Are you happy with the Outside Counsel model?

By MOIRA KULIK, J.D.   This article was written by Moira Kulik, J.D., a legal writer and attorney in Philadelphia -- 

If you are less than delighted with the traditional reliance on outside law firms to perform your organization’s legal work, you have plenty of company.

In the report resulting from its 15^th annual survey of Chief Legal Officers (CLOs), released just last month, Altman Weil, Inc. released the responses of 186 corporate legal officers to questions about managing their corporate legal departments.  The legal industry consulting firm reported that only 4 percent of CLOs are satisfied with the traditional model of relying on outside counsel to the extent that they presently do, especially as pressure increases to reduce costs. Although CLOs are acting on their dissatisfaction in different ways, these findings are “an unambiguous indicator that the old model is not sustainable,” according to the report.

Strategies for the future

Of the CLOs participating in the survey, 40 percent said they have moved work typically done by outside firms to in-house lawyers, 36 percent have moved their work to firms with lower fees, and many have used their newfound leverage in what has become a buyer’s market to control costs by obtaining price reductions from outside counsel, as well as alternative or fixed-fee arrangements. About half of those surveyed received direct price reductions, typically between 6 and 10 percent, but more than a third of respondents received even higher discounts.

One thing is for sure—the workload for in-house law departments is about to rise dramatically. Forty-three percent of those surveyed plan to add in-house lawyers to their staff, 32 percent will be adding paralegals, and 21 percent will be hiring more administrative staff. As a result, 26 percent intend to reduce their use of outside counsel in general in the coming year, and of those, 85 percent said they plan to assign the work to in-house legal staff. This trend in reducing reliance on outside counsel has continued for the past seven years, so it’s no surprise that CLOs are sticking with what works.

Of course, more than half of the legal departments surveyed increased their own budgets as a result of these decisions, but 48 percent have seen a corresponding decrease in their spending on outside counsel. With more control over who’s doing the work and how, corporate law departments have been able to increase efficiency and lower the cost of doing the work themselves. Two-thirds of the CLOs surveyed have increased the use of technology in their law departments, and nearly half have increased their use of paralegals and other paraprofessionals, contract and temporary attorneys, outsourcing, and project-management training. The greatest improvement in efficiency, according to the CLOs surveyed, was the reorganization of their internal resources.

Roles for Outside Counsel

Over half of respondents said they wanted to see a reduction in costs when using outside counsel, as well as better project management and budget forecasting. Over a third preferred transparent pricing on all work other than “bet the company” litigation, including the ability to discuss changes in fees. Nearly a third selected guaranteed pricing, a slightly smaller number chose value-based pricing (which is based on the CLO’s assessment of the value of the work performed), and only 10 percent would opt for the lowest available price. LexisNexis® Law360® reports that law departments want to pay “for results, rather than efforts” and they want “control of operations decisions that affect legal outcomes.” The focus should be on incentivizing outcomes, rather than billable hours, according to the Law360 report, and CLOs are taking advantage of more sophisticated alternative-fee arrangements.

Recognizing that the raw data suggests law departments “just want to pay less for outside counsel,” the Altman Weil report explained that, rather, CLOs generally just want them to increase efficiency. There was a fairly even split between CLOs who care about innovative service delivery models and those who don’t care how services are delivered, as long as they get the right results at the right price.

Regardless of which type of service delivery model they prefer, CLOs aren’t doing themselves any favors in the realm of pushing law firms to change the value proposition itself in legal-service delivery, as opposed to implementing cost-cutting measures. For the past five or six years, in these Altman Weil surveys, the median response is 5 on a zero-to-10 scale, and when CLOs consider how seriously law firms take their concerns on that subject, the median response is consistently a 3.  Moreover, they “give a vote of no confidence to law firms’ long-term interest in or ability to change,” with 43 percent stating that corporate law departments will take the lead. Only 6 percent believe law firms will make these changes in the next ten years.

What CLOs do

The fact that CLOs wear a number of hats while on the job may explain why they intend to bring in more staff, the Altman Weil survey revealed. CLOs reported that they spent a third of their time advising executives, about 23 percent managing their own departments, and only a quarter of their time actually practicing law. The remainder of their time is spent on compliance issues, HR, security, government relations and other duties. When asked about their greatest concern, chief among their responses were cutting costs, budgeting and “doing more with less.” 

Compliance in an increasingly complex regulatory environment is also at the top of the list of in-house counsel concerns. In its report, Law360 said the “record-setting fines paid by multinational businesses for violating compliance laws in 2013” along with ethical issues are among the top issues keeping CLOs up at night. In-house compliance teams are already growing, with the number of positions growing 31 percent in 2014. With the focus on creating robust compliance programs in corporate settings, corporate counsel are seriously debating the necessity to separate legal and compliance functions within corporations. Should this become a trend, it would bring all kinds of new staffing issues with it.

For these reasons, according to the Altman Weil report, CLOs have identified a need to attract, retain, motivate and develop lawyers and to ensure the continuity of law department services by planning for succession. Law360 suggests that a focus in corporate hiring on work-life balance “may be a key consideration in the coming years for attracting diverse candidates, given that perceptions of work-life balance correlate with retention and career decisions.”

A running theme in the Altman Weil report also seems to be the organization of law departments’ resources to maximize efficiency. CLOs view their law departments as strategic business partners with their internal clients, the board and CEO, suggesting “strategic approaches that add value to the organization.” Therefore, solving legal problems is not necessarily chief among their concerns.

Projections for 2015

If the trends identified in the Altman Weil report continue on the same trajectory, we should expect to see in-house law departments expanding, not only in terms of size, but in terms of their areas of expertise and capability. If the CLOs and the managing partners who participated in the surveys are right, we can anticipate that corporate law departments, especially those who expand their use of technology, will become the major agent of change in the legal market in the coming years. We can also expect that these law departments will diversify their staff, assigning much of the work traditionally done by both their lawyers and outside counsel to paralegals and other paraprofessionals, contract lawyers and non-legal-services vendors. Finally, the Altman Weil survey suggests as compliance demands become an increasingly serious concern for CLOs, they would do well to consider an emphasis on that area of their practice, if not a split between legal and compliance work altogether.