Feature

posted 22 Jun 2010 in Volume 12 Issue 12

Trends in Legal Spend

Corporate counsel may be increasing their legal spend in 2010, but they will also be closely managing costs. By Director Jo Summers at Acritas.

Over the past 18 months, the legal market has been coping with the challenges of the global financial crisis as well as a broad range of market shifts. These include:

costs pressures being exerted by clients and the gradual move away from the traditional hourly-rate billing model;
the rise of procurement and legal process outsourcing; and
the continued global push of large law firms.

These radical shifts will continue to challenge some large law firms, however this year’s sharplegal study highlights that opportunities also abound.

A subscription service provided by Acritas to 35 of the global 100 law firms, sharplegal is the world’s largest study of the legal market and encompasses 3,000 interviews with senior legal buyers globally every year, typically general counsel or assistant general counsel.

The first wave of results incorporates the views of global buyers of legal services representing major listed businesses with revenues of over US$1 billion (£677 million). In total, they share responsibility for more than US$3bn in global legal spend in 2010.

There are some positive trends, at last, for firms with a strong international presence and an even better outlook for truly global players.

Is the market recovery here? In parts of the market it clearly is, with opportunities emerging. The challenge is how firms react.

Increase in legal spend

On balance, 18% of respondents across the world anticipate an increase in overall legal spend in the next 12 months. In 2009, we observed a more gloomy decline of 5%.

Average legal spend per organisation interviewed is currently a healthy US$8.4 million, and typically 40% of total spend is international. Global buyers expect their legal needs to increase by more than a third this year.

Need for cost efficiency

The biggest spenders (the top 15% by budget size) are very cost driven, so pricing strategies and efficiency will continue to be hot topics of conversation for some time.

They are also significantly more focused on fees when asked about upcoming changes to the legal market, predicting changes to fee structures, greater flexibility on fees and increased usage of fixed fee arrangements.

These buyers are scrutinising their big spends and, correspondingly, are more likely to anticipate a decrease in these areas over the next year. Firms relying on these clients should prepare for tough negotiations. Competition will be rife for this share of the wallet and a small group of firms look set to gain the most.

Global capability continues to increase the gap between the leaders and the rest of the market. At industry level, patterns vary, with some looking set to grow very healthily in the next 12 months. The resulting impact, as law firms take stock of the opportunities, includes an increase in industry-focused strategies and initiatives, and a move away from more traditional practice and legal specialism structures.

Law firms need to study the market closely to understand where the growth will come from and what drives favourability towards firms in general, and their firm specifically. To take advantage of the upturn, law firms must know their strengths and play to them.

Panel rationalisation

The pattern of reducing the number of law firms providing services to an organisation has slowed. In 2009, as law firm panels were rationalised and companies made cuts to take advantage of legal buyers’ desire to manage fewer relationships, the number of law firms providing services to an organisation was expected to decrease by 27%.

This year, a smaller decrease in the number of law firms supplying organisations is evident, with just 5% anticipated. Buyers in the more buoyant markets of Asia Pacific and the Middle East are more likely to be increasing the number of firms they work with, whilst buyers in the US and Europe plan to use fewer firms in future. Historically, buyers in the US have always had many more firms supplying them with legal services than other countries.

Whilst the overall rate of rationalisation is slowing, the direction remains the same. A focus on closeness to the client and service delivery is vital to retain a share of the wallet.

Gathering client feedback at relationship and transactional levels are absolutely essential. Understanding clients’ businesses and their needs remains paramount in retaining and winning more work.

Law firms need to know how to clearly guard their panel status and which buttons to press to generate more opportunities, whilst ensuring they deliver sufficient value to their clients.

Adding to these economic insights from a brand perspective, no more than half a dozen global leaders are emerging. It is likely that these firms will emerge as the most dominant at the end of the year in terms of retention, favourability and share of the legal wallet.

– jsummers@acritas.com