing customer accounts
The changing circumstances of 2020 have significantly reduced the number of external clients that the legal department works with. After a steady but gradual decline over several years, the average annual decline in active clients working in the corporate law department is 16%. Most of this year will increase again in 2021 as corporate law activity has also increased. However, in 2021, we also saw an 8.6% decrease in the average customer count.
This new level of law firm consolidation affects smaller firms in terms of lost relationships. This raises a question: In their efforts to reduce costs and account for fewer clients, are law firms more likely to handle work with larger, more expensive firms? With many buyers looking to work with larger firms, buyers may be inadvertently creating a buyer’s market where firms are unwilling to lower rates.
In addition to these topics, Jeff and Nathan also discussed benchmarking data, other factors related to legal expenses, and using other legal service providers. To hear the full story, tune in The Rule of Law Exchange: Characteristics of the customer mix and total external spending. If you are a podcast app user, be sure to follow usTransfer of Legal Ownershipshow on your favorite app (Apple Podcast, Spotify, Google Podcast, Amazon / Audible.com, iHeart Radio), so you don’t miss our news section.