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The Big Squeeze
In recent years, as law firms adopted more corporate management practices and then drastically downsized, a result of the Great Recession, in-house legal positions became the hot ticket for many attorneys. Company jobs looked particularly attractive to associates bogged down by crushing billable hour requirements. It's not hard to see why: Law departments offered the promise of better work/life balance and the opportunity to become more involved in a client's business.
But as workloads continue to rise and hiring and budget increases don't necessarily keep pace, is the pressure inside the nation's legal departments now rivaling that of law firms? Daniel DiLucchio Jr., a principal of Altman Weil Inc., has been a consultant to both corporate law departments and law firms for more than 25 years, and he gives a qualified yes. "The workloads I see in-house are growing," he says. "They're getting pretty high."
Workloads are increasing so much that some lawyers nearing retirement age have confided to DiLucchio that they're ready to call it quits. Under ordinary conditions, he says, those lawyers might have stayed with the company a few more years. Instead, says DiLucchio, "they're thinking about retirement."
An annual survey conducted by ALM Legal Intelligence (ALI), a sibling organization of Corporate Counsel magazine, tracks workload increases and other legal department trends. And this year's results are sobering. Seventy-one percent of respondents to the 2012 edition of the "Law Department Metrics Benchmarking Survey" said their workloads were heavier over the past year. More than half said the load had increased by at least 10 percent, with almost 7 percent indicating that they had experienced a 30 percent or greater increase. Those findings are an improvement from a year ago, when 83 percent of respondents saw an increase in work.
But it's not all heavier workloads and a grinding pace. There's also a lot of good news in the report, which is based on data collected from 66 companies between May and July of this year. Hiring is up, and fewer companies trimmed budgets or reduced the size of their departments than did so the year before. Fifty-one percent of companies hired new lawyers last year, compared to 44 percent in 2010. Of all companies surveyed, 24 percent trimmed their budget, compared to 27 percent the previous year. And while 17 percent of companies reduced the size of their department in the previous survey, this year just 6 percent made reductions.
Numbers like that are what DiLucchio would call "glass-half-full" findings. The flip side of the hiring increase is the harsh reality that 49 percent of companies hired no new lawyers in 2011. Another 22 percent hired just one. "At least they're not continuing to downsize," he says.
As the economy improves and legal business and spending pick up, in-house lawyers need to work not only harder, but smarter. A key measure of efficiency, the number of full-time lawyers and staff in the legal department per $1 billion in revenue, was seven on average in 2011. That's a slight increase from the average of 6.4 a year earlier.
But efficiency isn't necessarily declining. Lauren Chung, senior director in the law department consulting practice of HBR Consulting, says departments are absorbing work that would have been farmed out in the past. For the first time in years, she's seeing outside firms insist on rate increases. "Outside counsel spending is going up," she says, "but that doesn't mean that more work is being outsourced." As the cost of doing business increases, departments are looking to get more bang for their buck by using internal resources. "Keeping work in-house is the most widely adopted cost-savings measure," Chung says.
Medtronic Inc. general counsel D. Cameron Findlay knows a thing or two about making the most of limited resources. The medical technology industry in which the company operates poses growing legal threats and regulatory requirements. Despite an increased workload, Findlay says, the response from his financial colleagues has been "That's all well and good, but we want you to get all this new work done without any additional resources, or perhaps with even fewer resources than you had before."
To keep quality high, Findlay has had to prioritize. "We really have tried to step back and look at what we do with a clear-eyed assessment of what are the biggest risks the company faces, what is it absolutely critical that we accomplish, and what are some of the things that we've always done but maybe aren't so important in the grand scheme of things?" says Findlay.
Zynga Inc. GC Reginald Davis tries to root out unnecessary department practices before they become habitual. Davis knows that time is valuable, and he urges in-house lawyers not to waste it. He limits all internal meetings to 45 minutes and sets a clear agenda for each one at the outset. The GC also asks that department members use what he calls "good email hygiene." Instead of inundating each other with messages, Davis encourages lawyers to be more efficient with email use. "We end up spending all of our time reading email, if we're not more thoughtful about it," he says.
Like Findlay and Davis, most general counsel these days are scouring budgets to separate wants from needs. For respondents generating from $15 billion in annual revenuethe median expense-to-revenue ratio was 0.2 percent. Hard economic times inspired a top-down scrutiny of department expenditures that appears to be here to stay, even as the economy hints at improvement.
As a result, GCs are running their legal departments like businesses within a larger enterprise. To better align themselves with the goals of the company, more than 50 percent of respondents indicated that legal department compensation was linked to meeting business goals. Three-quarters of survey respondents also said they provide regular status reports to their business department heads.
When GCs meet with CEOs and other business leaders, they're talking more like businessmen themselves. HBR's Chung says that metrics play a key role in conversations with the business side. Whether their goal be defending current resource allocation or seeking an increase, GCs are using numbers to make their case. When GCs know their lawyers are overwhelmed, she says, data showing that their head count is well below the median compared to peers at the same revenue level "sends a powerful message."
Not all data-backed pleas will be successful, of course. DiLucchio says: "The business people also have pressure." In many companies he's even seeing business units pushing off some of their work onto the legal department. "It's not just legal work that's increasing," he says.
The rise in work expectations is having a negative impact on GCs' ability to manage outside counsel. For a decade or more, departments have tried to scale back outside counsel rosters in order to obtain more control of their relationships with those firms. The average number of law firms employed by companies with revenue of at least $5 billion dipped from 126 to 116 in this year's survey, after a rare increase the previous year. Despite the reduction, DiLucchio says, inside counsel are stretched so thin that "management of outside counsel doesn't get the attention it deserves."
Legal evaluation of current outside counsel performance also doesn't appear to be on par with that applied to internal lawyers. Cost, results, and understanding of the business were the top three criteria that legal departments used to assess outside counsel performance, but 71 percent of respondents said they had no formal review policies in place.
With all the scrutiny of expenses, it may seem counterintuitive that GCs wouldn't be more concerned with outside counsel performance. Traditionally, law firms and other external legal service providers have constituted about 60 percent of legal spending.
For surveyed companies with $100 million or more in revenue, the median percentage of total expenses that went to outside counsel and other external providers of legal services was 58 percent.
So why aren't GCS waving their measuring sticks at outside counsel? Nilanjan "Nicky" Mukerji, chief information officer at the consulting firm Legalbill, says in-house lawyers "don't want to spoil" the relationships. But outside counsel may actually be craving such feedback. "They want objective feedback they can really use," Mukerji says, adding, "When outside counsel know what's going on, there is more satisfaction."
WellPoint Inc.'s law department is an exception to the finding. Interim GC Ray Umstead says his "hands-on" legal department interacts with outside counsel daily. "We regularly share feedback with the firms working on our behalf," he says. "Additionally, we work closely with our procurement department to complete a yearly evaluation process of each of our panel firms."
The company has managed to work those reviews into the operations of a very lean department. Its budget has decreased year over year, as its workload has gone up. Chung predicts that more departments will be moving in WellPoint's direction in the near futureprioritizing formal protocols despite their high activity levels. "We're probably going to see an increased focus on that area," she says.
Moving forward, 59 percent of survey respondents predicted that they'll also do more business with firms using alternative fee arrangements. Fifty-two percent of total respondents said they'd used AFAs in 120 percent of billing arrangements, but 70 percent said their use hadn't increased over the previous year. The most-cited reason for not employing more AFAs was a lack of time and resources. Noticing a pattern yet?
With every new year comes a renewed opportunity for change. Findlay says that if companies have a high volume of work to offer firms, they can make AFAs work for them. He's found that virtually all law firms these days are flexible about entering into alternative billing arrangements. "A key to it is getting good data," he says. "It helps both sides trust each other." A lawyer from one of the best-known firms in the country recently said to him, "It's a great buyer's market for you right now. No reasonable offer will be refused."