Sometimes, when you look within the numbers, an entire new story may reveal itself. That’s why when I read the recently released “2018 State of Corporate Law Departments” report, the first trend that jumped out at me was how corporate counsel are allocating their legal spend, and to whom.
The new report was issued this week by Thomson Reuters and Acritas. The report analyzed data and research from Thomson Reuters Legal Tracker, Acritas and the Corporate Legal Operations Consortium (CLOC).
According to data provided by Acritas, the last five years have seen a six-percentage-point shift in the in-house/outside ratio of legal spend allocation, with 63% of spending going external in 2013 but dropping to 57% in 2017. To balance that out, 43% of legal spend last year, on average, was dedicated to internal resources.
The report identifies a “sweet spot” of sorts for the optimal range of internal spend. According to the report, “[t]he most efficient departments tend to fall within an optimal range of 40% and 70% of budget allocated internally.” That means we are currently sitting on the low end of the optimal range.
I think this finding should provide a warning of sorts that the balance may swing back the other way before it levels out. If the optimal internal allocation ranges from 40% to 70%, and the average is currently at 43%, it’s not inconceivable to think that the average may shift into the 50% if not the 60% range before it finds a stasis point, assuming such a point even exists. Suffice it to say, we may well see additional dollars leave the outside counsel marketplace for reallocation internally before we see internal spend being reallocated to outside firms.
While this should be concerning for law firms, it is not all bad news. The report makes clear that clients want to work with those law firms that deliver against what matters most to them — value for their dollar. In fact, nearly 30% of corporations reported that they are placing a high priority on allocating more work to firms that proactively show their value. Another 37% rate this as a medium priority.
The reallocation of dollars to internal spend also will likely bring with it a high degree of volatility regarding the law firms with whom clients will work. A study that we released in December showed that nearly 3-in-5 law firms are shifting at least some portion of their work portfolio from one firm to another every one to two years already — that’s not likely to slow down.
But for those firms who are making strides to proactively show their value, it may be a huge benefit. Clients are expressing a desire to work with such firms — they want to reallocate more work to them. Law firms who can communicate to their clients the value they bring and how that aligns with the client’s priorities will not only be in a good position to capture new work, but they will also be less likely to see their current share of work diminish.
The challenge then becomes, which firms are asking their clients how they define value and are strategizing how to deliver against that definition? And, if your firm isn’t asking those questions, why not?