Corporate Law Departments Focus on Cost Control
Altman Weil, Inc. | Oct 23, 2013
Newtown Square, PA, October 23, 2013 – Corporate law departments continue to pursue cost control in legal service delivery, with a clear emphasis on internal change, according to over 200 Chief Legal Officers (CLOs) who participated in the Altman Weil 2013 Chief Legal Officer Survey.
“Chief Legal Officers are trying to find a new, more cost-effective and efficient balance of resources. They are reformulating the mix of in-house lawyers and staff, outside law firms, new technology tools, and non-law-firm vendors, in order to deliver quality and value to their corporate client,” says Altman Weil principal and survey author Daniel J. DiLucchio.
The survey found that 78.5% of CLOs negotiate price reductions from outside counsel to control costs. Almost half of law departments (48.1%) receive an average reduction of between 6% and 10%. Twenty percent of departments have negotiated discounts of between 11% and 15%; and 19% of departments get average price cuts of 1% to 5%.
However, when asked about preferred outside counsel pricing scenarios, Chief Legal Officers overwhelming indicated that their preference is not simply for the lowest price they can get.
When offered four possible law firm pricing options, 36.4% of CLOs said they wanted ‘transparent pricing’ in which they understand how and why the price is set and have the opportunity to discuss changes. One-third of CLOs chose ‘guaranteed pricing’ as their preference; and 20.3% of CLOs preferred ‘value-based pricing’ that varies based on results. Only 9.6% of Chief Legal Officers say they wanted the ‘lowest price’ available.
“This is very striking,” comments DiLucchio. “If a rate discount is the only thing offered, law departments will certainly take it, but Chief Legal Officers are saying what they really want is predictability and control. So far this is a challenge that most law firms have been slow to address.”
A new balance of resources
The 2013 survey reports 42% of corporate law departments plan to add in-house lawyers in the next 12 months, compared to only 5.4% who plan a decrease. At the same time 29% of law departments plan to decrease their use of outside counsel while only 15% plan an increase. Of those who plan to decrease their use of outside counsel, 82% say they will shift the work to in-house legal staff.
As part of their efforts to control costs, law departments report an array of efforts to move work from higher to lower priced resources. Along with shifting work from law firms to in-house lawyers, corporate law departments are also shifting law firm work to lower-priced firms, reducing the overall amount of work given to outside counsel, shifting in-house work from lawyers to paraprofessionals, using contract lawyers, using technology tools to increase efficiency, and outsourcing to non-law-firm vendors.
Reflecting these shifts, 47% of law departments surveyed report they decreased their outside counsel budget in 2013. This number is up from 39% of departments that reported decreasing their outside counsel spend in last year’s survey, and 25% that did so in 2011.
Inside – Outside Relationship
When asked to select the service improvements and innovations they would most like to see from their outside counsel, three of the top four CLO responses involved costs and pricing. CLOs’ first choice for change in law firm services was improved budget forecasting, followed by greater cost reduction, more efficient project management and non-hourly based pricing structures.
However, Chief Legal Officers appear to have little hope that law firms will rise to the challenge. For the fifth straight year, the survey asked CLOs to rate how serious law firms are about changing their legal service delivery model to provide greater value – and for the fifth year, the median rating was a dismal ‘3’ on a scale of 0 (not at all serious) to 10 (doing everything they can).
To balance the picture, CLOs were also asked how much pressure corporations are putting on law firms to change the value proposition. CLOs rated themselves at a median 5 on the scale, as they have for four of the last five years.
“After five years of similar responses to this pair of questions, it’s seems pretty clear that Chief Legal Officers have decided to tackle these problems themselves, rather than rely on outside counsel to partner with them on change,” says DiLucchio.
The survey offers some additional insight on the inside-outside relationship. In a final question, respondents were asked to comment on who has the harder job – Chief Legal Officers or law firm Managing Partners. Sixty-four percent thought CLOs have the greater challenge, citing the breadth and complexity of their role.
However, just over a third of survey respondents think Managing Partners face a harder road, for reasons that include the current law firm business model. One Chief Legal Officer commented “Structural changes impacting law firms are intense. CLOs have more options to traditional law firms today than ever before, and more are becoming available all the time.”
The Chief Legal Officer Survey has been conducted and published annually by Altman Weil, Inc. since 2000, most recently in September and October 2013. Two hundred and seven responses were received for the 2013 survey, 16% of the 1,269 corporate law departments invited to participate. Demographic and budgetary data on responding law departments is included in the survey report. The full survey is available to download at www.altmanweil.com/CLO2013.
About Altman Weil
Founded in 1970, Altman Weil, Inc. is dedicated exclusively to the legal profession. It provides management consulting services to law firms, law departments and legal vendors worldwide. The firm is independently owned by its professional consultants, who have backgrounds in law, industry, finance, marketing, administration and government. More information on Altman Weil can be found at www.altmanweil.com.