It’s hardly news that the once-cozy relationship between BigLaw and corporate legal departments has morphed into something quite different. In Facebook terms, it’s gone from “in a relationship” to “it’s complicated.” Relationships once cemented over rounds of golf and scotch have yielded to RFP’s and reverse auctions. The bloom is off the rose. And clients are voting with their feet as companies replace law firms about as often as laterals hopscotch in search of sweeter deals. But corporate legal departments are doing a lot more than simply substituting one firm for another.
Lots of Signs of Client Dissatisfaction- And a Myriad of Responses
Most large legal consumers are radically pruning the number of firms they outsource to. They are also segmenting outsourced work based upon value, expertise, risk tolerance and price. They are increasingly negotiating fixed pricing, both for individual matters as well as portfolios. Law firms now routinely work with service providers as well as in-house departments as work is further divided based upon “who is the proper resource to handle it.” Factors include: expertise (not just legal but also legal, technological, or process), value, price, risk, and other considerations.
Even still, many corporate legal departments recognize these measures affecting outsourced work are a panacea- but not a cure- for their dissatisfaction with law firms. And the degree of dissatisfaction is significant. A recent study by BTI Consulting reveals “Only 40.1% of clients recommend their primary law firm to a peer, after the second biggest drop on record last year, when 33.3% of clients recommended their primary law firms.” That means–even with the improvement over the prior year– six in ten clients would not recommend event their primary outside firm. What does that say for the other firms it uses, not to mention the far less than ringing endorsement of their “go-to” firms?
Structural issues endemic to the cost-escalating partnership model cannot be readily repaired. One reason is unwillingness of older partners to “take one for the team” and to accept less partnership tribute to reduce cost. Unlike corporations where aging management have an ongoing financial stake in the enterprise’s long-term success, law firm elders generally adopt a “future is now” approach to maxing out compensation. This promotes instability and compromises an orderly succession process. And corporate legal departments know this.
Corporate Legal Departments are Doing More–And Driving Innovation
The real threat to law firms–who for a couple of years now have confronted a stagnant demand for their services–comes from in-house legal departments. They have increased in size, prestige, management responsibility, and attractiveness to top legal talent. And it’s not just labor arbitrage that accounts for the shift from outsourcing work to doing it in-house. Knowledge of the client’s business is a key factor in the corporate build-up. True, the best lawyers acquire a keen understanding of their client’s business whether they work in-house or at a firm; however, most firm lawyers are removed from the actual client, with corporate counsel as an intermediary. In-house counsel, by contrast, are embedded with the client, operate under its corporate structure, ethos, 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 also as business partners with legal expertise.
Some corporate legal departments are doing even more. Not only are they hiring fewer firms to do less work, but also they are managing the legal supply chain and pursuing strategies that optimize efficiency, reduce cost, mitigate risk, and align with corporate objectives. The recent decision by Shell Oil’s Legal Director, Donny Ching, to consolidate “back office” tasks in a single offshore center–one where Shell lawyers will work side-by-side with legal operations (legal ops) personnel–is illustrative.
Mr. Ching is no stranger to bold moves. For example, under his watch Shell has created an in-house global litigation boutique that handles most of the company’s major litigation. It’s logical, then, that he is next tackling the substantial cost of litigation support, integrating the IT and process elements with the legal expertise capability. Ching stated: “Shell is taking essential steps to building a more sustainable and resilient company… Shell’s legal team is examining opportunities to offshore some specific parts of our work where it makes sense to consolidate services, increase efficiencies and reduce costs.”
And while some might say, “Several law firms are creating offshore operations centers, too,” there are salient differences. First, for law firms, offshore service centers are an internal cost-saving/revenue generating measure, not one that necessarily drives value to clients. Also, most firms do not integrate legal operations with legal expertise as Shell and other forward-thinking legal departments have. It’s not in their DNA to offer an equal seat at the table for technology and process experts as it is for corporate departments.
Corporate legal departments like Shell, 3M, and AIG are taking an operational excellence approach to legal delivery. This means that not only are they aligning legal expertise, technology, and process management within their department (as well as with outside resources as necessary), but they are also aligning legal operations with the corporate enterprise. It’s becoming increasingly difficult for law firms–whose stock in trade is limited to legal expertise–to compete with their in-house counterparts.
The client centricity of corporate legal departments, coupled with their understanding of the client’s business and DNA, set them apart from law firms. And so too does their rewards structure; corporate lawyers have a long-term financial interest in the enterprise most law firm partners don’t. That’s another reason why corporate legal departments, not law firms, are driving innovation in the corporate segment of the market. And they are not only voting with their feet but also taking strides towards replacing the partnership model that many of them came from.