Finding the right mix of external legal spend to keeping work in-house is a puzzle that many corporate legal departments are having difficulty solving, according to a new study by Acritas Research.
Indeed, the report — Patterns in Legal Spend Report, Part 2 — is the follow-up to the UK-based research firm’s earlier legal spend report, which was published in mid-June. The reports are based on Acritas’ annual Sharplegal study, in which it conducts more than 2,000 interviews with senior in-house counsel in large organizations across the world each year. Respondents are asked a range of questions relating to their goals, challenges, buying behaviors, perceptions and experiences with external providers, the firm said.
The new legal spend report affixes a “zone of maximum efficiency” for general counsel looking to balance internal and external legal spend, according to a release on the report. Indeed, it turns out that there is a fairly wide range to reach that maximum efficiency — yet the majority of companies surveyed allocate their budget in a way that puts them outside this optimal range.
According to the results of the survey, corporate legal departments should allocate between 40% and 70% of their legal spend budget internally, the report noted, adding that currently, 60% of organizations globally report internal allocations of budget outside of this range, with the majority allocating less than 40% internally.
“This shows that for more than half, potentially there could be room to improve their efficiency, if they follow the standard industry pattern, just by adjusting the amount of work they do internally to externally,” said Lisa Hart Shepherd, CEO of Acritas. “When you see the efficiency drop off at about 70% work done internally, you can see those firms should be sending more work out, effectively.”
The report also analyzes the typical number of lawyers in a legal department, saying that a legal team of 6 in-house lawyers was the median across the survey. On average, organizations reported 0.4 lawyers per $100m of revenue; of course, the report showed that this was highly variable by company size, with the smallest (revenue $50 – 500m) having 0.9 lawyers per $100m of revenue and the largest companies ($6bn+) having 0.2 lawyers per $100m of revenue.
“To me, the team size seemed quite low compared to the size of revenue,” said Hart Shepherd. “We found that the average in-house lawyer was working with $260 million worth of revenue — that’s quite a big chunk of revenue per person internally. That shows that perhaps pushing the number of people up in the legal department might help to drive some efficiency.”
Hart Shepherd explained that overall, the numbers and averages in this report were useful to corporate legal departments in order to help GCs judge where their department sits among its similarly situated peers. “Often, legal departments, both large and small, may not have a good handle on their spend,” she said. “So, this report can highlight the need to have a good control on your spend, both internal and external, so you can actually measure it in the first place.”
And once you have got a good grasp on that, it’s much easier to then think about how your metrics compare with others in your size range or geographic region. “Are you in that optimal range?” Hart Shepherd asked. “If not, do you think there could be benefits from moving towards the optimal range? And what would you need to do?”