How long is your vendor “tail”?

For the last 10 years, LexisNexis^® CounselLink^® has reported on six key benchmark metrics in our annual Trends Report. One of those metrics has been tracking the legal industry trend toward vendor consolidation; that is, corporate legal departments engaging a smaller panel of vendors to meet their outside counsel needs. Our current benchmark data shows that in 2020, 50% of corporations engage 10 vendors or fewer to handle 80% of their spend.

Consolidation to a small number of firms or other vendors for the majority of spend clearly has potential benefits for legal departments—leverage to negotiate more favorable rates, stronger vendor relationships, depth of knowledge, and improved legal outcomes. But tracking this one metric begs the question: how well are legal departments managing the firms that represent the remaining 20% of spend?

We took a look at the number of vendors that bill CounselLink customers and found some compelling data. On average, 11 vendors account for 80% of a corporation’s legal spend. And another 62 vendors account for the rest of spend—that is, the “tail.” You may download our infographic for a better visual representation of the data.

It’s important to keep in mind that there’s considerable variability by industry sector. These are the average numbers of firms billing companies in several key sectors as defined by the North American Industry Classification System (NAICS):

On the low end of the spectrum, companies in the Health Care & Social Assistance sector have 37 vendors in their tail, and those in Retail Trade have 38 vendors. On the high end, Pharma companies have an average tail of 90 vendors and, not surprisingly, Insurance carriers come in with an average tail of 330 vendors.

Corporate size also correlates to tail size. Small to mid-size companies with less than $1 billion of annual revenue have an average tail of 38 vendors; large companies between $1 and $10 billion have an average tail of 65 vendors; and the largest companies average 102.

Taking the analysis one step further, we also looked at the number of tail firms that were engaged in 2020 for only one matter. Excluding Insurance carriers, on average, corporations engaged 31 firms for just one matter in 2020, which means that half of the firms in the tail have extremely limited engagement with the companies that hire them.

So why does tail size matter? The longer the tail, the greater the administrative burden of managing those vendor relationships and the likelihood that poorly managed relationships are not producing optimal results. Firms in the tail are more likely to have less favorable rates negotiated, lack of familiarity with company-specific outside counsel guidelines, and only superficial knowledge of a company’s business and culture.

Many corporate legal departments have made great strides in building out vendor management programs for their primary vendors. One way we at CounselLink see legal departments gaining in maturity is by also building strategies for managing their tail firms. These strategies can include strict guidelines for engaging vendors outside of the core panel of firms, centralization of rate approval, and tracking of outcome satisfaction with all vendors. Contact us at CounselLink if you’d like guidance on your vendor management strategy.