12 January 2009

Practice: Large US Businesses plan to cut Spending on Outside Lawyers

During November 2008 the well known legal consultants, Altman Weil Inc., polled 1,292 general counsel (in-house legal advisors) in the USA as to whether they faced budget cuts in 2009 and, if so, what they planned to do about them.   The consultancy’s findings are published in a report entitled Law Department Cost Control which can be downloaded from its website.

Although there were only 115 respondents they represented some of the biggest corporations in America.    Some 43.8% had annual revenues of between US$2 and 10 billion and a further 24.3% had revenues of over US$10 billion. The respondents were not identified but businesses of that size are likely to have worldwide interests including some in the UK. Nearly 70% were public companies, 23% private companies and the rest partnerships, not for profit or government agencies. Over two thirds of those respondents had very substantial legal departments. Some 6.2% employed more than 100 lawyers.

The most depressing finding for the legal services industry is that nearly three quarters of the respondents reported cuts in their budgets for 2009.   In some cases these cuts were expected to be between 31 and 35%. Of the legal advisors whose budgets will not be cut, some 62.1% reported that they expected their budget increase for 2009 to be smaller than in previous years.

As to how they proposed to cut their expenditure, it is perhaps not surprising that the least likely economies were to be outsourcing offshore, numbers of lawyers, paralegals and other staff, lawyers and staff bonuses and lawyers’ earnings.  Savings were most likely to be made by doing more work in-house, attending training and events, looking for cheaper outside advisors and negotiating alternative fee arrangements. By far their greatest concerns over legal spending were outside lawyers’ cots and lack of predictability followed by inefficiencies encouraged by hourly rates and litigation risks. When asked to rank the top three concerns, outside lawyers’ costs came out top.  Well over half the survey reported that they intended to cut back on work to outside lawyers and only 7% anticipated an increase.

While this is an American survey it would be surprising if the results were different for England except that since costs follow the event in England the risks and uncertainties must be even greater. As I said yesterday in  “The Future of IP and TMT Services” even well established  American firms like Cravath, Swaine & Moore LLP are rethinking how they deliver and charge for their services in the face of competition from bricks and mortar firms such as Valorem that charge by the value of their work rather than by the hour and internet based practices which have very low costs.   

In England, and Wales, law firms will face competition not only from within the solicitors’ branch but also from outside it. These include patent and trade mark attorneys with the right to conduct litigation or with law firms attached like Marks & Clerk Solicitors and HGF Law, an increasingly confident and technically savvy Public Access Bar that regards solicitors less as clients as troubled competitors and, above all, well funded alternative business structures brimming with new techniques and innovative services which should be entering the market just as recovery gets under way.

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