The Thomson Reuters Institute has published the 2022 edition of the Legal Department Operations (LDO) Index report. The data in the report includes real-world legal spend analytics gathered from Thomson Reuters’ Legal Tracker and sourced from 1,500 corporate law departments. It is complemented by responses from 107 law departments to a Thomson Reuters survey conducted in August and September 2022.
The report suggests that areas such as outside spending, technology adoption, in-house legal operations, and environmental, social and governance (ESG) and diversity, equity and inclusion (DEI) initiatives were top of mind for many respondents.
Law department priorities
The priorities for many law department operations professionals have not altered much since the last version of the LDO Index was published, with the top five this year being:
- Controlling outside counsel costs.
- Using technology to simplify workflow and manual processes.
- Focus on internal data security.
- Focus on legal operations.
- Bringing more work in-house.
Cost control is a high priority for 85% of respondents, with a particular focus on external legal spend. This is unsurprising as external legal spend remains the largest single budget item for most law departments. Nevertheless, few are looking to reduce the number of outside firms, or to increase the use of alternative fee arrangements (AFAs) or alternative legal service providers (ALSPs).
Annual spending on outside legal counsel far exceeds spending on in-house legal technology, ALSPs or internal staff costs, which is consistent with previous editions of this report. Unsurprisingly, larger organisations typically spend a smaller proportion of their revenue on legal expenditure, as they benefit from economies of scale and stronger buying power.
The bulk of work for law departments continues to be handled by outside counsel:
- Roughly 80% of departments report that 25% of more of their work was handled by a law firm.
- 50% stated that about half or more of their legal work was handled externally.
- 22% stated that more than 75% of their legal work was handled externally.
Despite these trends, alternative pricing structures (such as AFAs or blended rates) remain relatively rare. Anecdotal evidence indicates that many in-house lawyers still rely on hourly fees because they feel that their outside firms have not provided them with acceptable alternatives to hourly billing.
Increasing workloads and staffing concerns
Most law departments report an increasing volume of legal matters in the last 12 months, with a larger amount of that work being handled in-house. Bringing work in-house is a high priority for 49% of respondents. Department leaders are also looking for ways to use technology to simplify workflows. 71% see using technology to simplify workflow as a high priority.
50% of respondents see internal headcount increasing, 39% expect it to remain the same, while 11% think it will decrease. However, increasing matter volumes and growing headcount have not necessarily meant increased budgets for many law departments.
Most law departments rate their spend management sophistication as “middle of the road” and continue to rely on general billing guidelines and discounts as their primary cost-control measures. Only 15% of respondents report having an optimised level of spend sophistication that employs tactics such as:
- Centralised management of rates.
- Utilisation of request for proposals (RFPs).
- Bidding processes.
- Using internal processes to drive down costs.
Law departments need to use metrics to determine the effectiveness of their cost control measures but many of the most common metrics only tend to look at data at a high level. The most common metric tracked is total spend by outside firm which, although important, provides little in the way of insight. Roughly 30% of respondents said that measuring forecasted spend versus actual spend was among their most important metrics.
Law departments continue to adopt legal technologies but concerns remain that these solutions are underutilised. Technologies that help law departments simplify their workflows show the highest rates of adoption. For example:
- Electronic billing.
- Electronic signatures.
- Online legal research.
Underutilised technology tools are often in key operational systems such as:
- Contract management.
- Knowledge management.
- Legal workflow automation.
There are several technology systems that respondents say they are looking to purchase within the next two years, including artificial intelligence for contract analysis and robotic process automation.
Most respondents report having some staff dedicated to legal operations functions, although this appears to be a limited number. In some cases, legal operations were handled by paralegals and perhaps one coordinator, but those were not truly dedicated roles.
One respondent stated that while they had been doing legal operations work for years, it was only added to their title in the past year, and the company is still hesitant to use the term “legal ops”.
Part of the reason that the numbers for legal operations look low is that it is a difficult function to define. Legal operations tasks are also unlikely to be confined to one particular role or job title. Relatively few law departments report an increase in hiring legal operations staff.
Environmental, social and governance (ESG)
Despite an increased focus on ESG this year, 53% of respondent companies currently have no DEI initiative in place. Of those companies that did have one, 33% of those initiatives had been in place for two years or less. Most of the initiatives lack granularity and most companies report that they are unsure how to use the data that they collect. 49% currently do not use diversity data in external counsel selection.