Nearly one-third of senior law department leaders expect their annual operating budget to increase in 2017. That’s according to recently released data in ALM Intelligence’s Corporate Counsel Agenda, an annual survey of corporate counsel at large U.S. corporations. In the coming year, three-quarters of law departments expect their budgets to either remain flat or increase (last year the number was 84%).

You might think this would be cause for celebration among those in Big Law. You would be wrong.

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Recently, firm leaders have lamented falling demand for their services and attributed the source to client budgetary constraints. It’s a convenient tale for Big Law to tell itself, because it does not require self-examination. Under this construct, the problem is simple and twofold: law departments are being squeezed in unseen ways, or the overall the economy is just flat. Consequently, growth in gross revenue among Am Law 200 firms is down significantly when compared to pre-recession levels.

By this line of reasoning, all firms need to do is wait for their clients to grow their budgets, and then, let the good times roll, right? Not so fast.

What if I told you that law departments are not being asked to do more with less? Instead, they are being asked to do more with more (though sometimes their budget increases are not keeping up with their new responsibilities).

Falling demand for Big Law services is not the same as falling demand for all legal services. Billable hours may be trending downward, but the demand for legal services is not. Law departments have money to spend, and in an increasingly global and regulated business environment, the businesses they serve desperately need legal guidance.

Yet, law firms aren’t reaping the benefits. Forty-three percent of the respondents to the ALM Intelligence Corporate Counsel Agenda survey indicated that they plan to decrease their overall use of outside counsel in the next 12 months. Why?

CC Agenda_Figure 2

Law firm leaders get one part of the equation right: The decision to reduce outside counsel use is driven by new budget constraints on law departments. However, that is only part of the story. Corporate counsel no longer operate on an island. Many have shed their singular role of legal advisor and are increasingly integrated into the C-Suite as a strategic business partner. Law departments are now being treated like any other corporate business unit, and as a consequence, department budgets are being subjected to increased scrutiny. The free spending old days are gone forever.

Corporate counsel, often with operations managers by their side, are changing how they value the services of Big Law. This is a pressure that has been building for many years, but the advent of big data and the era of measurement have given in-house departments new tools to finally force the issue.

According to the Corporate Counsel Agenda Survey, of those respondents that plan on reducing their use of outside counsel, 85% cite the cost savings as the reason, but — drum roll please — 92% of the work will be re-directed to attorneys in-house. This flips the traditional outsourcing paradigm on its head. In the main, companies outsource to reduce costs, but in the case of retaining outside counsel, law departments are finding costs so prohibitive that hiring additional attorneys and staff to handle the workload internally is often understood to be a cheaper alternative.

How has Big Law responded to its increasingly price sensitive client base? Some have taken notice, and implemented concrete steps, such as opening shared service centers, to cut costs and gain efficiencies. Yet, at the same time, others have raised billing rates to cover myriad new costs, including those arising out of the recent spike in first-year associate salaries.

Going forward, firms that underestimate the competitive threat posed by law department in-sourcing, do so at their own peril. To succeed in the post-recession new normal, at the top of the market, successful firms will need to retain their capability to handle complex transactions and bet-the-company transactions, but if they don’t find ways to become more lean, they will be whistling past the graveyard.

The fault, dear Big Law, is not in your clients, but in yourselves.

Agree or disagree? Feel free to reach out at skovalan@alm.com or on LinkedIn.

ALM Intelligence Notes:

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  • Who’s Got Next?: The coming wave of Baby Boomer retirements poses a serious threat to firm stability.
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