Navigating the Business Side of Law Department Management

For all companies participating in the surveys, the four-year increase in total legal costs was 18 percent, or an average just over one-half of 1 percent of annual sales revenue. While the percentage increase was more or less the same for the two groups, the actual cost as a percentage of annual revenue for the law departments in high-revenue companies is less than half of that of all law departments reporting. Some of this difference can be attributed to greater opportunities to leverage purchasing power by consolidating the number of law firms employed, effectively using e-billing information and ensuring that, from a pricing perspective, the companies are placing the appropriate legal work with the appropriate outside counsel.

Breaking down this percentage, we discover that the 2007 survey reports that the larger companies of $5 billion and over spend approximately 44.44 percent of their total legal expenses inside the corporation. For all companies, 46.79 percent of their total legal budget is spent inside.

Changes in the Cost of Inside Counsel

As we continue to peel back the layers of the legal-cost onion, another way to look at the cost of legal services is to analyze the expenses of a fully loaded in-house law department. Analyzing these expenses on a per-lawyer basis allows for company-to-company comparisons.

As we see in Table II, the average inside legal costs measured on a per-lawyer basis increased during the four-year period by 10 percent for the largest companies participating in the surveys and 5 percent for all companies. Companies with higher annual revenues have higher per-lawyer internal costs and have experienced an increase in their inside costs at twice the rate of all companies in the surveys. These changes might be attributed to increases in inside-counsel compensation, designed to compete with outside-counsel compensation, allowing the companies to attract, retain and motivate their in-house attorneys.

Changes in the Cost of Outside Counsel

Total legal costs are composed of the cost of operating the in-house legal function and expenses related to outside counsel. Table III provides information regarding the average changes in outside counsel expenditures as measured on a per-lawyer basis. The per-lawyer analysis is calculated by taking the total outside expenses of the company and dividing that amount by the number of in-house counsel.

As seen in Table III below, the average outside legal costs measured on a per-lawyer basis increased over the four-year period by 26 percent for the largest companies participating in the surveys. For the large companies, this averages to be a 6.5 percent increase per year over the four years, which approximates law firm annual hourly-rate increases. In comparison, all companies reported only a 5 percent increase. This difference might reflect the significant legal issues facing larger companies, including large litigation matters and significant compliance requirements, fee increases from outside counsel as well as the fact that some smaller companies are doing an effective job of managing their outside counsel costs.