The median number of outside law firms and legal service providers used by large corporate legal departments dropped by 16% in 2020 and another 8.6% in 2021, according to Wolters Kluwer’s LegalVIEW Insights team.
But the biggest of those companies, which Wolters Kluwer defines as those with greater than $20 billion in revenue, defied that trend.
Some ultralarge companies actually increased outside vendor count, while others experienced a lesser reduction in total legal vendors, according to Volume 5 of the LegalVIEW Insights report. Overall, these companies saw their average vendor count rise from 433 in 2019 to 451 in 2021.
Nathan Cemenska, director of legal operations and industry insights at Wolters Kluwer’s ELM Solutions, told Legal Dive that several factors likely drove the findings about the largest companies.
First, companies in this revenue bracket typically have vast global enterprises, which result in a wide array of legal service needs.
“Instead of having to obey the laws and regulations and be sued only in one country, [the company] has to do those things in 20, 30, 50 or 200 countries,” Cemenska said.
This creates complex legal needs, he said, because “if you are doing business in 200 countries, that is not 200 times harder, that’s 500 times harder.”
Regulatory demands
Cemenska also said that larger companies typically draw more regulatory scrutiny than smaller ones, which increases the need for legal assistance.
He cited the example of General Data Protection Regulation (GDPR) enforcement in the European Union as one example.
“You're painting a target on your back to some extent by getting so big,” he said.
Cemenska said some of the increase in legal vendors at the ultralarge companies may also be a result of mergers and acquisitions amid a record-setting more than $5 trillion in M&A activity last year.
The combined companies would have more legal vendors initially, though he said the companies would likely consolidate the number of outside law firms and legal service providers they use down the line.
A mix of other factors could also spark larger companies to reduce their roster of external legal vendors, according to the LegalVIEW Insights team, which draws information from a database of more than $150 billion in legal invoices.
“When corporations are very, very big and they experience a sudden spike in demand for legal work, bandwidth issues in both inside and outside legal teams may force them into a lot of relationships with vendors they might not retain in an ordinary year,” the Wolters Kluwer Volume 5 report said. “To the extent those bandwidth issues recede, however, the largest corporations may join their less big (but still very huge) peers in continuing to consolidate vendor count.”
Rising legal spend
Even as many corporate legal departments on average reduced the number of outside vendors they utilized last year, overall legal spend saw a large spike.
Wolters Kluwer’s LegalVIEW Insights reported that the mean external legal spend by large corporate legal departments rose from $73 million in 2020 to $99 million in 2021, a 36% increase, while median spend rose 21%.
This spike followed a six-year period (2015-2020) in which legal spending among the largest purchasers remained flat or near flat.
The report attributed the average rise in legal spend last year in part to a small percentage of companies experiencing “extreme increases.”
“The reality is, total spend in some of these outlier legal departments exceeded the total spend of ten ordinary legal departments combined,” the report said. “In other words, these outliers can be viewed as “market makers” that are so big that they can set the tone for the entire legal market.”
ALSPs
Of the legal spend, alternative legal service providers (ALSPs) represent a very small but consistent portion.
LegalVIEW Insights reported that ALSPs not counting the Big Four accountancies represented 1.7% of outside legal spend in 2021, within the 1.5% to 2.5% range seen in the last six years.
The report said the competing narratives that ALSPs are the way of the future or that they are overhyped could both be true to some extent, as statistics indicate “ALSPs have penetrated most large [corporate legal departments] and continue to grow those relationships yet represent a very small dollar portion of the overall legal market.”
Cemenska made a similar point about the ALSP figures from 2021.
“Keep in mind, this is an environment where the mean growth in legal spend was 36%, so in order to hold steady they had to grow their business by 36%,” he said. “So I would not misconstrue what's in the report to be dismissive of ALSPs.”
Rate increases
The Wolters Kluwer report noted that one challenge for ALSPs in seeking to gain ground in the percentage of legal spend they comprise is that large law firms start from higher base rates and are able to negotiate rate increases upward of 10%.
Along those lines, Cemenska said he has heard from legal department clients that the most typical rate increase they are getting from law firms of late is 15%.
He said these requests, which have come during an uncertain economic environment, have created some “sticker shock” for legal leaders.
They also have prompted some legal departments to consider greater utilization of law firms lower down in the Am Law rankings or unranked firms.
“So there's some interest in going down market, but I'm not sure that there's going to be enough capacity down there if everybody tried to do that at once,” Cemenska said.
“Also, I think that there's issues with even how to go about it,” he continued. “A lot of the buyers that we are talking about aren’t familiar with options outside of what has been their experience. And it would take a sustained institutional effort to identify and vet and retain a whole different slate of law firms that was down market.”
