Companies in the United States spend vastly more on lawyers and other legal services than anywhere else in the world, according to an Acritas study
If you always felt that companies in the United States were spending more on lawyers and other legal services than anywhere else in the world, now you have the numbers to back that up.
US companies spend a whopping 166% more on legal services than their global counterparts — roughly 0.4% of their revenue — on average, according to a new study by Acritas, now part of Thomson Reuters. The average spend per dollar of revenue varies, of course, by company size, with larger companies benefitting from economies of scale; and by industry, with the real estate, banking and technology sectors (not surprisingly) spending the most.
The findings in the Acritas report are derived from its annual survey of more than 2,000 chief legal officers and general counsel across multiple industries worldwide.
The average legal spend at companies around the world is 0.23% of revenue, according to Acritas. Other heavy legal spenders are Canadian companies, at 0.26% of revenue; and United Kingdom companies with 0.24% of revenue. On the other end of the scale are Japanese and Chinese companies, which both spend an average of 0.03% of revenue on legal services.
So, what makes it so comparatively legally expensive to be a US or UK company?
“Generally, the US is a much more litigious country, so that’s part of it, but there’s also a number of different factors that we’ve identified,” said Lisa Hart Shepherd, chief executive officer of Acritas. “If you look at the complexities of different state laws, for example, that can increase the volume of advice that you need. You also get higher lawyer salaries both in-house and in private practice in the US, making hourly rates higher, as well.”
In the UK, legal spend is also comparatively high due to several various factors, Hart Shepherd explained. “The UK is quite a sophisticated market. You’ve got a lot of financial institutions and tech companies focused within the London market specifically,” she said, adding that many more regulated industries also center their European operations in the London market.
“This gives UK law firms more high-bracket companies for which to work, as well as allowing them to pick up European and international clients.”
Legal Spend Varies by Industry & Size
Acritas also found that the companies’ business sector significantly impacts legal spend globally. The real estate industry outpaced all other market segments by a wide margin, spending more than three times the global average. Law departments in the banking and technology sectors also have sizable budgets relative to their revenues, spending 109% and 96% more than the global average, respectively.
Hart Shepherd says this factor only gets more complex as a business’s operations become more sophisticated and complicated themselves. “If you are in a hybrid sector like Fintech or biotech then you’re probably likely to have even a higher legal spend,” she said. “When you’re pushing the boundaries in terms of what you’re doing, you’re likely to be delving into new areas of law and dealing with the complexities of multiple markets.”
The Acritas report did suggest that legal spend appears to be scalable, in that as an organization grows, its legal spend shrinks in proportion to revenue, in some cases, significantly. And that is good news for smaller companies looking for growth.
Companies with less than $500 million in total revenue spent over twice the global average on legal services, according to the Acritas report. Yet, those with at least $6 billion in revenue spent just one-quarter of the global average.
What’s a Company to Do?
The findings of the Acritas report suggest that companies would be wise to pay attention to these kinds of benchmarks, both to understand their legal spend and to analyze how it compares to other companies in their sector, their region or of their size.
“As a legal department, if you’re going to be benchmarking your legal spend, you must access relevant benchmarks and get the kind of industry-specific benchmarks and region-specific benchmarks you need to help understand your environment and where your company should be,” Hart Shepherd said.
For example, if you’re a legal officer in a US company you need to be thinking about those higher levels of spending and asking yourself if there are ways you can move some of it — to lower-cost markets, she explained.
In the end, these benchmarks may help legal departments show their corporate bosses that their legal spend is within an acceptable range, or if it is below that range, that maybe the company should be spending more on its legal department. “Also, people have used these benchmarks to make the case for budget when expanding into new jurisdictions,” she added. “No matter the use, it is important to have this information to understand your company’s legal spend levels and communicate that with your board.”