Last week I wrote an article analyzing the principal reasons why corporate legal departments are taking on so much more work themselves instead of outsourcing it to law firms. This is, of course, an ominous sign for law firms and the traditional partnership structure. So too is disaggregation and the emergence of legal service providers as well as others – notably the Big Four – poised to enter the gargantuan legal services market.
Some companies have taken the transition from legal consumer/provider to another level. These companies have spun off their corporate legal departments and have turned them into businesses that initially service the parent but are intended to then ply their competitive advantage in the broader marketplace. This has profound implications for legal delivery as well as how- and for whom- lawyers will be working.
Legal Futures reported last week that Elite Insurance, a legal expenses insurer, joined a small group of companies that have turned their in-house legal teams into an alternative business structure (ABS). The newly minted Elite Law is domiciled in Gibraltar and is a subsidiary of the insurance company, Elite Legal Services of London Ltd. Elite Law will take on various insurance defense services including: risk and legal matters, claims management and handling, and legal defense of claims brought against Elite Insurance and its policyholders.
This arrangement goes way beyond the “captive” insurance firms that many US insurers have long maintained. Elite Law is starting small with a small band of lawyers handling specialist insurance work initially solely for Elite. But the ABS intends to expand operations to other insurance carriers and their policyholders in the near future. Insurance defense firms in the UK: you are on notice.
Elite’s general counsel, Mark Thomson, is a former partner at a good-sized regional law firm; he knows how firms play the game. He summarized Elite’s objective securing an ABS license: “By extending our in-house reach with the granting of an ABS license, we are building a strong platform to handle the rising cost and complexity of claims across insurance lines.”
Query: if outside counsel did the job to Elite’s satisfaction, would the company have gone down the ABS road? And while we’re at it, would so much work be taken away from law firms and performed in-house? These questions are rhetorical, of course.
The failure of law firms to satisfy client needs, coupled with ABS, has not only caused in-house departments in the UK (and elsewhere) to take on more work internally, but it has also created a market opportunity for them to leverage internal resources and to enter the legal service business.
Elite Is Not The Only Company To Take This Route
British Telecom, property management company Crabtree, and several local UK authorities have previously transformed their in-house legal teams into standalone ABS’s. And while legal service is not their core business, these new ABS entities, like Elite, have morphed from large legal consumers into legal service providers. These companies have not only created a more cost-effective way to handle their own legal needs, but they have also harnessed internal technological and process expertise, melded it with specialized legal acumen, and have created a competitive business. Law firms take note: this goes way beyond labor arbitrage by in-house departments. These corporate pioneers are filling a void in the marketplace caused by firms’ obsolete, cost-escalating structures. They see a business opportunity. And this is a smoking gun in the argument that most law firms are witnessing their “Kodak moment.”
AIG Does Not Need ABS To Enter the Legal Field
Insurance behemoth AIG is, perhaps, the ultimate consumer of legal services, spending more than $2 billion in legal service per year. In addition to its in-house department, the company manages more than 1,500 law firms. And for over 3 years, the company’s 80person in-house legal operations team collected data and compiled an enormous database from which emanated benchmarks for all manner of legal staffing and spend.
AIG has turned this internal team –and database-into a business called The Legal Operations Company, LLC. Its aim is to establish more competitive pricing in legal delivery, and it serves not only as a resource for AIG but also as a paid service for other large corporate legal consumers. AIG has harnessed its substantial intellectual capital and operations expertise (IT and process again) and, in The Legal Operations Company, has created a business that will initially focus on the approximately 50 companies whose annual legal spend eclipses $300 million. Aaron Katzel, AIG’s global head of legal operations as well as the new venture’s President and CEO, explained the impetus for the new business: “The legal marketplace…hasn’t been terribly good about delivering information about what the right costs for services are and the right value is for the services that are being delivered.”
US law firms (as well as others around the globe): you are on notice.
Corporations have indeed morphed from legal consumer to legal provider. And some, as noted, have gone the next step, servicing not only their internal client but also others in the marketplace. This has occurred because law firms, that for decades had a stranglehold over the legal market, failed to respond to market changes brought on by a global financial crisis and its aftermath, the heightened importance of technology and business process in legal delivery, the rise of service providers, and globalization.
Consumers have voted with their feet, first by taking more work in-house and utilizing alternative providers to law firms, and, more recently, by setting up their own legal service profit centers. The failure of law firms to drive innovation is exacting a toll. And while PPP still remains high at many firms, the structural weaknesses of those firms—and their sustainability—is readily apparent. In an age of Uber, law firms are looking a lot like taxicabs.
This post was originally published in Law360.