When GCs Hire Law Firms Instead of Keeping Legal Work In-House

The traditional law firm model has been in turmoil for years and there’s no slowing down the pace of change. A contributing factor to the turbulence, or the result of which, is the evolving role of general counsels and corporate legal departments.

Instead of blindly continuing law firm spend for the same issue or farming out consistent work streams in particular areas, general counsels (GCs) are bringing the work in-house where it can be done more cost-effectively. And, for a growing number of legal departments, even complex issues previously handled by outside experts are being brought in-house.

The pendulum has swung, but GCs still need to hire outside counsel for some of the work. In this new environment, what are some of the factors that go into the GC’s decision to hire law firms vs. keeping the work in-house?

Related: Law Firms vs. In-House Counsel In a Changing Legal Environment

When GCs keep the work in-house & lessons for law firms

Payment not tied to performance by law firms

Allstate GC bemoans that, “As an industry, or a profession, there isn’t a lot of conversation about winning and losing, success fees, or maybe things didn’t go so well, so the law firm doesn’t get paid,” Lees said. “The industry is really unique, in that sense. It used to be tough to explain, but it’s gotten incredibly difficult to explain fees to business people.”

Lesson: To be considered this work, law firms must offer alternative fee arrangements (AFAs).

See:
How Many Alternative Fee Arrangements Are There?

Advice from Procurement consultants re: cost savings

At the end of a procurement analysis process, a consultant may recommend a reduction in outside legal spend and an adjustment in the types of financial arrangements the legal department has with existing firms. This can result in legal departments moving work in-house or dispersing work among smaller firms instead of consolidating work to larger firms which comes with higher fees.

The shift of balance in total spend between outside counsel and in-house spend is approaching 80 percent of the budget on inside counsel and 20 percent outside, and the trend is expected to continue.

Lesson: To slow down the trend, law firms must become more accountable by being better at analyzing key performance indicators and employing reporting processes and technology.

See:
Law Firm Service: Back to Business Basics and Technology
Boost Your Law Firm’s Profitability with Advanced Analytics

Legal departments now have their own “first-year associates”

GCs are skipping over law firm associates and hiring right out of law school.

The handling of diverse, complex issues allows in-house departments to deal with interesting cases formerly handled by outside counsel which make working in-house and keeping the work there an even more attractive option. This is especially appealing to junior attorneys.

“Agrochemical and biotech giant Monsanto joined the club of companies reserving some spots for law students, rather than laterals. Asked about his pitch to students, General Counsel, Dave Snively, said the company offers the chance to skip over the drudgery commonly associated with work as a junior associate.”

Lesson: Law firms can work with corporations to “share” junior attorneys. Such as giving them a desk in the company’s legal department office. These types of arrangements are already in place for some firms and their corporate clients.

Rising hourly rates in law firms have lowered the tipping point at where work is brought in-house

This is a growing concern for in-house counsel and the recent spate of first years’ salary increase hasn’t helped.

Lesson: Find alternative compensation models for associates.

See:
What if Law Firms Offer Pay Raise Alternatives That Both Associates and Clients Will Love?

Work still being farmed out to law firms

It’s not all gloom and doom. Some work is still being handled by outside firms.

Advisory work

This work could be on a deal, a dispute or some other unique objective that requires the time of senior attorneys and is not particularly price sensitive.

Execution work

The company’s legal department knows what they want to do and may even know how to do it but don’t have the resources required to get it done.

Litigation
One exception to the trend of bringing work in-house is litigation which is sporadic and where companies often need counsel in multiple jurisdictions.

Although these types of work are still being farmed out, law firms must be diligent and proactive in determining how to identify and capitalize on each.

Sources:
Sorry Law Firms, Verizon’s GC is Taking it In-House
The Rise of the GC: From Legal Adviser to Strategic Adviser (PDF)
Allstate GC: Law Firm Rates Are Way Too High
The Monsanto GC’s Recruiting Pitch to Law Students
Corporations Are Moving Work to Less Traditional Law Firms
The Revolution’s Second Phase: How the Role of GCs Is Transforming Business and Law
Comment: Gibson Dunn’s Geffen argues law firms can sell judgement or process but few can excel at both