The trend towards larger in-house teams by the major blue-chips continues, but is there a limit to what these departments can do, or will they eventually replace entirely the use of external law firms?
Certainly the going has been more challenging since the banking crisis for all sections of the legal industry, whether you are betting on ‘flight-to-quality’ or ‘more-for-less’, but overall the Global 100 looks no nearer to an existential threat or much meaningful consolidation. AI? The accountants? New Law providers? The former reflects a genuine force set to substantially change the industry, though it is not apparent whether that will come at the expense of high-end law firms. The latter two players have yet to come near to living up to the fanfare made for them.
The irony is that if there is a current threat to high-end law firms it comes from those paying the bills, the clients. The sustained development of in-house teams means major blue-chips already have legal teams that resemble global law firms in their breadth and resource. Part of that transformation is fired by the global arms race in private practice, which sees law firms fight to increase profitability to retain partners and hike salaries for associates. This, of course, allows in-house teams to keep justifying recruitment of expensive in-house counsel as a substantial saving… while welcoming the flood of disgruntled associates (and even some partners) that want out of the war. The drain of good people from private practice to in-house has become a feedback loop and a dangerous one for law firms as it remakes the legal industry. In the UK, more than one in four commercial lawyers works in-house. On current trends it is not outlandish to imagine a 50/50 ratio in 20 years. What happens to the conventional buy/sell dynamic when the clients have as many providers in-house as externally? Why go to a law firm at all?
Some partners indulge in a level of denial regarding such trends. General counsel and their increasingly able teams want to move up the value chain. Good for them. But a considerable part of that goal means displacing and pushing law firms down the hierarchy. Listen to general counsel without law firms in the room and they frequently say as much.
There are several viable strategic responses to such trends – some of which revolve around focusing on specialisms that are not practical for in-house counsel to build. But such lucrative market territory appears to be narrowing by the day. There is a risk that law firms become marginalised into increasingly narrow niche providers. If you were to apply Clayton Christensen’s model of disruptive innovation to law, the march of in-house teams is a better match currently than alternative law providers.
An on-form special report from The Economist recently focused on what it called ‘superstar companies’, the global stars that are exerting an increasingly tight grip on world markets. The Googles, General Electrics, Apples and Facebooks addressed in the report have already built extremely formidable legal teams.
What is your strategic response to that? For many law firms, which cannot separate notions of alignment with clients from such increasingly ominous trends, the answer is to not think about it. Well, the study of markets is clear in this regard: what your clients want is not always good for you. What your clients want can clean you out. Food for thought.
To discuss the market further and ensure you are well positioned for future trends in the legal industry, contact the author of this piece – James Yates on +44 (0)203 893 8965 or via firstname.lastname@example.org.