Do Bigger Companies Require More Outside Law Firms?

The second in a three-part series of articles based on ALM’s 2011 Law Department Compensation Benchmarking Survey and Law Department Metrics Benchmarking Survey.

E.I. du Pont de Nemours and Company and Pfizer Inc. may be leading the way on convergence programs to shrink the number of law firms they hire, but a new survey by CorpCousel.com sibling ALM Legal Intelligence suggests that few companies are following their lead.

DuPont general counsel Thomas Sager pioneered the convergence model in the mid-1990s (before he was GC), trimming the 350 law firms the company used down to 34 preferred providers. Pfizer GC Amy Schulman followed suit in 2009 with the Pfizer Legal Alliance, with a goal to have 75% of the company’s work done by 19 law firms.

The ALM survey, released in September, questioned 99 companies. The average number of law firms employed in 2010 by companies earning between $1 billion and $4.9 billion was 43. The number grew exponentially for larger companies (with earnings over $5 billion in revenue) using an average of 173 law firms. (See chart here.)

Legal department consultant Albert Parker said the trend didn’t surprise him. “I hear people are trying to winnow down the field of outside law firms, but I haven’t seen a whole lot of that happen,” said Parker, former general counsel at Wyeth (which became part of Pfizer) and now principal at GC Legal Advisors in Radnor, PA. He added, “A number of companies—despite statements to the contrary—continue to use many outside counsel.”

Legal consultant Rees Morrison, president of Rees Morrison Associates in Princeton, explained that it makes sense for larger companies to need many more law firms. “You can be sued in more jurisdictions; you operate in more countries; you have more inside lawyers, each with a law firm or two they like to use; you have more lines of business—and all of these boost the absolute number of firms used.”

Despite the statistics, a type of convergence could still be going on. More companies, like DuPont and Pfizer, could still have the bulk of their legal spend going to a relatively few number of firms, even if many more law firms shared the smaller remainder. (See chart here.)

On legal spending, Morrison said he would be surprised if external spend per unit of revenue increases with a company’s size—and he would be right. The ALM survey showed that, excluding companies with revenue under $100 million, the median inside versus outside legal expense as a percentage of a law department’s total expenses remained steady at about 40 percent inside/60 percent outside, no matter how large the company.

Morrison explained, “From my consulting and research, scale advantages hold for law departments: the larger the department—and thus likely the larger the company—the lower the total legal spending as a percentage of revenue goes. So it does not make sense that external spend rises, unless internal spend drops dramatically.”