The 2007 Altman Weil Law Department Metrics Benchmarking Survey, published with LexisNexis Martindale-Hubbell, reports total expenditures for the largest U.S. corporate law departments are up significantly – with internal costs (led by lawyer compensation) outpacing external expenditures.
For companies with annual revenues of $5 billion or more, total law department expenses went from .19% to .27% of annual revenue – an increase that, according to a press release on the study, would translate into an additional average spend on internal and external legal costs of $3.77 million and total expenditures of $13.27 million in legal services for a corporation with $5 billion in revenue.
The internal costs of operating an in-house law department of a large company with $5 billion or more in revenues grew from $323,697 per lawyer to $346,497 per lawyer, a 7% increase over the previous year. Lawyer compensation and benefits for large companies, the biggest component of internal expenditure, was up 19.2% to $313,747 per lawyer.
Outside expenditures for large companies were up 1.4% in fiscal year 2006 to $616,519 per lawyer. Of all companies, the Chemical Manufacturing industry had the highest average outside expenses, $1,063,294/lawyer, more than four times higher than the Insurance industry, which had the lowest expenses at $251,405/lawyer.
Corporate law departments spend the highest percentage of outside counsel fees on Litigation (30.3%), followed by Products Liability/Class Actions (18.1%) and Risk Management (17.4%). Two thirds of all fees (66.1%) on average are paid to a department’s top four law firms.
The survey reports that the number one selection criteria for outside counsel is firm specialization; number two is responsiveness; and number three is cost. Only 29.9% of law departments formally evaluate law firm performance, but, when they do, the top three evaluation criteria are: results, knowledge/expertise and costs.
According to the report, the three biggest mistakes law firms make with their corporate clients are:
- lack of responsiveness,
- over-lawyering and
The law departments surveyed continue to favor traditional billing arrangements with their outside counsel. Most frequently used methods are hourly billing and reduced hourly billing. However, the survey shows movement toward the use of alternative fee arrangements (AFAs). In the 2007 survey, 68.1% of law department reported using AFAs for at least some portion of outside counsel assignments, up from 59.8% the previous year.
The use of e-billing systems that potentially help law departments to improve their cost management of outside counsel continues to increase. In 2007, 22.2% of law departments used e-billing, up from 13% in 2006 and 10.3% in 2005. Of those departments that have an e-billing system, 48.4% require its use to do business with the law department.
Law Department Staffing
Lawyer staffing in corporate law departments was steady in 2006, with the key measure - lawyers per billion dollars of revenue - at 3.52 lawyers/billion, compared with 3.49 lawyers/billion in 2005. This comes after a 19% staffing jump the prior year.
When asked about new lawyer hires, 14.6% of law departments reported adding one new lawyer to their department in 2006. An additional 14.6% hired two new lawyers; 9% hired three lawyers, and 6.3% added four or five lawyers to the legal staff. The top two sources of new lawyer personnel were outside law firms and other law departments.
The Altman Weil Law Department Metrics Benchmarking Survey is published annually with LexisNexis Martindale-Hubbell and tracks U.S. law department expenditures, outside counsel relationships, operations and staffing. It includes data from 144 companies, reported by sales revenue, number of corporate employees, industry type and law department size. Data were collected in the spring of 2007 and reflects fiscal year 2006.