Law firms’ competition

Larry Ribstein —  6 November 2011

The biggest competition for law firms is not other law firms but in-house counsel. So reports the ABAJ.   I make a similar point in a paper I’m presenting at a University of Wisconsin program next week.

There are two reasons for this:  pressures on firms to reduce fees, and law’s information revolution which is reducing firms’ need to rely on traditional legal services. In my Wisconsin paper I consider the impact of the following developments, among others:  automated contracting, compliance software, knowledge management, streamlined dispute resolution mechanisms, and Web-based processes for learning about and hiring lawyers.

Simultaneously with these developments, law firms are becoming less reliable as reputational intermediaries because they do less monitoring, mentoring and screening of lawyers (see Death of Big Law).  Corporations are finding that they can dispense with the middleman (law firms) and hire lawyers directly.

I predict the next step in the evolution of corporate legal services will be the mutation of in-house lawyers themselves.  Instead of corporations simply bringing law firms within their walls, they will spread legal expertise throughout the organization — what I refer to in the Wisconsin paper as “embedded lawyers.”

These developments have significant implications for the market for corporate legal services.  Law firms have managed to survive for decades on a business model that enables them to charge corporate clients hundreds of dollars an hour more for their lawyers’ services than the firms are paying.  The difference, of course, is profits to the partners.  Corporations are now competing away these profits.

Needless to say, law graduates and law schools will see the effects of this competition between in-house and outside law firms.  At the same time that law grads are seeing fewer corporate jobs they may also be seeing lower wages for the jobs that are available.

Moreover, applicants for these in-house jobs will have to meet corporate specs. Under the old model, law firms hired generalists from the best schools and trained them.  Corporations hired some of the better ones a few years out. Now corporations are looking to hire cheaper lawyers right out of law school.  They’re looking for graduates who don’t need the law firm apprenticeship.

The law schools that will win the corporate job placement derby will be the ones that can provide some of the training law firms used to provide.  In other words, while law schools seem to think they need to teach their graduates where to find the courthouse, the biggest need will be those who understand how businesses make money.

These developments have implications beyond corporate legal services.  Corporations can access legal technology without worrying about the unauthorized practice rules that restrict this technology at the consumer level.  But once this technology is widespread in firms it will be harder to block its availability to consumers.

Watch this space for more on these issues.

Larry Ribstein

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Professor of Law, University of Illinois College of Law

12 responses to Law firms’ competition

  1. 
    Ebenezer Scrooge 17 November 2011 at 7:36 am

    I speak as an in-house lawyer hired directly out of law school. Professor Ribstein’s post comes out of the uniform spherical world of Chicago economics.

    First, only the biggest firms can take students right out of law school. Everybody else needs lawyers who can come up to speed within a few months. No law school on this planet will ever produce such lawyers. (btw, I would be terrified of a 24-year-old who thinks that s/he has been trained on “how businesses make money.” I’d be twice as terrified if these thoughts derive from Chicago economics. Fortunately, most 24-year-olds are smart enough to discount such training 100%.) Somebody has to provide the apprenticeship–either government or law firms.

    Second, even firms with strong in-house departments need outside counsel: for surge work, for specialized work, for independent counsel whitewashing, and for imposing the usual agency costs that exist everywhere but spherical Chicago. (Bet-your-company cases are one example, but other, more tawdry ones exist. Consider a discrimination suit in which senior officers are arguably implicated. GCs need somebody to blame if things go wrong. And they are not going to want to blame their senior in-house litigator.)

    Third, no smart in-house counsel uses outside firms as reputational intermediaries any more, except for whitewashing. You hire lawyers, not firms. The fancier firms tend to have better associates, but you would be nuts not to vet them as individuals, if you are going to rely on them.

    Fourth . . .
    . . . hey, I should get back to work.

  2. 

    The one thought I would add to this productive exchange is the liability of in house counsel for misdeeds of the corporation. It would be interesting to see how malpractice insurance, indemnification and D&O insurance compare for in house versus law firm counsel. There may also be reputational effects for attorneys themselves in deciding between in house and law firm positions. Of course, law firms are also subject to malfeasance and misfeasance. Perhaps the risks are equilibrated and differences turn out to be a wash. But I do think the issues of comparative liability and reputational effects are worth examining.

  3. 

    Take a recent recent JD, thrust into the job market with his or her law degree, bar admission, and a record level of debt.

    At the highest level of legal practice–prestigious corporate-oriented law firms– jobs are becoming more and more scarce because corporations are using in-house counsel.

    At the intermediate level– public sector employment– jobs are becoming more scare because of age-of-austerity cutbacks.

    At the bottom level– document review– jobs are becoming more scare because of offshoring. The ABA delightfully ruled, in 2008, that there was nothing unethical about foreign attorneys handling the work, so long as they are supervised by a US attorney.

    Of course, most lawyers graduated without a clue as to how to practice law, so solo-ing is a recipe for disaster– both for the newly-minted lawer and for any client unfortunate to stray into his or her clutches.

    In my opinion, the current model of legal education ought to be eliminated in favor of one geared towards training practitioners. All law professors ought to be replaced with adjunct faculty, i.e. successful local lawyers, paid by the semester. Law school should consist of a bar review type course at the beginning to teach core doctrine fast, followed by a structured series of externships, clinics, and apprenticeships to ensure that law students learn how to try a case, how to write an appeal, and how to represent clients in various practice areas.

  4. 

    Spot on.

    Lawyers are trying to deal with an economic challenge through erudition when the solution clients require is expedition. For as long as this continues they will be increasingly disintermediated – especially by GCs and in-house counsel, but not exclusively. In the UK there is much noise about legal services deregulation, but the fact is law firms have been being disintermediated since the 1970s and now markets with sales in the billions are happily co-existing and often preferred by clients as more practical solutions than those on offer from law firms.

    Technology is a symptom of this, not a cause.

  5. 

    Automated contracting? BigLaw isn’t doing a lot of transactional work that can be automated.

    Compliance software? I don’t think the first call when an audit committee discovers some bombshell is going to be to tech support.

    Knowledge management? Maybe. Over-rated in my view. There is no substitute for (1) experience and (2) bespoke thinking about a particular situation.

    Web-based hiring? GCs hire lawyers they know and trust.

    BigLaw may be changing, but count me as a skeptic that technology has a lot to do with it.

  6. 

    As in-house counsel drafted right out of law school in 2010, I can attest to this theory.

  7. 

    A comment from Henry Manne (all of which I agree with):

    I appreciate that much of your position in the last blog relates to the practices of the larger law firms that traditionally served large corporate clients. You imply that there is a Coasian (1937 not 1960) process underway in the corporations because they are finding it more efficient to bring the work in house rather than going into the market for it. I think there is a great deal of truth in that, and I especially like your emphasis on exogenous technological and administrative advances that have caused this shift. However, it seems to me that you have overlooked a possible alternative (or at least complementary) scenario. That is that the market may come to hold a large number of small, yet highly specialized firms and that this more specialized and fragmented market for legal services will to some extent replace the older large-firm, centralized model. In other words the Coasian pressures may be working the opposite of what you have implied, and the large firms are (probably though for the reasons you mention) dis-integrating. I think I discern some evidence for this, so now we are left with an empirical question: has there been greater growth of the use of in-house counsel or greater growth of small, specialized and perhaps even localized firms (or both, since this may not be an either/or issue). If it is the latter, the law schools may actually be quite responsive to market forces in reverting to the older “bar-cram” model of legal education (and here I’ll include clinical work even if that was not part of the much older tradition) at the same time the more insightful ones also add more separate courses in economics, accounting, finance, etc.

  8. 

    And rounding the bend in competition with law firms for providing legal services to corporate clients are LPO’s which are gaining a great deal of traction. As more work comes in house, more corporate general counsels will contract directly with LPO’s and not simply allow law firms to sub-contract work to LPO’a . See, http://kowalskiandassociatesblog.com/2011/06/21/grabbing-slices-of-the-diminishing-legal-spend-pie-legal-project-outsourcing-downsourcing-and-insourcing/

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