60% of organizations allocate legal spend inefficiently

Acritas’ latest research report reveals the zone of maximum efficiency for GCs looking to balance internal and external legal spend.  It turns out that there is a fairly narrow range to reach that maximum efficiency – yet the majority of companies surveyed allocate their budget in a way which means they lie outside this optimal range.

Acritas runs the annual Sharplegal study, conducting over 2,000 interviews with senior in-house counsel in large organizations across the world each year. Respondents are asked a range of questions relating to their goals, challenges, buying behaviors, perceptions and experiences with external providers.

According to Acritas’ report, organizations should allocate at least 40% of their legal spend budget internally. However, spending more than 70% externally may start to reduce efficiency. Presently 60% of organizations globally report internal allocations of budget outside of this range, the majority allocating less than 40% internally.

Lisa Hart Shepherd, CEO of Acritas confirmed: “Having the breadth of data we generate through Sharplegal has allowed us to compare and contrast the most efficient approaches, in terms of their impact on the overall cost metric – which is legal spend as a proportion of revenue.”

Caution is needed though on broad generalizations: the pattern differs by country and industry sector. Although in many cases there is an upper level beyond which inefficiencies are observed, in higher spending countries it also appears keeping too much budget in house drives inefficiency. The optimal range identified in the US is 40-70%.

Lisa said: “Globally, the average proportion of revenue allocated internally is 44%. However, it’s rarely useful for organizations to benchmark themselves against global or even country averages as they are unlikely to be in line: Russian companies, for example, have far lower external spend and much bigger in house teams. So it’s important to find a relevant peer group benchmark.

“We have seen the internal spend grow in recent years and it’s increased by 11% since we first measured it in 2012.”

Lisa added: “There is much to be learned from big data in law. We are only beginning to scratch the surface but are driven to helping organizations find the most appropriate benchmarks.

The report also analyzes typical numbers of in-house lawyers. On average, organizations reported 0.4 lawyers per $100m of revenue. This was highly variable by company size with the smallest (revenue $50 - 500m) having 0.9 lawyers per $100m of revenue and the largest companies ($6bn+) having 0.2 lawyers per $100m of revenue.

Lisa confirmed: “It is rarely useful to benchmark your organization against global or even country averages. You are unlikely to be in line. It is important to find a relevant peer group benchmark.”

To help companies find a more appropriate benchmark, Acritas provides an Analytics platform, where legal department heads can compare their legal spend, team size and the proportion of budget allocated internally against peers in the same industry, region and size.

Acritas’ next Patterns in Legal Spend report, will look at remuneration levels for senior, largely Chief, legal roles within in-house departments. It also includes benchmarks to equity partner remuneration in law firms.” 

 

For more information about Acritas and its Analytics platform for legal departments, or to purchase a copy of the report please contact: Jo Aitken on +44 (0) 808 178 3020 or email jaitken@acritas.com

Along with key benchmark metrics, free access to the latest Patterns in Legal Spend report is also available to eligible senior in-house counsel on Acritas Analytics. To check your eligibility and schedule your Sharplegal interview to gain access to Analytics please contact us.

 

 

Methodology

Acritas’ Patterns in Legal Spend Report - Part 2 is compiled from analysis of an extract of data from the Sharplegal Global Elite survey 2016 dataset. All data is derived from over 2,000 interviews with respondents, in $50 million+ revenue organizations across the world, who have senior responsibility for buying legal services.

As part of the Sharplegal survey, respondents are asked to provide their legal department’s: external legal spend; internal legal spend; team size (number of lawyers); revenue; location; and industry sector.

For this report, the second in a series of three, we have looked at the number of lawyers employed internally and how this differs by industry, country and size of business. We have also looked at the proportion of total spend that is allocated internally and how this differs across different industries, countries and sizes of business. Finally, we have looked at the impact of different proportions on the efficiency of total spend as a proportion of revenue.

All interviews were conducted by telephone in local languages across 55 countries throughout 2016.  

All interviewing was undertaken by Acritas in strict accordance with the rules governing best practice in research. As such, no law firm or other third party had any involvement in selecting sample, analyzing or influencing responses or the Index rankings.

The geographic spread of the interviews is determined by three factors: the number of Forbes 2000 companies headquartered, GDP and the average legal spend in each market around the world. 

Incorporating over 50 questions, the full Sharplegal survey is an independent and robust market research study of the current legal market that generates data and insight on law firm brands, usage, market trends, spend, international needs and much more, available by subscription only with elements available for respondents who participate via our Analytics platform.

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