Corporate clients are steadily changing the way they access legal service. The changes have profound significance for every competitor which seeks to serve that market. For the traditional law firm in particular, the changes make even clearer the imperative to move to a new business model.
How Corporate Client Behavior Has Changed
Corporate clients’ need for legal service is greater than ever before, and is expanding. The combined effect of increased regulation, the explosion of data, and globalization has created an unprecedented magnitude and complexity of legal issues with which they must contend.
Meanwhile, corporate clients are under intense pressure to control all of their expenditures, including, of course, what they spend on legal service. Indeed, corporate clients are particularly focused on reducing their legal service expenditures because they have become a much larger element of the overall corporate cost profile. The easiest and most obvious way for clients to manage legal costs is to push back on their law firms for discounts or other price concessions. All firms now expect fee pressure and have adopted pricing tactics to deal with it.
Increasingly, however, clients are taking much more fundamental action: moving their legal work away from the high-cost law firms they traditionally have used to more cost-effective alternatives. Instead of haggling over price with incumbent providers, they are getting what they need elsewhere.
— $160 Billion Has Moved In-House
The clearest example of clients accessing legal service elsewhere is the dramatic expansion of corporate legal departments. Peer Monitor estimates the total corporate legal spend that is now done in-house in the United States to be a whopping $160 billion, representing nearly 37% of the total market. Client surveys indicate that the amount of work retained in-house will continue to increase. My personal interaction with law department leaders reveals that for the largest companies, the percentage of in-house work is materially greater than 37%.
This move alone is very significant. But there is more. Much more.
— $1 Billion Has Moved to LPOs and Is Growing Rapidly
Less readily quantifiable is the amount of legal service that corporate clients are sending to legal process outsourcers (LPOs). While there is less reliable data on this segment of the market, Peer Monitor estimates it to be approximately $1 billion (about the scale of the revenue of an AmLaw 25 law firm). Although this represents a small share of the overall market, an Altman Weill survey estimates it to be growing at a rate of 30% per year. Whatever the actual pace of growth, it seems clear that more and more legal work with move to LPOs in the future.
— AmLaw 200 Losing Market Share
The impact of this changed client behavior is apparent in the AmLaw 200 data. While the overall market for legal service is up, average demand for AmLaw 200 firms is flat to down. For a substantial percentage of AmLaw 200 firms it is even more apparent: their revenues are materially down year-on-year.
— Potentially Unlimited Market Share Is Moving to Other Law Firms
What may prove to be the most significant segment of work being moved away from incumbent law firms, although presently not quantifiable, is work being moved to other law firms. Based on my conversations with law department leaders, they are increasingly looking for new firms who can reliably and cost-effectively take on portions of their legal work. This is work they neither want to bring in-house nor assign to an LPO. They want a law firm to do it, but one that delivers the work differently.
While cost is the primary motivation, the movement of work to other firms is driven by several factors, including:
- A fundamental frustration that, even after discounts, the fees are just too high;
- A more specific frustration that incumbent firms “over-lawyer” matters (we need lithographs, not masterpieces);
- A sharper focus on the range of stakes of matters and the option to use less prominent firms for more work (the right horses for the right courses);
- An increased willingness to experiment in order to make progress; and
- The enhanced capability that less prominent firms are able to offer by embracing legal technology and new design concepts.
I believe this is where the most important action is for law firms along with the greatest opportunity and the greatest risk.
Implications for Law Firms
The willingness of corporate clients now to move their work away from their traditional law firms obviously intensifies the imperative for law firms to re-examine elements of their business model. Just as the clients have gone beyond pricing to fundamental change in the way they access legal service, law firms need to undertake fundamental change in the way they deliver legal service.
I have written about five dimension of change that future successful firms likely will achieve. Those dimensions provide a useful template for thinking about how firms can adapt to changing client demands. Next week I will discuss that template in further detail.