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Law department leaders at large Southern-based companies are significantly increasing their spending on outside legal services providers beyond law firms to cope with higher internal demand for legal services, even as their budgets remain relatively flat.

That was one of the most significant findings of HBR Consulting's annual Law Department Survey. Of 207 large companies nationally, 26 were based in the South, which included Georgia, Florida, Alabama, Tennessee and North Carolina, plus Texas and Oklahoma. HBR advises both law firms and corporate law departments.

The Southern-based companies reported a 43% increase in spending on outside legal service providers in 2018 over the prior year—well above the 11% increase nationally, which was itself a big jump. That includes alternative legal service providers, or ALPS—such as the Big Four accounting firms, suppliers of contract lawyers and ediscovery vendors—as well as traditional outside vendors such as court reporters and expert witnesses.

That compared with only a 1% increase in spending on outside counsel for respondents in the South—and a 3% increase nationally.

Meanwhile, 92% of the Southern law departments said they expect their companies' legal needs to increase, which is even higher than the 88% of legal departments nationally—even as law department budgets remained relatively flat. Total legal spending, both in the South and nationally, rose only 2% in 2018.

A recent Altman Weil survey of corporate legal departments similarly reported budget constraints. Only 40% of law departments surveyed nationally said their budgets increased this year, down from 53% of respondents with budget increases in 2018, according to the legal consultancy's Chief Legal Officer Survey.

For HBR's law department survey, 65% of participating companies nationally are Fortune 500. The Southern-based companies were slightly smaller than their national counterparts, with median revenue of $9.1 billion and 9,800 employees, compared with $10.5 billion in median revenue and 15,000 employees for companies nationally. Their law departments employed a median of 22 lawyers with a $28.2 million legal spend, which compared nationally with a median law department head count of 29 lawyers and a $33.7 million legal spend.

"Law departments are looking at new and alternative ways to address growing legal demand," said Lauren Chung, an HBR managing director who has led the Law Department Survey since its inception 16 years ago.

Unsurprisingly, cost control remains a top priority for Southern law departments, with 57% of respondents citing it as their No.1 challenge. (That compared with 51% of respondents nationally). For the Southern cohort, managing outside counsel was the next-biggest challenge, cited by 44% of respondents, followed by using systems and technology (32%).

Turning to ALSPs tracks with in-house counsels' focus on cutting costs and improving efficiency when they are tasked with providing more legal services within roughly the same budgets, Chung said.

Many Southern law department leaders are also focusing on process improvement and increasing internal staffing, according to the HBR survey. The top efforts that respondents cited for handling increased demand were: increasing the workload of existing legal resources (57%), improving work processes (49%) and increasing the number of in-house lawyers (43%). While 43% of respondents in the South said they're hiring more lawyers in-house to manage demand increases, respondents nationally instead said they've chosen to redistribute work.

Southern law departments also plan to increase their technology use in the next two years, the survey found. Chung said they've laid the foundations, noting that 100% of respondents in the South reported they have electronic billing technology in place, compared with only 84% nationally, and 83% have implemented matter management, compared with 76% nationally.

Now these law departments are focusing on emerging legal technologies, Chung said.

Looking ahead, 50% of Southern law departments said they plan to deploy artificial intelligence (AI) for work processes over the next two years, while 32% plan to incorporate e-Signature technology and 28% plan to use a contract life cycle management system.

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