Everyone knows that the role of corporate counsel (a/k/a in-house lawyers) has undergone a transformation that has accelerated post the global financial crisis of 2008. Their number, influence, compensation, responsibilities, and status have risen dramatically. Why?
A Quick Introduction to The “Why?” Question
Corporate legal departments are in the midst of a “golden age,” while law firms are feeling the squeeze. There is a causal connection.
Demand for law firm services is flat while many corporate departments are hiring and taking on more and more work once outsourced to law firms. This results in no small part from law firms’ failure to utilize technology to reduce the cost and promote the efficiency of legal delivery or to respond to client demand for enhanced value. Study after study confirms this. And clients are starting to vote with their feet; they are as peripatetic as laterals. Not only are corporate departments reducing their panels of outside firms, but also they are segmenting outsourced work rather than sending it all to one firm. They are also directing more work to legal service companies whose structures, competencies, and pricing — not to mention corporate DNA —differ from law firms.
Most significantly, corporate legal departments are handling more work themselves.
It’s Not Simply a Matter of Price
Lawyers are too expensive. That’s a common, if not universally held market view (in the retail and corporate market segments). But it’s more than rates; the beef is increasingly casting a harsh light on lawyer structure and function issues. “Structure” refers to the traditional law firm partnership model that has multiple embedded cost escalators that benefit the provider but not the consumer. “Function” describes who performs what “legal” tasks (all of which are “legal” to law firms but not necessarily to clients).
The urban myth that “law firms must deliver all facets of a matter” has been debunked, and that has given rise to disaggregation and a legal supply chain. Not only does this affect cost, but it also requires “the right person, operating from an appropriate cost structure, to perform the appropriate task.” Law is following the transformation that medicine underwent decades ago. The structure of medical delivery has changed. And so too are the functions doctors perform narrowed to those requiring medical expertise.
Cost is certainly a key factor in the rise of in-house departments. The putative “loaded hourly rate” of an attorney working in-house is significantly less than an AmLaw 100 firm. This is labor arbitrage.
But there’s much behind the rise of corporate legal departments than cost alone. Knowledge of the client’s business is another key factor in the corporate build-up. True, the best lawyers (law firm or in-house) acquire a keen understanding of their client’s business; however, most firm lawyers are removed from the actual client. In-house counsel, by contrast, are embedded with the client, operate under its management and DNA, and are expected to “provide answers” to business challenges. Translation: in-house lawyers enjoy a “home field advantage” over their law firm counterparts, and they are expected to function not simply as lawyers but as business partners with legal expertise.
Globalization has also contributed to the ascent of corporate legal departments, especially among multinationals. While some firms have tried to “follow the money” by opening offices around the world, they confront a legion of conflict, cultural and integration issues — especially, as is frequently the case, when their growth is by acquisition. Those limitations are significantly reduced for corporate legal departments who have the advantage of tapping into their client’s substantial IT, process management, and HR resources. At a time when legal expertise is just one part of legal delivery, in-house departments have ready access to other key delivery components and can, when necessary, cherry pick outside legal resources when needed. Translation: corporate departments can more readily grow with the client than law firms can.
Collaboration is another element in the ascendancy of corporate counsel. Law firms are strangers to it because for so long they handled all aspects of outsourced matters. Today, they frequently handle parts with a growing list of legal supply chain providers that include: in-house counsel, service providers (entities “not engaging in the practice of law”), and consultants. It’s not in most lawyers’ training to collaborate instinctively, especially when it’s outside the firm. In-house lawyers must integrate and collaborate with the client. And integration fosters business knowledge, personal relationships, and trust. Advantage: in-house lawyer.
Prestige is another contributing cause of corporate counsel’s rise. As recently as a couple decades ago, most in-house lawyers were monitors of the law firms to whom they assigned the bulk of the client’s legal work. Corporate legal teams rarely handled large litigation or significant M&A work. But that’s changed. Some examples: Verizon recently revealed that it spends only 20% of its legal budget on outside law firms, and Shell recently formed an in-house global litigation team to handle some of its biggest matters. And with the assumption of more high-stakes matters on a direct basis has come increased salaries, perks, and —let’s face it–job security. Oh, and there’s the equity component; corporate lawyers can earn salaries plus stock options. Translation: it’s a good time to be a top in-house lawyer, and it’s certainly more prestigious than it once was. That’s why more top lawyers are jockeying for in-house positions than ever before.
Corporate legal departments operate from a different structure than law firms. They do not have the cost escalating partnership model, conflicts, and internecine battles that have come to characterize BigLaw. Nor is PPP their measure of success. Likewise, their DNA is more corporate than firms and this encourages a more holistic view of “legal” issues, relating them to business challenges.
Several corporate legal departments have created legal operations teams to address the integration of technology and business process/project management to legal delivery. Corporate departments are generally ahead of firms in structuring their delivery as an amalgam of legal expertise, IT, and process management. And that is central to why they have morphed from legal consumers to legal providers.
This post originally appeared in Law360.