On the Future of Law Departments

Today Dialogue is pleased to publish this piece on the future of law departments by Ken Grady. Increasingly clients are leading change in the way they meet their legal needs.  We move forward by challenging the way things are today.

It is easy to look at the world, see what is happening and assume that is the way it has been and will be. It is hard to imagine a different future, but if we do, we often find ways to improve. The chatter today is about a world with different types of large law firms. In this essay, I’m going to ask a different question, “Is there a future with different types of law departments?”

Law Departments Are Not Immune to Change

There was a time when large corporations operated without law departments or, at most, had a general counsel. The legal work was done by law firms. Often, a lawyer from the main outside law firm representing a corporation would sit on the corporation’s board of directors. Practicing law was not considered, in the terminology we use today, a core competency of a corporation. Law firms were trusted advisors to corporate leaders.

If the corporation had a small law department, the lawyers were gatekeepers handling the legal work flow between inside clients and firms, and they handled simpler matters, such as routine corporate governance for subsidiaries. A general counsel might be a well-respected internal strategist, but the substantive work was done outside the corporation.

For many corporations, having a law department is a recent thing. Forty years ago, when I started working in law firms, it wasn’t hard to find a large corporation, even a Fortune 500 corporation, without a law department. I remember when Continental Bank, one of the largest banks in the United States, outsourced its law department to the law firm known then as Mayer, Brown & Platt. My first in-house job was with a Fortune 500 corporation that had started its first law department less than a year before I joined.

If you have been around corporations long enough, you have seen them go through organization philosophy phases. At one time, corporations boasted large IT departments charged with running the heavy metal computers that comprised the IT infrastructure. The people in IT were not closely intertwined with the business. They were there to make sure the corporation’s backbone (accounting, ordering, etc.) functioned.

Over time, the heavy metal phase gave way to lightweight servers which gave way to the cloud phase. IT departments became integral business partners often charged with developing technology structures to support or implement new business models. IT leaders still must make sure the bills are paid and the orders tracked, but they do far more than that in a good corporation. At the same time, they have shed the routine, day-to-day work to outside providers.

We have seen corporations go from no law departments to large, labor-burdened law departments. Is it time for a phase-shift in law department philosophy?

Shifting the Corporate Law Department

Obviously, there are no legal barriers to operating a corporation without a law department, though in some corporations we would need to pull out the compliance functions and keep them in the corporation. Law departments have advantages over law firms in many (not all) situations. But, advantages are not barriers to outsourcing. There are advantages law firms enjoy over law departments. In fact, most corporations do not have law departments until they reach a certain size or need level. Smaller corporations often operate without law departments, and “smaller” can be quite large including $1 billion corporations.

The question I’m posing, then, is whether we will get to the point where multi-billion corporations go without law departments or at least scale the law department down. Think of a law department with a general counsel and a few subject matter leads (securities, employment, etc.), but no one else even though the corporation ranks in the top 50 on the Fortune 500 list.

Today, the answer would be no. The cost gap between in-house lawyers and outside lawyers continues to grow while the skill gap shrinks. Over the past 30 years, and particularly over the last 5 years, corporations have learned they can bring in-house the same lawyer they use in a law firm, but at a greatly reduced cost. This knowledge has led law departments to go on a hiring binge as they trade outside spending for in-house payroll.

A New Model Law Firm to Support Law Department Change

What would it take to change? Let’s engage in a thought experiment. Imagine a new large law firm. The organization structure is similar to what we see in many businesses, with a central services function composed of centers of excellence (CSE). Those centers include human resources, technology, marketing, finance, and supply chain management. What does supply chain management do? It handles retaining and integrating resources outside the law firm that are needed for particular matters. These could include e-discovery vendors, managed service providers, and specialized technology services.

The CSE functions work together on a common platform (something like SAP for law). They each use specialized modules that hang off the backbone of this common platform. The modules talk to each other through the backbone, eliminating much of the complexity that exists in the modern, siloed law firm world. The backbone also could be used by law departments, allowing law departments to work seamlessly with many law firms and law firms to work seamlessly with many law departments.

The client-facing part of the law firm is more interesting. First, the firm has three major brands. We’ll call them Queen’s Counsel, Middle Lex, and Average Joe. All three use the CSEs, but each presents a different (though at the margin, overlapping) face to the world. In fact, each business is housed in a separate legal entity, all owned by the parent firm.

Queen’s Counsel markets itself as the best of the best. It is a high end purveyor of bespoke legal services that clients use when price isn’t the issue. It has partners with tremendous experience and the price for legal services reflects the premium quality. When Queen’s Counsel handles a matter, the matter leaders (not all lawyers) quickly disaggregate it into the high-end work (usually strategic planning and work on key documents), and other work. The other work is performed by a combination of one or both of Middle Lex and Average Joe, and outside service providers hired by the supply chain CSE. Very experienced project managers coordinate the process using the project management module attached to the backbone.

Middle Lex handles what the lawyers jokingly call “department store” issues. Clients are somewhat price sensitive when it comes to this work, but it still has a fair amount of non-standardized elements. Occasionally, the Middle Lex lawyers will call on Queen’s Counsel lawyers for expertise, but generally Middle Lex uses its team supplemented by the Average Joe team and outside providers arranged through the supply chain CSE. Middle Lex also uses project managers very experienced in handling its type of work.

Average Joe is a volume shop. The attorneys have specialized teams organized to very quickly and efficiently handle simple or routine (but not necessarily simple) legal work, heavily relying on technology. Most of the team involves domain specialists who aren’t lawyers, but are very well trained in their specialized areas. It has a steep pyramid structure, with very few supervisory personnel compared to the number at the base of the pyramid. Process improvement specialists fine-tune everything Average Joe does to make sure waste is kept to a minimum.

Average Joe is a supplier to both Queen’s Counsel and Middle Lex, because their matters generally have components well-suited to what Average Joe does and using Average Joe brings down the price. But Average Joe also does a lot of work directly with clients. For example, Average Joe can turn many types of contracts very rapidly at low cost. With its sophisticated software, database of tens of thousands of contracts (growing rapidly), and dashboard analytics, Average Joe can input a contract and tell in seconds where to focus its energy during negotiations.

Clients know the three businesses are owned by the same firm, just as they know hotels at various prices ranges are owned by the same company. Clients choose among the law firm businesses based on the matter at hand, just like they choose the hotel where they stay depending on need. The law firm operates the three businesses on different revenue and cost models, rolling the results up to the parent law firm. Lawyers own the firm and bear liability for all it does. But the firm manages the three units differently. Hiring, compensation, work environment, marketing, and more are differentiated based on the market for the services. Technology is held in a separate subsidiary that handles research and development and licenses specialized modules to other firms and law departments.

One of the key CSE teams is the Data Analytics Group (DAG). DAG captures streams of data from all of the legal work flowing through the firm. It gathers basic information, such as lead time, process time, and percent complete and accurate. It also does natural language processing and computational analytics. Each text document is stored in the same, prescribed format. As part of the storage process, the document is tokenized (broken into chunks, such as words), annotated (each word assigned a label), and parsed (relationships assigned within the document). Using machine learning and other tools, DAG creates the dashboards lawyers use as part of their workflow.

When a lawyer is asked whether a term is “market,” she can instantly query the firm’s database using DAG analytic tools and provide an answer across all similar matters the firm has handled and across all similar matters the firm can access. DAG combines the firms’ data with external sources, to provide rich models used as part of the firm’s predictive analytics offering. For example, the firm can look at all single plaintiff employment lawsuits it has handled, the results of all reported cases, and the results of all EEOC investigations. From that analysis, it makes recommendations to the clients that could decrease or eliminate the risk from such lawsuits.

Evolving the Law Department

With this law firm model in mind, we can go back to whether a corporation needs or wants a law department. The corporation could decide to outsource its legal work to one or several firms of the type I just described. The work could be organized by geography, product line, or risk level and distributed among firms. All of the work would be done undervalue fee arrangements. The firms bear the risk, under the assumptions agreed to between the firms and the corporation, of cost overruns but the business model enables them to manage the risk.

Going to my question: would a corporation outsource its legal work and eliminate its law department? Probably not. More precisely, it probably would keep a small crew of lawyers in-house. The role of the in-house lawyers would change, however. The in-house lawyers would not oversee teams of lawyers, but would oversee the interface between the corporation and outside providers. They would also focus most of their time on strategic, business focused issues. The law firms would be far more cost efficient than the corporate law departments under the model I described.

If you think this theoretical law firm is unlikely, then consider a variation. The Big 4 accounting firms are all moving into the legal industry again. They already have all the capabilities I described for the new law firm, though they don’t use them as part of providing legal services—yet. A Big 4 firm would not have to move far to create the law firm structure I described, and already has the CSE and technology infrastructure to pull it off. The accounting firms tend to focus on the Middle Lex work right now, but adding subsidiaries to do Queen’s Counsel and Average Joe work would not be difficult.

We look at the way the industry is structured today, recognize that it has been structured the same way throughout our lifetimes, and assume change will happen slowly or not at all. Law firms are very fragile organizations (in the words of one of the largest law firm leaders, they start as a new firm each year). Changing the legal service delivery model is more about culture and habit and less about technology, processes, and costs.

Just as law firms will evolve into many models, law departments should evolve and some should become more like the model I describe—skeleton in-house teams managing sophisticated and multi-layered outside law firm models. Law departments have tremendous opportunities to re-shape legal practices, not just through their outside law firm spend but by re-designing their internal models to meet what clients need. Just as law firms have been slow to evolve, law departments are sticking largely with mini-me law firm models (even the law departments in the UK, where we have seen the most evolution).

For law departments to really cut costs, become highly responsive to clients, and reduce risks, they too need to re-think their legal service delivery models and evolve.

Author

On the Future of Law Departments was first published by Kenneth Grady on August 11th, 2016 in SeytLines from Seyfarth Lean Consulting, Chicago. 

With Ken’s permission, On The Future of Law Departments is published here. 

Other posts on Dialogue by Ken Grady include There’s Gold in Them Servers, on the value of data and analytics in legal services.