A NEW REPORT has revealed Australian companies are spending more than a billion dollars a year on legal services, the figure inflated by the failure of 70 per cent of external law firms to come in on budget.
The report also found that 50 per cent of clients believe that their lead firm’s main competitors could do the same work equally well, while 70 per cent reported no significant barriers to changing firms. Most companies anticipated reviewing which law firms they engage within the next two years, and three-quarters expect the review to take place within the next 12 months.
These findings and others contained in the Legal Department Benchmarking Report look set to shake up the legal industry, indicating that firms could be in a precarious position if they fail to adapt to increasingly sophisticated client demands. The reportis the first of its kind in Australia, produced by the Australian Corporate Lawyers Association (ACLA) and the Corporate Lawyers Association of New Zealand (CLANZ).
Peter Turner, chief executive officer and general counsel of ACLA said the survey result was “disconcerting”, as only 30 per cent of the external law firms come in on budget. “We’re getting the message that the pot is not being managed very effectively on either side by the law firms or by in-house council and I think that means there’s an area of improvement there,” Turner said.
Catalyst Consulting’s founding partner Richard Stock, who assisted with the preparation of the report, believes that the management of costing needs “more scaled development”. In his presentation to ACLA members, he expressed incredulity at the results which indicate that 40 per cent of in-house counsel don’t ask for discounts when engaging external firms, 42 per cent don’t get price estimates and 45 per cent don’t use budgets on a regular basis.
According to Stock, the legal department’s relationship with external firms has reached a tipping point. “We are at a point in the evolution of the financial part of the relationship where purchasing could be done in a very different way, and not a lot of people [in the industry] have history and practice doing that,” he said.
If Stock’s analysis bears out, law firms will need to adopt the qualitative project management practices already utilised in other professional services sectors such as engineering, accounting, public services and architecture.
“I think it’s a situation that is going to change quite dramatically and some firms are going to get good at this very quickly”, he said.
The survey also revealed the weighty workloads fuelling the $1.1 billion legal spend by in-house legal departments. “The most pressing issue [in the report] was workload,” Stock said.
“The second most pressing issues are around the ability to get and keep good in-house talent and respond to that workload. It’s a supply-side problem and it’s not going to reduce,” he said. “I believe that it’s only going to get more intense in the years to come.”
The pressure is on for both law firms and legal departments to find more creative ways to get the work done, not only on time and on budget.
“I think what’s almost disappointing is the lack of evidence of measurement tools to better communicate, in non-financial terms, the value of what the [in-house] legal department does. It’s embryonic,” Stock said.
“Legal departments are being pressured to adapt corporate tools to express the value of the strategic advice they give, the risk management advice they give and the enablement of business advice that they give, and you can’t do that with loaded hourly rates or anything else,” Stock said.