By Joe Calve

Every year, The BTI Consulting Group asks general counsel, chief legal officers and other purchasers of high-end legal services to name the biggest changes taking place in their departments. For the last few years, they most frequently cited the addition of in-house lawyers.

Fed up with exorbitant hourly rates, questionable value and rank inefficiencies, corporate law departments took matters into their own hands – and out of the hands of outside counsel. Despite the “more with less” strictures imposed by corporate CEOs and CFOs – or perhaps because of them – law departments grew. According to Michael Rynowecer, founder and CEO of BTI, who has been surveying buyers of legal services for almost 30 years, it amounted to $12 billion in work moving in-house over the last five to six years. Then, last year, the pendulum swung. It was, according to Rynowecer, a “dramatic” shift.

“The number saying the biggest change in their departments was the addition of in-house attorneys dropped from 23 percent to 7 percent,” he says, noting that another shift also caught his eye. “The number who said the biggest change was to develop internal processes to streamline work doubled from 12 percent to 24 percent.”

Those changes, along with the spending numbers, suggest that companies have hit the pause button. “It looks like they’re going to rationalize their resources and get more efficient with staff, where before they had been adding new staff and figuring out where to go,” he says. “They’re seeing pressure from CEOs and CFOs. The staffs are big enough, they’re saying.”

Rynowecer hearkens back to the early 2000s, the era of the Enron and WorldCom scandals. “There was a big movement to send work out to law firms rather than doing it in-house,” he says. “There’s nothing that big today, but there has been a surge in complex and bet-the company work. Class actions involve 30 percent to 50 percent higher exposure. Law department staffs aren’t built for those kinds of matters. They can’t mobilize for them. Put it all together and it’s clear that the in-house hiring binge is over. I see this as the beginning of the pendulum swing.”

BTI isn’t the only one detecting a swing. A new survey of corporate counsel insourcing and outsourcing from ALM Intelligence, “Build or Buy? The Evolution of Law Department Sourcing,” also suggests law departments, after years of insourcing, may be backing off.

“[G]rowing too much in-house can create an unsustainable mini law firm that may be too large for the rest of the organization to support,” says the ALM report. “At a certain stage of growth, law departments may lose some of the efficiencies and cost savings it [sic] started insourcing to achieve.”

This swing of the pendulum, however, bears scant resemblance to the smooth, hypnotic swings of yesteryear. In-house counsel and their growing operations staffs are working overtime to assemble and analyze the data needed to understand what has become an increasingly complicated build-or-buy equation. What work belongs in-house? What should continue to go to outside counsel? Where do legal process outsourcers and the crazy quilt of alternative providers fit in? What about automation? The Big 4?

The ALM survey points to the ideal “practice playbook” put forth by one legal operations professional: 50-60 percent of the work stays in-house, 20-25 percent of it is outsourced to alternative providers, and the rest – mostly work requiring widespread resource networks such as M&A, bankruptcy and litigation – goes to traditional law firms.

Rynowecer, in his blog, “The Mad Clientist,” lays out four factors he says are feeding the Big Pause:

  • Corporate counsel, facing more diverse legal needs in areas such as product liability class actions, tax and cybersecurity, “can’t possibly staff up to cover all these areas.”
  • Four times more companies report facing bet-the-company work than just three years ago. “This means clients need more attorneys than they have in-house.”
  • With the typical corporate law department growing 33 percent over the last five years, in-house teams are “hitting the infrastructure limits” and their companies are unlikely to add the resources needed to sustain such growth.
  • Finally, and most interestingly, in-house departments are having a harder time luring talent away from law firms. “Both clients and law firms see the value in partners who have walked in corporate counsel shoes – and both are competing for talent,” he says. “[I]n-house counsel can more easily accept they will access this talent through outside law firms instead of their own staff.”

Rynowecer elaborated on the last factor in an interview. “The tendency for companies is to want flexibility – to have the right resources for the right legal issues at the right time,” he says. “Very few can do that. It’s cheaper to scale up and scale down than to rely on in-house resources.”

Despite that need for flexibility, outside counsel budgets remain stagnant. There is a range of reasons, Rynowecer says. Legal operations professionals are saving the average in-house department of a large company an estimated $2 million to $4 million through internal efficiencies, and an estimated $3 million through the use of alternative fee arrangements. These and other factors have kept the heat on law firms now in their 10th year of flat demand, intense rate pressure and hypercompetition. Clearly, as the Am Law 100 numbers show, there will be winners and there will be losers.

As the Chinese curse goes, “May you live in interesting times.”