In the face of mounting workloads and compliance obligations, corporate legal departments are poised to increase their reliance on outsourced providers this year. But as Wolters Kluwer’s Aileen Santiago discusses, finding the right outside counsel could require some legwork.
More often than not, corporate legal professionals find themselves having to work both smart and hard, a reality made all the sharper by rising workloads and an increasingly tangled string of compliance challenges. As general counsel and other senior leadership look to bolster efficiency while also streamlining the allocation of internal resources, many have begun looking for reinforcements outside the walls of the department.
Our 2022 survey of more than 100 executives responsible for corporate legal outsourcing decisions at U.S. companies with more than $500 million in revenue showed that 93% of corporate legal departments have outsourced work over the past three years. Additionally, close to half of the corporate respondents surveyed anticipated an increased need for legal technology and corporate compliance providers over the next three to five years.
But forget the next three to five years — let’s focus on 2023 for a moment. Here’s a look at factors poised to impact corporate legal department outsourcing over the next year.
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There’s no doubt that corporate legal departments are dealing with a plethora of challenges so far in the first half of 2023. The patchwork of local, state and national regulations facing businesses operating across any number of industries continues to grow increasingly robust and complex, leading to heightened workloads and, in more severe cases, employee burnout. There’s also a confluence of intangible economic forces at play driven by volatile markets, the ongoing conflict in Ukraine and the lingering hold of the pandemic — all of which lurk outside the reach of any business’ immediate control.
In the face of those mounting pressures, outsourcing has emerged as a viable alternative to the substantial bump in overhead costs that accompanies the hire of new, full-time employees who can shoulder some of the work. Engaging an outsourced partner on an as needed basis instead affords legal departments the opportunity to delegating time-consuming and mundane — yet highly necessary — tasks in order to allow in-house employees the freedom to address more meaningful work and generate stronger performance for their organization. Those benefits might take the shape of increased productivity, a reduction of internal processing costs and shorter project completion timelines.
We’ve established that corporate legal has ample incentive to outsource, but what are the practice areas or urgent business needs driving the bulk of that work in 2023? According to more than 100 corporate executives surveyed in late 2022, both present and future outsourcing plans are most heavily concentrated around regulatory risk and management, which isn’t a huge surprise given the pervasive regulatory stress applied by ESG issues, data privacy mandates and cybersecurity risk.
Entity management, due diligence and business licensing needs were also cited as substantial drivers of outsourcing activity. For starters, organizations with a large global footprint have to contend with regulatory obligations spanning multiple jurisdictions, tasks related to managing reputational risk and reevaluating operating models and governance structures. Outsourcing these and other entity management related tasks can provide instant access to knowledge and expertise around entity management or M&A activity that isn’t readily available on a company’s payroll.
M&A-related needs may also drive much of the corporate legal outsourcing taking place this year. The volatility being experienced in equity markets is expected to heighten M&A activity spanning a plethora of verticals, so much so that chief legal officers are forecasting that M&A work, corporate spin-offs and other major transactions will demand the largest allocation of time and resources in 2023.
Inflationary pressures and the prospect of a recession both factor heavily into that calculation, reportedly driving the volume of post-closing M&A disputes upward as buyers ponder the option of trying to recoup valuation gaps in the face of the underperforming deals typified by a challenging marketplace as well as increases in the use of earnout structures.
In most organizations, the majority of legal outsourcing decisions are being directed by either legal operations professionals or in-house counsel and corporate compliance executives. Fewer businesses leverage or invite procurement professionals into the process. But regardless of who is making the decision, there are some overlapping criteria that legal professionals are using to select both what and where they will outsource.
Among the most important considerations in play when selecting a vendor include: Cost, experience and security. This indicates that these decisions are made concurrently, implying that trusted providers are driving buyers to outsource certain activities, rather than buyers making that decision independently first, followed by a selection of the most appropriate vendor.
However, beware the temptation to fixate squarely on the size of a vendor’s pricetag. While fiscal responsibility should always be top of mind, the reality is that selecting a low-cost provider can often come at the expense of other critical factors that can directly impact the quality of the work being performed, such as accuracy, security, availability and timeliness.
Security, for instance, is paramount given the robust framework of global privacy regulations in place and the sensitive data flowing through each organization. It’s therefore crucial that legal departments invest the time to ask a prospective vendor about their security precautions, as well as protocols for safeguarding contracts, UCC search and filing data and entity management data. Also, it never hurts if a provider has mechanisms in place for securely backing up data.
Try to conserve expenses by focusing your search on providers that offer a broad range of services, eliminating the need to engage multiple providers. For instance, when searching for an outsourced provider that can facilitate needs related to due diligence, ensure that the portfolio of services includes categories such as legal and financial (UCC filings, tax and judgment liens, hidden legal liabilities), intellectual property (confirm IP ownership, assessing the quality of IP assets), reputation and regulation (background checks, negative news searches, FCPA assessments), industry specific services (motor vehicle services, hospital lien searches, agricultural lien searches) and corporate services (formations, qualifications, business licenses, dissolutions, withdrawals, M&A filings).
The sizable workloads confronting the average corporate legal department aren’t headed for a sudden decline any time soon. Instead, general counsel would do well to identify some of their most pressing needs both now and in the immediate future — whether it be pending M&A activity, regulatory compliance workflows, or other ongoing challenges — and identify an outsourced provider who can work within budgetary parameters without sacrificing quality. Proactively addressing inflated workloads will allow in-house legal teams to mitigate employee burnout and safeguard against substantial disruptions to the business of serving their organization.