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Law Departments Putting Cost-Cutting Into Action
The Legal Intelligencer
October 14, 2009
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 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 percent in the United States and by 4 percent worldwide between 2007 and 2008. When looking at outside counsel spending, which makes up about 60 percent of the average legal budget, that spending increased 4 percent in the United States and 6 percent 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 percent of the respondents anticipated a decrease in the number of in-house lawyers in their departments, while 30 percent expected an increase. Hildebrandt said that reflects a cost-reduction strategy of bringing more work in-house that had been done by outside counsel.
Aileen R. Schwartz, assistant general counsel of Hill International Inc. in Marlton, N.J., said her department has traditionally been lean with just the general counsel, an international counsel based in Spain and herself.
She said the department has always paid attention to cost control, but because budgets for legal spend are tighter this year, "we're paying even closer attention." The department is trying to find new and innovative ways to get the same results within a tighter budget.
Because Hill International is a company that handles project management, construction management and expert services in the area of construction claims, it has minimal outside legal issues, Schwartz said. But one way the company tries to reduce outside legal costs when they do arise is to get the lawyers to offer them the same rates they offer the insurance carriers they represent in the construction cases.
In general, Schwartz said the legal department is looking to know the fees up-front and have an overall idea of the litigation budget. She said the department also tries to utilize counsel that promote its business.
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 percent. Of that group, 41 percent completed the convergence process, 42 percent are in the midst of it and 16 percent are planning a convergence program. Nearly one-third of the respondents expected to use fewer outside firms while 8 percent 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 percent of companies indicated that alternative billing arrangements represented 11 percent or more of their outside counsel spending. In 2009's survey, 46 percent of the companies anticipated such arrangements will make up more than 11 percent 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 percent, compared to the 5 percent that was reported in the 2008 survey. The average base salary was $179,000 in 2008 compared to $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 percent compared to the 8 percent 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 percent in 2008. That was compared to a 10 percent increase the year before.
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 percent of the Fortune 500 list. When including privately held companies or those based outside of the United States, 30 percent of the respondents had revenues at or above the Fortune 500 level.
