General counsel expect smaller budget increases in 2014 than they did coming into 2013—and it appears that last year’s rush to add new in-house counsel is coming to an end. Early responses to our latest legal budget benchmarking survey suggest that departments plan to spend instead on existing staff and on technology. They may want to reconsider their priorities.
Making the Best of Small Budget Increases
The median budget for in-house work in all departments will grow just 3% for 2014, according to survey responses so far, compared with the 5% growth experienced between 2012 and 2013—that’s a 40% slowdown.
Last year’s larger budget increases paid for more lawyers (a median of 2.8%). Respondents also forecast that non-lawyer headcounts will stay flat in 2014, as they did for 2013.
That leaves two places to spend: pay raises or technology investments.
Are these the best allocations for small budget bumps?
You may want to consider adding non-lawyers (paralegals, contract managers, project managers, legal operations staff) if you have the opportunity. Our research suggests higher paralegal to lawyer ratios are a cost-effective solution for growing volumes of legal work. Given 2013’s lawyer additions, the ratio may be heading in the wrong direction for many legal departments.
Conversely, you should pressure-test new technology investments against potential alternatives because we’re hearing mixed reviews.
Budget growth for outside legal expenses, although inherently less predictable, will also slow to 2% on average compared with 3% in 2013, survey respondents say. With rates increasing almost 5% a year (much more among the largest firms), general counsel will have to bring more work in-house or revisit law firm relationships to stay in budget. Another option: turning to vendors that are not law firms (and not as pricey) for standardized work – see how one company started using one to streamline the contract management process.
Next year’s budget experience will vary by industry. The distribution, transportation, and hospitality sector, for example, expects just 3.5% growth in 2014 budgets after a 9% increase in 2013. Insurance company departments, on the other hand, say their in-house budgets will be growing 3% after staying flat since 2012—they are increasing lawyer headcount by 8% (which had also stayed static since 2012). And the natural resources, construction, and engineering field will see dramatic drops in in-house budget growth (2% in 2014 from 7% in 2013) outside budget growth (1.5% in from 10.5%), and number of lawyers (unchanged in 2014 after a 10.6% increase in 2013).
Department size also matters. Staff expansion will continue at a modest pace for teams with more than 50 lawyers, while it will tail off in 2014 for those with fewer than 5 lawyers.
Small Departments – Sharp Dropoff in Internal Budget and Headcount Growth, Higher Outside Budget
In-house budget growth will slow considerably for smaller departments. The median 2014 budget will grow 4%, compared with 10% in 2013 (a 60% drop). But, unlike at their larger counterparts, outside budget growth will hold steady—5% in 2014, equal to the 5% jump between 2012 and 2013.
The median team size expansion will be 0% in 2014 (you read that right), after 20% in 2013 (you read that right, too).
Large Departments – Modest Inside and Outside Budget Growth with Selected Headcount Additions
Median budgets will be up 3% in 2014, just half of the 6% in 2013. For outside legal budgets, growth rate will decline by half, 2% in the coming year compared with 4% in 2013.
Lawyers on these larger teams are more likely to greet more new colleagues soon; the number of attorneys will increase by 1.9% for 2014, the same as the previous year.
You can still take our 2013 Legal Budget Diagnostic. You will receive a customized report with analyses of legal spend and staffing metrics and tailored recommendations to get more from your budget.
Discover how you can best control your outside legal expenses by participating in our Outside Counsel Spending and Staffing Diagnostic.
Finally, to learn more about how the best legal teams do their job with fewer resources (and cutting down on the amount of redundant or irrelevant legal work) attend one of our meetings, A New Framework for Legal Productivity.