Clients in the legal ecosystem

This is the second part in my exploration of the legal environment. The first part provided a general overview, and this moves on to look at how clients affect the operation of the ecosystem. For now, I am concentrating on business clients, rather than individuals.

Historically, legal advice has tended to be a distress purchase, and this persists to some extent. The model is well stated by Jeremy Hopkins:

The vast amount of the buying market … have a legal problem, to which they need an effective solution at the right price.

Over time, as the affairs of businesses and wealthy individuals became more complicated, lawyers became trusted advisors. For some, this might mean such proximity to power that they would be asked for advice on non-legal issues. By the 19th century, if not before, the role of general counsel (GC) was starting to become more common. (This article [PDF download], by Sarah Helene Duggin provides a useful and referenced potted history of these developments in the United States.)

It is interesting to observe how in-house lawyers have grown in significance, and especially to look at the factors that have affected that development. Early GCs tended to be senior lawyers whose close relationship with one client resulted in co-evolution together. These GCs were characterised by deep experience of legal practice, together with insight into the business they served comparable to the other members of the board and senior management. Their work would typically be advisory, and law firms would be instructed to take on the more mundane activities.

One obvious (and cynical) reason for using external firms is to take advantage of their professional indemnity insurance. More significantly, the cost of running a legal team — especially ensuring that lawyers are well trained and up to date on the law — was not within the means of most companies until legal information became more readily available piecemeal via online systems. In addition, in a time when there was little regulation of transactions or financial activities, the need for detailed legal advice was so much less important that an internal legal team was simply not necessary.

By the end of the 20th century, it looked like things had stabilised into a fairly clear picture. Most businesses of a significant size had some form of internal legal capability — whether a GC alone, a Head of Legal with a small team of generalist lawyers, or a large multi-skilled group of lawyers rivalling many law firms in terms of size and expertise. The larger in-house teams were able to support trainee solicitors, so that it was possible for a lawyer to spend their entire career outside private practice.

From the perspective of law firms, in-house lawyers were one source of work, together with executives and others at all levels of business. Sadly, I don’t have any data (if someone else does, please let me know in the comments below), but my sense is that until the early 2000s, relationships between law firms and their commercial clients involved the in-house team less than half the time. For many firms, therefore, the natural place to invest in those relationships was anywhere but the in-house team. At this stage businesses tended not to  appoint panels of law firms for their work, and this also meant that the natural focus for lawyers was on those who were directly responsible for instructing lawyers.

The last 15 years or so have seen major changes. Commentators tend to focus on the years after the banking crisis of 2008, but other factors prior to this had a part to play. One that has already been referred to is the way the information landscape has shifted. Until PLC (now Practical Law) was founded, law firms still had the upper hand in terms of access to legal current awareness and standard documentation. Businesses might have had access to databases like Lexis and to law libraries (either their own or those of local law societies), but those rarely gave much more than the primary materials: analysis of legal change was missing. PLC changed that — putting their law firm and corporate customers on a level playing field. The ready availability of other forms of technology (even basic tools like word-processing, email and law firm extranets) also eroded the distinction between in-house and private practice.

In-house lawyers who were better equipped to compete with external lawyers could start to raise their profile within their businesses. In particular, they were increasingly responsible for controlling the flow of work to law firms. It then became more common to appoint panels of law firms to whom instructions could be give, as a way of managing the flow. Initially panels were sometimes quite large, but there has been tendency more recently to reduce numbers of firms on each panel. (Barclays being the most recent example.) One consequence of better management of law firms has been greater visibility of legal spend within the business. Once the cost of lawyers became a significant line on the balance sheet, it was only a matter of time before Finance Directors started to look carefully at how the money was spent. This is the beginning of costs pressure on law firms — budget control within businesses.

Now, as the Financial Times reports [subscription required], in-house lawyers aren’t just instructing firms freely as they might have done before. They are managing their budgets carefully and turning to a variety of other providers.

Nearly two-thirds of general counsel at some of the world’s biggest businesses have already used so-called contract lawyers rather than their traditional law firms, according to a poll of 185 in-house lawyers around the world with a collective legal budget of £3.5bn. The figure rose to 74 per cent among respondents who said they were likely to use contract lawyers over the next five years.

This clearly has an impact on law firms — it means most will have to adapt to this new environment or die away, unless they are in a niche that can continue to support them. (This is a basic evolutionary principle.)

But how should firms react? The problem for many firms is that they have tried to guess what clients need and invested heavily in a limited range of responses, which can be loosely defined as disaggregation. That may still work for some, but some initial evidence in The Lawyer suggests that clients are not overwhelmingly impressed.

Respondents were asked overall how satisfied are they with the level of innovation shown by their primary legal services providers in relation to the delivery of legal services? Just 7.1 per cent said they were very satisfied.

The Lawyer’s research found that the primary factor when buying legal services for the majority of in-house lawyers was quality.

What isn’t clear from the report is whether firms have yet to change at all, or whether they have started to change but in ways that clients don’t like. What is clear is that clients are still not confident that they are getting what they need.

The challenge for firms is more stark now than it has been in the past, but otherwise things are no different — it is virtually impossible to predict the future from current or past behaviour. In 1890, who would have suspected that 80 years later businesses would commonly have teams of internal lawyers? In 1970, who would have predicted that those teams would be competing effectively with external lawyers by the turn of the century? In 2000, who predicted that in-house teams would have the upper hand and be turning away from law firms entirely? I am not sure that even Richard Susskind saw that development coming.

What happened over that long history was that firms and clients evolved together into new relationships and business models. That is what will happen in the future too, except that the term ‘law firm’ will have to expand to include many new types of business, some of which may depend much less heavily on lawyers than firms do now. As the new legal landscape develops, clients will also continue to change in ways that are unpredictable as responses to those changes. Only by keeping an eye on what is happening, and regularly testing new ideas will firms be able to have any confidence in surviving.

There is a future for some forms of legal business, and there will continue to be some kind of exchange of value for legal services — they won’t become a purely internal function. As legal businesses change the way they work, it is possible that they will start to be able to meet currently latent demand for their services. But what might this mean for lawyers? The next post in the series will explore that.