Companies Spent 7% Less on Legal Fees in Q1

But the decline isn't likely to last; new research shows legal departments predict a higher need for outside counsel in the coming months.

Companies have sharply cut back their outside legal budgets so far this year, ending the steady growth law firms were experiencing over the past four years. While businesses will spend more of their legal budgets on hiring law firms to help them with regulatory, bankruptcy, securities, and employment issues this year, according to a survey of corporate lawyers, they will spend less on other areas, such as litigation, mergers and acquisitions, environmental issues, and intellectual property.

Still, the study, conducted by BTI Consulting Group for the legal industry, predicts overall legal spending by companies in 2009 will decline by only 1.4%. The firm says companies will spend an average of $19.4 million on outside counsel services this year.

BTI says regulatory work will see the most growth and forecasts that companies will spend 5.8% more on that area in 2009, followed by bankruptcy seeing a 2.6% increase, securities at 2.1%, and employment issues at 0.7%. Michael Rynowecer, president of BTI Consulting, acknowledges the bankruptcy figure could end up going much higher. “Most people aren’t thinking, Oh, yes, we’re planning on going bankrupt,” he says, and thus most respondents probably didn’t believe the question about bankruptcy applied to them.

The legal industry experienced a 6.7% drop in business from their corporate clients during the first three months of 2009; however, BTI predicts that overall, companies will beef up their spending on outside legal services by 5% in the latter half of this year. The firm recently polled 370 corporate counsel at Fortune 1000 companies.

Companies had been steadily doling out more cash to law firms in recent years. Rynowecer attributes the better days at law firms — which, like many industries, now are having a significant number of layoffs — to several factors, including the beginning years of Sarbanes-Oxley compliance, a boom in M&A, and the increased interest by corporations in needing outside counsel to assist them in protecting their intellectual property. Now, companies are focused — or should be focused — on risk aversion, he says.

Moreover, the downturn has resulted in companies bringing more legal work in-house and renegotiating legal fees, according to a recent survey of 619 top corporate legal executives conducted by the Association of Corporate Counsel.

Indeed, companies “have much more negotiating power” these days, says Rynowecer. In some cases, they are deferring legal work to another time. “Currently, there is much more supply than demand; however 18 months ago, the reverse was true,” Rynowecer says.

Companies also increasingly appear to have a “disinclination to fight,” Rynowecertold CFO.com. Companies are hiring outside counsel to do “early case assessments,” which are formal investigations into whether they should keep a case in litigation. As a result, Rynowecersays, over the past 18 months, businesses that would have been unlikely to settle a lawsuit “now would rather get a case off the books” and avoid the risk of a case not going in their favor.

To be sure, companies may have to make more of those decisions in the coming months and years as lawsuits stemming from the credit crisis and recession arise. Accounting firms have been warning that a surge in lawsuits against companies is imminent, as is a rise in fraud within corporations.

Likewise, corporate lawyers predict that an uptick in legal disputes is brewing, after a two-year decline in the number of lawsuits and regulatory proceedings companies had to tackle. A study conducted by law firm Fulbright & Jaworski, which surveyed 251 U.S. corporate law departments last year, found that 34% of respondents expected to have to deal with litigation, most likely prompted by issues related to the recession and the credit crisis.

As it is, nearly 80% of companies have dealt with at least one new lawsuit in the past year, according to the Fulbright study.

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