Essay
From the Experts: Seize the Day
An article by Mark Harris.

The ho-hum, half-a-trillion-dollar global legal services industry—a sleeping giant by any measure—appears to be headed for a rude awakening, and that's inspired us lawyers who populate it to do what comes naturally: talk. Across business and legal publications, on the Internet and at industry gatherings, the question "How are law firms planning to adapt?" has been asked and answered, documented, debated, and blogged about.

But if what most of us care about is how the industry will look in five or ten years, then we ought to start worshiping at another altar, because when God wants a laugh, he asks law firms for their business plans.

The right question to start with is not "How are law firms planning to adapt?" but who actually decides what the industry will look like. We've got that one dead wrong so far.

The large law firm has dominated the legal ecosystem since the beginning of time or, at least, since Paul Cravath introduced us to the pyramid more than a century ago. So, naturally, inertia points us to law firms as the source of answers about the future of the profession.

Unfortunately for law firms, the future of the legal industry will actually be presided over by the general counsel of the largest 5 percent of corporations, who among them control more than half of the $100 billion U.S. corporate legal services market. In fact, even within this small population, 80 percent of the market is controlled by a mere 200 GCs. These are the men and women who control the fate of the entire legal industry.

Big-company general counsel hold the purse strings, and their purchasing power is multiplied by the lack of concentration among law firms, where the world's largest firm boasts all of a 0.8 percent market share and the top 20 firms combined account for less than 10 percent, according to financial services firm William Blair & Company.

Somehow, this fragmented swarm still managed to increase prices 70 percent in the ten years leading up to the recession of 2008, compared with a rise in nonlegal business costs of 20 percent during that same period, according to the research and analysis company Corporate Executive Board. That contrast of leverage and outcomes defies everything we know about economics. It's a disconnect that's alarming to CFOs and increasingly difficult for general counsel to explain or accept.

In the absence of explanations, general counsel will have no choice but to exert their market power. While many GCs are still working out exactly how that happens, this is a group of people who are ready, able, and increasingly willing to act.

Contrast that with their law firm brethren, who are wrapped in a straitjacket of structural limitations and are little threat to the status quo. It's widely understood that Big Law partners pay brutal dues for up to 20 years to land atop the pyramid and reap its richest financial rewards. However, the crucial corollary is that any investment they might make in innovation comes directly from the partnership's take-home pay, during this short window of high earnings they've suffered decades of hard work to achieve.

These perverse incentives are exacerbated by the portability of each partner's book of business. A managing partner who reduces short-term profits to make strategic investments risks inciting an exodus by the firm's top earners. These fundamental punishments meted out for change have ensured near-total stasis decade after decade.

This doesn't mean that law firms are hapless. But in a dispassionate assessment of who's willing and able to grab the wheel in our profession, law firms are decidedly in the passenger seat.

If indeed we're in for serious change, it will come from a subset of the 200 GCs who have found themselves at the controls of one of the world's largest and most important service economies.

So, the question becomes: "how and when do big-company GCs plan to adapt?"

My view is that change will begin on the inside. In 2008, executive search company BTI Consulting reported that a third of the U.S. legal market is spent on in-house teams. This spend is directly under the GC's control, and the return on that spend—the value the law department contributes to the corporation—is how GCs are most easily measured by CEOs.

What qualifies as value is admittedly subjective, but most evidence suggests that the in-house law department could be delivering more of it. In a recent survey of U.K. in-house lawyers conducted by London firm Nabarro, only 40 percent believed that their departments were measuring up to high expectations. CEOs were less generous: Only 14 percent thought their legal departments were making a "strong contribution."

Many of the GCs I meet with are determined to get their own house in order before they start attacking law firm practices in radical ways. That's a conscientious approach, and it also makes good sense. Large law departments are more talented than ever, and realigning that talent to higher-value activities will mean that less work goes to law firms to begin with.

A somewhat oversimplified method for separating in-house lawyers from work they shouldn't be doing is to look at the actual cost of getting that work done and ask if it can be done more efficiently elsewhere. If that approach qualifies as a "method," it is part of what forward-leaning general counsel are calling "segmentation." The point of segmentation is to align various categories of legal work with the most appropriate provider set—law firms, in-house teams, lawyers in India, contract administrators, software programs, etc.

For instance, a general counsel's decision to outsource an in-house legal function could be based on the promise of improved segmentation. That is, migrating the team away from routine (even if sophisticated) activities to matters that are impactful and strategic, increasing the department's value to the broader company and, in many cases, eliminating law firm involvement.

Analyzing each legal activity, assessing its degree of risk and complexity, assigning more appropriate resources, and redeploying team members to higher-value tasks invariably unearths a whole set of opportunities for GCs to create more commercial value for the larger company. New metrics come into focus as the day-to-day gets sorted out. Can we shorten the time to revenue recognition by 15 days? Can we reduce revenue leakage in sales and contract implementation by 10 percent? Can we leverage our current intellectual property to achieve other CEO objectives? These are the questions that can turn an order-taking GC playing defense into a board-level player regularly scoring real points.

Segmentation may not fit our preconceived notions of dramatic industry transformation. It is an admittedly "in the weeds" orientation that most law firm partners couldn't give a hoot about. But a forward-leaning general counsel wielding segmentation (or some similar change-management tool) is putting disruption in motion.

A law department rebuilt in the mold of a lean, activist corporate center can then apply its well-honed internal disciplines to the construction of more efficient outside provider relationships. In other words, the right time for GCs to fix law firm relationships is when they have a deeper understanding of their needs and alternatives than most have today.

Segmentation is one way for general counsel to begin exerting their rather lopsided market power. But when will they get around to doing it?

There's certainly no stampede under way, which, given all the talk, is curious. But a herd is forming, and I believe that within 12 months we'll see segmentation or other change-management exercises under way in earnest across the majority of the Fortune 100. Thoughtfully and proactively remaking an industry allergic to change will require serious leadership. That leadership will come, not from law firms, but from their biggest clients. And it's just begun.

- Mark Harris is the CEO of Axiom, a 900-person new model legal services firm that serves nearly half of the Fortune 100 across nine global offices.

 

(Originally published in Corporate Counsel, October 2011)



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