Leader

GCs are seizing the day (from their advisers)

Are you a Capitulator? A Coaster? A Champion? Comfortably Numb perhaps? To an in-house profession used to having its qualities of leadership and innovation praised to the hilt, the recently-produced report on ethical standards among general counsel from UCL’s Centre for Ethics and Law is an awkward read.

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Can anything truly threaten the premier league of global 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 world’s top 100 commercial law firms look no nearer to an existential threat. 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 bluechips already have legal operations 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 lawyers 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 work 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?

The drain of good people from private practice to in-house has become a feedback loop and a dangerous one for law firms.

But it is not just about the number of bodies, as our cover feature this issue on leadership makes clear – general counsel and their increasingly able teams want to move up the value chain. 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. Panel reviews and law firm management at larger companies is now being pushed down to procurement and specialist operational teams, freeing up in-house counsel to focus on senior roles in their companies.

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. For years there has been a pretence that the interests of general counsel and law firms are much more aligned than they really are. Yet the big trends in the legal industry strongly suggest this divergence of interests between client and adviser will become increasingly stark in the years ahead when technology and outsourcing will become flashpoints as GCs and law firms try to work out who can undercut the other.

For external counsel, there are a number of 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, leaving law firms marginalised as increasingly narrow niche providers. The truth is that there is only so much influence to go around and GCs mean to seize what clout they can. Good for them but if I was running a major law firm I would factor that into my long-term planning… or look for a job in-house.

 

alex.novarese@legalease.co.uk