Law Departments Putting Cost-Cutting into Action

Cost-control methods in law departments are more than just talk as cost pressures are creating a fundamental shift in the management and operation of the departments and their interaction with outside counsel, results of a recent Hildebrandt International survey suggest.

Results of the Law Department Survey are a further indication that more work is being brought in-house, alternative fee arrangements are in high demand and spending is shrinking. The rate of increase for inside and outside legal spend and compensation slowed in 2008.

“Now more than ever, cost control is a strong management imperative for law departments,” the survey's editor, Lauren Chung, said in a statement. “The 2009 survey previews changes in the way law departments operate, especially with regard to reducing and managing inside and outside costs.” The results show signs of cutbacks in spending and staffing compared to prior years, a significantly reduced rate of increase for attorney compensation and an adoption of a wide array of cost-control strategies, Chung said.

This Year's Survey

This year's survey tracks 2008 data and compares it with 2007 numbers. While it doesn't take into account the events of 2009, Hildebrandt said the data is most reflective of the period leading into the economic downturn that began in mid-September 2008.

Jonathan Bellis, head of Hildebrandt's law department consulting practice, said the survey was sent out in March 2009 and included a number of new questions dealing with overall cost control methods moving forward.

The one thing that was clear was that there was no one way departments were tackling the issue, he said. His clients have been looking at reducing discretionary budgets, limiting attendance at events, a shift in compensation structures, an increase in contract and temporary attorneys, the use of more regional law firms and shifting more work back to the business side of the company.

Many of those tactics were catchphrases in the 1990s and are being put back into action, Bellis said. Some tools, like the use of alternative fee arrangements, become more of a “self-fulfilling herd instinct” in which corporate counsel aren't leading the trend, but following the discussion, he said.

Decrease Predicted to Occur in Internal Staffing Needs

The survey shows an overall increase in total legal spending, but it was at the same rate as in the prior year. The total spending increased by 5% in the United States and by 4% worldwide between 2007 and 2008. When looking at outside counsel spending, which makes up about 60% of the average legal budget, that spending increased 4% in the United States and 6% worldwide.The median figure spent on outside counsel in the United States is $13 million and worldwide it is $15 million.

In looking at internal staffing needs, 18% of the respondents anticipated a decrease in the number of in-house lawyers in their departments, while 30% expected an increase. Hildebrandt said that reflects a cost-reduction strategy of bringing more work in-house that had been done by outside counsel.

Reducing Roster of Outside Counsel

The percentage of companies reporting some type of convergence activity when it comes to reducing the number of outside counsel they used remained relatively unchanged from last year at 56%. Of that group, 41% completed the convergence process, 42% are in the midst of it, and 16% are planning a convergence program. Nearly one-third of the respondents expected to use fewer outside firms while 8% planned on increasing the number.

For the first time in years, the survey results showed an increase in the number of law departments adopting or expressing interest in alternative billing arrangements, with many predicting a larger percentage of their outside costs will be done through alternative fees.

In 2008, 33% of companies indicated that alternative billing arrangements represented 11% or more of their outside counsel spending. In 2009's survey, 46% of the companies anticipated such arrangements will make up more than 11% of the outside legal budget.

Compensation Lags Behind

It probably comes as no surprise that salaries rose at a much slower pace in 2008 than they did in 2007. According to the survey results, the average increase in base salary for in-house attorneys was 3%, compared with the 5% that was reported in the 2008 survey. The average base salary was $179,000 in 2008 compared with $174,000 in 2007.

The total cash compensation, which includes base salary and a cash bonus, for all attorney levels grew at a much slower pace, with an average increase of 3% compared with the 8% increase that was seen between 2006 and 2007. The average total cash compensation for the responding departments was $229,000, down from $236,000 in 2008's survey. The largest impact on total cash was a decrease in cash bonuses. Total compensation, which includes salaries, bonuses and all other incentives, grew by 4% in 2008. That was compared with a 10% increase the year before.

Conclusion

The survey had the greatest number of respondents since its inception, which Hildebrandt took to reflect the strong interest of in-house counsel in comparing notes with their peers. The 2009 survey received 231 responses representing 21 industries and 22% of the Fortune 500 list. When including privately held companies or those based outside of the United States, 30% of the respondents had revenues at or above the Fortune 500 level.

Gina Passarella is a reporter for The Legal Intelligencer, a sister publication of this newsletter.

Cost-control methods in law departments are more than just talk as cost pressures are creating a fundamental shift in the management and operation of the departments and their interaction with outside counsel, results of a recent Hildebrandt International survey suggest.

Results of the Law Department Survey are a further indication that more work is being brought in-house, alternative fee arrangements are in high demand and spending is shrinking. The rate of increase for inside and outside legal spend and compensation slowed in 2008.

“Now more than ever, cost control is a strong management imperative for law departments,” the survey's editor, Lauren Chung, said in a statement. “The 2009 survey previews changes in the way law departments operate, especially with regard to reducing and managing inside and outside costs.” The results show signs of cutbacks in spending and staffing compared to prior years, a significantly reduced rate of increase for attorney compensation and an adoption of a wide array of cost-control strategies, Chung said.

This Year's Survey

This year's survey tracks 2008 data and compares it with 2007 numbers. While it doesn't take into account the events of 2009, Hildebrandt said the data is most reflective of the period leading into the economic downturn that began in mid-September 2008.

Jonathan Bellis, head of Hildebrandt's law department consulting practice, said the survey was sent out in March 2009 and included a number of new questions dealing with overall cost control methods moving forward.

The one thing that was clear was that there was no one way departments were tackling the issue, he said. His clients have been looking at reducing discretionary budgets, limiting attendance at events, a shift in compensation structures, an increase in contract and temporary attorneys, the use of more regional law firms and shifting more work back to the business side of the company.

Many of those tactics were catchphrases in the 1990s and are being put back into action, Bellis said. Some tools, like the use of alternative fee arrangements, become more of a “self-fulfilling herd instinct” in which corporate counsel aren't leading the trend, but following the discussion, he said.

Decrease Predicted to Occur in Internal Staffing Needs

The survey shows an overall increase in total legal spending, but it was at the same rate as in the prior year. The total spending increased by 5% in the United States and by 4% worldwide between 2007 and 2008. When looking at outside counsel spending, which makes up about 60% of the average legal budget, that spending increased 4% in the United States and 6% worldwide.The median figure spent on outside counsel in the United States is $13 million and worldwide it is $15 million.

In looking at internal staffing needs, 18% of the respondents anticipated a decrease in the number of in-house lawyers in their departments, while 30% expected an increase. Hildebrandt said that reflects a cost-reduction strategy of bringing more work in-house that had been done by outside counsel.

Reducing Roster of Outside Counsel

The percentage of companies reporting some type of convergence activity when it comes to reducing the number of outside counsel they used remained relatively unchanged from last year at 56%. Of that group, 41% completed the convergence process, 42% are in the midst of it, and 16% are planning a convergence program. Nearly one-third of the respondents expected to use fewer outside firms while 8% planned on increasing the number.

For the first time in years, the survey results showed an increase in the number of law departments adopting or expressing interest in alternative billing arrangements, with many predicting a larger percentage of their outside costs will be done through alternative fees.

In 2008, 33% of companies indicated that alternative billing arrangements represented 11% or more of their outside counsel spending. In 2009's survey, 46% of the companies anticipated such arrangements will make up more than 11% of the outside legal budget.

Compensation Lags Behind

It probably comes as no surprise that salaries rose at a much slower pace in 2008 than they did in 2007. According to the survey results, the average increase in base salary for in-house attorneys was 3%, compared with the 5% that was reported in the 2008 survey. The average base salary was $179,000 in 2008 compared with $174,000 in 2007.

The total cash compensation, which includes base salary and a cash bonus, for all attorney levels grew at a much slower pace, with an average increase of 3% compared with the 8% increase that was seen between 2006 and 2007. The average total cash compensation for the responding departments was $229,000, down from $236,000 in 2008's survey. The largest impact on total cash was a decrease in cash bonuses. Total compensation, which includes salaries, bonuses and all other incentives, grew by 4% in 2008. That was compared with a 10% increase the year before.

Conclusion

The survey had the greatest number of respondents since its inception, which Hildebrandt took to reflect the strong interest of in-house counsel in comparing notes with their peers. The 2009 survey received 231 responses representing 21 industries and 22% of the Fortune 500 list. When including privately held companies or those based outside of the United States, 30% of the respondents had revenues at or above the Fortune 500 level.

Gina Passarella is a reporter for The Legal Intelligencer, a sister publication of this newsletter.