There is plenty of data confirming the migration of work from law firms to corporate legal departments. Once regarded as law’s junior varsity, the in-house role has become a coveted alternative to the grind and uncertainty of Big Law. As Huey Lewis said, “It’s hip to be square.”
What is less often considered is how and why corporate legal departments have wrested the reins of the profession—and industry—from law firms. Are in-house departments contemporary law firms, albeit captives with different structures, economic models, leadership qualifications, performance metrics, functions and culture than traditional partnership model firms? Are in-house counsel—especially senior leadership --hybrids in the evolution of lawyers from “legal experts” to something different? The answers to these questions cast light on law’s future in a client/customer-centric digital world.
The Global Financial Crisis Changed Law—Gradually
The ranks, status, responsibilities, compensation, and influence of in-house professionals have increased markedly, especially since the global financial crisis. There are several reasons—some macroeconomic, others endemic to law. The collapse of Lehman and the fiscal maelstrom that ensued rebooted business--how it's conducted and the way goods and services are bought and sold. “More with less” and “better, faster, cheaper” morphed from mantras to mandates for companies digging themselves out of the financial ditch created by the crisis. Companies melded labor arbitrage and rapid advances in technology to reduce cost, accelerate delivery, and align with consumers. This became the impetus, means, and blueprint for new business models that offered consumers enhanced access, efficiency, cost-effectiveness, speed, connectivity, data, and alternatives to traditional delivery models. The balance of power in the buy/sell dynamic shifted from providers to buyers. The age of the consumer, enhanced by social media, was launched.
Law, unsurprisingly, registered a more deliberate, insular response to the financial crisis than other industries. Legal buyers eschewed new delivery models like Clearspire in favor of shifting work from law firms to bulked-up in-house departments. This was the “safer” option for precedent-bound, risk-averse in-house lawyers and a sure-fire way to reduce legal spend. Buyers routinely negotiated discounts and used the prospect of “in-sourcing” as leverage to exact steeper rack rate reductions from firms. These practices ticked the “cheaper” box of “better, faster, cheaper,” fueled in-house growth, and, significantly, tilted law's balance of power from law firms to corporate legal departments.
Technology and Disaggregation
Technological advances enabled in-house departments to disaggregate chunks of “legal” once handled by law firms . Corporate departments had a choice: "in-source" or outsource to “alternative legal service providers” (a/k/a law companies including the Big Four, Axiom, Thomson Reuters, and UnitedLex, among others). In-house counsel also began to separate “practice” -- differentiated legal expertise, skills, and judgment—from “delivery of legal services”—the business of law and leveraging practice via technology and process. The result was a constriction of “practice,” law firms’ stock-in-trade and the underpinning of its labor-intensive, leveraged pyramidal model. Law firms had previously handled matters end-to-end and profited mightily from premium billing of high-volume, low-value work at premium pricing. This eroded with automation, disaggregation, and competition—from corporate departments as well as law companies. Many services once sold exclusively by law firms were now offered by other providers--including in-house teams--more expertly, efficiently, and cost-effectively.
Law firms became part of a legal supply chain. Law was no longer solely about lawyers selling legal expertise; it was now the intersection of legal, business, and technological capability. Law companies—including “captive” in-house legal operations (legal ops) teams—specialized in "business of law" products and services. Law firms generally lacked expertise and efficient, cost-effective delivery capability--in part because it was anathema to their labor-intensive model . This checked the “better and faster” boxes for in-house teams. It also foisted them into a business role—they had primary responsibility for delivering more services and managing a legal supply chain. The divide between law firms and in-house departments was widening. Law firms were not being supplanted by in-house teams, but they were alternatively competing and collaborating with them--as well as with other providers. In-house teams, not law firms, were driving legal delivery--either directly or managerially. Law firms no longer controlled the delivery of legal services.
A New Legal Buy/Sell Dynamic
“Practice segmentation” was also taking place. In-house “relationships” with firms had previously meant retention across multiple practice areas, no matter the firm’s expertise, experience, price, or value sensitivity. In the years before the financial crisis, many firms grew and prospered by operating as undifferentiated legal big box stores. Post-2008, buyers became more discerning in no small measure because the C-Suite demanded it. They had options: handle “practice” tasks in-house, source them to firms with requisite matter expertise commensurate with cost (value), or “mix-and-match.” Corporate departments began to segregate their portfolios by required expertise, complexity, value, experience, cost, risk, and geography. This applied to “practice” and “delivery." It explains why several leading corporate legal departments opted to ramp-up their in-house capability to handle more—and more high-value—practice work in-house. Shell, which formed a captive global litigation boutique, is one of several examples. In-sourcing of "legal ops" work spawned the creation and growth of the Corporate Legal Operations Consortium (CLOC) and the Association of Corporate Counsel Legal Operations (ACC Legal Ops). Outsourcing of "legal business" work fueled the growth of law companies. DXC recently took a different tack, ceding primary management responsibility for a segment of its in-house legal portfolio to UnitedLex, a global law company. GE took a similar approach when it "rebadged" approximately 600 global tax professionals with PwC.
The ascent of in-house counsel coincides with the accelerating speed and complexity of business and its dizzying pace of change. Clients expect the legal team—no matter the provider source-- to be proactive, not reactive. As one CEO remarked to his senior in-house and firm lawyers, “I expect you to avert the mess, not simply clean it up.” In-house counsel acquired a dual role: defenders of the enterprise and business partners advancing enterprise objectives. Knowing the business—its challenges, competition, risk tolerance, culture, and objectives—is essential to success in each role. The dual role and “client-centricity” of in-house teams is markedly different from law firms. Corporate counsel understand clients want integrated business solutions, not legal briefings. This is yet another reason why more work has moved in-house. It’s not just a matter of price; it is expertise, “knowing the client,” providing actionable solutions at the speed of business, and calibrating legal exposure as one among several risk factors to be considered by the decision-maker. Not all in-house lawyers function this way or have fully embraced this mindset; however this is the direction corporate departments are headed. Some are already functioning as future lawyers and legal professionals.
Pressure from the C-Suite to reduce legal spend has spawned other changes in the legal buy-sell dynamic. Lawyers long sold exclusively to other lawyers; now, procurement is increasingly involved in legal buy decisions. This has helped debunk several legal myths: (1) lawyers—not clients—determine when their services are required and what’s “legal;” (2) all tasks and matters have a comparable value and require the best possible legal work product; (3) t better results obtain by hiring large, branded firms. Procurement has been instrumental in the widespread use of RFP’s, reverse auctions, fixed-fee arrangements, and other methods designed to “show cause” how a provider is qualified for engagement and possesses the delivery capability to produce results that are cost-effective and commensurate with client objectives and ascribed value. Differentiation of provider sources cuts across practice and delivery axes and is now embedded in the legal buy/sell dynamic. To be differentiated—and that includes in-house departments—a provider must demonstrate: (1) requisite domain expertise and experience; (2) delivery capability (that includes collaboration partners); and (3) customer satisfaction based upon results, not pedigree; value; and client engagement. These are additional reasons why more work is migrating from firms in-house and/or to other provider sources.
The Cultural Divide Between Corporate Legal Teams and Law Firms
The cultural divide separating in-house teams and law firms has widened during the past decade. In-house departments were formerly “law firm annexes,” populated principally by firm alumni/ae. More importantly, the two operated similarly; firms did the “heavy” lifting and in-house teams generally “managed” the work. Each was lawyer-centric. That’s changed. The market void created by law firm reticence to change (notwithstanding all the law firm “innovation” awards) has been filled by the in-house community and law companies. They embrace technological and process adoption, provide an equal seat at the management table for "non-lawyers" (non-licensed attorney legal professionals), and champion diversity. Law firms continue to focus on practice, not delivery; profit-per-partner (PPP) and internal metrics, not net-promoter score (NPS), and input (hours/origination) driven, not output (results/value) driven. In-house teams function in a completely different environment that is corporate, diverse, enterprise-aligned, designed for customer-centricity, fast-paced, business-oriented, digital (or headed that way), and results- driven. In-house counsel function as “business resources with law degrees,” not traditional lawyers operating in legal silos. They have a “home court advantage” over law firms and are far better aligned with the clients they serve. How they function is a glimpse into law’s future.
In-house teams are still reliant upon law firms, but not as they once were. They have forged a new paradigm for how legal professionals function that is more accessible and closely aligned with clients; provides holistic, interdisciplinary solutions; and relies on data more than gut. In-house teams are agnostic as to which provider source performs work--they are not ceding revenue by collaborating but advancing client objectives, outcomes, and value. Their success is aligned with client outcomes. Today’s in-house lawyers are client-centric, attuned to the challenges, demands, objectives, speed, and complexity of business; data-driven, proactive, and a business resource and potential profit center, not a drag on the bottom line. This is the contemporary "law firm" no matter what it is called.
Mark A. Cohen is CEO of Legal Mosaic, a legal business consultancy; speaker; author; and Distinguished Fellow at Northwestern University Pritzker School of Law.
This item was originally published in Forbes.