ACRITAS

PATTERNS IN LEGAL
SPEND REPORT
Part 1
A thought provoking look at patterns in legal spend as
a proportion of revenue which points to the need for
organizations to seek relevant benchmarks.

June, 2017

Copyright © Acritas Research Ltd 2017.

NEW YORK | LONDON | NEWCASTLE Data must not be used externally without referencing Acritas as the source.
 Executive summary

Legal spend is highly variable. The dataset within this report is sourced from an annual,
global telephone survey of approximately 2,200 senior
The characteristics a company in-house counsel across the globe. Respondents provide
has are likely to define its level Acritas with their external and internal legal spend, team
of spend – from headquarters size and other demographic factors such as location,
industry sector and revenue. We are able to calculate the
location to industry sector proportion of revenue allocated to legal spend and
and size, notwithstanding its compare this across different types of organization. We are
geographic footprint, growth then able to identify which types of organization are typically
high spending and, conversely, low spending.
trajectory and approach to
managing risk. In this report, we Globally, the median proportion of revenue spent
on legal, both internally and externally, is 0.23% – in
look to examine the differences other words just under a quarter of 1%, but this is
observed across these highly variable across different regions, industries
characteristics with a view to and size of business. This means it is rarely useful to
benchmark your organization against global or even
helping organizations think more country averages. You are unlikely to be in line. It is
about the environmental factors important to find a peer group benchmark.
that influence their spend levels
To help companies find a more appropriate benchmark,
and how they might be able Acritas created an algorithm, an estimating model which
to drive more value from takes into account the different characteristics and provides
their investment. a relevant benchmark for each individual organization. As
the dataset builds, we continue to develop this model.
We’re currently looking at the different relationships
between region, industry sector and size of business, where
sometimes the effect of layering these characteristics can
be cumulative, creating significantly higher spend.

Developing the model was not easy. We had to discard

nearly 50% of the data, where people could not provide
reliable spend data. But even within the 1,973 data
points we did use, many companies were way out of line
when compared to the average, either over-spending or
under-spending. One in five respondents told us it had
been a particularly high spending year, above their usual
level of spend. This compared to only one in 20 who had
experienced a particularly low level of spend. The over-runs
were usually caused by extraordinary events, such as a
large dispute or transaction, and on average caused a 50%
over-run – something that CFOs need to be prepared for –
typically once every five years.

In light of the range of responses and the pattern of data,

we chose to run our analysis looking at the median average,
the middle of the range, for each group, to remove the
effect of outliers. This figure has stayed consistent for the
last three years.

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 Key findings

REGIONAL DIFFERENCES

Across countries, the highest spending Can you

is the US, at nearly double the global relocate any of
average. This is partly driven by higher your legal work
rates and higher salaries, but also the to lower spending
higher volume of legal needs when countries, or lower
cost regions within
operating within the US. Conversely,
countries?
the lowest was China, where the spend
level is approximately an eighth of the
global average.

INDUSTRY DIFFERENCES

Across industries, at a global level, real estate

was the highest spending industry, at nearly
four times the global average. This was followed
Is your organization
by technology/media/telecoms and financial
a disruptive player
services who were spending nearly double the in your industry and
global average – although the pattern wasn’t therefore likely to
always consistent within each country. Lower have a higher spend
spending industries were automotive, retail and than more traditional
food/farming, spending approximately half the competitors?
global average. Going forward, as technology
plays an increasingly important role in these
industries, it will be interesting to observe
whether legal spend increases to be
more in line with the tech companies. REAL ESTATE TECHNOLOGY BANKING

ECONOMIES OF SCALE

The biggest range in ratio of spend to

How can you
revenue was observed by size of company.
access economies
This is where economies of scale come
of scale earlier
into play. Those with revenues of less than in your growth
$500m were generally spending around evolution?
10 times the average ratio of those between
$6bn and $20bn.

We hope you enjoy this report, which is the first in a series.

The next report will look at the influence of internal and
external split of budget and provide team size benchmarks.

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 Methodology
Acritas conducts a global telephone survey of approximately
2,200 senior in-house counsel in large organizations across
the world. Respondents are asked a range of questions
relating to their goals, challenges, buying behaviors,
perceptions and experiences with external providers.

EXTERNAL LEGAL SPEND REVENUE

As part of
the survey,
INTERNAL LEGAL SPEND respondents LOCATION
are asked to
provide

TEAM SIZE
INDUSTRY SECTOR
NUMBER OF LAWYERS

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 The chart below
shows the spread
of responses
The total legal spend is divided by revenue to determine the proportion of revenue received from 1,973
allocated to legal services for each organization. The resulting percentages are organizations over
placed in order, low to high, and the mid-point of the range, the median, is then the last two years.
used as the average. This prevents outliers having too much influence which can
happen if you use the mean average.

TOTAL SPEND AS A % OF REVENUE

Full dataset of 1973 organizations

2000

90TH PERCENTILE = 1.1%

1500
75TH PERCENTILE = 0.55%

1000 MEDIAN = 0.23%

500 25TH PERCENTILE = 0.09%

The higher spenders drive

up the mean ratio to 0.48%

0
0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%

We have pinpointed the 25th, 50th and 75th percentiles – all below 1%. Top 59 (3%) removed from chart
as outliers – ratio above 3%

It is not until the 89th percentile that the figures move above 1%. From Base: 1973
that point onwards, the outliers start to emerge – often in fast growth
companies, that are preparing their platform for much higher revenue,
or organizations which have experienced extraordinary events.

The top 3% of responses were removed as outliers.

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 Regional differences in legal spend

SPEND % REVENUE: BY COUNTRY

Medians by country

US 0.39%
Canada 0.26%
UK 0.24%
Global average 0.23%
Netherlands 0.22%
Australia 0.20%
Germany 0.16%
Spain* 0.13%
Brazil* 0.09%
India 0.08%
Italy 0.07%
France 0.06%
Percentage varies by country with US
Japan* 0.03% legal departments spending the most
relative to revenue
China* 0.03%

Base: US (709), Canada (270), UK (215), Netherlands (49), Australia (107), Germany (69),
Spain (22); Brazil (20); France (68), Italy (34), India (33), Japan (27), China (24) *Low base

The country where an organization is based has a big impact on its

expected spend level. Most countries sit below the global average. POINT TO CONSIDER
The largest part of our sample base is located in the US (39%),
and this, combined with the significantly higher ratio of legal spend For organizations with
to revenue here drives the global average up above most other a global footprint but
countries. heavily resourced in
high spending locations,
Canada also sits above the average and the UK is virtually on the it may be worthwhile
average. Sitting just below the average are the Netherlands and considering allocating
Australia. It is interesting that four of the top five are predominantly some of your legal
English speaking, common-law countries. Germany comes next and work to the lower cost
then the ratio drops as we move across Mainland Europe, South countries, when you
America and Asia with China and have a choice.
Japan the lowest.

These differences are driven by a range of factors – higher rates and

pay levels, higher levels of regulation and more dynamic regulation,
and a more complex legal framework, often more litigious.

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 Industry differences in legal spend

SPEND % REVENUE: BY INDUSTRY

Medians by industry

Real Estate 0.89%

Banking 0.48%
Tech / Media / Telecoms 0.45%
Hospitality / Leisure 0.42%
Not-For-Profit* 0.41%
Business Services 0.39%
Financial Services 0.38%
Pharma / Bioscience 0.34%
Government / Public 0.30%
Healthcare 0.28%
Insurance 0.27%
Energy / Utilities 0.24%
Engineering 0.23% Percentage varies by
Natural Resources 0.23% industry with Real Estate
spending the most relative
Global average 0.23%
to revenue
Manufacturing 0.18%
Construction 0.17%
Transport / Logistics 0.16% Within the US, all of these
Automotive 0.14% percentages are higher
Retail / Wholesale 0.11%
Food / Farming 0.09%
Investment 0.08%

Base: R. Est. (39); Banking (42); TMT (211); Hosp./Leis. (34); Not for profit (20); Bus. Svcs (52); Fin. Svcs (55);
Pharma (41); Gov’t (55); Health (114); Ins. (63); Energy (162); Eng. (49); Nat. Res. (70); Manu. (304); Constr. (98);
Trans./Log. (111); Auto. (55); Retail (130); Food (105); Inv. (55) *Low base

Like region, industry sector also has a big impact on the expected level
of legal spend. Real Estate reported the highest level of spend overall, POINT TO CONSIDER
nearly four times the global average – possibly explained by a revenue
model which is more focused on assets. Banking and Technology/Media/ Think about the
Telecoms come next. different environments
you are exposed to,
We generally see the more heavily regulated industries sitting above including commercial
average. Although, these patterns do differ depending on which geography drivers and risks,
you are sitting in, as regulatory frameworks can differ. In general we would regulatory and legal
see higher figures for every industry within the US. frameworks. Does
your spend level
In the chart above we have looked at traditional industries – but those who reflect adequate
sit across more than one industry, a hybrid business for example, such as investment to ensure
bio tech or fin tech, are likely to have even higher spends. These, and other your organization is
‘disrupter’ businesses are blurring the boundaries of traditional industries sufficiently protected?
and regulatory frameworks, resulting in higher levels of legal spend.

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 Differences in legal spend by size
SPEND % REVENUE: BY SIZE
Medians within revenue bands

<$200m 0.68%
$200-399m 0.55%
$400-599m 0.42%
$600-799m 0.40%
$800-999m 0.25%
$1.0-1.19bn 0.20%
$1.2-1.39bn 0.24%
$1.4-1.59bn 0.29%
Global average 0.23%
$1.6-1.99bn 0.21%
$2.0-2.99bn 0.17%
$3.0-3.99bn 0.13%
$4.0-4.99bn 0.18%
$5.0-5.99bn 0.17%
$6.0-9.99bn 0.08% As organizations increase in size,
$10-19.99bn 0.07% legal spend as a percentage of
revenue significantly declines.
$20bn+ 0.03%

Base: <$200m (169); $200-399m (203); $400-599m (137); $600-799m (81); $800-999m (91); $1.0-1.19bn (155);
$1.2-1.39bn (88); $1.4-1.59bn (73); $1.6-1.99bn (95); $2.0-2.99bn (222); $3.0-3.99bn (101); $4.0-4.99bn (71);
$5.0-5.99bn (55); $6.0-9.99bn (128); $10.0-19.99bn (106); $20bn+ (116)

Size was the factor that caused the

biggest diversion in legal spend – an THOMSON REUTERS POINT TO CONSIDER
organization with less than $200m LEGAL TRACKER
revenue was typically spending nearly We partnered with Thomson How can you access
10 times the proportion of its revenue Reuters Legal Tracker, to try economies of scale
on legal as an organization with $10bn and find out which work-types quicker? What are the
revenue. were most likely to benefit areas which most drive
from economies of scale and economies?
There is a very clear correlation – the which weren’t. The results were
higher the revenue band, the lower fascinating and identified specific
the ratio. Of course spend does go areas where larger companies
up in absolute value terms – but as a spent more of their budget than
proportion of revenue, spend reduces smaller companies. These areas
– meaning there are significant are generally more unpredictable
economies of scale in legal spend. and costs can be difficult to
control. Business-as-usual areas,
meanwhile, generated bigger
economies of scale, as companies
learned to work smarter and leaner.

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 The complex relationship between
different demographic factors

0.40%
The patterns we observe by industry and size are not the
same in every jurisdiction. As the cost of lawyers differs
by market, along with the legal and regulatory framework,
this impacts the scope and total cost of legal needs for
each organization. The characteristics of each jurisdiction
also have an impact on the type of companies within each US
sector – for example, whether the country is rich in natural
resources, the consumer purchasing power and how
evolved the infrastructure is. All of these characteristics
shape the resulting demand in legal services and

0.45%
ultimate spend.

We also find when different demographic factors are

layered on top of each other, such as industry, region
and size, that they often have a cumulative effect.
We are currently developing our estimating model to
TECHNOLOGY
factor in these effects.

The example we have shown here is within the US –

0.425%
where looking at the US overall average and the global
tech average, you would expect a US tech company to
land somewhere between the two. In reality, the company
faces an uplift in spend from being based in the US,
and then a further uplift from being in tech. The result is
therefore half as much again, at 0.68%. This is before we AVERAGE
consider the impact of size!

0.68%
REALITY

POINT TO CONSIDER

Organizations must
compare themselves
to a peer group which
takes into account
region, industry – and
size – in order to have
a realistic benchmark.

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 Accessing relevant benchmarks

Free year-round access to your

peer group benchmarks

Acritas can provide access to its online analytics platform

in return for participating in a 25-minute telephone To participate and access
interview. You will be able to benchmark your spend and Acritas Analytics, please email
team size against peers with similar characteristics. You appointments@acritas.com
can adjust the filters to view data in a different region, with your preferred time and phone
adjacent sector or for different sizes as you look to grow number. You must fit our qualifying
or downsize, or move into new markets. criteria to gain free access which include
a minimum revenue of $50m and being
We provide this for free as an incentive to participate in a decision-maker when it comes to
our global research. The collated results of this research procurement of legal services. Paid
are sold to law firms for business planning purposes access is available for $995 per annum.
and that is how Acritas funds its business model.

The analytics tool also provides access to a database

of exceptional Star Lawyers, as recommended by other
survey participants, across more than 50 countries
worldwide. You can see why the Star is recommended
and the demographics of the client making the nomination.

Building up to a suite of metrics –

Acritas PEER Model

This is a free report containing a framework of metrics

which are being used by large legal departments to help
demonstrate the value they bring to their organization.
The metrics cover efficiency but also look at effectiveness
and preventing legal risk. This model was developed after
talking to over 1,000 legal departments across the world
and refined with our advisory board of General Counsel
and legal operations experts.

Visit www.acritas.com/
acritasPEERmodelTM.com
for free download

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 What next?

Our next report, which will be published in September, will

look at the internal and external split of budget and provide
benchmarks for the number of lawyers on your team.

In addition to evolving our estimating model to include the

impact of layering demographics, Acritas is committed to
building an even smarter dataset, where we start to look
at the impact of different buying approaches – such as use
of AFAs and alternative legal services providers, adopting
formal panels and legal risk management. We will also
explore the impact of other organizational characteristics
such as geographic reach, growth trajectory and appetite
for risk.

If you would like to contribute ideas to this project or

become part of our advisory board please get in touch.
We look forward to hearing from you.

Lisa Hart Shepherd

analytics@acritas.com

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Acritas provides market analysis, benchmarking, research and advisory services,
through a unique combination of:

 Our research-led scientific approach

 Our unparalleled legal market dataset and related insights
 Our systems and dashboards specially developed for the legal sector.

For further information on how Acritas can help you and your organization,
please contact Lizzy Duffy on eduffy@acritas.com or +1 646 480 5738
or Jo Aitken on jaitken@acritas.com or +44 808 178 3020.

We look forward to hearing from you.

US: +1 646 480 5738

UK: +44(0) 808 178 3020
research@acritas.com

YouTube: AcritasInsight
Twitter: @acritas
LinkedIn: Acritas

Copyright © Acritas Research Ltd 2017.

NEW YORK | LONDON | NEWCASTLE Data must not be used externally without referencing Acritas as the source.