Lawyering to Legal Operations

May 10, 2017 7:30:04 PM

A Tumultuous Legal Ecosystem

The annual CLOC Institute this week has me thinking about how much the in-house legal landscape has changed in the past decade. CLOC (Corporate Legal Operations Consortium) refers to it as the “eco-system”. It really has developed into a vibrant eco-system, with different habitats and even a few storms on the horizon. This blog briefly looks at the changes in the Legal marketplace.

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A Maturing “Demand Side”

Over the past 10 to 20 years, in-house legal departments have firmly established themselves at the top of the legal eco-system pyramid. Even the largest and most powerful law firms would concede this fact. In-house legal teams have re-conquered and grown into accepting the fact that they are the client. They call the shots.

This is quite a departure from the early days (decade ago admittedly) when the decision was not whether to use a law firm or not, but which law firm to use. Legal departments would typically not actively be lawyering, they were primarily advisers to their business colleagues. The majority of the time legal work would be handled exclusively by law firms with limited oversight or input from in-house counsel. That was the model of the in-house team as the trusted partner & consiglieri (not a lawyer).

Decisions used to be focused on which outside law firm to use for what work, typically with go-to firms who would receive the majority of work for a specific matter type farmed out to them.

In today’s eco-system, in-house functions are much more sophisticated and actively involved in their approach to managing work. Multiple models have been tried to find the right of in-house versus outside counsel work. The answer varies from industry to industry and from company to company.

In-house teams have started to optimize the way they engage their law firms, often conducting (formal or loose) “panel” arrangements with law firms that have been persuaded to offer generous terms to be part of this elite group. This is a very good exercise & discipline to create, but offers limited incremental benefits compared to current alternatives.

At a macro level, bar some notable exceptions, the industry is trending toward handling work in-house with increasingly talented legal staff as the default and resorting to outside counsel as the 2nd best alternative. This is typically driven by lack of specific skill in-house or limited bandwidth. Some of the largest organizations (especially in highly regulated industries) have legal staff in excess of 1,000 individuals.

The next evolution for in-house teams was to look at the “outside counsel” with renewed interest and start working with legal service providers that aren’t law firms at all, which brings us to the next point.

A Maturing “Sell Side”

While in-house legal departments are getting smarter buyers of legal services, the “Vendor” landscape has become more complex as well over the past 10 years.

The 1st real alternative to the traditional law firm model was “Off-shore Legal Process Outsourcers” (remember them?). 20 years ago, outsourcing work was cutting-edge, a bold and risky step. Then the outsourcing model itself matured with new models, hybrids: near-shoring (and best-shoring), captives, outsourcing to law firms locally, outsourcing work to a law firm’s off-shore captive, and best-shoring between different options based on a cost/quality arbitrage. Over time the outsourcing model improved itself and found its balance. It is now a mature option for in-house teams of any size and complexity.

In some jurisdictions (England & Wales for example), the monopoly of law firms was partially dissolved and a new breed of companies entered the market, the “Alternative Business Structure” (ABS) legal services providers. To simplify, these providers are able to provide legal advice but are not strictly speaking law firms. ABSs were supposed to revolutionize the legal landscape and strike in the heart of the law firms. Sure, the advent of ABS did affect law firms in some respect, but it did not trigger the monumental market shift that was expected by many. ABS were law firms in disguise and did not offer much of an alternative to some of the services that nimble law firms were able to offer. Meh.

That seismic market shift is happening, but it is coming from a different angle. It is also more of an undercurrent and is being led in a more discreet way by another set of “Alternative Legal Providers”.

These new legal providers were not just law firms in disguise, they offered true innovation and a different business model. They mixed smart technology and people in a way that neither law firms nor LPOs were able to truly achieve. Legally trained individuals using expert systems. Systems that with minimum input are able to ingest, digest, analyze a huge volume of contracts, and provide an outline of key risks and obligations for example.

What about different habitats?

Early in the evolution of the legal eco-system, there were law firms and clients. Pretty simple…Pangea. Enter technology, an exploding amount of data, and an increasing cost & efficiency pressure. Given that legal education (until very recently) did not include instruction on the business of law and supporting technologies, non-lawyers emerged to fill the roles made necessary by technology and eDiscovery (not to mention cost constraints placed on legal departments).

New types of companies grew to serve the legal market and complement, and in many cases, compete with law firms. These companies developed a set of legal technologies. Soon, in-house legal departments became empowered by technology and increasingly influential operational professionals. Until a few years ago, the LegalTech market evolved fairly slowly with relatively few entrants. Now, there are new start-ups in the LegalTech space every day, in every continent, and not just in the eDiscovery space, in every domain of Legal.

So instead of Pangea, we now have a complex eco-system of habitats that include clients, law firms, quasi-law firms, software companies, alternative service providers, etc. These forces have driven efficiency in the market and driven down law firm profits, turning traditional legal careers on their head and leading to serious and well-documented upheaval in the legal eco-system.

Storms on the horizon you say?

It is not hyperbole to call what has happened in the legal marketplace over the last couple of decades a revolution. As with any revolution, there are winners and losers. In-house departments, the businesses they support and the operations people that support them have clearly been elevated by the changes. Clients dictate terms more than ever before. They are in a position to be sophisticated users of technology and innovative staffing models. Decisions to offshore or nearshore some bits of legal, administrative and operational work are available to just about any organization that is interested. A trend that is likely to cause another “storm” is the idea of insourcing much of the routine and transactional legal work a company needs to handle. This may be done by hiring full-time staff, but more likely will be done by partnering with a provider of legal managed services.

And, of course, the technology storm is never really over. Artificial Intelligence (I am using the term loosely!), is rapidly advancing and making serious progress in the legal marketplace. Expert systems, machine learning, AI technology is already supplementing or in some cases displacing lawyers in some areas, and that trend is likely to accelerate. People who realize that AI enhances their abilities rather than replaces them and figure out how to harness that will best weather this next storm.

Next Post – Selected Trends for the Future in the Legal Eco-System