The Triple Threat Facing Generalist Law Firms, Part 1: Insourcing

Workload is up for 76.7 percent of corporate legal departments, according to Altman Weil’s 2020 Chief Legal Officer Survey.

But that won’t necessarily correspond with additional work for law firms.

Indeed, despite an increase in work, from 2019 to 2020, 70.2 percent of legal departments did not increase their law firm spending; 38.4 percent decreased it. Nearly 13 percent of those who trimmed their outside counsel budgets did so by more than 10 percent.

Specifically, when asked how they planned to cover their overall workload, 54.8 percent of legal departments – more than half – said they would shift work to their in-house workforce.

The budget trends support this: 40.4 percent of legal departments increased their internal budgets, while 36 percent report plans to hire more in-house lawyers and 10.6 percent plan to hire contract lawyers.

In 2021, law firm spending is slated to continue its slowdown: 73.4 percent of legal departments said they will not increase their law firm spend, with 39.5 percent planning a decrease.

A Larger Trend

Altman Weil data shows that 2020 was the third straight year that in-house spend exceeded outside counsel spend. But the shift toward insourcing goes farther back. Legal Evolution shared statistics from the Bureau of Labor Statistics:

  • From 1997 to 2016, the number of employed lawyers in law firms grew by 27 percent;
  • For the same period, the number of employed lawyers in in-house legal departments grew by 203 percent.

In 2016, BTI Consulting reported that corporate general counsel had shifted $4 billion in legal spending back in-house by September. For context, that’s akin to seeing the salaries for 27,733 lawyers evaporate.

The Motivation

Writing for Legaltech News, Nathan Cemenska of Wolters Kluwer shared three primary benefits for insourcing legal work:

  • Better understanding of the business. As Cemenska writes, “[Corporate legal departments] ay a high hourly rate for outside counsel to ask basic questions – questions that insourced teams can skip because they work in the same organization and already know most of the answers. In addition to saving time and money, this reduces frustration by not having to bother business folks with questions and (expensive) meetings those folks view as unnecessary distractions from making money.”
  • Better alignment. Similarly, insourced teams are better aligned with business priorities. Cemenska argues that in-house counsel tend to focus on business facilitation over basic risk management.
  • Better processes. Insourcing work doesn’t always mean hiring, Cemenska points out. Many tasks are ripe for process improvement, and the legal teams that explore new workflows, technology solutions or automation can find significant ROI.

A 2016 survey by Thomson Reuters had a more straightforward approach. When asked why they were working with fewer outside law firms, 58 percent of in-house counsel cited cost containment, 52 percent cited efficiency, and 39 percent cited quality.

The cost factor is far from negligible: According to the Association of Corporate Counsel’s Global Legal Department Benchmarking Report, the median cost per lawyer is $90 per hour. Meanwhile, the average hourly rate for a lawyer in Georgia is $292; in New York, $308. (Multiply that by three for Big Law.)

What’s Vulnerable

The GC 350: Benchmarking Study for the In-House Community provides a look at in-house counsel preferences for work distribution.

When it comes to level of work sent to law firms:

  • Low-level legal process: 16 percent outsourced;
  • Day-to-day legal: 16 percent outsourced;
  • High-level strategic: 26 percent outsourced; and
  • Specialist advice: 45 percent outsourced – nearly three times as much as the first two categories.

When it comes to subject matter, in-house departments are more likely to claim the areas of focus that either require a thorough understanding of the company’s operations (i.e., commercial work) or broad knowledge in a general field (i.e., employment).

The areas typically handled internally:

  • Bribery, corruption and compliance: 92 percent;
  • Company and commercial: 87 percent;
  • IT and e-commerce: 78 percent;
  • Regulatory: 76 percent;
  • IP: 64 percent;
  • Insurance: 55 percent; and
  • Employment and employee benefits: 51 percent.

Conversely, the areas typically sent externally pertain to sophisticated or complex areas of the law (i.e., environmental or corporate finance) or projects involving multiple parties or jurisdictions (i.e., M&A and dispute resolution). They include:

  • Capital markets: 86 percent;
  • Insolvency and restructuring: 83 percent;
  • Banking and corporate finance: 78 percent;
  • M&A: 76 percent;
  • Competition and antitrust: 62 percent;
  • Real estate and environmental: 61 percent;
  • Tax: 59 percent; and
  • Dispute resolution: 57 percent.

What This Means for You

It’s time to take a hard look at your work and what it means to each client.

How likely is your work to be insourced? Consider these risk factors:

  • Matters that are frequent (contracts, trademarks);
  • Matters that are similar (employment issues);
  • Matters that are low-stakes;
  • Matters that are straightforward (i.e., single-party transactions, single-party plaintiffs, contract review).

If your work fits any of these criteria, it’s imperative you offer – and deliver upon – meaningful value for the client. Some options may be:

  • Are you the go-to firm for agribusiness, fashion or banking?
  • Are you the leading litigator in a certain jurisdiction? Does your firm have deeper roots, a bigger footprint, a commanding presence in your state?
  • Do you have leading experience with a given statute, transactional maneuver or regulatory agency?
  • Process. Do you have a better – and proprietary – method?

It’s time to take a fearless self-inventory – and start making a meaningful claim to the market. Well-branded specialist firms will be the most protected from the influx of work in-house.

Up next: Legal Technology (or The Robots Are Coming).

Scroll to Top