A just-released survey suggests that US law departments will, by 2013, spend $2 billion on legal outsourcing.
The Change Agenda: Looking Ahead (American Lawyer Magazine, Dec 2008) reports on a survey by law department consultant Rees Morrison and American Lawyer editor Aric Press, conducted on the professional social network, Legal Onramp (LOR). One survey question asks
“Between 2008 and 2013, ___% of our law department’s spending will move to lower cost offshore service providers, whether directly or as a subcontractor to our in-country law firms.”
Based on the answers to this question and some conservative assumptions, we estimate that U.S. corporate law departments will spend about 3% of their budget on legal outsourcing. This translates to US legal process outsourcing (LPO) spending in 2013 of almost $2 billion. To be completely transparent, we spell out how we make this estimate; following that are some caveats and comments.
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Estimate Step 1: Percent of Inhouse Counsel Spending that Will Shift to Outsourcing
The answers to the question above about shifting spending to LPO by 66 law department respondents at companies with more than $1 billion in revenue are as follows:
| Respondents | Percent | |
| >10% of total spending | 10 | 15% |
| 6-10% of total spending | 11 | 17% |
| 1-6% of total spending | 11 | 17% |
| Decrease, we are moving more onshore | 2 | 3% |
| No change | 32 | 48% |
To determine the percent of spending that will shift, we need to calculate a weighted average:
| % Spending Shifted to Outsourcing | Weight | Weighted |
| 11% | 15% | 1.7% |
| 8% | 17% | 1.3% |
| 3.50% | 17% | 0.6% |
| 3.6% |
For “% Spending Shifted to Outsourcing”, we assume for those answering answering “greater than 10%”, an 11% value, which is a conservative approach. For those answering 6-10% or 1-6%, we use the midpoint of each range, which is the typical convention in the absence of other information. The “Weight” column simply copies the percent each answer represents of the total number of responses. The “Weighted” column multiples the Spending Shifted by its Weight.
We could conclude that by 2013, 3.6% of inhouse counsel spending will shift to legal outsourcing. We are not comfortable doing so, however, because of possible sample bias. This survey was conducted on Legal Onramp, a social network targeted at corporate law departments. The current LOR members are “early adopters” of social networking and, by extension, could be LPO early adopters. Adjusting for this is, by necessity, arbitrary but we think adjusting downard by 20% is appropriate. Applying this adjustment factor, by 2013, 2.9% of inhouse counsel spending will shift to legal outsourcing.
[There is insufficient data to be able to account for the two respondents decreasing outsourcing. Given the conservative estimates here and in subsequent assumptions, we feel comfortable not adjusting for this.]
Estimate Step 2: Determine Total Law Department Spending
To what dollar spending do we apply this percent? We need to know the total US law department spend. Most AmLaw 200 revenue is from corporate law departments but some is from deal-makers, small businesses, and individuals. We believe that a conservative approach is to assume 80% of the AmLaw 200 total revenue is from corporate law departments.
The AmLaw 200 total revenue for 2008 was $81.5 billion. Applying our 80% adjustment brings it to $65 billion. (American Lawyer Magazine articles report on 2008 total revenues: Amlaw 100 for 2008 and Amlaw 200 for 2008.)
Something is missing, however, from this estimate. The survey question asks about total legal department spending. Prior survey questions refer to outside counsel spending. Consequently, we should add to the $65 billion an estimate of law department spending for their own lawyers and operations. Rather than apply other survey data that might allow an estimate, we exclude this big chunk to keep the estimate conservative.
Estimate Step 3: Multiply for The Answer
Applying the 2.9% shift in spending to $65 billion yields $1.9 billion of US legal outsourcing by 2013.
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Comments and Caveats
Estimate Does Not Consider Legal Market Growth. In the vein of conservative estimates, we are not adjusting for revenue growth; were we to assume a conservative 4% growth through 2013, the number would be about $2.25 billion.
UK Legal Outsourcing Would Probably Add Another $1 Billion. The estimate above is just for the US market. UK firms are ahead of US firms in outsourcing and currently account for a disproportionate share of legal outsourcing. In 2007, the top 100 UK firms generated a bit over 12 billion GBP (see links to the 2007 revenue tables at UK 200 in TheLawyer). Applying an exchange rate of 1.8 USD per GBP, UK top 100 firms generate about $22 billion. Given that UK firms outsource more, it is reasonable to apply 5% rather than 3% by 2013. If so, that would add $1.1 billion to the total legal outsourcing market.
Comparison to Other Estimates. We think that most LPO observers would likely agree that $2 billion for US legal outsourcing represents significant growth from where we are today. As a point of reference, a widely-cited ValueNotes study from 2007 predicted an India-only LPO market of $640 million, growing from a base of $146 million in 2006. The National Law Journal today, in India work grows, with glitches, cites another widely study by Forrester, which predicts a legal outsourcing market of $4 billion by 2015. When considering the different years of each forecast, rapid LPO growth, and the different countries covered by the forecast, the estimates are not that far apart.
The Impact of Postivie Market Dyamics. The estimate here is static; it does not account for market dynamics. As more law departments outsource and discuss their findings, this will affect the decisions of other general counsels. We are optimistic that this “feedback loop” will increase the spending shift to legal outsourcing.
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Update 23 Dec 2008: The Law Society Gazette, in In-house counsel survey on offshoring (11 Dec 2008), reports on a legal outsourcing survey it conducted. Applying the same weighted average method as above, this survey finds that in the next two years, inhouse counsel will offshore 2.3% of their work. Considering the above is a five-year estimate, the Law Gazette findings are reasonably consistent.
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