We have consulted legal counsels to hear why companies choose internal legal solutions, what motivates their choice of a law firm, and in the end what the external law firms could do to become more attractive to general counsels.
In addition to the emergence of new legal technologies, an increased focus in diversity and the global financial crisis, the rise of inhouse legal has been one of the biggest stories of the legal industry in the 21st century. Lawyers are moving inhouse in search of a better work-life balance and a more business-oriented approach to their profession. And the companies see substantial benefits in having an internal legal recourse with extensive knowledge about their business model. Interestingly, a new report suggests that simultaneously the role of general counsels has evolved from its traditional legal function to a more strategic part in the centre of the business.
The numbers support the trend. Figures from the British Law Society shows that the number of solicitors working inhouse in the UK grew from 13,000 in 2002 to almost 28,000 in 2017. In a smaller scale, Exterro's latest report showed that nearly 70% of legal teams conducted most of their litigation services inhouse in 2018 compared to just 50 % the year before.
According to Ian McDougall who is general counsel in LexisNexis, the reason why companies have been jumping the inhouse counsel bandwagon in the past years is that “the global financial crises required companies to be more cost-conscious”. He is supported by Eduardo Reyes of The Law Gazette whose research “indicated that when frozen legal budgets were allowed to increase again, general counsel would use the extra cash to hire more in-house lawyers.”
The increase in inhouse spending has not resulted in a decrease of law firm revenue, however. Business is still going strong so the million-dollar question is, of course, how much stronger it could have been, had this trend not occurred. We are not able to deliver such a number. So instead, we have consulted legal counsels from LEGO Group, Bavarian Nordic and North Media to hear why companies choose internal legal solutions, what motivates their choice of a law firm, and in the end what the external law firms could do to become more attractive to general counsels. What is it that inhouse counsels want from their external law firms?
TL;DR: Clear communication, specialised legal knowledge and access to technology are what gets a legal counsel going.
Morten Max Rasmussen is general counsel in the international biotechnology company Bavarian Nordic. He believes that the inhouse trend is due to some companies not feeling they get enough value for money with external law firms: “The law firm's traditional billable hour model with high hourly rates makes it relatively easy for an inhouse counsel to create a reasonable business case for taking home certain types of cases,” Ramussen explains to Legal Tech Weekly.
When choosing an external lawyer, his most critical parameter is the right expertise. That includes high legal knowledge, hands-on experience and a specialised understanding of the specific industry that the company operates within. He nevertheless sees a tendency where more companies have most contract related tasks solved and dealt with by inhouse counsel: “The reason is that it is often cheaper and more efficient since inhouse counsel has more knowledge of the company's specialised business area and a higher appetite for risk,” says Rasmussen.
Signe Toft is general counsel in the Danish media group North Media. She agrees that expertise and competence are the most important metrics when deciding between internal and external solutions: “Internal lawyers have an advantage because of their integration in the company, and the resulting understanding of the business,” says Toft, and mentions that internal lawyers usually have a better overview and more insights to the commercial aspects of a business.
“As an internal lawyer, you are usually only a specialist in some of the areas that the business needs advice on, and therefore we place tasks where there is a need for a specialised knowledge we do not possess internally,” Toft elaborates.
To get a better overview of the relation between inhouse counsels and their external peers, Legal Director in the Danish toy manufacturer LEGO Group, Claus Andersen, uses a matrix.
“Imagine a graph with a vertical axis and a horizontal axis. One represents volume and the other risk. Cases of high volume and low risk can be outsourced and standardised using automation, like procurement contracts or sales agreements. It also makes sense to outsource cases of high risk and low volume where you do not have a critical mass. That could be court trials or various regulatory things. Then there are high volume/high-risk cases which are obvious to keep inhouse, as well as low volume and low risk which we try to make self-service. That could be non-disclosure agreements or power of attorneys for example,” Andersen explains.
Besides professional expertise, efficiency, creative solution and proactive client-management, Signe Toft also mentions the ability to communicate clearly as a crucial parameter: “External lawyers could benefit from considering that the internal lawyer should be able to forward their advice to other non-legal colleagues that do not necessarily understand legal concepts or a text with a high LIX,” she says.
Rasmussen agrees: “It has a high value when the lawyer can communicate shortly, clearly and with a recommended solution to the specific problem. As opposed to longer legal statements of the legal position with arguments for and against various alternatives,” he explains.
In LEGO Group, they value full transparency to manage expenses and the recourses available better. “We have had the best experiences when using a digital interface since you cannot have total outsourcing without supervision. Then you would have a black box of legal items, so you need some transparency by monitoring the various cases, how they are solved and the billing of them,” explains Andersen.
He points out that inhouse legal counsel is usually not the first in line when a company buys new IT-systems. Since the profit-driving departments often are the priority, Andersen prefers law firms that include digital solutions in their services: “I am not sure that the law firms are aware of it but they can offer something super valuable by including digital solutions. Transparency is the new reality. Twelve years ago, when I sat on the other side, we just send a bill in the end. Now you need full transparency during the whole process which has also become more interactive.”
Rasmussen from Bavarian Nordic agrees that law firms should be offering digital solutions to increase the client loyalty: “In my opinion, many external lawyers have not understood the opportunities in making digital tools available so that the companies get closer ties to the law firm. It would be much harder to change your legal advisor if the law firm offered a digital platform with standard contracts, a contract builder, database, information about new laws, compliance tools etc. Think about how difficult it is to change bank because you have to start all over and navigate in a new eBank,” says Rasmussen.
Since a lot of companies prefer user-friendly digital tools that can make the internal legal processes more efficient, Rasmussen predicts an increased pressure on the external law firms.
“In the future, I believe that there will be a higher need for specialised legal advice and a more service-minded client-care where the external lawyer offers legal IT-based solutions that make life easier for the company and the inhouse counsels. I, for example, think of IT-extranets where the external lawyer helps the company to manage and update standard contracts and maybe make a contract database as well as a case management system available so the client can track their cases in a dashboard,” he explains.
He is well aware that it is difficult and not always profitable for law firms to move out of their comfort zone, but he nevertheless think that they should: “They leave the scene to other actors such as ”Alternative Legal Service Providers” and if the law firms does not provide IT solutions the companies will themselves eventually find and develop their own cheaper IT tools elsewhere,” Rasmussen says, and then concludes:
“It will be interesting to see to what extent the external lawyers will participate in this development.”