Regulatory compliance has become the top strategic priority for many legal departments across the globe and a significant percentage of in-house professionals believe regulatory changes will continue to pose significant risks in the coming years, according to a recent report from the Thomson Reuters Institute.
Overall, 22% of corporate legal departments listed complying with evolving regulatory developments as their top priority, which was the highest percentage among other pressing issues cited by in-house teams.
The strong emphasis on compliance comes just four years after it was rated as the fifth-most important priority among legal teams, the 2023 State of the Corporate Law Department Report said.
New or pending regulations in the areas of cybersecurity, data privacy and ESG are among those in-house legal professionals are working to help their businesses comply with across different regions.
“These shifts have massively increased the potential regulatory consequences and compliance burdens for businesses operating in a global marketplace, particularly since there is wide disparity in the adoption, application, scope, and enforcement of these regulations,” the Thomson Reuters Institute report said.
The frequency and complexity of regulatory changes were chief among future risks anticipated by law departments, with more than one in four sharing that concern.
One in five respondents highlighted data privacy and ESG issues as key areas in which they anticipate additional risk.
“The rapid and sometimes incongruent shape of today’s shifting regulatory environment will continue to disquiet corporate law departments, likely for the foreseeable future,” the Thomson Reuters Institute report said.
In a similar vein, regulatory work was the area with both the highest percentage of survey respondents who said they expected to increase legal spend and the lowest percentage who said they planned to decrease spend.
However, the report said that rather than producing greater spending with outside law firms, this trend “may represent a potential windfall for alternative legal services providers (ALSPs).”
This is because regulatory risk and compliance services are among the top ALSP use cases in every region of the globe, according to a recent report on ALSPs from Thomson Reuters Institute, Georgetown Law and the University of Oxford’s Saïd Business School. Such usage of alternative providers is one reason the market for ALSPs has eclipsed $20 billion.
Risk and litigation mitigation came in a close second on the list of priorities cited by legal departments across the globe, as it was listed by 21% as a top priority.
The Thomson Reuters Institute report said this risk focus reflects the influence of the changing regulatory environment, as well as the importance in-house departments place on litigation avoidance.
“The cost of litigation has risen substantially due to factors such as the increased complexity and cost of litigation necessities such as e-discovery and the quickly escalated rates charged by outside counsel,” the report said.
Law firms grew their “worked rates” by an average of 4.8% in 2022, with some firms and practice areas increasing their rates by substantially more, according to Thomson Reuters Institute.
The third most frequently cited priority for legal departments globally was cost control, which includes reducing external legal spend and bringing more work in-house.
Among companies in the U.S., cost control was the top priority cited and it was second among companies in the United Kingdom.
Mergers and acquisitions is one area where in-house teams are likely to reduce spending.
M&A helped drive very strong performance by law firms in 2021, but a slowdown in that type of transactional activity last year played a key role in Thomson Reuters’ Law Firm Financial Index falling to a new low at the end of 2022.
“Continued contraction in this area, while wise for companies looking to minimize risk and postpone strategic combinations for times of greater economic certainty, could have broader ramifications on the outside law firms that are serving these corporate clients,” the recent corporate legal department report said.
The findings in the Thomson Reuters Institute report were derived from 1,569 interviews conducted with professionals from corporate law departments at companies with more than $1 billion in global revenue. Interviews were conducted throughout 2022.