For a majority of general counsel and heads of legal operations the last quarter of the year represents planning and budgeting season. It comes with a necessary moment of reflection to consider the needs of the coming year, the size of reserves, and the future of legal staffing.

To help guide in-house budgeting decisions, it's important to take a step back and consider some of the fundamental ways legal departments are—or are not—changing and what that means for investment decisions.

Rising Cost, Resource Constraints

The cost of corporate legal services continues to rise. After years of holding flat, median legal expense as a percent of corporate revenue rose over the last three years to 0.468 percent of company revenue (up from .31 percent in 2010). Despite the rising expense, actual department budget growth remains tepid. While almost 60 percent of legal departments expect a budget increase for 2019, the median increase is only 2.1 percent. The department and company focus on reducing the legal department's top line cost footprint may be counterproductive – the tension between greater legal demands and constrained budgets may miss an opportunity to build more efficient legal services for the company.

Interestingly, this trend runs somewhat counter to the slow, long-term shift we've seen toward more in-house spend. For the first time since Gartner began measuring it, in-house spend represents a larger share of total budget (50.2 percent) than outside spend (49.8 percent). While the difference may seem insignificant, this is a notable milestone. Traditionally, the most efficient legal departments do more of their work in-house—allocating a somewhat higher percent of spend toward in-house staff, technology investments, and, to a limited extent, alternative service providers. And going forward, almost half of legal departments expect to further reduce external law firm spend.

Legal Department Staff and Structure

Most legal departments have between 4 and 7 lawyers per billion dollars of revenue with, across most industries, the number of lawyers per billion declining as corporate revenue increases. Staff size will remain the same in 2019. In fact, 60 percent of legal departments anticipate either flat or reduced staff levels next year.

In 2018, 60 percent of legal staff consisted of lawyers and 70 percent of lawyers were generalists. Interestingly, the percent of generalists has increased steadily over the last 8 years while the percent of non-lawyers has declined. For many organizations, this decline could represent the more formal separation of compliance and privacy staff.

Meanwhile, the type and variation of non-lawyer roles continues to expand. In 2018,

• 33 percent of legal departments have a legal operations manager
• 21 percent have dedicated technology counsel
• 15 percent have a legal project manager
• 9 percent of have a data scientist

As corporate needs shift, so to do the necessary roles within the legal departments. In particular, there is growing demand for project management and analytics expertise to utilize the potentially valuable insight and automation potential that exists in contract management, eBilling, and other legal management systems.

Use of Outside Counsel

The vast majority of outsourced spend goes to outside counsel. In 2018, the median legal department works with 18 law firms; 26 percent of which are “large” firms with more than 500 lawyers. The median large company—those with revenue more than $10 billion—work with considerably more (172) law firms.

Overall, legal departments have experienced a shift from working with more, typically smaller, firms to fewer, bigger firms. And as a very general rule, and irrespective of company size and legal complexity, the most cost-efficient legal departments use fewer law firms. The lowest-cost legal departments tightly manage work and use a relatively small body of firms.

So, what are they spending their money on?

About a quarter of this outside spend is for litigation work, with a small, but significant, amount of spend for intellectual property (15 percent), finance and securities (10 percent), labor and employment (10 percent), and M&A work (10 percent). The primary drivers of law firm cost include matter duration, matter staffing mix, lawyer rates (primarily driven by law firm size, law firm location, and practice area), and billing discipline. It's of course worth keeping in mind that the implied in-house lawyer rate is approximately 59 percent of law firm associate rates and only 40 percent of law firm partner rates. This discrepancy between in-house and outside counsel rates suggests a strong case for in additional in-house capacity.

Are We Making Progress?

We also asked General Counsel about achievement of specific cost and capability outcomes. We wanted to know what improvements have been made in the cost basis and efficiency of legal service to the company. Progress has unfortunately been spotty. In the last three years, only 30 percent of departments feel they have reduced legal cost as a percentage of corporate revenue. Similarly, only 31 percent of departments have reduced average matter cycle time.

To understand where we might improve, we also asked about analytic and automation maturity. The median legal department rated their analytics capabilities as limited and descriptive and their level of automation as a limited “templatization” of a few routine processes. This is a missed opportunity. For example, while Sales and Distribution and Procurement contracts are considered “routine,” only a handful of departments have automated their review. So even when work is standardizable, it is often managed in an ad hoc fashion. Failing to standardize or automate routine legal judgment leads to overinvestment of legal department time and money.

Meeting Future Needs

While many departments are asked to reduce their expenses, few have been successful. Yet, there are some proven techniques that can help including reducing the number of law firms organizations do business with and bringing more work in-house. To implement these techniques requires direct conversations with the CFO and business leaders and a clear business case for how additional resources and staff can save money. And going forward, the growing role of project management and analytics in legal departments combined with new technologies offers the potential to automate a significant portion of routine work. Longer-term reduction in legal expense will likely require investments in analytic maturity and process standardization.

As you budget for the coming year, go beyond the immediate future and consider the long-term investments your legal department needs to make. The opportunity to fundamentally reduce the cost of legal services requires putting resources towards a new set of capabilities, and this is where leading legal departments are beginning to make their investments.

Abbott Martin is a legal research leader at Gartner, a research and advisory company headquartered in Stamford, Conn.