The influence of in-house lawyers continues to increase, writes Angela Priestley, and law firms must adapt to what now appears to be a permanent shift in the legal services landscape.
Globally, numerous surveys on the legal market have concluded that the power and influence of general counsel is on the increase.
Such findings are nothing new and, for the most part, appear to reflect the increased competition law firms faced during the global financial crisis.
But with the release of the preliminary findings of the 2011 Corporate Counsel survey by Deloitte this week, it's clear that such trends are showing few signs of letting up, nor are they necessarily a symptom of current economic conditions. Instead, a legal sector in which in-house lawyers wield the majority of the power in their relationships with law firms may well be the new normal.
Deloitte's latest study on general counsel - conducted with the input of 877 legal professionals across 10 different countries including Australia - finds that corporate counsel are not only retaining more work in-house, they are also seeking to avoid lengthy and expensive litigation, focus internally on more complex legal work and outsource their less complex work to foreign jurisdictions.
And such trends are being clearly reflected in the level of work currently outsourced to law firms. According to Deloitte, 40 per cent of global respondents have decreased the level of work they outsource to external law firms compared with five years ago.
While these figures are based on the global response, Trish Hyde, CEO of the Australian Corporate Lawyers Association (ACLA), told Lawyers Weekly such a drop in outsourcing work is noticeable in Australia.
"Over the years in-house legal counsel have become more integral to their organisation's operations and this has led to businesses seeing the benefit they provide," she says.
It's also led to law departments increasing the capacity of their internal resources. According to the ACLA Benchmarking Report, released late last year, 65 per cent of participating organisations reported that their law departments had grown moderately or significantly in the last year, and no respondents reported downsizing. "Naturally, if businesses have internal resources the type of work they outsource is going to change," says Hyde.
Deloitte lawyer Victoria Sweetman agrees, noting that the newfound ability of corporate counsel to better manage costs and focus on more complex legal matters is yet another example of how the delivery of legal services is changing. She points to globalisation as a key factor in accelerating such change.
"These trends, as with many other industries, mean that the legal industry is increasingly seeing the effects of corporate globalisation changing the way that legal advice from in-house corporate counsel is consumed and perceived," she says. "Traditional operating models have been challenged both locally and globally."
It's not all bad news for law firms. While Hyde believes the Australian market is reflecting the global trend of reduced outsourcing, Australian organisations are not necessarily reducing their spend. "Rather, in-house counsel are seeking better value from their spend by matching their internal skills by outsourcing appropriate work to the right people," says Hyde.
But even if the money is still being spent, the influence that law firm partners have on Australian organisations still appears to be on the decrease, opening a new realm of opportunity to general counsel and their law departments.
According to Deloitte, Australian general counsel believe they hold more power than partners in law firms, with 92 per cent claiming they are the initial source of advice for senior management when there is a legal or regulatory issue, compared with just 64 per cent in the March 2010 survey.
Meanwhile, 72 per cent of Australian respondents believe that a general counsel carries greater influence in a business environment than a large law firm partner. Five years ago, just 24 per cent of respondents believed that was the case.
On top of such growing influence is the rising number of in-house lawyers as a proportion of the broader Australian legal sector.
"In the past, the in-house legal profession was small in comparison with the law firms and now it is almost an equal third to private practice," Hyde says.
She adds that such factors will lead to some significant changes in the work required from private practice.
"Already, an in-house lawyer can outsource commoditised high-volume work to cost-effective specialists, brief a barrister directly or seek the services of a specialist boutique firm," she says. "Most firms realise the need for change and are looking at value-add products and services."
And such change looks set to continue despite any boom times the legal services sector experiences in the future.