More than two thirds of in-house legal teams are facing cost pressures from their business, according to a new report from Thomson Reuters.
As many as 69% of in-house lawyers said they are feeling moderate to significant budgetary pressures from business leaders, while 72% said they are looking to improve the efficiency of their legal departments, according to Thomson Reuters’ 2024 State of the Corporate Law Department report.
More than three quarters of respondents (76%) said they believe AI has the potential to help them achieve their efficiency goals, while 68% said they were planning to bring more work back in-house to save costs and 48% said they were planning to outsource work to cheaper firms.
Jas Sandhu-Dade, head of corporates Europe at Thomson Reuters, said: “The perception of legal departments as cost centres has put pressure on them to strengthen productivity. There is a gap between the value a corporation’s law department aims to provide to the business and how chief legal officers and general counsel feel they are perceived by leaders of their business. Legal department leaders are keen to emphasise the strategic value they deliver to the wider business.”
The report also found that smaller companies spend proportionally more on in-house legal counsel than larger peers, in some cases more than 10 times what they pay. On average, businesses spend 0.26% of their revenue on legal costs, though for businesses with more than $6bn in revenue that falls to 0.05% compared to 0.83% for businesses with between $50m and $1bn in revenue.
Despite the cost pressures, 36% of in-house teams globally expect their spending on outside legal counsel to rise over the next 12 months, with 40% in the UK expecting spend to increase. Meantime, the healthcare and pharma sectors expect to see the biggest increase in spending, with 56% anticipating costs to rise.
Some 67% also said they are seeking more discounts on rates to get better value out of their law firms, while 52% said they are looking to secure alternative fee arrangements (AFAs). As many as 80% of legal departments said law firms’ willingness to offer AFAs, including success fees or fixed fees, was a key factor when selecting their external legal provider. Some 41% of European legal departments said offering AFAs is now mandatory when selecting firms.
Sandhu-Dade added: “Nearly all large law firms – and increasingly even midsize firms – are employing skilled pricing professionals in order to negotiate better deals with their external counsel. It is likely not possible for most corporate law departments to handle 100% of their legal work internally due to the considerations of staffing, matter volume, complexity and more. Rather, general counsel should carefully evaluate what portion of a company’s legal work is best addressed internally – and what legal work would benefit from external expertise.”
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