Legal Services - Key Trends Driving Change
With firms eyeing transforming legal services from a typical low mature procurement line item to a more strategic function requiring constant monitoring and a more futuristic framework, we take a look at key trends to watch out for this year.
As corporate legal spend hit record levels in 2016, a recent survey covering over one thousand Chief Legal Officers across multiple countries established that in-house legal spend has increased due to rising government scrutiny for regulatory breaches. Almost one-third of law firms have been scrutinized for regulatory violations, with the spotlight on ethics and compliance issues. Corporations are increasingly utilizing legal services for guidance on cross-border regulatory issues, as they expand overseas and take extra care to avoid litigation and heavy penalties.
Over 50% of legal spend was claimed as in-house and the rest on external help last year, with firms taking another look at the advantages of housing internal resources rather than outsourcing key functions. With major legal markets such as the US and UK considering a more inclusive approach over the next few years, the future of Legal Process Outsourcing hangs in the balance. There is also a conscious effort by corporate houses to differentiate commoditized legal support with high value services. Corporations are outsourcing their standard legal work for lesser costs to paralegals, contract attorneys or third parties, which includes standard contracts, wills and estates and incorporation papers. Firms are willing to pay $200/hour and above only for complex high-value services which would require senior associates or partners. There is also a rise in hires of paralegals and staff attorneys who specialize in niche areas to add to in-house capabilities.
As with other services-based industries, the online marketplace is turning out to be quite a disruptor, with startup firms like UpCounsel allowing corporations to place their projects on open portals allowing freelance lawyers to place bids regarding fees and time to complete project. UpCounsel has raised $2.4 million in seed funding and already has 5000 registered employees. Others, such as RocketLawyer in the US and LawPath in Australia, allow clients to pose simple legal questions and get answers for a lower fee, posing a threat to the traditional mode of engagement.
Top growing practice areas include the fields of cyber law, real estate and corporate law. Cybersecurity is growing three times greater than the average growth of other practice areas, as there is a surging need for compliance and representation in litigation and government investigations. Practices such as real estate and corporate grew by 3.1% and 2.8% respectively in the US. However, lucrative practices like bankruptcy fell by 3% due to improving economic conditions in North America.
Overcapacity and its impact on profitability is causing some reorientation in the legal sector, with 52% of firms stating that their employee resources were underutilized and over 60% of firms not being able to keep their non-equity partners fully utilized. Above 80% of firms with 250 or more lawyers currently face this problem and are trying to address it with lateral acquisitions by hiring partners who bring business to the firm, while some are shifting work to less costly part-time lawyers. Laws firms are increasingly merging together to maintain their profitability by acquiring firms with strengths in other legal practice areas.
The rise of alternate fee models is also interesting to note, with corporate legal departments willing to experiment Alternate Fee Arrangements (AFA) with 76% of $18 billion invoices being paid with AFAs in 2015, up from 59% in 2011. AFA models that are most popular are task or unit-based fee, percentage-based fee, retrospective fee based on value and hybrid-based fee arrangements. Over 80% of firms strongly feel that an increase of non-hourly billing methods is the preferred mode of engaging with legal advisory firms.
Some critical levers that large companies can capitalize on to reduce legal expenses include:
- Cutting the short cost per hour of a lawyer’s time and the number of hours of lawyer time required by the company
- Negotiating ‘alternative billing arrangements’ with external lawyers
- Developing settlement strategies
- Channeling legal resources to the areas of highest risk exposure and implementing reverse auction for low value components in legal spend
Outsourcing of lesser significant activities to LPOs and hiring of on-demand talent from various technology platforms may have more control over legal costs until more guidelines are set in place for legal spend.