Will merger activity see law departments converge work into fewer vendors?
New research suggests that “convergence by merger” may see reductions in the number of supplier relationships.
Wolters Kluwer’s ELM Solutions recently published its inaugural LegalVIEW Insights report, which focuses on law firm vendor usage by corporate legal departments (CLDs). The past year, the provider wrote, has been “the biggest shake-up in the outside legal services market since the 2008 financial crisis”, with many supplier relationships being put on hold.
Last week, Lawyers Weekly reported that the research had found that approximately 16 per cent of supplier relationships that existed in 2019 were put on hold for the entirety of 2020, and that 90 per cent of CLDs reduced their total number of active provider relationships “at least somewhat”.
Such reduction was “particularly striking”, Wolters Kluwer mused, given that the median number of active supplier relationships grew by 5 per cent in 2019, prior to the onset of COVID-19.
Most CLDs consolidated 80 per cent of their work into 20 per cent, or fewer, of their vendors, which Wolters Kluwer described as a recognised best practice that reduces administrative overhead and creates opportunities for volume discounts.
Converging work into fewer vendors
The provider mused that part of the reason why 80 per cent of work goes to approximately 20 per cent of law firms in the average CLD is that those departments have “deliberately consolidated” such work, so as to reduce the number of relationships to administer and to get volume discounts.
However, Wolters Kluwer continued, another reason is what it called “convergence by merger”, whereby smaller providers that CLDs used to work with have been absorbed into larger law firms, thereby reducing the overall number of provider relationships.
“Larger law firms tend to charge more per hour, and as they continue to merge, they may be able to charge higher and higher rates, both due not only to increased size and prestige but also from reduced competition,” the provider posited.
“These are cases where attorneys working for smaller firms are unable to negotiate rates above a certain threshold until those smaller firms are absorbed into larger, more prestigious firms with a better brand, better rate negotiation team, and better bargaining position. Suddenly rates go up, often with no meaningful increase in value.”
While the research pertains to American-based law firms, they do offer food for thought for Australian practices, especially if – as previously reported by Lawyers Weekly – law departments are looking into subsuming work into the business, hiring more lawyers in 2021, and/or considering sending increased volumes of work offshore.