Legal departments expect busy 2022, with spending on law firms to match

REUTERS/Andrew Kelly

(Reuters) – Corporate in-house legal departments’ total spending has grown at a moderate pace since the start of the pandemic, according to a pair of recent surveys and interviews with experts tracking the sector, but high demand and rising rates could bring a spike in spending on outside law firms next year.

“Caseloads for corporate counsel are at a record high,” said Michael Rynowecer, president and founder of BTI Consulting Group.

The company, which conducted more than 240 telephone interviews with executive and senior-level in-house counsel earlier this year, found total legal department expenditures had increased by about 2% this year. For next year, BTI is projecting a 5% increase in total spending, with spending on outside counsel rising from $71.2 billion to $76.2 billion, or 7%.

That compares with a projected spending increase from $40 billion to $40.7 billion on internal legal department staff and operations, continuing a trend of outside counsel spending outpacing internal spending, BTI said.

“They’ve got this enormous backlog to work through, as well as a pretty significant increase in current workload and current matters…and the M&A activity is growing at record levels,” Rynowecer said. “So you add all that up, and you need law firms to be able to do that.”

However, even with rising demand, Lauren Chung, survey editor and managing director at HBR Consulting, said most law departments had done a “good job” managing costs, with average outside counsel spending flat in 2020. But especially as law firms increase their billing rates, she expects additional spending will be inevitable.

“Demand for legal services is increasing. It continues to rise,” Chung said. “Law departments will need to invest more or allocate more budget to servicing the legal need, whether it’s internally or with outside counsel.”

Nearly half of in-house leaders from 160 companies responding to an HBR Consulting law department survey conducted between April and October said they anticipate a “moderately increased” budget next year. HBR’s report, released this week, said 84% of respondents expected greater demand for legal services related to contracts, data privacy, cybersecurity, regulatory matters and M&A.

“Legal executives are anticipating further need for outside counsel next year due to regulatory uncertainty related to the pandemic,” said Ross Gardiner, vice president of legal and compliance practice at consulting company Gartner. He added that in-house departments are also experiencing more departures, contributing to the greater need for outside counsel.

However, Gardiner said that over time, he expects outside counsel spending will recede proportionally as in-house departments continue to invest in technologies and focus more on workload allocation and internal growth.

To keep up with increasing demand, Mark Yacano, a managing director with recruiting firm Major, Lindsey & Africa, noted that legal departments have been adding “significant” headcount in 2021, particularly senior staff.

“It doesn’t look like the market is cooling off,” Yacano said. “I think you’re going to see strong, strong legal department growth in the coming years.”

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