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Hope springs eternal — even in the face of hard data. In-house counsel cite controlling legal costs as their top priority for the New Year, even though they acknowledge they’ll spend more on outside legal advice and need to hire more in-house staff in 2007. Corporate counsel predicted that their spending on outside legal counsel would rise by 10 percent in 2007, according to a survey of Fortune 1000 companies released last month by the BTI Consulting Group, a Massachusetts-based firm. This comes after a 20 percent spike last year in the amount spent on outside legal advice to $56.4 billion. The average company in the survey spent nearly $19.5 million on outside counsel last year, almost double the $10.5 million spent just five years ago. More good news for law firms is that corporate legal departments are increasingly outsourcing legal work, partially as a result of some anemic in-house departments. The growth of the outside-counsel market in 2006 outpaced the growth of the overall legal market, which saw an increase of 13 percent to a total of $85.5 billion. In fact, the percentage of companies’ total legal budgets going to outside counsel has been rising for the past five years. In 2006, law firms captured 65 percent of total legal spending, up from 42 percent in 2001. The increased use of outside law firms is due in part to the stricter regulatory regime and feeling of heightened corporate risk that has resulted from the bevy of corporate scandals involving Enron, WorldCom, Tyco, Adelphia, and dozens of other companies that marked the beginning of the decade. “The more high-profile legal issues there are, the more companies are pressured to demonstrate that they have gone outside to make sure they got the absolute best expertise they could on the matter,” says Michael Rynowecer, BTI Consulting’s president. Other factors predicted to fuel growth in spending on outside counsel in 2007 include increased compliance demands, understaffed in-house legal departments, and the continuation of heightened mergers-and-acquisitions activity. Rynowecer says that only about 5 percent to 6 percent of the increase can be attributed to increases in law firms’ billing rates. Companies in the pharmaceutical, banking, utilities, and energy industries outsourced the most legal work, while manufacturing, consumer goods, and retail companies outsourced the least. Even while outsourcing a growing amount of legal work, corporate legal departments are also trying to beef up their in-house numbers. Nearly one-third of the corporate counsel surveyed say they want to increase their staff. “In the post-Sarbanes world, it helps to have deep organizational knowledge to provide thoughtful legal advice,” says Eric Reicin, president of the Washington Metropolitan Area Corporate Counsel Association, referring to the Sarbanes-Oxley Act, the 2002 corporate-reform law. On average, legal departments have nearly 20 percent fewer in-house attorneys now than they did in 2001. Corporate counsel in the survey ranked additional in-house staff as their top unmet need. The pendulum may begin to swing back, and companies may outsource less in the years to come, says Jeffrey Liss, DLA Piper’s co-managing partner for the United States. “This really runs in cycles,” he says. “Sometimes companies decide the way to save costs is to do more and more in-house,” while other times they feel compelled to save costs by cutting personnel, he adds. RAMPING UP REGULATORY Some practice areas are expected to benefit much more from the uptick in spending on outside legal advice than others. So which practices will be hot in 2007? The survey’s answer to that question bodes well for D.C. law firms. Litigation and M&A earned the most votes for areas into which in-house counsel plan to funnel more funds this year. Corporate counsel expect to ramp up their spending in these practice areas by 46 percent and 40.2 percent, respectively. But regulatory work followed close behind, with 39.6 percent of counsel surveyed planning to increase their budget for that work, which is centered in the District. These three practice areas already command larger proportions of legal budgets than any other. Litigation sucks up nearly one-third of all legal dollars, while M&A accounts for 11.4 percent of budgets. Not far behind, regulatory work surpassed securities for the first time to land at No. 3. It now commands 11 percent of legal budgets, up from 9 percent in 2005. And in what might be the most welcome news of all for the region’s firms, the survey found that law firms are beginning to be able to command premium billing rates for regulatory work. BTI Consulting defines premium billing rates as being about 8 percent to 11 percent above average billing rates. Other practice areas able to garner premium rates include M&A, complex litigation, securities, and intellectual property. Corporate counsel say they’ve become increasingly concerned about regulatory matters in the face of uncertainty from a constantly changing environment. “Regulatory work has taken on new meaning in the last five years,” Rynowecer says. “Regulatory work used to be routine, but now regulatory work has become very high-exposure because of all the corporate scandals.” But a general counsel for a midsized area company, who said he could not speak on the record, cast doubt on whether firms could command premium billing rates for routine regulatory work. He cautioned that only regulatory work that is high-profile, involves an enforcement action, or is done by a particularly prominent lawyer is likely to justify premium billing rates. Predictions of a sharp increase in spending on regulatory matters could also be an indication that corporate counsel are expecting a more robust regulatory environment as a result of last November’s elections, says DLA Piper’s Liss. Although the interviews for the survey were conducted before the election (from June to August last year), Liss says in-house counsel may have predicted the outcome. “You could see it coming,” he says. “These things run in cycles, and I think the cycle was just about up.” Total spending on regulatory work is expected to rise by a whopping 18 percent this year. The financial services, insurance, industrial manufacturing, investment banks, telecommunications, and utilities industries expect to boost spending on regulatory work this year. The only practice area in which spending was predicted to grow even more was class action litigation; in-house counsel predicted a 19 percent surge in spending. That statistic seems somewhat incongruous with a recent study released by Stanford Law School and consulting firm Cornerstone Research that found the rate for filing class actions involving securities in 2006 was at its lowest since Congress passed securities class action reform legislation in 1995. Although the Stanford study found the number of new filings of securities class actions was down, in-house counsel may be expecting that the “spending cycle may be ramping up for the class actions that are already filed and at maturity,” Rynowecer says. Another factor explaining the predicted increase in spending on class actions, he adds, is that corporate counsel are devoting additional resources to settle lawsuits because they are more optimistic that litigation can be resolved. Finally, securities class actions represent only one type of class action. “There’s no shortage of them,” he adds. Meanwhile, practice areas expected to grab the smallest amount of increased legal spending were tax, environmental law, and real estate, which were expected to grow by 4 percent, 3 percent, and 2 percent respectively. The BTI survey is based on interviews with 250 corporate counsel from Fortune 1000 companies spread across 15 industries, including 24 percent of the Fortune 100.
Alexia Garamfalvi can be contacted at [email protected].

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