Pressure on corporate legal budgets eased in 2011, but that failed to halt a three-year decline in the use of magic circle firms. Legal departments instead chose to increase their own headcount, and to make greater use of UK mid-tier law firms, other international firms, the bar and niche firms.

These were the findings of the Chief Legal Officer (CLO) Programme’s benchmarking survey, conducted each year since 2004 among general counsel, most of whose 96 businesses are international and have a turnover exceeding £500m.

In previous years, the change in patterns of instruction could be attributed to the pressure on in-house legal budgets. Some 41% of general counsel in the 2009 survey reported a fall in their budget. In 2010, 35% had budgets cut. But in 2011, 71% of general counsel saw either ‘no change’ or an increase in the department’s budget. The improved position will continue in 2012, with 72% predicting a stable or increased budget.

The bad news for magic circle firms is that this group of companies is not simply reverting to previous instruction patterns. Some 18% of those who use magic circle firms employed them less in 2011 - for the third year in a row. By contrast, 25% sent more work to UK mid-tier firms, 18% increased instructions to ‘niche’ firms, and 22% decided to go direct to the bar and to ‘international firms’ more frequently.

CLO chair Sandie Okoro (pictured), general counsel at Barings, commented: ‘The findings in this year’s survey are the "new normal" - both because they confirm the trends first seen in 2009 and 2010, and because the trends are confirmed at a time when pressure on in-house budgets has decreased markedly.’

General counsel are using improved budgets to increase legal department headcount. Some 46% reported an increase in headcount in 2011, and 47% anticipate an increase in 2012. They also report greater influence over the ‘strategic direction’ of their companies - 52% said this had increased in recent years. Some 18% have ‘a great deal of influence’, part of a steady upward trend identified in 2009 and 2010.

Legal process outsourcing (LPO) businesses will take little comfort from the findings. Use of LPOs appears to have plateaued. While the use of LPOs showed a net increase of 8% in 2010, 2011 saw a net fall of 2%.

Law firms have reduced the provision of many ‘value added’ services, with general counsel reporting a reduction in client entertainment and secondees. Firms have instead increased emphasis on areas related to ‘knowhow’ - training, library access and some free advice.