If you dive into the data around legal spending, it appears that legal clients are demonstrating an amount of optimism that seems to belie the current gloomy economic climate
As the economy continues on its uneven keel and the possibility of recession remains, law firms might be wise to seek an understanding of how a potential economic downturn may impact client budgets in order to ensure business continuity.
Thomson Reuters’ Market Insights survey of legal clients helps shed light on these important budgetary questions. For example, spend optimism — the net difference between those clients that say their legal spend will increase and those that say it will decrease — has been rising since the start of the pandemic in Q2 2020. At that time, more clients were planning on decreasing their legal spend than increasing it, because many weren’t sure what the full impact of the pandemic would be on business operations.
Since that time, however, we’ve seen solid growth in spend optimism. In Q2 2021, just one year later after the start of the pandemic, legal spend optimism saw its strongest period of predicted growth in quite some time. Subsequently, we’ve seen continued spend optimism through this most recent quarter.
On the surface, total legal spend optimism stayed strong throughout the first half of 2022. In Q2 2022, twice as many clients (44%) said they expect to increase their legal spending rather than decrease (17%). And that optimistic percentage was the highest since Q2 2021, and the second-highest since mid-2019, before the pandemic.
However, this trend is not consistent across all buyer segments. Both large and midsize companies are beginning to rein in their legal spend amid predictions of an unstable economy. Indeed, this tempering of legal spend expectations often is an indicator of a shift in buyer sentiment.
Sector segments also reveal meaningful differences. While spend optimism is spread relatively evenly across all industries, companies in the technology, media & telecoms (TMT) sector are showing lower optimism in the first half of this year. About 30% of TMT companies said they expect to increase their legal spending, while 25% say they expect to decrease it, resulting in the narrowest margin of difference among the business sector segments. One possible reason is that TMT companies may have invested quite a bit in the early part of the pandemic, and now they’re starting to scale back compared to before.
While a full look at the data indicates continued optimism, there are hints across segments that may be signaling a shift. Historically, there have been delays between when a true recession hits and when the impact is felt on a company’s legal spend. And that means that clients’ budgets have yet to feel the full pressure of reduced optimism on spending.
There’s also an alternative explanation, offered by the history of the 2008 financial crisis that many in-house law department leaders experienced first-hand. That explanation holds that because of the difficulty department leaders had in getting their budgets back up to pre-crisis levels once those budgets were cut, many leaders now may be more willing to do everything they can to hold on to their budgets in the coming months.
Yet, for the time being, law firms can use these optimistic numbers on client spending projections to make their own operational plans and determine where their resources are best positioned.
The data can also provide lawyers with information on which clients might be good targets for additional outreach, based on their demographics and their needs. Certainly, it’s helpful to reach out to clients that are projecting increased spending in order to capture a portion of that work, but it’s equally important to set up conversations with those clients that are anticipating less of a spend increase or even a decrease. Clients in these straits may need help prioritizing their legal work and developing a work plan that ensures efficiency and value for their money.
By reaching out to all levels of clients with these kinds of suggestions and a demonstrated understanding of their position in the market, law firms can become a valued partner to corporate law department leaders and their legal teams.
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