2019 Legal Tracker LDO Index Benchmarking and Trends Report

Dedicated legal operations

The focus on dedicated legal operations – staff that does not have direct responsibility for the delivery of legal services/practice of law – continues to grow. A new high of 57% of legal departments said they now have dedicated legal operations staff with 17% of organizations reporting they’ve increased the number of legal ops staff in the last 12 months.

In-house vs. outside counsel ratios

Volume of legal work
More than two-thirds (68%) of legal departments report their volume of legal work has increased in the last 12 months.

To address this increasing volume, 53% have increased the percentage of work handled in-house with 37% increasing the number of in-house attorneys. Although the percentage continues to drop since Fall 2017, almost half (47%) of legal departments reported they increased outside counsel spending over the past year.

This year again, 35% of organizations report they are increasing the legal department budget to handle the increasing demands with medium-sized companies ($2B+ – $10B in annual revenue) most likely to see an increase in their legal department’s budget.

While law firm convergence has been a prior theme among legal departments, with increase in outside counsel spending also comes legal departments increasing the number of law firms utilized – 47% of legal departments reporting increasing the number of law firms used, while only 19% have decreased their count of law firms. With the increasing number of law firms utilized, the average corporate spend per firm decreased 26% year-over-year in 2018 from 2017.

Most legal departments report sending roughly between 35% to 65% of legal work to outside counsel. this aligns to optimal efficiency in research conducted by U.K. legal industry research firm Acritas, which identified that the most efficient departments fall within an optimal range of 30% to 60% of legal work sent to outside counsel.

In terms of priority, 53% of organizations reported increasing the percentage of work handled in-house in the last 12 months; and 41% of organizations identified bringing more work in-house as a high priority. Legal departments are far more likely to be increasing, rather than decreasing, the percentage of work handled in-house, with the greatest focus on increasing in-house percentage among small and large companies.

As organizations are increasing the percentage of work handled in-house, nearly a majority of legal departments are also increasing outside counsel spending.

Staffing

Paralegal and Attorney ratios remain relatively consistent relative to the size of the organization, with between 0.26 to 0.55 paralegals for every one attorney. On the other hand, attorneys make up between 50% and 63% of the total legal department staff for all sizes of organizations.

In terms of comparing the number of legal department staff to the annual outside counsel spend, organizations averaged one law department staff for every $446,278 in outside legal spend.

Outside staffing
Based on approved invoice data in legal tracker from 2018, overall legal work is staffed at a 50/50 ratio for partners and associates with 85% of work billed for attorney time (Partner, Associate, of counsel) as opposed to legal professionals (paralegals, legal assistants, other professionals).

Diversity

Research on diversity and inclusion conducted by Acritas shows definitively that diverse teams outperformed non-diverse teams on every aspect of performance, including quality and value.

Given that, the survey’s data on diversity is disappointing. Less than half of legal departments (45%) say it’s a priority to use diversity data as a factor in firm selection (although 64% of large legal departments said it was a priority).

Overall, 30% of legal departments require diversity information from law firms and the requirement of law firms to provide diversity information continues to grow, with 9% of organizations newly launching the requirement within the last year.

And, 13% of legal departments report on law firm diversity as a standard department measure.

Metrics reporting

Legal department survey respondents identified common legal department metrics utilized.

Indeed, the top four metrics reported – total spend by law firm, matter type, business unit, and practice group – that were employed by more than half the legal departments surveyed, are a good baseline for what every department should be measuring and tracking.

Spend management sophistication

Legal departments self-identified into one of five levels of spend management sophistication. Consistent with prior surveys, we continue to see the majority of legal departments (57%) identify themselves as Proactive – the middle of the sophistication curve.

Indeed, that middle band has remained consistent, averaging 58.75%, over the four editions of the report. Curiously, more than one-fifth of legal departments on average have identified their spend management strategies as Reactive with the percentage of departments identifying as such growing over the past two years.

Spend management sophistication model

• Chaotic – legal invoices outside of e-billing system; no consistent way to report on legal spending
• Reactive – Use of e-billing system and basic reports on spending
• Proactive – Use of billing guidelines, invoice audits & legal invoice review; process for management of timekeepers and matters
• Optimized – centralized management of rates; utilization of RFPs, bids or discounts to set rates; focus on internal processes that drive down costs; advanced reporting on legal department performance
• Predictive – Active management of matters with collaborative involvement from attorneys, outside counsel, and legal operations; detailed matter budgets, predictability, and forecasting; benchmarking performance

The larger the company, the more likely they will identify at a higher level of sophistication in how their spend is managed. Among large legal departments, only 18% categorize as Reactive, while 41% are Optimized or Predictive.

Organizations with dedicated legal ops teams also are more sophisticated in their management of legal spending – 26% of organizations with legal ops identify as having Optimized or Predictive spend management, compared to only 11% of organizations without dedicated legal operations teams.

Legal departments were asked to identify the practices below that were effective measures for cost control. Overwhelmingly, general enforcement of billing guidelines is listed as the top best practice with 89% of legal departments identifying it as an effective cost control measure.

Timekeeper rates

Timekeeper rates below are based on approved timekeeper invoice rates submitted for payment and followed by Thomson Reuters Legal Tracker, which includes in its database more than $90 billion in approved legal spend and matter benchmarks.

Rates can vary dramatically by industry, location, matter type, company and firm size – see some additional highlights of breakdowns below.

After a growth year for rates from 2016 to 2017, timekeeper rates in 2018 remained relatively flat.

The top 50 Am Law firms continue to command the greatest rates and achieve the greatest year-over-year increases. Overall, firms in the Am Law 101-200 are commanding lower rates that continue to stay relatively flat year over year.

Alternative fee arrangements

Legal departments identified the percentage of outside legal spend that is under alternative fee arrangements (AFAs) as opposed to standard hourly timekeeper rates.

Almost two-thirds of organizations (61%) have some priority on relying on AFAs as opposed to hourly rates. This priority is greatest among large companies.

Looking closer, 60% of organizations have between 1% and 20% of their outside spend involved in AFAs, and only 11% of organizations have greater than 40% of spend going through AFAs.

Key technology solutions

To address a growing workload and the push to increase efficiency and decrease costs, many legal departments are turning to technology to address these challenges. Indeed, 70% of legal departments identified using technology to simplify workflow and manual processes a high priority – while only 7% said they have no priority in using technology.

Just more than half of legal departments (51%) have increased their use of legal technology tools in the last 12 months; however, only 27% of organizations report that their legal department budget for technology is increasing. The more progressive legal departments – 15% of organizations surveyed – are quantifying savings from technology usage and are advocating for internal allocation of the savings realized to make additional technology purchases.

Emerging legal technologies

Legal departments also identified emerging legal technologies, ranking solutions where their organizations don’t currently have a solution but are looking to procure solutions. Top solutions include contract lifecycle management, document management, legal project/task management, legal hold/litigation hold, and legal platforms.

As the use of technology continues to grow, so does the depth of solutions utilized. All solutions were identified as important by at least 20% of organizations surveyed. Other technologies in the survey included legal RFP, e-discovery, knowledge management, workflow automation, IP management, and Business Intelligence/dashboarding/analytics tools, and know-how.

Small legal departments - key takeaways

• Small legal departments are least likely (44%) to have a dedicated legal operations team.
• 59% said they’re increasing the percentage of work handled in-house, while 62% said there will be no change in the headcount of in-house attorneys.
• 15% send less than 35% of their total legal work to outside counsel, which was the highest among segments.
• Small legal departments have the lowest Paralegal-to-Attorney ratio of 0.26.
• On average, small legal departments have one in-house legal department staff member for every $441,082 in outside legal spend.
• In our last report, Small legal departments had year-over-year increases in timekeeper rates of 7.39% for Partner rates and 17.50% for Associate rates. In this report, we saw biggest decreases in both year-over-year timekeeper rates among segments; 2.7% decrease on Partner rates and 1.3% decrease in Associate rates.
• 46% of Small legal departments said they have no priority around greater reliance on alternative fee arrangements (AFAs) as opposed to hourly rates.

Moderate legal departments - key takeaways

• 50% of Moderate legal departments have a dedicated legal operations staff with an average size of three people.
• 45% see an increase in outside counsel spending.
• On average, Moderate legal departments have one in-house legal department staff member for every $442,624 in outside legal spend.
• 64% identify their spend management sophistication is “Proactive,” which is the highest across segments.
• Moderate legal departments have the highest Paralegal-to-Attorney ratio of 0.55.
• Moderate legal departments showed the highest growth in both year-over-year timekeeper rates with a 1.4% increase on Partner rates and 2.6% increase on Associate rates.

Medium legal departments - key takeaways

• 38% of Medium legal departments send more than 65% of their total legal work to outside counsel, none send less than 35%, leaving the remaining 62% sending between 35%-65% of their work out.
• 49% have increased the number of in-house attorneys in the last 12 months, and 46% have increased their total legal department budget, both the highest levels among segments.
• Medium legal departments had the largest percentage (54%) saying that they will increase outside counsel spending.
• On average, Medium legal departments have one in-house legal department staff for every $427,656 in outside legal spend — the lowest of all segments.
• Medium legal departments showed flat growth in year-over-year timekeeper rates with a 0.1% increase on Partner rates and 0.1% decrease on Associate rates.

Large legal departments - key takeaways

• Large legal departments are most likely to have dedicated legal operations staff (77%), and 68% have kept head count devoted to legal operations flat for the last 12 months.
• 64% of large legal departments see the percentage of work handled in-house to be increasing, the highest of all segments.
• Only 23% of large legal departments said they were sending more than 65% of total legal work to outside counsel.
• On average, large legal departments have one in-house legal department staff for every $469,572 in outside legal spend — the highest of all segments.
• 32% of large legal departments identified themselves as “optimized” on spend management, leading all segments.
• Large legal departments saw the second-highest increases in year-over-year Associate rates with a 1.3% increase.
• 68% of large legal departments rank using AFAs as opposed to hourly billing as a priority, the largest percentage across all segments.