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    THOMSON REUTERS LEGAL DEPARTMENT IN-SOURCING AND EFFICIENCY REPORT


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    Thomson Reuters conducted a survey of 303 attorneys working in legal departments to identify their best practices in achieving greater efficiency and productivity across their in-house teams. To no one’s surprise, stretching too few resources and managing outside legal costs are persistently top of mind for these legal professionals. Accordingly, this survey report investigates TABLE OF CONTENTS how departments are looking to improve Executive Summary......................................……………………..3 efficiency and productivity through increased Biggest Challenges…………….....................................…………4 legal department headcount; deploying Department Staffing Trends…….......................................……6 on-boarding techniques; evaluating new On-boarding and Technology……..............................………….9 technologies; “in-sourcing”, or handling Division of Labor:...............................................……...................….11 more work in-house, including specific tasks Contract Drafting and Negotiation............................................….12 related to contracts, intellectual property, Intellectual Property………………….........................................……….13 Mergers and Acquisitions………………….................................……….14 mergers and acquisitions, and litigation; and Litigation and Dispute Management……………………...............…….15 challenging the traditional in-house/outside The Costs of Outside Counsel…….....................………………….16 counsel relationship. Conclusion…........................………………...............……….20 2


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    EXECUTIVE SUMMARY Legal departments face an array of legal issues, from staying apprised of statutory and regulatory changes, to managing litigation and disputes, to negotiating and drafting contracts, to protecting intellectual property and other company assets. While a legal department’s primary duties and turning to new ways to achieve efficiency gains responsibilities have not changed in recent in legal departments that extend beyond years, the strategies to address them have. the outside counsel relationship. Namely, Following the 2008 financial crisis, company more departments are benefiting from “in- executives and general counsel scrutinized sourcing,” and growing headcount and the cost and management of legal work and investment in internal resources. This focus mandated that departments reassess the on internal teams has allowed companies resources used in performing their traditional to retain greater volumes of legal work with legal duties. Immediately following the crisis, highly effective internal teams. Accordingly, legal departments focused almost exclusively before incurring the costs of turning to outside on their relationships with outside counsel, counsel, legal departments are benefiting identifying means to better control external from redeploying matters and tasks to their spend, such as requesting discounts or in-house teams. employing alternative fee arrangements. This single focus response has evolved over the years and has been supplemented by additional methods to drive change. This report highlights how departments are EXECUTIVE SUMMARY 3


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    BIGGEST CHALLENGES Legal departments of the past were once perceived as mere “middlemen,” relegated to finding and paying law firms to handle the lion’s share of a company’s legal work. Times have changed as legal departments are many departments continue to explore faced with budgetary challenges; the days of alternatives to maximize their limited budget “carte blanche” with outside counsel are over. and gain a greater return on their total legal As an attorney for a legal department in the spend, whether through better management construction industry commented, “There is a of outside counsel, increasing internal constant challenge of demonstrating value of headcount, exploring legal managed services the legal department and being forced to do or investing in technology. more work with fewer resources.” Accordingly, BIGGEST CHALLENGES 4


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    Legal departments have broadened the tools and measures to address these challenges. Rather than just focusing on their relationships with outside counsel, they are evaluating and implementing additional practices, such as increasing full-time attorney hires to their department, hiring temporary contract lawyers, employing legal managed services and implementing new technologies, to name a few. Managing the relationship with outside “Our main challenge is counsel continues to be a major challenge for legal departments. Through greater getting work done with reliance on in-house resources, technology our limited personnel implementation and use of third-party legal service providers, much of the work once done and resources,” by law firms has moved in-house or to more cost-effective alternatives. SAID A GENERAL COUNSEL IN THE The cost constraints legal departments face AGRICULTURAL INDUSTRY. have forced them to address their relationship “All other challenges with outside counsel in recent years, and it continues to be a main point of emphasis. pale in comparison.” Legal departments continue to rely on firms for their domain expertise, but many are exploring the use of alternative staffing, various technology solutions or legal managed services to perform commodity work, allowing firms and senior in-house resources to focus on the bespoke work. BIGGEST CHALLENGES 5


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    DEPARTMENT STAFFING TRENDS In order to address legal department challenges, general counsel look to their internal staff as a means to achieve greater efficiency. Notwithstanding the prevalence of limited benefits of an in-house team that is familiar resources, NEARLY ONE-THIRD of legal and better aligned with internal clients. departments (30 percent) anticipate adding This strengthened bond between in-house staff in the next year, predicting that their lawyer and client yields better access and hires will be a mix of lawyers from firms, communication; greater knowledge of seasoned in-house lawyers and paralegals. industry and the business; and improved These growing departments are redirecting fluency around business processes. Legal resources once earmarked for outside counsel departments that grow in this way improve to internal staffing. The increase in headcount their relationships with internal clients by is meant to address one of the challenges continuing to provide responsive, pragmatic articulated: “communication with internal and high-quality advice and work product. clients.” Departments are discovering the DEPARTMENT STAFFING TRENDS 6


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    This anticipated growth builds on the hiring undertaken in the recent past. In 2014 alone, 60% of legal departments hired new staff. The majority of new hires filled newly created full-time in-house lawyer and paralegal positions. Legal departments are looking at the right mix of lawyer-to-staff ratios as they hire. For instance, one corporate counsel from a medical device company stated that an increase “in support staff allows attorneys to do more high-level, less administrative work … so less has to be farmed out to law firms.” Additionally, to further address workloads, contract lawyers and support staff were hired. A chief legal officer of a technology company shared how the department’s growth is aligned with their growing sales activity. “We plan to add staff to support growth in the company’s sales activity. The additional staff will enable the department to be more responsive and to provide work product to internal and external clients more rapidly.” Not all departments enjoyed this growth in headcount. A small handful of departments (13 percent) saw cuts made to their staff, the majority of which impacted lawyers and support staff. DEPARTMENT STAFFING TRENDS 7


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    Looking to the future, this trend to grow legal departments’ internal resources will continue. Because of the efficiencies and improvements continued enforcement actions by regulators, yielded from this practice, many legal in-house attorneys are best suited to help their departments expressed their intent to create organization navigate compliance matters. more positions in the coming years. Thirty- These new hires, particularly in specialty three percent of respondents have areas, allow a legal department to “gain the created new positions in the last year, expertise in-house at a fraction of the cost with the majority of those to address contracts related to outside counsel,” shared a corporate and compliance. counsel in the insurance industry. Businesses benefit from an in-house attorney’s knowledge of the industry and strategic business goals as it relates to a company’s contracts. Additionally, with DEPARTMENT STAFFING TRENDS 8


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    ON-BOARDING AND TECHNOLOGY The discussion to grow internal headcount is only the first step to improving the speed and efficiency of delivering legal services to a company. Effectively on-boarding new members One assistant general counsel from a of the legal department is critical. The healthcare company shared their department’s legal department must educate new team aim is to “develop a more robust internal members on broad industry trends and the playbook and clause bank.” These types of company’s products, business model and risk materials developed by the legal department tolerances. Additionally, new attorneys must not only help on-board new hires but also build relationships of trust with new internal create efficiencies for the existing legal team clients. More departments are proactively and within the greater organization. For creating and procuring resources to facilitate instance, one legal department shared that use this knowledge accrual for these new hires. of these playbooks extends beyond the legal Legal departments not only rely on traditional department, describing the benefit of creating resources like CLE classes and articles but also a “written knowledge base and handbooks are creating company- and industry-specific for sales and marketing [departments] so checklists, playbooks, forms and other “know- repeatable questions can be answered using how” resources to inform and guide these those materials,” rather than consuming the new hires. limited time of in-house attorneys. ON-BOARDING AND TECHNOLOGY 9


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    While legal departments look to deliver legal used by one-quarter of the respondents, advice to their internal clients more effectively, streamlined a time-consuming manual, many turn to technology as an additional paper-based process. Utilization of knowledge opportunity to improve their efficiency and management technology reduces time spent workflow, extend capacity, and minimize or searching for buried organization knowledge, decrease administrative costs. Paper-intensive forms and templates. processes are improved by technology; This technological revolution is not entirely document management tools have been used universal; 24 percent of departments by the most departments: nearly half, at 49 responded they are not leveraging any percent. Matter management and legal hold additional technology systems to increase technologies have been leveraged by one- efficiency. In addition to having accesss to third of legal departments in the last year. technology solutions, the ability to train and Additional technology systems are being used understand the available functionality is key to to improve operations. For instance, eBilling, driving efficiency. ONE CORPORATE COUNSEL SHARED THEIR DEPARTMENT’S EFFORTS TO BRING MORE “work in-house through the use of more templates and contracting software” ON-BOARDING AND TECHNOLOGY 10


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    DIVISION OF LABOR: GREATER RELIANCE ON IN-HOUSE RESOURCES The evolving relationship between in-house and outside counsel is clearly illustrated in the changing division of responsibilities related to contracting, intellectual property, M&A and litigation matters. This analysis uncovers which activities and tasks are undertaken primarily by in-house counsel, and what additional drivers and considerations motivate legal departments to seek help outside of their immediate legal department. DIVISION OF LABOR: IN-SOURCING 11


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    CONTRACT DRAFTING AND NEGOTIATION Many legal departments responded that and overwhelmingly by in-house resources, contract drafting and negotiation is a “core including document drafting, review and competency” of the in-house legal staff, approval (81 percent); negotiations with noting that they have sufficient staff able to counterparties (79 percent); and discussion handle contracting needs. Other respondents of transaction details, including negotiation recognized that in-house attorneys have a status, with internal business clients (76 superior grasp of the business and industry, percent). making them a more effective contracting Twenty-nine percent of companies that do resource. This pragmatic approach is less contract drafting stated they don’t use outside pronounced in their outside counsel. counsel at all for this type of legal work. On One general counsel in the oil and gas the other end of the spectrum, 6 percent of industry made an observation shared by many departments claim to have a regular operating in the in-house practice, notably preferring to procedure wherein all contracting goes to keep work in-house “because in-house lawyers outside counsel. As it pertains to contracts, have more experience in our business.” three reasons dominated in-house counsel’s Two-thirds (66 percent) of legal departments use of outside counsel: complexity of contract/ stated that they “never” or “rarely” use drafting issues (45 percent); overflow caused outside counsel for the negotiation and by high volume of contracts (42 percent); and drafting of company contracts. Accordingly, significant risk associated with the contract multiple tasks related to the company’s (38 percent). contracting needs are handled primarily DIVISION OF LABOR: CONTRACT DRAFTING AND NEGOTIATION 12


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    INTELLECTUAL PROPERTY According to the survey, two out of five infringement.” More than three-quarters (41 percent) departments do not handle (78 percent) of respondents anticipate no intellectual property work. But for those who change this year in use of outside counsel for do, corporate counsel concentrate on advice intellectual property matters. However, the and counsel-related activities: namely, half top reasons a legal department would turn (50 percent) of the respondents stated they to outside counsel for help in connection with advise company executives and employees an intellectual property matter included the on day-to-day issues related to intellectual complexity of the intellectual property issues property, with slightly less than half (42 (59 percent) and the involvement of multiple percent) naming “train company personnel” or international jurisdictions (47 percent). as part of their responsibilities. Said one assistant general counsel, “We have very little of this kind of work. Usually another party is making a claim of trademark infringement, and we are giving advice as to how to proceed. We provide some education regarding how to avoid trademark and/or copyright DIVISION OF LABOR: INTELLECTUAL PROPERTY 13


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    MERGERS AND ACQUISITIONS Legal departments handled a wide range However, the top reason to turn to outside of tasks related to a company’s M&A counsel was attributed to the significance of transactions. When assessing the company’s the transaction (76 percent) and complexity transactional work, a legal department in the (68 percent). Perhaps as an indicator of healthcare industry shared, “We have internal the health of the market and the growing experts that can handle [this] work, and it number of M&A transactions, 44 percent of is more cost-effective to handle in-house.” legal departments stated that they turn to Due to the corporate counsel’s proximity and outside counsel because of the large volume deep understanding of the business, it’s no of deals causing overflow. Many departments surprise that the top tasks handled in-house noted an increase in M&A activity overall, included conducting internal due diligence (45 including growth in international transactions percent), negotiating deal terms (40 percent), and increased complexity of deals. Finally, and discussing strategy and goals with the 88 percent of departments anticipate their team (40 percent). For M&A transactions, reliance on outside counsel for M&A matters when does it make sense to turn to outside to stay the same or increase. counsel? Fifteen percent of legal departments noted that they turned to outside counsel because they lacked the requisite expertise to handle these types of transactions. DIVISION OF LABOR: MERGERS AND ACQUISITIONS 14


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    LITIGATION AND DISPUTE MANAGEMENT The pressure to better control external More than two-thirds of legal departments budgets has encouraged departments to (68 percent) responded that they “usually” handle portions of litigated work using in- or “always/almost always” turn to outside house resources. One assistant general counsel for litigation and disputes. In-house counsel stated, “Our budget is flat for attorneys are dependent on outside counsel next year, and as part of a large corporate for “high stakes” litigation, with more than department, we strive to conduct more half (59 percent) of these respondents citing litigation activities in-house when we can.” As this as the top reason to turn to outside part of this trend, legal departments are likely counsel for disputes. Complexities in legal to own a handful of tasks related to these issues or jurisdictions followed as other litigated matters, specifically those activities top drivers to partner with outside counsel associated with early case assessment, on litigation: “multiple or international including conducting internal information jurisdictions involved” (49 percent) and gathering (89 percent); gathering of discovery “litigation/dispute involved complicated legal (75 percent); and analyzing the risk/likelihood concepts” (47 percent). of success in pursuing settlement (75 percent). DIVISION OF LABOR: LITIGATION AND DISPUTE MANAGEMENT 15


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    THE COSTS OF OUTSIDE COUNSEL Notwithstanding the growing trend of legal This trend has evolved as some of these departments’ headcount and providing them departments experienced a decrease in additional tools and technology resources, volume in overall legal work (17 percent) and very few internal teams are in a position to litigation (2 percent), therefore yielding less handle the entirety of the company’s legal reliance on outside counsel. But largely, the work without some form of partnership with decrease on use of outside counsel has little outside counsel. Accordingly, departments to do with a company’s overall volume of continue to wrestle with the ideal split of legal legal work. work performed by in-house resources versus work sent to outside counsel. The preference Of the respondents who to keep work in-house remains strong; reported a decrease of their according to the survey, 84 percent of legal departments stated they outsource half or reliance on outside counsel, less of their company’s legal work to outside counsel. Along those lines, a small handful of AN OVERWHELMING 79% legal departments (4 percent) noted all legal have attributed this decrease work is done internally with no assistance from outside counsel. to the redirection of work to WHEN EVALUATING LEGAL WORKLOAD in-house resources. OVER THE PAST TWO YEARS, MORE THAN ONE-THIRD OF LEGAL DEPARTMENTS (35 PERCENT) REPORTED AN OVERALL DECREASE IN THEIR RELIANCE ON OUTSIDE COUNSEL. THE COSTS OF OUTSIDE COUNSEL 16


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    Not only are legal departments decreasing the amount of work sent to outside counsel, but many are engaging fewer firms. Compared with the prior two years, 23% of respondents noted they are consolidating the number of firms with whom they work, shifting their legal work or experiencing a decrease in the amount of legal work. The top reasons for consolidation of firms but with their in-house counterparts; this working on a company’s legal matters competitive market yields value-added included improved efficiencies and cost practices from law firms to legal departments containment. This reduction in overall use such as the delivery of early case assessments of outside counsel, along with the trend and budgets as well as the implementation in consolidation, is sure to create more of additional legal project management competition among law firms. Accordingly, techniques. In this competitive market, legal departments will require that their legal departments can control the rules of retained law firms have a more comprehensive engagement with clear guidelines on how understanding of their needs. Law firms best to secure, perform and maintain the legal are not only competing against other firms, department’s work. THE COSTS OF OUTSIDE COUNSEL 17


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    Despite a growing base of legal departments citing a decrease in their use of outside counsel over the past two years, some departments faced an increased reliance on their law firms; about one-quarter (24 percent) of the legal departments stated they planned to increase their use of outside counsel. For these departments turning to law firms at a greater clip, the increase in reliance may be attributed to overall increase in volume of work (78 percent) and an increase in litigation (5 percent). Other specific drivers yielding an increase in use of outside counsel included staffing cuts within the legal department and the company’s strategic plan to expand and grow. THE COSTS OF OUTSIDE COUNSEL 18


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    In addition to considering volume of work, the decision to turn to outside counsel takes into account numerous additional factors, including the complexity of such work and the need for subject matter expertise. For instance, most legal departments are not Two-thirds (66 percent) of legal departments staffed to handle the complexity of litigation. stated they “never” or “rarely” use outside Not surprisingly, more than two-thirds of legal counsel for the drafting and negotiation of departments (68 percent) responded they company contracts. THIS DEPENDENCY “usually” or “always/almost always” turn to ON IN-HOUSE RESOURCES FOR outside counsel for litigation and disputes. CONTRACTING CAN BE ATTRIBUTED Similar to significant litigation, few legal TO THE SPEED AT WHICH IN-HOUSE departments are in the position to internally COUNSEL CAN TURN AGREEMENTS, staff complex M&A transactions; accordingly, THEIR ABILITY TO LEVERAGE M&A work follows behind litigation as the type INTERNAL RELATIONSHIPS AND of work for which outside counsel is most often COMMUNICATION CHANNELS, AND used. According to the survey, 41 percent of THEIR DEEP UNDERSTANDING OF departments stated they “usually” or “always/ THE COMPANY’S RISK TOLERANCES almost always” rely on outside counsel in AND PRIORITIES RELATED TO SUCH connection with M&A work. Conversely, AGREEMENTS. work that is voluminous, repetitive and less complex is often kept in-house. THE COSTS OF OUTSIDE COUNSEL 19


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    CONCLUSION The demands on legal departments to better manage their resources and maximize opportunities to improve productivity and efficiency are persistent and never-ending. Accordingly, legal departments, in an effort to more departments are investing in internal demonstrate their value across the enterprise, resources, increasing headcount, better are turning to multiple practices to achieve leveraging technology and evaluating legal these goals. The initial means focused on managed services — all to improve legal managing outside counsel to achieve these services to their internal partners. higher levels of efficiency and cost control. In addition to the evolving dynamics of the in-house/outside counsel relationship, These trends illustrate that departments have several levers to pull to achieve efficiencies and will continue to redefine the ways legal work is addressed by internal resources within the legal department and with outside counsel for the time to come. 20


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