The litany of law firm gripes is long and familiar: exorbitant cost and rates, overstaffing, budget unpredictability, IT and process deficiencies, and limited knowledge of clients’ business. One would think that law firms would be responding to all this—they read and hear about it every day. So why are legal consumers—not law firms—driving change in the legal marketplace? Simple answer: most large firm partners have yet to feel the financial consequences of stasis and are staying the course so they can “run the table.”
Meanwhile, legal consumers are changing their buying practices. Some common practices include: reducing the rosters of outside firms; negotiating substantial discounts; engaging in reverse auctions, requests for proposal, and even eBay- style bidding; ceding many legal buy decisions to procurement departments; taking more work in-house; outsourcing more—and increasingly complex– work to service providers; creating internal legal operations units; and building, buying, or licensing software that mines data to reduce cost and improve outcomes.
Corporate Legal Departments Are Driving Change
Demand for law firm services has been flat for three years and counting. Meanwhile, the volume and spend of legal work is rising steadily. How to explain the delta? Simple answer: legal consumers are now also large-scale providers– in-house legal departments account for approximately 40% of total legal spend.
Corporate legal departments have grown in size, portfolios, responsibility, compensation, and prestige. Many are driving change that goes way beyond becoming better buyers; they are innovative providers, too. Shell Oil’s legal department, for example has created an in-house global litigation unit that handles the bulk of the company’s major litigation, a practice area once exclusively outsourced to firms. And when the company recently divested nearly $5B in assets, its total outside legal tab was approximately $100K. The 3M corporate leadership team set a goal to invert the 2/3: 1/3 ratio of outsourced to in-house legal work. In just a few years—and with substantial cost savings and positive outcomes—the goal is within reach. And AIG, the world’s largest legal consumer with an annual spend of approximately $2B, created a legal operations team to mine its data to reduce legal costs and improve results. After successfully tackling the challenge internally, The Legal Operations Company was spun off to advise external corporate clients how to reduce legal spend and improve results. These changes are not simply about reducing legal cost; they also involve better outcomes via timely resolution and an enhanced reliance on data rather than speculation and episodic precedent.
The rise of in-house lawyers as providers is also attributable to their “home field advantage” over outside firms. They are embedded with the client and acquire a keen understanding of the business, objectives, risk tolerance, and corporate culture—something difficult for law firms to compete with. In-house counsel has a dual role: lawyer and business partner. “Legal issues” become “business challenges.” This is a critical distinction as legal delivery morphs from a vertical to a horizontal—touching technology, governance, financial, and business interests, among other enterprise areas. The chief legal officer (CLO) interacts regularly with other C-suite occupants– notably CEO’s, CFO’s, and CIO’s as well as the Board. This reflects the interplay of legal expertise with technology and business process in the new legal delivery paradigm.
The emergence of corporate law departments as major providers is a more fundamental paradigm shift than labor arbitrage. Providing legal service is no longer about selling legal expertise alone—law firms’ stock-in-trade. A successful legal provider—in-house or outside—now must integrate legal, IT, and process management expertise. Law firms are solid on the legal prong but lag in IT and process management capability. That’s a key reason why buyers are kicking the law-firm-as-default-provider habit—whether they do the work themselves or outsource it to non-firm providers.
Service Providers Create New Options
Service providers have created new options for buyers. They tend to be more tech and process savvy than law firms and are more closely aligned with corporate structure, culture, modus operandi, and DNA than firms. The good ones do “more for less” while mitigating risk. That’s why, as a group, their revenues are experiencing 30% annualized growth and increased market share. Institutional money is investing in them, another sign of the legal market’s maturation as well as smart money’s bet that more significant change is ahead.
Yet even as service providers expand their imprint on the market, they have inherent limitations. They are the offspring of disaggregation, delivering elements of what has become a legal supply chain. And while they often collaborate with law firms, in-house departments, and other providers to offer more integrated solutions, there remains an unmet market need for an end-to-end, integrated, scalable solution. That is when the law firm habit will really be kicked. But who is on the horizon?
Wanted: A “Safe,” Scalable Alternative to Law Firms
The real reason behind the gradual pace of change in the legal market is the absence of a “safe,” scalable alternative to large law firms. Boutiques and service providers can be effective, but they lack the scale, infrastructure, and brand recognition to substitute for large firms. The cost to replace an incumbent firm is high, so there must be a substantial upside to justify the investment and uncertainty of a new provider. Equally, lawyers are trained to be risk averse, and substituting a familiar firm with a new provider is risky business for in-house counsel. In sum, kicking the law firm habit is more easily done when it’s not your job on the line.
Real change will come when viable alternatives to large law firms enter the marketplace. This could take on several forms: (1) an established global service provider with deep IT and process expertise pairs with a branded law firm; (2) a new model firm–corporatized and/or agile– comprised of high-profile talent aligns with a diversified service provider; (3) a crowdsourcing model backed by a respected “sponsoring” brand; and/or (4) the Big Four.
The Big Four hold advantages and market appeal. They have global brands, vertical integration capability, deep ties across the C-suite, unmatched IT and process expertise, and a wealth of existing service offerings that align—sometimes overlap—with legal services. They have the resources to acquire top legal talent and the know-how to integrate it, thereby providing a holistic solution to complex global business challenges. And the current regulatory barriers will likely fall when large-scale legal consumers demand they do.
Law firm hegemony over the delivery of legal services is over. Its traditional pyramidal structure supported by countless billed hours at high rates is out of synch with the “more with less,” consumer mindset. And options exist.
More importantly, legal expertise is now one of three elements in a delivery model also comprised of technology and process management. If legal expertise is a taxi, then law firms are cab companies in an age of Uber. The marketplace is primed for safe, scalable law firm alternatives. Diversified global professional service brands with world-class technology, process expertise, capital, and deep C-suite ties are already delivering many “legal” services. They will have no difficulty acquiring legal expertise as needed to provide end-to-end solutions to complex, transnational business challenges. That’s when real market change will occur and the legal industry will replace most of its taxi fleets with Uber.
This post was originally published on Forbes.com