Law Department Management Blog

In October Altman Weil collected responses from what they describe as 176 top corporate lawyers. More than half the participants represented corporations with revenues between $1 billion and $2 billion. Twenty percent had revenue greater than $10 billion.

Only one out of three respondents said they “regularly and formally evaluated outside counsel,” and less than one out of five said they communicated evaluations to the firm. I take even these doleful figures as probably over-stated since who wants to admit to failing to do something that is widely touted as a good practice?

Law departments who forego evaluations lose the opportunity to change their firms’ behavior, according to one commentator. That is true, but all law departments struggle to collect useful ideas from their lawyers about outside counsel and struggle even more to convey those suggestions to their firms, leaving aside totally whether the ideas make any difference thereafter.

An interview of John Oviatt, chief legal officer of the Mayo Clinic, turned up an interesting tidbit. He said you commonly recognize a pattern of concentration of spending by law departments: “[Y]ou see the number one law firm for many departments receiving in excess of 30 percent of the total outside counsel spend.” It would not surprise me to see that the next firm down the spending list gets approximately half that amount (15 percent?) and the third half again, and so on. That progression would make the function that describes the drop off in outside counsel spending by firm a power-law distribution.

If I knew how to identify a power-law distribution mathematically, I would be more confident when I refer to the function (See my post of Dec. 14, 2010: positive quarter-power law; Aug. 15, 2011: possible power-law distribution of law departments by number of lawyers; and Sept. 8, 2011: posts with lists exhibit power-law characteristics.). I have previously collected references to power laws (See my post of April 27, 2010: power-law distributions with 6 references.).

John Oviatt, chief legal officer of the Mayo Clinic, uses the term “reverse convergence” to mean law departments retaining more law firms rather than converging on fewer firms.

In a recent interview, Oviatt calls out two developments that can lead to increases in the number of law firms retained. “One is globalization, and so I may have a large number of small projects around the world where I have to hire local counsel, and most of us are becoming very international. And the other area is … regulation. There are so many growing numbers of areas of niche regulatory expertise that you sometimes have to employ a particular law firm.”

I think Oviatt correctly identifies two reasons why law departments need to beef up the number of firms they retain. A third reason is to manage costs better by choosing law firms whose cost structure and billing habits well match the complexity and demands of matters they handle. With all the tools available now to oversee law firms, the test should no longer be the number of firms but the concentration of spending by area of law and value alignment.

In October the consulting firm Altman Weil collected responses from 176 “top corporate lawyers.” The majority represented corporations with revenues between $1 billion and $2 billion, while 20 percent had revenues above $10 billion.

For this sample in 2011, the median increase in internal legal budgets was three percent, which was probably largely accounted for by increases in salaries. Triple that increase was outside expenditures: the median outside budget rose a whopping 10 percent. Since outside spend typically exceeds inside spend – 60/40 is quite typical as a ratio – the median total legal budgets must have risen by something like seven percent. Assuming corporate revenue rose over the same period, law department spending surely kept pace with the faster tempo of business. But the shift of that spending to outside counsel was marked.