In-house legal departments spending more for outside counsel expertise

As consumers started paying more at the gas pump and the grocery store last year, businesses spent more for work done by their outside legal counsel.

The Corporate Legal Operations Consortium’s 2021 State of the Industry Survey found spending on outside law firms nearly doubled from the previous year. The median external legal expenditure reached $14.5 million in 2021, compared to $7.9 million in 2020.
Blake Garcia

In its analysis of the results, the report notes the increase is partly because of the shift in the mix of survey respondents.

Likewise, Blake Garcia, senior director of business intelligence at the Association of Corporate Counsel, cautioned against linking the rise in external legal spending to law firms hiking their rates.

The ACC worked with the consortium on the survey, Garcia said, and the data indicated the increase in external spending was fueled by the increase in the amount legal work.

“COVID caused numerous legal challenges for organizations, regulatory changes and financial issues, leading to an increase in mergers and acquisitions, major labor and employment changes and supply chain disruptions, to name a few,” Garcia told Indiana Lawyer in an email. “Most legal departments were not equipped to handle this scale and variety of issues they suddenly faced and often had to turn to outside counsel.”

However, the Indianapolis tech company Terminus cited rate hikes as leading to its decision to build an in-house legal department.

Kasey Johnson, chief administrative officer and general counsel for Terminus, said law firms are charging more for their hourly rate services while in-house legal budgets are remaining stagnant or only moderately growing. Moreover, the demand for legal services and the increase in external legal spending is expected to continue in 2022.

“With budgets relatively remaining the same and demand increasing, something has to give,” Johnson wrote in an email. “Over the last year, Terminus has on-boarded an internal legal team to buck this trend, enabling us to create deeper business continuity between the organization and its legal needs. We’ve materially cut costs on outside counsel and shifted that back to our national team.”

Garcia acknowledged some of the increase in cost could be caused by inflation, but he emphasized that it is too soon to tell what impact the current economic upheaval is having on legal spending. Yet, he said, businesses are still demanding their in-house attorneys control costs, which puts pressure on outside counsel to keep prices manageable.

“We continue to see the use of alternative fee arrangements,” Garcia said, “and pressure to make sure the right level of work is being performed by the right level of outside lawyer.”

Controlling expenses

Bob Kobek, president of Mobius Vendor Partners in Indianapolis, remembered being on a call with a Fortune 500 company that had 14 attorneys present. As the parties discussed compliance issues regarding data at rest and in motion, one of the lawyers piped up and asked Kobek where his attorney was.

“What is my attorney going to do that the 14 of you aren’t?” Kobek responded. “I’ve got 14 attorneys on the phone and … if you’re going to do something that’s going to hurt me, I’m not going to take the business.”

Before he signed the agreement, the Hoosier did have his company’s outside counsel do a final review, but allowing the other side to provide the legal firepower is one way Kobek’s business controls its legal spending. Mobius does not have an in-house legal department and relies primarily on one outside firm.

Thus far, the law firm has not raised its rates for Mobius, Kobek said, although he would not be surprised if a hike is coming. A price increase will not cause him to shop for new counsel, he said, unless the attorneys push the limit.

“If our lawyers raise their rates, I don’t believe that would cause us to look for another lawyer,” Kobek said. “The rates (might be) going up … but that doesn’t mean I need a new lawyer. If they get stupid about it, if it looks like they’re getting greedy, adios.”

Joshua Stevens, a partner at the Ohio boutique firm of Mac Murray & Shuster, said when the pandemic hit in March 2020, “a number of especially larger corporate clients” asked for fee reductions. The Ohio firm focuses on regulatory work, primarily in the privacy arena, and, Stevens said, views itself as “an extension of in-house legal departments” for a variety of companies including Mobius.

As the economy has recovered, the pressure on pricing has eased, Stevens said. But the firm has raised its rates and continues to be cognizant that it could lose talent if inflation takes too big of a bite out of the purchasing power of the attorney and staff salaries.

To help clients control spending, Mac Murray & Shuster has allowed a number of clients to pay a flat fee for monthly retainers and offered to do certain projects for a flat fee. Also, when clients have a high volume of work, the firm has
negotiated a discount off its normal hourly rate.

“We will entertain and discuss pretty much any idea that the client has about a fee structure,” Stevens said. “That’s one of the nice things about being a relatively small firm is we’re nimble so we can say, ‘OK, you’ve got an interesting idea here, let’s talk about it and see if we can make that work.’ Sometimes we can, sometimes we can’t. But that is something that I think you get with a smaller firm that you often don’t get with a larger firm.”

Regulatory costs

Driving much of the legal costs at Mobius are compliance issues with its CustomerCount business. CustomerCount designs and develops feedback surveys, which Mobius’ clients can use to measure customer experience.

The surveys fall under numerous federal, state and even European privacy laws and consumer protection regulations, so Mobius routinely checks with its legal counsel to see if any tweaks to the software are needed. Running afoul of the law could require the company to pull multiple records to show when the violation happened as well as why and how it happened.

“Just the initial step to prove that you shouldn’t be fined is a very expensive proposition. I would have my lawyer sitting in my office for that,” Kobek said. “When you get fined, particularly in a compliance issue like (the Telephone Consumer Protection Act) and some privacy laws, you’re fined per incident, so it goes all the way back to the beginning of time.”

The 2022 State of Corporate Law Departments report by the Thomson Reuters Institute found 43% of in-house legal departments around the world are expecting their spending to increase over the next 12 months. Regulatory work was cited by 41% of the respondents across all industries as fueling the expected rise in corporate legal costs.

Kobek keeps on the right side of regulators by being attentive to how he engages his attorneys, he said. He does not seek business advice from the lawyers, but instead tells them his plans and then asks if they are legal.

“I want to be well within the law,” Kobek said. “I have a pretty good relationship with the consumer protection people at the (Federal Communications Commission) and I really don’t want anything to mess that up.”•