Future implications of in-house growth for firms
While in-house legal teams have historically and typically been quite small, as legal work changes, so have those teams. This, recruiters and GCs have confirmed, will have a number of future implications on the legal landscape.
Over the last decade, in-house legal departments have grown in size, resulting in a greater amount and variety of work for in-house lawyers – but also in less work being briefed out to external firms.
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In economic turbulence, however, will firms have to fight against in-house teams for work that was historically guaranteed? And in light of this, is in-house now the place to be?
In-house legal teams growing
The 2022 Annual Profile of Solicitors NSW, published in June this year, the number of in-house lawyers more than doubled (104 per cent) between 2011 and 2022. While the number of private practices also increased by 40 per cent, many in-house legal teams have grown in recent years.
There are a number of longstanding pros to moving in-house, with some saying private practice experience is no longer needed as a prerequisite for junior lawyers and the growth of in-house legal teams previously said to be one of the factors contributing to the continued consolidation of private practice firms.
Legal recruiters are also seeing this shift, Beacon Legal director Matthew Edwards told Lawyers Weekly.
“There’s no question that more and more lawyers are seeing in-house practice as an attractive career path. At Beacon, our in-house division has grown substantially over the last few years, which is reflective of the growth in the in-house market itself. We’re investing a lot of time and resources into our in-house division in anticipation of further growth in the coming years,” he said.
“I’m also seeing a real shift in the timing of an in-house move. Historically, lawyers would spend at least five years in a firm, or reach senior associate, before they even thought about moving in-house. That’s happening a lot sooner now. I regularly speak with lawyers at the 2+ PQE level looking to make the switch. Companies are also far more open to hiring junior lawyers than they were 10 or so years ago, so it’s a win-win for everyone – except the law firms who are really struggling to retain their talent.”
Australian insurer Youi is a good example of this, with a permanent legal team of seven, in addition to occasional legal contractors – and head of legal Bianca Lau was brought in in April 2019 to grow the legal team, which was almost non-existent at the time.
As she continued to hire into her team, Ms Lau was able to present a business case and various data to support hiring more legal staff – which she said means Youi’s legal department is now doing more of the work the company would have traditionally briefed out to firms.
“You could actually point to the work you were currently briefing out and make the case that you would actually save a lot more money by hiring the person full-time and not briefing out that work anymore,” she told Lawyers Weekly.
“It is a lot more cost-effective when you look through your data and you can see how much money you’re spending with external lawyers, and if you’re satisfied, you can actually bring someone in internally in the team, there’s a lot of cost savings there.”
This is also something Naiman Clarke managing director Elvira Naiman observed, she said on a recent episode of The Lawyers Weekly Show.
“In-house teams have grown. I think one of the reasons for that has been because the cost of legal services has increased,” she said.
“I think, particularly, the larger organisations that have been spending a lot of money on external legal providers have found some sense in bringing some of those skills in-house. And as such, they have grown some of those more specialised teams, and we’ve certainly seen real uplift in the in-house space over that period of time.”
Ms Naiman said there were a number of reasons for this uplift – a change in “in-house existence” being one.
“We’re no longer seeing people say, ‘Well, I’m moving in-house because I think my life is going to be easier.’ That doesn’t seem to be the reason, and I think, in truth, that life is not easier. So, I think that certainly has been some real changes that we’ve seen,” she said.
“And also, weirdly with that. We’ve also seen a lot more traffic of people coming back from in-house, which we traditionally weren’t really seeing a lot of. Once you’ve got in-house, that’s where you stay. And I think it isn’t necessarily the panacea that people think that it might be.”
This sentiment was echoed by Dovetail managing director Andrew Murdoch, who said that although there has been a slight decrease in the number of lawyers moving in-house, those who do are there for good.
“In the 17 years I have been recruiting in-house lawyers, I have only seen a handful return to private practice and stay, so I suspect there’s something in that,” he opined.
“However, over the past two years, we have seen a significant drop in the flow of private practice lawyers moving in-house. We attribute this to the significant salary increases and increased working flexibility firms are now offering. Although, forced recall to work from the office and stagnant wage rises may see a surge in lawyers moving in-house.”
As the candidate market remains relatively tight, this means that legal departments are now competing with firms for the top talent, too.
“We’re competing with private practice firms now for the talent because we’re building up bigger teams and we want to get the best people, which I don’t think historically necessarily was the case. Yes, we might be using law firms less, but we’re also competing for the same people to hire, particularly in the tight employment market we’ve got at the moment. As in-house teams grow a little bit, we need to be quite competitive in how we attract people.
“We’ve been quite lucky to be able to grow out the team. One of the other things we’ve really focused on is we’ve done quite a bit of work over the last few years around legal tech and automating low-value work like non-disclosure agreements, for example, and because traditionally, a lot of that work would sit within our legal team. And historically, some of the meatier complex matters would get briefed out,” Ms Lau added.
“But it’s hard to attract talent if they’re going to be working on things that don’t excite them and get them up in the morning. So non-disclosure agreements are an example. No lawyer really wants to come to work and gets really excited about pumping out 12 non-disclosure agreements a day. So, it helps having a slightly bigger team so that you can allocate some time to focus on some efficiency measures. By doing that automation task, it means you bring the lawyers in your team to the more interesting work, which I think a lot of in-house teams are doing now. That really helps keep your talent and attract more talent, as well.”
So, while in-house work traditionally involved “mundane tasks”, with the more exciting work briefed out to external firms, Ms Lau said this “old model” was just that: old.
“I think a lot of teams now are turning away from that kind of model, and being in-house now means there’s a lot of stimulating and challenging work to do, and I think that helps bring high-quality lawyers in-house,” she said.
“That’s what initially attracted me in-house, actually; the idea that I’d be doing a bigger variety of tasks but also be a lot more engaged with the business and seeing the outputs of my advice. And probably one of the main things I know my legal team wants is really interesting work and to be challenged intellectually on a daily basis. And so, it’s on the leaders of teams to facilitate that kind of working environment if they want to keep staff.”
Bigger legal departments mean less work being briefed out
As the Youi legal department has grown, the amount of work being briefed out to external firms has, understandably, dropped – although Ms Lau said the company still uses law firms in new and strategic ways.
“We still use law firms. We’ve got predominantly a handful of firms that we’ve got existing relationships with, and we still have certain work we will brief out, but it’s very limited now compared to what it used to be a few years ago. So, each time we’ve been able to sort of grow the team and expand our expertise, we’ve been quite strategic about making sure we hire someone who’s got the skill set of the type of work that might traditionally have been briefed out. So, that’s worked really well,” she said.
“We’ve also got some new law firms out there that charge in a much different way. So, I think the question is not so much will the billable hour die, but when will it die? And whether a time-based charging of fees is sustainable. I think this might push a look at how traditional law firms are billing their clients.”
This comes after the Lawyers Weekly Top 25 Attraction Firms ranking for 2022–23 polled in-house respondents, asking them which firms law departments engaged, the volume of law firms utilised by one’s law department in the past year, whether those in-house professionals would recommend their chosen firms to others, and how they would rank the performance of the firms engaged.
According to the research, more than seven in 10 corporate counsel were unlikely to recommend the firms they utilise to their colleagues across the market – showing that there is room for improvements, particularly in an increasingly cost-cutting environment.
In fact, LOD Legal senior legal counsel Helena Kolenbet told Lawyers Weekly earlier this year that cost-cutting is something that is ranking consistently high on the agendas of legal departments.
“Legal teams do feel the pressure because you’re a cost centre of the business, and as such, there is increasing pressure to do more with less. So, the ability to prioritise as a member of the legal team is quite challenging because you’ve got your stakeholders that have what’s hugely important in their world, which may not necessarily be aligned with the priorities of the legal team as a whole,” she said.
“Because as a legal team, you are at the centre of the organisation, you have visibility across what the organisational priorities are, but that’s not to diminish the importance of what’s going on with your individual stakeholders because what they’re sending to you and what they need from you is at the crux of what they need to be able to do to function.”
Despite cost-cutting measures and ongoing economic turbulence, however, private practice and in-house growth trends are “fairly linear”, according to Mr Murdoch, who noted that neither show signs of tapering.
“To what extent recent technology advancements impact these figures remains to be seen. However, it’s not the first time the legal profession has faced technological change and continued to grow – the typewriter, fax, email, and electronic documents all spring to mind,” he added.
How – or if – technology is likely to impact firms’ service offerings will be “fascinating” moving forward, Ms Lau agreed.
“Especially with the technology changes at the moment, I think this is going to be a really defining time for our profession generally, and those that can’t adapt and change the way they work are going to fall behind,” she said.
“Firms need to really look at their service offering, and this seems to be flowing through firstly their billing models and how they charge clients and then secondly adoption of technology and efficiencies. I think they’re the two main things, it’s that technology piece and also changing their model to reflect the new market and very much focused on what value you can add.”
Looking to the future in economic uncertainty
If a recession hits, however, Ms Lau said it would be “interesting” to see whether companies will continue to grow their legal teams or brief out more work to firms instead.
“This is totally speculative of me, but some teams might be breaking out more work rather than building their teams because of that sensitivity to headcount. But other companies, I think, will be looking at, well, look how much we’re spending on external legal fees. So, I think there’ll be a mixture. I think there’ll be the sensitivity to headcount versus companies looking at it from the overall perspective of how much they’re spending on external legal fees because it’s actually a lot cheaper to have an in-house team depending on where your business is at,” she opined.
“The legal team fundamentally understand the business, how it operates, what its objectives are, so you’re always going to have actual advice that’s much more closely aligned to what the business needs rather than having to retrain someone every time you brief out.”
And despite the rising cost of living and already inflated salaries at BigLaw firms, Mr Murdoch was positive about the future of briefing for private practice.
“I think there’s enough legal work to sustain the growth in private practice, but in-house lawyers will place more pressure on them to demonstrate value. As in-house teams become larger, more sophisticated, and efficient, they expect their external lawyers to do likewise and similarly improve efficiency and service,” he added.
“At the risk of sounding like a cliché, it’s not the biggest or fastest firm that will succeed in the new technological age. It’s those that can adapt. At the start of the computing age, technology and software were expensive and large law firms and their purchasing power had the advantage over smaller ones. However, now that technology is cheaper and accessible to all, the benefit may lie with those firms being able to implement new technology quickly and undertake tasks usually reserved for large firms – think tasks undertaken by teams of junior lawyers at large firms being done by AI at smaller ones.”
In terms of the future implications for in-house teams growing out their legal functions, Mr Edwards said that if those teams are well resourced and functioning properly, “the positives far outweigh the negatives”.
“More streamlined, cost-effective, efficient and commercial advice should only serve to benefit the company. That said, there are some challenges that in-house legal teams continue to grapple with as they grow. Sometimes it isn’t practical, or possible, for in-house teams to try and ‘do it all’. There needs to be a balance between retaining the work which can be done in-house, and outsourcing the work which might require more specialised advice from a firm,” he outlined.
“There’s also the cultural challenge – as teams grow in size, they run the risk of sacrificing the close-knit, collaborative culture which attracts lawyers in the first place. The legal market is competitive at the best of times, and that competition is only exacerbated by challenging economic conditions. As more work moves in-house, firms will be required to really think about their value proposition and offer economically attractive solutions for clients.”
As a result, Ms Lau was confident that more and more lawyers would start to move in-house in the future years, particularly as less work is briefed out and legal departments continue to grow.
“I’m totally biased, but I do think in-house is the place to be. I think it depends on what you want out of your career, though, and in-house is not necessarily suited to everybody. I gravitated towards in-house because I really love to engage with people and do a lot more interactive work. And it doesn’t mean you’re any less technical and not on the tools as much, but it’s just a different style of working,” she said.
“I think in-house is more appealing now because even if you’re a lawyer that’s really attracted to doing complex and technical work, there are a lot more opportunities now to do that level of complex work in-house, whereas traditionally that might have been briefed out.”