Corporate legal departments are still trying to cut costs, even as litigation risks and regulatory compliance burdens continue unabated.
A new survey finds that the poor economy is forcing legal departments to restructure their costs and stretch budgets farther. Many are relying less on outside counsel, trimming the fees they pay to outside firms when they do, and asking their own staff to work longer hours.
According to the Association of Corporate Counsel's annual survey, 54 percent of 1,165 general counsels polled around the world said they are still responding to the economic downtown with changes to the department—although that number is down considerably from 2009, when 74 percent said they were forced to cut spending or make other changes due to economic conditions. Specifically, 76 percent of respondents said they are experiencing increased workloads, and more than one-third (36 percent) are making cuts to expenditures for outside counsel.
Some chief legal officers worry that the cuts have gone too far: 20 percent of respondents said that the biggest challenge the legal department now faces is too few resources or too small of a legal budget. Another 18 percent said the top problem was reducing outside legal costs.
The legal department at Acer America, an IT and electronics company, for example, is feeling the pinch. At a panel discussion during the ACC annual conference last month, General Counsel Teigue Thomas said additional hiring is currently on hold. “What that means is all of my lawyers are working a lot harder. That is something I'm seeing in our peer companies, as well,” she said.
Doing more with less is the “new normal,” said Jonathan Block, vice president and general counsel at retail chain Hot Topic. “It's the way it's going to be for some time. That's forced me to have to be more creative.”
Block is hardly alone. The ACC survey found that plenty of legal departments are looking to find ways to decrease spending or increase efficiency. The most common change: exploring alternative fee arrangements with outside counsel, a tactic reported by 57 percent of respondents. Legal departments are also relying more on paralegals, contract lawyers, and administrative staff. Forty-three percent of respondents reported using more such professionals, up from 35 percent in 2009. Block said he is looking to bring in more contract attorneys on a temporary project basis, and use paralegals “more creatively and effectively than I have in the past.”
According to the survey, 12 percent of respondents use contract attorneys, with three being the average. Fifty-three percent of respondents said they enlist the help of only one contract attorney, while 40 percent said they use two to five.
Collaboration With Outside Counsel
Chief legal officers on the panel agreed that the tough economic times have let them start new conversations with outside counsel about lowering fees, which is a good thing. “It's opened it up in a way that really transcends the traditional discussion about fees and discounts,” Thomas said. “From our perspective there is really more of a focus on value.”
Others on the panel expressed similar sentiment. “I've been having very frank discussions with them about what my expectations are, why we hire outside counsel, the value I expect,” said Alan Tse, general counsel with gaming company Churchill Downs.
According to the ACC survey, 63 percent of general counsels are using some type of value-based fee arrangement. “We need to know what it is we're getting for the money we're paying and the results that have been achieved,” said Barry Fisher, general counsel, and corporate secretary for SAP Canada. “Decide early what result you want to achieve, and then get a budget and stick to it.”
“You cannot overstate the importance of the (legal) department being aligned with the interest of the business and understanding what the business is trying to achieve.”
—Jonathan Block,
General Counsel,
Hot Topic
The pressure to do more with less is not confined to general counsels in the United States. “In the U.K., we are still seeing pressures to reduce costs. That's usually achieved by reducing numbers,” said Dan Fitz, group general counsel for British Telecommunications, a global telecommunications services company.
“On the other hand, we're seeing a lot of growth and demand for legal sources in our Asia-Pacific and South America operations,” where the proportion of lawyers and new hires is far greater than in the U.S. and Western Europe, Fitz added. The survey results showed similar findings among other legal departments, where legal staffing declined only in the United States.
Risk-Management Strategies
In addition to controlling costs and managing relationships with outside counsel, 35 percent of respondents ranked “keeping apprised of company activities that may have legal implications” as another top concern.
According to Fisher, senior executives don't always ask for legal analysis, so the legal department has to make sure it knows about activities that could raise legal issues. “No one wants to be told what they cannot do,” said Fisher.
Thomas agreed. “It's really incumbent upon us to be enablers at this point and to make sure the business objective can be achieved in a way to enforce compliance with the law,” she said. “It's incumbent on us to look at how we're going to help the business do what it needs to do.”
“You cannot overstate the importance of the [legal] department being aligned with the interest of the business” and understanding what the business is trying to achieve, Block said.
WHERE ATTORNEYS HAIL FROM
In the following chart from the Association of Corporate Counsel's 2011 Chief Legal Officer Survey, respondents were asked what percentage of their attorneys came from the following regions.
Increasingly, respondents' full-time/part-time attorney staff are coming from other regions of the world besides the United States.
Source: Association of Corporate Counsel.
General counsels on the panel also discussed the need to keep the other members of senior management apprised of legal developments. “I'm a huge believer in metrics and transparency,” said Thomas.
Fisher gave the example that at SAP Canada, the legal department surveys business units and senior management on the performance of in-house counsel. Some of those questions include: What are we doing well? What are we doing not so well? Where can we improve? What are we doing too much of?
At Churchill Downs, every aspect of spending is tracked. Costs are reviewed monthly with all departments, so people are aware of the company's goals. “It's not just a cost goal,” Tse said. “I'm a firm believer in if you can't track it, you can't manage it.”
According to the survey, 62 percent of legal departments are funded from the company's general overhead budget. Other funding structures include charging back related legal costs to business units (15 percent), allocating a portion of legal costs to the overhead costs of each business unit (12 percent), and allocating the total cost of running the legal department as overhead to each business unit (9 percent.)
At the Mayo Clinic, costs are “allocated back to the overhead of the organization, but it's managed in a very transparent way,” said Jonathan Oviatt, chief legal officer of the not-for-profit medical center. For example, each business unit—legal, compliance, IT, human resources—knows what the other business unit is spending and on what. “We really work with each other to discuss what the priority areas are, and who among us really needs the money,” Oviatt said.
One bright spot in the ACC survey: More chief legal officers said they are planning to hire staff in the coming year, with 37 percent reporting plans to add to the staff. That's the highest percentage since 2006.
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