Altman Weil’s recent Chief Legal Officer Survey provides new evidence of clients’ increasing market power and the availability of alternative sources of legal services.
The report is full of good data about management trends among in-house law departments, spending trends, and relationships between in-house lawyers and the firms they hire. But the most revealing storylines come from some of the report’s spending data.
First, the number of Chief Legal Officers (CLOs) that say they have decreased their budget for external law firms continues to grow every year for the past four years, and the number who say they have increased their external spend continues to decline:
- CLOs that plan to increase outside counsel spend in the past year have declined to about 26% of firms surveyed this year, from about 46% in 2011.
- Conversely, CLOs that plan to decrease outside counsel spend in the past year have increased to about 48% of firms this year, compared to about 25% of firms in 2011.
So where is the money that’s shifting away from law firms going?
CLOs were asked to indicate how their current budgets are allocated between internal spending, outside counsel, and outside non-firm vendors. That latter category includes a lot of different kinds of players: Legal Process Outsourcers (LPOs), such as Pangea3, UnitedLex, Integreon, and CPA; e-Discovery and document review service providers; due diligence providers; legal research firms; alternative and “NewLaw” legal service providers, etc.
The non-firm vendor share of budgets has moved up over the past three years, from 3.9% in 2012 to 7.1% today. That is a significant jump, almost doubling the outside spend on providers other than traditional law firms. Depending on who you ask, the total U.S. corporate legal spend is probably conservatively around $200 billion. An increase like we’ve seen over the past three years to non-firm vendors means a total pool of around $14.2 billion, which includes an additional amount of spending of about $6.4 billion.
Who are they?
That potential $6.4 billion growth in spending on non-firm outside vendors is a nice source of revenue for lots of new players to go after. And there are a lot of new players to go after it. Jordan Furlong has one of the best inventories in a much-cited post, An Incomplete Inventory of NewLaw, that appeared on his blog, Law21.
He even provides a helpful segmentation of the models that are out there:
- New Law Firms That Align Human Talent with Legal Tasks
- New-Model Law Firms(Potomac Law, Riverview Law, Seyfarth Lean)
- Project/Flex/Dispersed Legal Talent Providers (Axiom, Fondia, Halebury)
- Managed Legal Support Services (Obelisk, Radiant Law, Pangea3, United Lex)
- Firms that Apply Technology to the Performance of Legal Tasks
- Tools To Help Lawyers Do Legal Work Differently (Diligence Engine, Lex Machina, Neota Logic)
- Tools To Help Clients Resolve Disputes Directly (WeVorce, Modria)
- Tools to Help Clients Conduct Their Own Legal Matters (A2J Author, Docracy, Shake)
The last two categories include many companies targeting a latent consumer market that’s not really addressed by commercial law firms, but the vast majority of the other companies in Furlong’s roster are organizations that directly compete with, or could be partners with, traditional law firms.
What value do they provide?
Law department leaders are not just shifting their spending to non-firm entities; they are recognizing that these new kinds of players are a key source of innovation in the industry.
In the Altman Weil survey, when asked to identify the most likely “change agents” in the legal market over the next 10 years, most (43.3%) identified themselves (corporate law departments). But a significant number identified technology innovation and non-firm providers of legal services as key change agents:
Most likely change agents in the legal market over the next 10 years?
- Corporate law departments: 3%
- Technology innovation: 6%
- Non-firm providers of legal services: 3%
Clearly, the survey strongly underscored what many in the legal industry already have observed: While law firms are without a doubt still the primary outside partners for corporate law departments, they are no longer the only game in town. Law department heads are voting with their dollars for a legal services industry that is less law firm-centric, and they recognize the innovation that’s emerging from non-firm players.
Note, however, that an increasing number of firms (many of them on Furlong’s list) are finding ways to innovate and launch their own alternative practices or business models. Disruption does not only have to come from the outside.