Law firms’ competition

Cite this Article
Larry Ribstein, Law firms’ competition, Truth on the Market (November 06, 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.