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Even with expanding budgets, in-house legal departments face pressure from all directions: soaring talent expenses, escalating law firm costs, unplanned AI expenditures, and a continuously growing workload.
Leading alternative legal services provider Axiom has recently conducted a survey of 510 in-house legal leaders and chief financial officers (CFOs) from companies with an annual revenue of more than $250 million.
The report follows previous research from Axiom Global, suggesting that demand for outside AI guidance is strong, with legal teams seemingly choosing alternative legal service providers (ALSPs) for tool selection, implementation, and AI-enabled work.
Across the past year, more than 60 per cent of in-house teams increased their use of ALSPs, with the most significant gains occurring in data privacy and cyber security, with 71 per cent reporting ALSP usage, followed by 65 per cent in categories across M&A diligence and integration, intellectual property, and litigation support.
The report uncovered that while no in-house team permits unguided ALSP deployment, engagement remains largely driven through recommendations rather than strict mandates.
Informal guidelines are the singular most common approach, with 40 per cent of teams noting this as a reason to encourage ALSP use.
However, 60 per cent back ALSP usage with justification requirements, written policy, or incentives.
With expanding team sizes, legal budgets generally fall into three distinct tiers based on headcount.
Small departments of 15 or fewer practitioners average about $9.5 million annually, while mid-sized teams of 16 to 50 hover near $23 million.
Meanwhile, larger departments with at least 51 members average roughly $33 million to $34 million.
Notably, the middle category exhibits the most consistency, with teams ranging from 16 to 50 lawyers reporting virtually identical average spend despite significant variation in staff numbers across the group.
Over 80 per cent of internal legal departments cite rising total compensation expenses compared to the previous year.
While the majority experienced low single-digit percentage gains and a minor segment observed mid-single-digit hikes, virtually no teams saw overall practitioner remuneration decline.
Over 50 per cent of internal legal departments reported that talent retention became less challenging throughout the prior year, with an even greater proportion observing similar improvements in recruitment efforts.
This trend persists despite rising overall compensation expenditures, though the report highlights the shift rather than pinpointing underlying drivers.
Speaking on the findings from the report, Axiom’s chief legal AI and talent officer, Sara Morgan, noted that legal departments are constantly reallocating resources towards flexible talent and specialised ALSP solutions to cater for increasing law firm rates effectively.
“Despite larger budgets, in-house legal departments are being squeezed from every angle – by rising talent costs, ballooning law firm fees, and an AI bill nobody budgeted for – and a workload that’s outrunning all of it,” Morgan said.
“Eighty-three per cent of in-house legal leaders and CFOs expect their legal budget to increase in 2027, and not one respondent anticipates a significant cut.
“The problem is what’s happening to that budget before it’s even signed off on.
“Nearly 60 per cent of legal leaders say their firms have raised fees with AI marketed as a value-add; few saw any reductions passed their way.”
Regarding technology usage, in-house legal teams reported that artificial intelligence is already reshaping legal operations, with its influence extending across various functions rather than remaining limited to isolated tasks.
Over 77 per cent of respondents anticipate that the impacts of AI will be felt within in-house legal departments throughout the coming year, both in terms of cost and efficiency.
