In-House Legal Departments

We see many companies these days running law firm convergence exercises – generally resulting in a preferred law firm network with fewer “approved” firms than the company previously used. The goal of this exercise is usually to reduce total legal spending and simplify outside counsel management. This kind of effort has a long track record at large companies, and the recent strength of the trend has had a big impact on the legal marketplace. It is, among other things, a significant driver of the continuing law firm merger trend.

Like many corporate initiatives, however, we don’t really know how well it works.  Is convergence always an effective way to get better price and quality? Or is it a center-led initiative that raises costs and creates only the illusion of control?

At AdvanceLaw, we work with about 180 corporate general counsel to vet law firms and provide feedback on lawyers’ performance within the group.  We have worked with dozens of GCs to design and build their preferred provider networks. Our most recent initiative, the GC Thought Leaders Experiment, is a collaboration with 25 general counsel aimed at better understanding outside counsel management practices by collecting and analyzing a large amount of matter-specific data.

Based on both our experience and our research, we believe convergence efforts can be very successful – and they are usually necessary.  But there are significant problems with how convergence exercises are sometimes carried out in practice.  The main goals of the effort can be undermined or even backfire.  Our goal is to make preferred provider networks work better for everyone; the purpose of this series is to outline what we believe doesn’t work – and what does.

We’ll start with the problems in how convergence efforts are sometimes executed today.

A formatted PDF of Dan Currell’s three-part series on convergence is online here. wdh

How it starts . . .

Most companies accumulate law firms over time, adding new firms as needs arise. It is typical to end up with 50, 100 or more law firms issuing at least one invoice each year to a mid-sized public company. It is quite possible to have over 1,000 firms working, at least a little bit, for a large multinational. The majority of spending is likely concentrated in ten or twenty of these firms, but the headache of managing the rest of the herd is considerable. (Nobody seems to know who these guys in San Francisco are and why they did $1,247 worth of work for us in March.)

Experienced in-house lawyers will regard this situation as natural. If you have a big company with lots of legal issues in different jurisdictions and practice areas, this is just how it is.

What’s the problem?

From a procurement perspective, this “natural state of things” looks like a mess. There are three apparent problems with spreading legal spending across so many law firms:

  1. Diffused Purchasing Power. By spreading our spending out across so many law firms, we are diffusing our purchasing power. If we concentrate our spending on five or ten firms – or heck, maybe just one or two – we will get a far better deal from those firms in return for the volume of business.
  2. Management Messes. Nobody can efficiently manage 100+ law firms, and indeed a portfolio of that many firms is often not managed at all. If we can get our preferred provider list down to 20 firms, we can implement effective management practices and stick to them – invoice compliance and review, alternative fee arrangements, performance management, use of alternative providers, matter postmortem reviews, project planning, process management and so on.
  3. Startup Costs. Firms that don’t know the client very well can take a lot of time and energy to ramp up on a matter.  Firms that serve a client consistently over time can hit the ground running on every new matter because they already know the client well.  It stands to reason that working with fewer firms will result in better service because each “preferred” firm will get to know the client better.

The procurement solution

Applying conventional procurement wisdom to the problem of outside counsel spending, the conclusion is easy: we should concentrate our spending into fewer law firms than before. Controlling for quality, we can drive down prices and therefore overall cost by aggregating our purchasing power.  There is much to commend this, which is why companies continue to create preferred provider panels.

But there’s an essential problem with the logic, because the act of concentrating purchasing power onto a small number of law firms alone will rarely result in lower prices. In fact, if not properly designed, this approach can lead to significantly increased legal spending. This is a little surprising, since convergence is intended to reduce legal expenses.

How can conventional wisdom be so wrong? Two reasons. First, economies of scale aren’t commonplace in legal services, so the underlying economic logic doesn’t work as neatly in law as it does in other markets. Second, convergence efforts often push clients up-market to larger law firms with higher revenues per lawyer, raising the basic cost of legal services.

Both of these problems can be overcome with the right design – but first it’s worth understanding how these problems play out in practice.

(1) concentration of purchasing power

The “concentration of spend” tactic is very beneficial in industries characterized by economies of scale. If I need a million sheets of paper but I choose to buy a quarter million sheets each from four different suppliers, it really does cost more for those million sheets to be made, packaged and delivered than if I had ordered the whole million from one supplier. There are serious economies of scale in that kind of business. If I concentrate my spending onto one supplier, some of the efficiency created by that big order is passed along to me in the form of a lower price per page.  (In an efficient but competitive market, half the savings will go to me and half to the supplier – we both win.)

Following this example from the paper market into the law market, if we concentrate our spending with one law firm where previously we spread it across four, will that reduce the cost of production for the law firm?

In theory, yes. And for the most innovative law firms, the answer will be yes. But most of the time, in the actual legal market of 2017, the answer is no.

Legal practice has historically had very few economies of scale. On the traditional model, if a firm was given four times the work, the natural path was for the firm to work four times as many hours.  Things are changing – but they aren’t changing all that fast.  Most law firms still aren’t set up to achieve efficiencies on a day-to-day basis in the way that other businesses regularly do.

But it’s not just that there is a lack of efficiency in law. It’s potentially worse. If there are no efficiencies to pass along to the client but the client nevertheless uses its market power to get a lower price from the firm, how will the firm preserve its profitability? The most tempting option is to save money by reducing quality.

We have plenty of firsthand evidence that law firms don’t do this.  Law is a heavily reputational business, and law firms will fight to serve their clients very well irrespective of profitability in most cases. But that said, it’s unhealthy for a market to be suffused with the temptation to make money by serving clients poorly. We want a better market than that.

(2) bias toward higher RPL firms

In practice, how do convergence initiatives play out?  When we see a multinational company consolidating into a very small panel of law firms, the winners usually include firms like Latham, Freshfields, Jones Day and the like. It’s just not possible to have one or two law firms handling, say, all of your global labor and employment work without getting into that bracket of 1,000+ lawyer firms with $1b or $2b+ in revenues. Nobody else has the necessary office footprint and practice area coverage. And those firms’ revenues per lawyer are $1,000,000 or more.  In all cases, the firms themselves have a lot of market power because they are big.  In some cases, they are bigger – by revenues – than the client.

If a convergence effort is consolidating work into national and global law firms, it is common in our observation that a dozen or more regional or local firms will lose the same work.  These firms usually have revenue per lawyer numbers around half the level of the firms that have replaced them. Since revenue per lawyer is the most fundamental measure of what clients pay, the convergence exercise that was intended to reduce spending has, in many cases, just increased it in a fundamental way.

So this is what we have regularly seen: a client is working with several regional firms whose revenues per lawyer are around $600,000. As a result of a convergence effort, the client leaves those firms for a smaller list of national and global firms whose revenues per lawyer are $1,000,000 or more. The theory behind this is that a bigger purchase will lead to better pricing. But that’s not how law works. One way or the other, the client will end up paying more for what it’s getting.

Put another way, in its search for efficiency, the client has just moved from a more efficient firm to a less efficient firm.

What about quality?  We have little evidence that quality and cost are much related. Big firms have a scope advantage – many offices, many practice areas, more lawyers who are deep and narrow in certain specialties – but our research into matter-level quality suggests that ultimate work quality is about the same as between regional, national and global firms. Not surprisingly, responsiveness from the biggest firms actually tends to be worse in the opinions of in-house lawyers.

To be clear, a move to a big firm may well be the right move. Such firms are in high demand and their fees are, at least to an economist, prima facie evidence of value.  But clients too often believe that the move to a short list of bigger firms will save them money on fees – and this just isn’t so. More often it’s the exact opposite.

Louis Vuitton, esq.

If the explanation above still doesn’t have you convinced, let’s try it this way: we saw that we were spending an awful lot of money on purses and handbags from dozens of different suppliers around the world.  In order to drive a better bargain, we decided to concentrate our spending on a few suppliers of purses and handbags.  But we needed a handful of suppliers who could sell us these products anywhere in the world, and we found that the only providers with a truly global footprint (every airport and city center) were Louis Vuitton, Chanel and Hermes.  So we decided to concentrate our spending with them; that way, we’re sure to get a better deal.

Obviously not.  These products are just fundamentally more expensive than middle-market handbags, and no amount of bargaining or bulk purchasing will make a Hermes handbag reasonably priced.  Market facts immediately trump procurement theory in this story.  And so with law firms, for the same basic reasons.

In both the law firm and handbag examples, the logic of concentrating spend to drive a better bargain is swamped by a confounding variable: global footprint (and in law, practice area depth and breadth) happens to have developed first and most strongly at the tippy-top of the market.  As a result, going to a short list of global suppliers will drive prices up, not down.  Any deal you get from Louis Vuitton will be radically more expensive than whatever you were doing before – because your decision to consolidate means that you are no longer buying the same product.  You can be happy with the quality, you can love the global footprint and the customer experience, you can benefit from only having to deal with a few suppliers rather than dozens.  But you cannot possibly save money by buying Louis Vuitton handbags.

Others Reasons for Convergence

Are there other benefits to going with a very short list of suppliers?  There may be.  The tendency across all areas of industry in the last two decades has been towards large, single-source contracts that make it easier to integrate a supply chain and enhance total efficiency.  In this way the world has tended overall towards large contracts between a single supplier and its customer rather than a range of suppliers working with the same customer.  The total benefit of the single supplier goes beyond price.  It may create greater overall efficiencies because of more reliability, simpler process, better management practices and other factors – and those are very real and important considerations.

We might just bundle all of that together and call it quality: we’re willing to pay more for quality in law because quality ultimately reduces the total cost to the client.  This is why it can make some sense to hire the former Solicitor General at $2,000 an hour or to give Wachtell a percentage fee on a certain kind of deal.  By the same token, it explains why it may be sensible to work with a global firm across a dozen or more jurisdictions for the sake of integrated service.  Those are enhanced features, and they may increase the total overall value of a representation, but they will not reduce its cost.

There are other problems with conventional practice.  Two are most apparent in their effect on the law firms’ day-to-day work.

  1. Firms formally placed on a preferred provider panel know that the work is locked up, so they have little incentive to hustle in order to please the client.  Often, responsiveness suffers.
  2. Costs rise not only because firms are now inherently more expensive but also because they are assured a position in the client’s set of law firms – they are, in a sense, formally entitled to the work.

These problems result from how the preferred provider panel is structured.  Firms that otherwise may have been constantly competing for a client’s business are now assured of getting the work.  Again, this is not intended, but it is a predictable result of today’s common practice.  And in our research, we do see indications that in some cases, firms assured in their position on a preferred provider panel can work less hard than firms who are actively competing for more work from the same large client.

Having said all this, we are in favor of preferred provider panels in part because the alternative is untenable.  Nobody can coherently manage 100 or 200 law firms.  There are tremendous management benefits to cutting that list down to size.

But it does have to be done right, and that doesn’t happen without focus and adherence to a few key principles.  The next installment (Post 030) will focus on how to do preferred provider panels right.   We’ll outline the management practices that we believe achieve the overall results companies are looking for from their law firm panels.

What’s next?  See Part II on Convergence: How to Make It Work (030)

One of the biggest stories over the summer of 2017 was an open letter from 25 general counsel announcing that they are working together to test industry assumptions about the legal market. Although the composition of this group is very impressive, it is also not random. Each company is a member of AdvanceLaw, a network of buyers and suppliers of legal work that seek to drive value by sharing quality metrics and creating data-driven best practices.

Fortunately, Legal Evolution readers are about to get the benefit of some of AdvanceLaw’s insights. Over the next three days, AdvanceLaw Managing Director Dan Currell will post a three-part series on law firm convergence and preferred provider networks — basically, theory versus practice (029), how to build a panel that can deliver value (030), and the necessity of active client management (031).

Over the last 10 to 15 years, many large corporate clients have attempted to use convergence to rein in their legal costs, typically through a process that reduces the number of outside law firms, often from two or three hundred to twenty or fewer”preferred provider” law firms. Convergence is controversial because, among other things, it disrupts longstanding (and often comfortable) relationships between in-house lawyers and established law firms. Also, because the process is run by risk-averse corporate counsel who are winnowing firms for the first time, the results tend to favor the “safe” choice.

Notwithstanding these problems, we are going to see more — and better run — convergence in the future, as clients have a strong incentive to fix the underlying design and execution issues. The state-of-the-art is definitely going to improve.

Dan Currell is uniquely qualified to write on this topic.  Prior to joining AdvanceLaw, Currell spent more than a decade running the General Counsel Roundtable for the Corporate Executive Board (CEB). Between his time at CEB and AdvanceLaw, Dan has spent more time listening to challenges of senior in-house lawyers than virtually anyone in the legal industry.  Further, Dan and his colleagues at AdvanceLaw are now in a position to help shape the future.

I hope you enjoy these posts. WDH.

What’s next?  See Part I on Convergence: Why Theory Falls Short of Practice (029)

Among the many impressive finalists for this year’s ILTA Innovation Awards, the submission for the Telstra legal department stood out as a compelling change management story.  By enabling the right kind of collaboration among its lawyers, the Telstra change initiative reduced the internal workload on the 220-lawyer department by 40,000 hours. Further, by returning time to overburdened lawyers, the department created a culture that is much more supportive of change efforts.

Yet, what is most significant about this story is that virtually any legal organization could replicate this success by taking a few simple steps.

The business challenge facing the Telstra legal department

Telstra is an Australian telecom company that was formally a state-run utility.  Shortly after completing a phased privatization in the mid-2000s, the 2008 financial crisis forced the company into downsizing mode. 10% annual budget cuts were implemented for all parts of the business, including the legal department.

Like many successful change initiatives, this one began with false starts and disappointment.  As the cost-cutting pressures continued to mount, in 2013 the legal department created a long list of key pain points that needed to be addressed for the group to be successful. Recalls Mick Sheehy, Telstra’s General Counsel of Finance, Technology, Innovation & Strategy, “we thought the list was so important we made it everyone’s shared responsibility, including our senior legal leaders, which meant ultimately it became no one’s responsibility.”

A Process to Prioritize, Plan, Implement, and Repeat

With the department struggling to gain significant traction, in 2015 Sheehy attended a design thinking course at Harvard Law School.  Impressed with these ideas, Sheehy returned home and ran a design thinking workshop with a group of his own lawyers, receiving some expert facilitation from a team at Herbert Smith Freehills. Cf. Post 015 (noting key determinants of organizational innovativeness are leadership’s attitude to change and openness to external perspectives).

After once again creating a laundry list of the department’s biggest pain points, the group limited itself to the top four.  Thereafter, they used design thinking techniques to construct potential solutions for each problem and to implement them through an eight-week “sprint.” (Borrowing from the world of software development, a “sprint” is a discrete time period — usually two weeks to two months — where a team creates a working prototype or an updated version of a product. See Agile Glossary.)

Below is the simple process each Telstra work team used evaluate and improve each change initiative:

What makes the Telstra process different that other change initiatives is that it is iterative and enables the group to learn from implementation.  Thus, a decision to continue is also a decision with much better information and a higher likelihood of success.  Likewise, a decision to kill an initiative is less a failure than a prioritization of limited department resources to support the highest impact projects.

Notes Sheehy, “We ran the sprints and we came back to another workshop and we looked at what we achieved and were so enthused and excited that we decided to do the whole thing again. And we haven’t stopped. This is now an embedded process in Telstra legal and we recently ran our 8th Telstra innovation workshop.” Cf. Post 008 & Post 011 (noting simplicity and trialability as among the keys to successful adoption).

Telstra rotates lawyers through the innovation program, known internally as the Legal Innovation Forum, or LIF.  As of August 2017, 35 Telstra lawyers have participated in the program.


Thus far, four “streams” have left the Forum, having achieved their core objectives.  Although Sheehy notes that none of them are particularly exciting on their own, “collectively they’re telling a great story.”  Here are the four streams.

  1. Self-Service NDAs (5,300 hours saved).   Most non-disclosure agreements are standard and low-risk.  By embedding the key decision points into an automated workflow, the number of lawyers hours per annum dropped from 6,425 to 1,125, resulting in an 82% time savings.
  2. Less Legal Report Generation (2,250 hours saved).  The equivalent of two lawyers were producing a weekly report for the CEO that he was not regularly reading. So the reports going to the CEO were cut by nearly 2/3, reducing the time commitment from 3,750 hours to 1,500, resulting in an 60% time savings.
  3. Fewer Internal Meetings (31,500 hours saved).  Throughout the legal department, the numbers of internal meetings was widely viewed as excessive. As part of a LIF initiative, internal meeting where categorized as either “decision making” or “information sharing” meeting. For decision making meetings, organizers were told to only invite people they needed and to make the decision points explicit in advance. For information sharing meeting, each attorney was limited to 2.5 hours per week. Across the 220-lawyer department, this resulted in a drop in internal meeting hours from 60,180 to 28,680 (52% reduction).
  4. Reduce Legal Review of Internal Communications (1,008 hours saved).  A careful triage of the type of internal communications subject to legal review revealed that a substantial volume of review was unnecessary.  Better workflow criteria resulted in reduction of attorney hours from 3,470 to 2,462 (29% time savings).

Telstra’s internal time saving target for these four initiatives was 27,000 hours per annum time.  Yet, they overshot the mark by achieving more than 40,000 hours.  This is the type of ROI available when lawyers use people, process, and technology to “do less law.” See Ron Friedmann, Do Less Law — A Taxonomy of Ideas, June 11, 2015.  It was also enough for Telstra to win the 2017 ITLA award for legal department innovation.

Lessons learned

As noted above, as of August 2017, Telstra had eight workshop/sprint iterations, which is the basis for an enormous amount of organizational learning. What are the key lessons?  Sheehy offers several:

  • Data.  “It’s critical to measure your baseline and know your starting point so you can tell a data driven story so people can understand all the effort you’re putting in is driving results.”  Cf. Post 008 (data makes innovation more observable and thus more likely to be adopted by others).
  • Not reinventing the wheel.  “The problems we’re solving are not unique to Telstra legal department and may be faced by other law firms and departments in the company. Having an outward focus rather than an inward focus is critical.” Cf. Post 017 (noting openness to external ideas and influence as key determinant of organizational innovativeness)
  • Not waiting for perfect; avoiding options paralysis. “We have a tendency to overthink problems when we sometimes just need to get started. Jeff Bezos had a great point when he said that if you’re waiting for more than 70% of the information to make a decision you’re probably waiting too long, and getting something wrong is less expensive than being slow.”
  • Communication.  “All of this has a degree of behavioral change and behavioral change is really hard. We had to focus on the communication. The reduction in meetings was difficult and to get people to think differently on that – a lot of it was down to communication.”

Below is the last graphic from Telstra’s ILTA presentation.  Note that in its original form it was a series of sticky notes generated by team members during the Forum debriefs. In other words, a simple low-tech process is the engine that is powering tremendous organizational efficiency and learning.   Per Sheehy and his Telstra colleagues, the blocks in red are particularly important.

A special thanks to Mick Sheehy and Ali Caldicott of Telstra for making the ILTA slides and presentation script available to me.

What’s next? See Currell on Convergence and Preferred Provider Panels (028)

alanbryanfutureoflitigAs a law professor, I worry about my students’ job prospects.  One way to manage this worry is to study clients and to work backwards from their needs.  Opportunities tend to find lawyers who follow this discipline.

Yet, making generalizations on law clients in the year 2017 is surprisingly difficult. This point was recently driven home by the juxtaposition of two “voice of the customer” examples at the Ark New Spectrum conference in Chicago last month.  The first example came from Aric Press, longtime editor-in-chief of The American Lawyer, who now spends a good portion of his time doing client feedback interviews through his consulting firm, Bernero & Press.

Example 1

Do law firms need to embrace sophisticated tech-based solutions to retain their largest and most important clients?  Aric put some variant of this question to a senior in-house lawyer who controls tens of millions of dollars of legal spend at a client we’ve likely all heard of.  The response was surprising, even to Aric. “I only need two pieces of technology. Email and my phone. And both work fine.”  This same in-house lawyer praised the firm being reviewed for cultivating a relationship of trust that felt personal. That’s comforting feedback for the service providers.

Example 2

The second “voice of the customer” came from Alan Bryan, Senior Associate GC of Legal Operations and Outside Counsel Management at Walmart. Alan presented the chart above, which graphically summarizes some of his views on the evolution of litigation [click on image to enlarge].

Caveat:  Alan Bryan is skilled and careful legal operations professional, which means he understands the range of interpretations that lawyers assign to graphical information.  A major caveat Alan made during his remarks is that the arrows above “are not to scale” — i.e., they do not reflect the quantum of hours worked or dollars spent. The chart instead shows a likely directional change in the relative mix of service providers, including in-house counsel.  The growing green arrow includes, at least in part, non-traditional legal service providers of the type profiled in “Efficiency Engines,” ABA Journal (June 2017).

So what’s the takeaway?

The nature of legal work among the nation’s largest corporate clients is simultaneously changing significantly and not at all.

On one level, this is frustrating because it means any generalization is vulnerable to the killer counterfactual anecdote. Within firms, this means strategy setting can veer toward melee.  The broader “profession” will also struggle to plan and adapt.

On another level, however, these two voice-of-the-customer examples reveal large client segments that are operating on different time tables. Alan Bryan feels sufficiently strongly about the changing nature of law practice that next year he will be teaching the first second full-semester* “Introduction to Legal Operations” course at an ABA-accredited law school. The course will be offered at his alma mater, University of Arkansas-Fayetteville School of Law.

The legal world is changing, albeit unevenly and in ways that defy simple generalizations.  That said, I would be comfortable wagering that over the course of a 40-year career, taking Alan Bryan’s legal ops course will, in cumulative effect, open as many professional doors as a degree from Harvard Law School, albeit HLS appears to be hedging itself in a very prudent way.  See Underestimate Harvard Law’s New Admissions Strategy at Your Own Risk.  As a field, legal ops is disruptive because it focuses on measurable results. See Post 005 (discussing rise of legal ops and CLOC).  You either have the knowledge, skills and experience to deliver, or you don’t.  Credentials and pedigree can’t fill that gap.

 * Since the fall of 2015, legal innovator Ken Grady has been teaching “Delivering Legal Services” at Michigan State University College of Law.  This is a 2-credit course that functionally covers the terrain of legal ops, including, per Ken’s email, “project management, process improvement, technology, metrics, design thinking, and a few other topics.”  Since January 2016, Indiana Law has been offering a 1-credit Legal Operations course during our January Wintersession. If your school also offers a “legal ops” course, please let me know and I’ll amend this post.

What’s next?  See Example of Automating Private Placement Documentation (014)

Six Types of Law Firm Clients
Six Types of Law Firm Clients

As the legal market remains flat for law firms, the focus naturally turns to clients.  How they think. What they care about. How they spend their budgets. Etc.  Yet, to the extent that clients vary in significant ways, the generalizations aren’t particularly helpful.

Six Types of Clients

There are many ways to categorize clients, but by my lights the most useful is size and organizational structure of the in-house legal department. As shown in diagram above, this metric varies from zero for individuals (Type 1) and business owners (Type 2), to the equivalent of a specialized law firm embedded inside a large corporation (Types 5 and 6). Continue Reading Six Types of Law Firm Clients (005)

A lot. The trend is large and longstanding.  Over the last two decades, the number of lawyers working in corporations has more than tripled, growing from 34,750 in 1997 to 105,310 in 2016. The chart above shows the trendlines.

Most people working in the legal industry know that in-house legal departments have been growing, but has there been an accurate sense of the magnitude — 7.5x faster than law firms over the last 20 years?

It took a fair about of time to pull these data from the Bureau of Labor Statistics and put them into the right format to generate the above chart. Yet, the chart itself raises more questions than it answers.

  • Why are corporations in-sourcing a non-core function? During this same period, outsourcing of various business processes has been growing.  Why is legal treated differently?
  • How long into the future will this trend continue? What might curtail this trend?
  • What are the age demographics of in-house legal departments compared to law firms? Law firms are graying. Will in-house departments avoid this same problem, or will it hit over the next 5 to 15 years?

The orange “in-house line” is so far above the other two sectors that is obscures another unexpected finding.  Since the mid-2000s, government has been growing faster than law firms – what’s causing this rise?  Either the government’s been on stealth hiring binge, or law firm hiring has flattened out in a way that cannot be characterized as cyclical.

Subsequent posts will return to these questions.  Before doing that, however, I want to time build out a simple theoretical framework that we can apply to legal industry data. This framework in rooted in diffusion theory.

What’s next?  See What is the Rogers Diffusion Curve? (004)