Law Department Highlights, Trends and Myths

This tension between change and status quo was the setting for the 2010 Chief Legal Officer Survey.

Are CLOs Serious About Pressuring Law Firms for Value?

Well ' not really. For the second year in a row, CLOs were asked to rate how much pressure corporations are putting on law firms to change the value proposition in service delivery, and in turn how serious law firms are about changing their service delivery model. The survey found no change from the 2009 results. Law departments assessed their own desire for change at a median of five on a scale of zero to 10, and scored law firms at a dismal three on the same scale. Table I and Chart I below show the results of CLO self-assessment. It is surprising that in an atmosphere of cost-savings and value-plus propositions that the CLOs do not see themselves as more serious about changing the legal services value proposition. 

Legal Budgets

From a benchmarking perspective, the total legal spend of a company, as a percentage of its revenues, is fundamental. Once this threshold number is determined, one begins peeling the benchmarking onion by analyzing how much of the total legal spend is allocated to outside counsel and how much is spent to operate the fully loaded in-house legal function. In most law departments, more of the legal budget is allocated to outside counsel than to in-house operations. Therefore, it is interesting to look at chief legal officers' intentions for outside counsel spending. For the past eight years, the survey has asked CLOs whether they intend to increase or decrease their overall use of outside counsel. Chart II below displays their answers by year. In each year from 2003 to 2007, over three-quarters of CLOs expected their use of outside counsel to be the same or greater than in the prior year. Even in the last three years as the economy faltered and cost-cutting pressure intensified, that number held well over 50%.

With the combination of increasing use of outside counsel and intense budgetary pressure, it is not surprising that CLOs have turned to an array of tools including Requests for Proposal (RFPs), convergence programs, e-billing programs and alternative fee arrangements as ways to contain outside counsel costs, obtain greater budgetary predictability and improve the legal services value proposition.

These tools are of significant interest to those CLOs focused on improving the value proposition. However, as we saw above, law department pressure on firms to change the value proposition varies with the company and the CLO.

Myths

Procurement Involvement in Outside Counsel Selection

Over the past few years there has been some open discussion about the possibility of corporate sourcing departments becoming more involved in the selection and retention of outside counsel. Law firm procurement can happen either in concert with the CLO, or the sourcing department might work on its own. Recently, I met with the procurement group of a major pharmaceutical company that was exploring its role in the selection of outside counsel, establishing metrics and evaluating results ' providing some first-hand evidence of this.

To assess whether procurement department involvement in the selection of outside counsel is trend or myth, the survey asked CLOs whether procurement, purchasing or strategic sourcing professionals are involved in outside counsel selection decisions in their organizations. As Chart III below shows, sourcing professions are involved in less than 20% of outside counsel selection decisions ' either sometimes (17.4%) or always (1.2%). Chart IV below clarifies the picture by asking that 18.6% of companies how procurement professionals are involved and to what extent. According to the responses, in no case is procurement the final authority and in all cases procurement professionals are, in order, either available as needed, serve in an advisory role or assist with the RFP process.

Although not a myth, this idea clearly has a long way to go before it is an established practice.

Use of First-Year Associates

In the last decade, the rapid escalation of lawyer starting salaries at law firms across the U.S. caused some CLOs to voice their concern over the value first-year associates bring to their legal matters. Some CLOs suggested publicly that they would either watch the staffing of their legal matters carefully, or they would refuse to allow first-year associates to bill for their time.

The recession, extensive layoffs, hiring freezes and associate salary reductions temporarily put a check on these concerns. But in 2010, some if not most of these associate starting salaries returned to their past levels. With the reinstatement of the top-level starting salaries for first-year associates, the Survey asked CLOs whether they allow law firms to use first- and second-year associates on their legal matters. As can be seen in Chart V below, only 5.4% of the CLOs said that they never allow the use of first- and second-year associates. A majority (80.1%) of the CLOs said that they “sometimes” allow it and 14.5% of the CLOs “always” allow first- and second-year associates to work on their matters.

Here's an instance where the trend may be tipping into common practice as most CLOs consider this question for each new matter.

Conclusion

In reviewing the 2010 Chief Legal Officer Survey, we can draw a few conclusions:

• The intensity of pressure on law firms to change their value proposition varies with the CLO and the corporation. It is important for each law firm to assess each client's attitude and focus on value.
• A majority of CLOs believe that the use of law firms will either remain the same or increase. With little change in the way law departments are organized and operate internally, as well as the relatively relaxed attitudes toward the value proposition, this is not surprising.
• The idea of sourcing departments assuming responsibility for the selection and retention of outside counsel does not seem to be a major issue. However, the groups have become more involved in the process as support to the CLO.
• CLOs have become value vigilant about the effective and appropriate use of first and second year associates in the handling of their legal matters.

It has been a tumultuous few years for the legal profession, and as such it's not surprising that many CLOs have taken a cautious approach to change. However, as we emerge into a new more austere economic reality, it is important for all CLOs to be familiar with the latest trends ' and distinguish them from the myths ' in order to effectively lead their law departments.

To download a complete copy of the Altman Weil 2010 Chief Legal Officer Survey, go to http://www.altman/ weil.com/CLO2010.

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Daniel J. DiLucchio is a principal in the Newtown Square, PA, office of Altman Weil, Inc. Mr. DiLucchio has been providing management and consulting services to corporate law departments and law firms for over two decades. Contact him at 610-886-2012 or djdilucchio@alt manweil.com.

For the eleventh consecutive year, Altman Weil has conducted a Chief Legal Officer (CLO) Survey on issues of importance in managing corporate law departments. The purpose of these surveys is to capture current thinking of CLOs and share the results with the legal profession, enabling both corporate law departments and law firms to benefit from the surveys. This survey was conducted in September and October of 2010, and contains responses from 174 CLOs. This article discusses selected results of the recent survey. It makes comparisons to prior surveys, and explores both trends and myths of the marketplace.

Dramatic Change

There has been dramatic change in the legal profession in the past decade ' accelerated especially in the last few years by the great recession. Interestingly, most of the impact from those changes has been absorbed by law firms. Corporate law departments ' as clients ' often are the drivers of change, but their own organizations remain largely the same. For the most part, law departments look exactly like they did 10 or even 20 years ago. Staffing may be greater or lesser, e-billing might now be installed, but the organization, structure and roles of in-house staff remain similar, if not identical to that of the past decade.

This tension between change and status quo was the setting for the 2010 Chief Legal Officer Survey.

Are CLOs Serious About Pressuring Law Firms for Value?

Well ' not really. For the second year in a row, CLOs were asked to rate how much pressure corporations are putting on law firms to change the value proposition in service delivery, and in turn how serious law firms are about changing their service delivery model. The survey found no change from the 2009 results. Law departments assessed their own desire for change at a median of five on a scale of zero to 10, and scored law firms at a dismal three on the same scale. Table I and Chart I below show the results of CLO self-assessment. It is surprising that in an atmosphere of cost-savings and value-plus propositions that the CLOs do not see themselves as more serious about changing the legal services value proposition. 

Legal Budgets

From a benchmarking perspective, the total legal spend of a company, as a percentage of its revenues, is fundamental. Once this threshold number is determined, one begins peeling the benchmarking onion by analyzing how much of the total legal spend is allocated to outside counsel and how much is spent to operate the fully loaded in-house legal function. In most law departments, more of the legal budget is allocated to outside counsel than to in-house operations. Therefore, it is interesting to look at chief legal officers' intentions for outside counsel spending. For the past eight years, the survey has asked CLOs whether they intend to increase or decrease their overall use of outside counsel. Chart II below displays their answers by year. In each year from 2003 to 2007, over three-quarters of CLOs expected their use of outside counsel to be the same or greater than in the prior year. Even in the last three years as the economy faltered and cost-cutting pressure intensified, that number held well over 50%.

With the combination of increasing use of outside counsel and intense budgetary pressure, it is not surprising that CLOs have turned to an array of tools including Requests for Proposal (RFPs), convergence programs, e-billing programs and alternative fee arrangements as ways to contain outside counsel costs, obtain greater budgetary predictability and improve the legal services value proposition.

These tools are of significant interest to those CLOs focused on improving the value proposition. However, as we saw above, law department pressure on firms to change the value proposition varies with the company and the CLO.

Myths

Procurement Involvement in Outside Counsel Selection

Over the past few years there has been some open discussion about the possibility of corporate sourcing departments becoming more involved in the selection and retention of outside counsel. Law firm procurement can happen either in concert with the CLO, or the sourcing department might work on its own. Recently, I met with the procurement group of a major pharmaceutical company that was exploring its role in the selection of outside counsel, establishing metrics and evaluating results ' providing some first-hand evidence of this.

To assess whether procurement department involvement in the selection of outside counsel is trend or myth, the survey asked CLOs whether procurement, purchasing or strategic sourcing professionals are involved in outside counsel selection decisions in their organizations. As Chart III below shows, sourcing professions are involved in less than 20% of outside counsel selection decisions ' either sometimes (17.4%) or always (1.2%). Chart IV below clarifies the picture by asking that 18.6% of companies how procurement professionals are involved and to what extent. According to the responses, in no case is procurement the final authority and in all cases procurement professionals are, in order, either available as needed, serve in an advisory role or assist with the RFP process.

Although not a myth, this idea clearly has a long way to go before it is an established practice.

Use of First-Year Associates

In the last decade, the rapid escalation of lawyer starting salaries at law firms across the U.S. caused some CLOs to voice their concern over the value first-year associates bring to their legal matters. Some CLOs suggested publicly that they would either watch the staffing of their legal matters carefully, or they would refuse to allow first-year associates to bill for their time.

The recession, extensive layoffs, hiring freezes and associate salary reductions temporarily put a check on these concerns. But in 2010, some if not most of these associate starting salaries returned to their past levels. With the reinstatement of the top-level starting salaries for first-year associates, the Survey asked CLOs whether they allow law firms to use first- and second-year associates on their legal matters. As can be seen in Chart V below, only 5.4% of the CLOs said that they never allow the use of first- and second-year associates. A majority (80.1%) of the CLOs said that they “sometimes” allow it and 14.5% of the CLOs “always” allow first- and second-year associates to work on their matters.

Here's an instance where the trend may be tipping into common practice as most CLOs consider this question for each new matter.

Conclusion

In reviewing the 2010 Chief Legal Officer Survey, we can draw a few conclusions:

• The intensity of pressure on law firms to change their value proposition varies with the CLO and the corporation. It is important for each law firm to assess each client's attitude and focus on value.
• A majority of CLOs believe that the use of law firms will either remain the same or increase. With little change in the way law departments are organized and operate internally, as well as the relatively relaxed attitudes toward the value proposition, this is not surprising.
• The idea of sourcing departments assuming responsibility for the selection and retention of outside counsel does not seem to be a major issue. However, the groups have become more involved in the process as support to the CLO.
• CLOs have become value vigilant about the effective and appropriate use of first and second year associates in the handling of their legal matters.

It has been a tumultuous few years for the legal profession, and as such it's not surprising that many CLOs have taken a cautious approach to change. However, as we emerge into a new more austere economic reality, it is important for all CLOs to be familiar with the latest trends ' and distinguish them from the myths ' in order to effectively lead their law departments.

To download a complete copy of the Altman Weil 2010 Chief Legal Officer Survey, go to http://www.altman/ weil.com/CLO2010.

[IMGCAP(1)]

[IMGCAP(2)]

[IMGCAP(3)]

[IMGCAP(4)]

[IMGCAP(5)]

[IMGCAP(6)]

Daniel J. DiLucchio is a principal in the Newtown Square, PA, office of Altman Weil, Inc. Mr. DiLucchio has been providing management and consulting services to corporate law departments and law firms for over two decades. Contact him at 610-886-2012 or djdilucchio@alt manweil.com.