Major trends: Central governance, insourcing, law firm management, digitization

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Since 2005, KPMG Law has been observing the trends and developments of international legal departments in the top 150 German companies. The past fifteen years were marked by four major trends: increased central governance, dominant insourcing and law firm management (both mostly in order to reduce external spending), and digitization of support processes.
Nowadays, as the growth of the legal department is coming to an end, a high degree of standardization, strategic sourcing decisions and purposeful tech solutions is dominant.

The efficiency improvements of the past 15 years

Stronger central governance
Over the past few years, there has been a large increase in international legal departments leading global, decentralized departments under disciplinary control. Implementing this change in leadership, which impacts all areas including HR-related decisions, resulted in large financial benefits for the General Counsel. Besides better transparency and thus a better risk position, this setup allowed savings of 9 to 15% on the total costs per bn sales compared to those of same industry that practiced a weaker central governance. However, it should be emphasized that this organizational change should only reflect the relevant elements of an international cooperation within a global legal department, leaving the local units responsible for local legal advice, as before.

Strategic insourcing
In recent years, a very black-and-white view towards outsourcing could be observed, in which outsourcing (black) was seen as costly, and insourcing (white) as the cheaper and better solution to reduce total costs. The resulting insourcing strategies in turn led to a massive increase in inhouse counsels, reaching +92% in respect to the companies’ revenue. In 2019 a plateau was clearly reached, with C-Levels imposing a stop on expanding the department for the sake of cost savings. Reviewing both the organization and operations has become the key success factor, as opposed to further increasing the numbers.
The following graphic demonstrates the development of the average number of inhouse counsels since 2005 in relation to the companies’ revenues. The number of lawyers depends largely on the sector (automotive and classical industry clearly below the average, chemical industry and, incrementally, pharma more than double). Coincidingly, the support ratio decreased from 1.2 lawyers per support employee in 2005 to 4.5 in 2019. This support quota however, is fully unaffected by the respective industry. Conversely, it strongly varies according to the degree of specialization within the legal department. The more specialized, and (in most cases) the bigger the legal department is, the less need there is for support staff. In turn, the more general the operations in a legal department, the higher their support ratio will be.

Strategic law firm management
Since 2005, we have seen a large decrease in the number of external law firms retained. In 2019 more than 60% of the top 150 in Germany were reliant on 30 or fewer global partners, largely by introducing provider management. This ensures a system for improved selection and management of the engaged law firms, better quality and invoice control and an evaluation of the individual firm at the end of the task. All this has allowed for a continuous reduction of the total costs for the external services, of course excluding costs for areas like litigation or M&A deals.

As in other departments, technology has started playing an increasingly important role in the legal department as well. Up until a couple of years ago, in a first wave, IT tools were largely introduced within the legal departments, aiming at the improvement of support processes such as archiving, spend control or matter management. These tools allowed for better internal management but were not observable nor accessible by the internal client. Consequently, they did not create space for improved collaboration within the business. These days, the role of legal tech in companies is changing considerably.

The legal department of the future
Legal operations and the extended use of legal tech will stand at the forefront of the legal department’s transformation. Tech support in core legal work, performance measurement and standardization will dominate the future. Furthermore, as the market for (alternative) legal services strengthens, strategic sourcing will be business critical.

Standardization & strategic sourcing
When it comes to finding new ways of achieving efficiency gains and structural improvements, it will not be about constantly reinventing the wheel, but merely about standardizing internal processes for simple use by clients and lawyers in day-to-day work. This will apply to processes such as global contract management, as well as the substantive processing of documents, in order to reduce the cycle time from start to completion.
Whereas the above-mentioned black-and-white view played a dominant role in the past, today it has evolved into a wide spectrum of shades of gray. Many Alternative Legal Service providers, as well as the more classic law firms now offer managed services. Standardized processes can be outsourced at a lower cost than when done by the in-house teams. General Counsels have come to a point at which careful consideration is required on whether tasks are best undertaken internally, outsourced or transformed and supported by legal tech. It will increasingly come down to finding the right mix within the service portfolio, which can reduce costs while ensuring the constant flexibility of resources in ever-more volatile business cycles, not to mention the influence of Covid-19.

Purposeful legal tech & performance tracking
We have transitioned into the second maturity phase of digitization, focusing strongly on purposeful “legal tech“. While the past tools were arguably not “legal tech” in a specialized sense – today’s and tomorrow’s legal tech will support the internal client by enhancing the core legal work and having an increased functionality that will require less involvement of the legal department for repetitive and typically low-risk processes.
Also due to the extended use of tech, it will be possible to measure the performance level of the legal department in a simplified, automated and precise way. General Counsels will have to focus on their monitoring of efficiency and effectiveness but also on risk key performance indicators.

Where will this lead to?
In the future we will see a fully integrated service delivery model, optimally combining and assigning internal and external resources, as well as automated tech services on one legal platform. This platform, the legal “one-stop shop for legal services”, will embrace the current tech silos in legal departments. It will empower both lawyers and internal clients to create documents or to solve legal matters either by using chatbots or artificial intelligence or by being directed to the specialized lawyer for personalized legal counselling. A vision of the “one-stop shop for legal services”, is displayed below, introducing chatbots, legal monitoring, spend management, contract automation and many more.

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